As we have written in prior articles, we believe that Unilife (NASDAQ:UNIS) does not have a viable business model, will never generate meaningful revenue, and is highly overvalued at what is now a $580m market capitalization.
Over the past week, two new developments reinforced our thesis. First, its Chief Financial Officer resigned, most likely because he wants to monetize his shares while they still have value and to sever ties with Unilife before its product claims are shown to be overhyped. Second, the company entered into a debt financing agreement last week that not only provides additional support for the company's bleak business prospects, but also saddles the company with onerous debt that will accelerate the Unilife's demise.
Sudden CFO Resignation Raises Red Flags
Former Chief Financial Officer Richard Wieland resigned on March 12th, entering into a separation agreement with the company that was announced on March 18th. CFO resignations are always concerning, and the case with Unilife is no different. Wieland resigned without announcing another opportunity that he is taking, indicating that he's not leaving Unilife for a better alternative but because he no longer wants to be employed by the company. Unilife's appointment of the Comptroller as Interim CFO, and its need to advertise for a new CFO within the actual press release, reveals that the resignation was unexpected.
Based on what we've seen of UNIS, we assume that Mr. Wieland no longer wants to be associated with a company that is built around stock promotion, misleading product claims and a horrendous financial profile. Rather than stay with the company for its ultimate descent into the pink sheets, Wieland likely wanted to exit while his stock options are in the money and shares have some value.
Having departed, Wieland can now monetize his 240,000 shares, as disclosed in the most recent proxy, without filing the relevant Form 4s. Alan Shortall and other senior management may be pressuring executives to avoid sales of their shares, due to the negative message share sales send to the market, and the most expedient way for Wieland to cash in his holdings is by resigning from the company.
Additionally, Wieland received severance of $245,000 and the vesting of 115,000 shares of stock. Given that Wieland could earn this additional income, monetize his current holdings and sever ties with a questionable company, the resignation was probably too attractive to forego.
Onerous OrbiMed Financing Expedites Financial Demise
Unilife entered into a debt financing agreement last week that not only provides additional evidence of the company's grim product potential, but also burdens them with high-cost debt that will probably ultimately render the company insolvent. On March 12th, Unilife announced that it entered into a $60 million loan agreement with OrbiMed Advisors. The loan carries a usurious interest rate of L+925bps, and is backed by a pledge and security agreement, general security deed and commercial mortgage and security agreement. The company will not disclose the debt agreements until it files its next 10-Q, but we wouldn't be surprised if the loan is collateralized by Unilife's owned property.
The high interest rate incurred in the financing is a sign that Unilife could not find other lenders willing to provide debt financing to the company. Whereas other businesses would be able to arrange loan facilities with banks such as Wells Fargo or Bank of America, Unilife had to seek out a hedge fund for its high cost capital.
OrbiMed likely believes that Unilife will continue to be able to tap the equity markets through both secondary offerings and At-The-Money equity offerings to raise equity capital that can be used to pay its high interest rates.
However, as we have seen with other biotech companies with gloomy revenue prospects, debt financings can ultimately come back to haunt these businesses when the equity markets finally tire of stock promotion and become unwilling to provide additional equity financing. When this happens, cash flow problems can compound quickly, driving the company into bankruptcy.
In the case of Unilife, we believe that OrbiMed has positioned itself favorably in the event of a default, by including an L+14.25% default rate and likely incorporating the company's real estate into its collateral package. In fact, OrbiMed may be better off in the event of a Unilife bankruptcy, a situation which would leave UNIS shareholders penniless.
Retractable Technologies, a Close Comparable, Trades at a Fraction of Unilife's Valuation
Unilife has repeatedly told investors that its retractable needle designs are a "game-changing" technology with no viable peers. But another microcap company, Retractable Technologies (NYSEMKT:RVP), has long battled the industry leaders to market a retractable needle design. Unlike Unilife, RVP consistently generates genuine product sales of $30 - $40m with its VanishPoint line of retractable needle designs. But RVP's management isn't vocal, shunning quarterly conference calls and lavish investor presentations. Since it is largely self-funding, RVP has no need to drum up enthusiasm for secondary sales every few months. This lack of promotional activity has resulted in RVP's shares trading at less than one-fifth the market capitalization of Unilife even though RVP generates four times the revenue.
The VanishPoint syringe from Retractable Technologies is shown below.
Source: Retractable Technologies
Over the past decade, Retractable Technologies has only managed to marginally increase its revenue, growing from $19m in 2003 to $31m over the last twelve months. This meager 5% growth CAGR proves just how difficult it is for niche players to compete in the syringe market.
Based upon the disclosures given thus far, Unilife's fundamentals cannot come close to justifying the current $580m market capitalization. The net present value of the disclosed milestones is just $53m versus an expected cash burn rate near $100m over the same two year period. Management's guidance for year-over-year growth in 2014 sets an extraordinarily low-bar given that UNIS has earned just $8m of revenue over the past twelve months. If Unilife did expect positive cash flows in 2014, proper guidance would have been given. Instead, we'd expect another year of value destruction, dilutive financings, and extended timelines as Unilife struggles to compete with multi-billion dollar industry incumbents.
We further think the two major developments for Unilife this month provide additional support that UNIS is a highly overvalued stock with dismal business prospects. The company's stock rise has been driven by stock promotion and vague customer announcements rather than tangible evidence that its product will be successful in the marketplace.
Disclosure: The author is short UNIS. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Read our full disclaimer at kerrisdalecap.com/legal-disclaimer-3. I am long RVP. This is not a recommendation to buy or sell any investment. We may transact in the securities of UNIS and RVP at any time subsequent to publication.
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