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Unilife's CEO Discusses F2Q 2014 Results - Earnings Call Transcript
Feb. 3, 2014 10:40 PM ET | About: UNIS
Executives

Todd Fromer - KCSA Strategic Communications

Alan Shortall - Chairman and CEO

Ramin Mojdeh - President and COO

Analysts

Dennis Hulme - BBY

Jeremy Feffer - Cantor Fitzgerald

Keith Markey - Griffin Securities

Raj Denhoy - Jefferies & Company

Danielle Antalffy - Leerink

Jeffrey Cohen - Ladenburg Thalmann

Unilife Corporation (UNIS) F2Q 2014 Earnings Call February 3, 2014 4:30 PM ET

Operator

Good day, ladies and gentlemen. Welcome to the Unilife Corporation Second Quarter Fiscal 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. (Operator Instructions) As a reminder, this call is being recorded.

I would now like to introduce your host for today's conference, Todd Fromer, Managing Partner of KCSA Strategic Communication. Please go ahead, sir.

Todd Fromer - KCSA Strategic Communications
Thank you. Good afternoon, everyone, and good morning to all our Australian supporters. Thank you for joining us for the Unilife Corporation fiscal 2014 second quarter conference call.

Before we begin today, I would like to remind everyone that this conference call contains forward-looking statements. All statements that address operating performance, events or developments that we expect or anticipate to occur in the future are forward-looking statements. These forward-looking statements are based on management's beliefs and assumptions and not on information currently available to our management.

Our management believes that these forward-looking statements are reasonable as of when made. However, you should not place undue reliance on any such forward-looking statements because such statements speak only as of the date when made. We do not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as required by law.

In addition, forward-looking statements are subject to certain risks and uncertainties that could cause actual results, events and developments to differ materially from our historical experience and our present expectations or projections. These risks and uncertainties include, but are not limited to, those described in Item 1A, Risk Factors, and elsewhere in our Annual Report on Form 10-K and those described from time-to-time in other reports, which we file with the Securities and Exchange Commission.

With nothing further, I would now like to turn the call over to Mr. Alan Shortall, Chairman and Chief Executive Officer of Unilife Corporation. Alan, the floor is yours.

Alan Shortall - Chairman and CEO
Thank you, Todd. Good afternoon to those dialing in from the U.S.A. and a special good morning to those in Australia. First of all, I would like to introduce Ramin Mojdeh, Unilife's President and Chief Operating Officer, who is joining me on the call today.

Ramin Mojdeh - President and COO
Good morning.

Alan Shortall - Chairman and CEO
Thank you, Ramin. I am calling from Sydney, where I have been holding shareholder briefings and institutional investor meetings as part of a non-deal road show, and I stress, a non-deal road show. It has been great to catch up with so many of our Australian investors and I am very encouraged by their wonderful support. This has been a strong quarter for Unilife, in which momentum continues to build behind our product, our expertise and our capabilities.

We have signed several significant new contracts with the leading pharmaceutical companies, including Novartis, MedImmune and Hikma. As a result of our execution of these and other customer programs, revenue for this quarter is up more than 12%, compared to the first quarter of fiscal year 2014, and more than 400% compared to the same period last year. As I have said before, we continue to experience sequential quarter-to-quarter revenue growth in fiscal year 2014.

Cash payments from customers are also increasing. Since the start of the current fiscal year, we have invoiced more than $20 million. Most of that cash has been received since my last earnings call in November. This quarter has also seen us continue to narrow the loss per share. This has been done at the same time as we have been increasing our investments in R&D and expanding our operations.

Contract negotiations with the multitude of pharmaceutical companies are continuing across all of our product platforms. Many of these negotiations are at a very advanced stage. With so much business to begin [right at from signed] [ph] and prospective contracts, I am comfortable in our current cash position and I expect it will only continue to improve from here.

Given our favorable outlook for 2014 and beyond, I reiterate that we have no intension of doing any type of large secondary offering. It is also my intention to avoid using the ATM in the foreseeable future. Shall we wish to strengthen our cash position outside of receipts from customers I expect it will be via a debt financing program with a leading global healthcare investor. Should we elect to borrow [inaudible] program, it would be at favorable terms that I believe should be well received by the market.

First off, I would like to give you an update on recently signed contracts. I will start with those contracts that have been signed since our last earnings call.

Hikma. In November, we signed a long-term supply contract with Hikma, one of the largest and fastest growing generic injectable companies in the world. Hikma will be converting an initial list of 20 of their generic injectable products from vials into our Unifill prefilled syringes. We expect initial device sales will commence mid-year. It is my expectation that some of the devices we supply to Hikma this year will be used commercially.

Device sales to Hikma under the contract will increase to minimum unit volumes of 175 million units per year and I expect demand from Hikma for our products will end up exceeding those minimum unit volumes. The program with Hikma is moving forward at exceptional speed. We received the first milestone payment of $5 million in the second fiscal quarter of 2014 and may have already begun to receive additional milestone payments during the current quarter.

In total, we expect to receive $15 million in milestone payments during calendar year 2014, with an additional $20 million to follow. These total payments of $40 million are of course in addition to device sales.

Also, in November, we signed a significant agreement with MedImmune, the global biologic arm of AstraZeneca to customize and supply devices from our platform of wearable injectors for use with several target drug candidates. This is a significant customer supply relationship that I believe underlines our leadership position in the wearable injector market, which is expected to reach in excess of $8 billion in revenue by 2024. That's annual revenue.

I believe this MedImmune contract has strong potential to generate significant commercial revenue in the near future. We will continue to generate recurring revenue from MedImmune as we move forward in this program. In December 2013, we signed our first contract for our Ocu-ject platform with a global pharmaceutical company that is a market leader in ophthalmic therapies. They are seeking to use Ocu-ject to deliver a target injectable therapy into the eye.

Ocu-ject represents game-changing technology within the highly competitive and rapidly growing market of ocular injection therapies. The overall market is moving to prefilled syringes. Pharmaceutical companies are seeking to provide the best clinical outcomes with their competing drugs and there is no, I repeat, no competing technology to our knowledge that can deliver the small dose therapies with the accuracy and precision of Ocu-ject.

Revenue from this program will commence during the third quarter of fiscal 2014. I expect revenue from this program will continue as the program advances. Due to the competitive nature of this space for ocular therapies, it's not appropriate to give any more detail on the customer or their target drug at this time. However, as the program advances, I hope we can provide some color.

Based upon the game changing nature of the Ocu-ject platform and the number of other pharmaceutical companies who are seeking access to our technology, I expect additional contracts will be signed for Ocu-ject during 2014. Also, in December, we signed the second stage of our partnership with Novartis to supply clinical products from one our platforms of injectable drug delivery systems for use with a targeted early stage pipeline drug. Again, I can't say too much about this program at this stage for commercial and competitive reasons. However, I will say that our technology has helped to enable the delivery of this target drug through a new route of administration.

Without our device technology, it would have required surgery to deliver the drug into the target organ of the body. We have generated revenue under this Novartis program during the second quarter of fiscal year 2014, and additional revenue is expected going forward.

In regards to other previously signed contracts, I first like to give you an update on our program with Sanofi for the use of the Unifill Finesse with Lovenox. We are making excellent progress on this Sanofi program. I understand all parties are very pleased with the progress we made. I just want to say that we have a wonderful relationship with Sanofi and I expect that our partnership will continue to evolve moving forward.

In regards to milestone fees, we received the first payment of $5 million during the first quarter of fiscal year 2014. I am also very pleased to confirm that we have already received the second milestone payment of a further $5 million during the fiscal year third quarter. In addition, our EZMix supply contract with Biodel continues to proceed in a positive fashion. We expect to receive additional payments through the fiscal year as we support Biodel's schedule to commercialize their glucagon product in EZMix.

I would also like to remind quickly remind listeners that our supply contract with a customer for the use of our Unifill syringes with the generic version of an approved auto-immune therapy is continuing. Additional payments are expected for this program as the product heads towards approval and anticipated commercial launch.

Finally, I think it's important to say that there are some contracts that we have signed to-date that we have elected not to disclose. These are contracts that are not yet material and it's not appropriate to make any comment for commercial and competitive purposes. In most of these cases, I expect we will be able to say more as the program and the customer and the partnership moves to the next stage.

Our commercial pipeline continues to deepen and expand based on responses from a multitude of pharmaceutical companies, it's clear that demand continues to build for our game changing products, industry expertise and our customer-centric business model.

In regards to upcoming deal flow, there is a lot to look forward to for the remainder of fiscal year 2014 and beyond. Several contracts that I have anticipated, we will have had signed by December 2013, are still on track to be completed during the third and fourth quarters of fiscal year 2014. Some of these contracts are now at a late stage of negotiation.

There are also a number of additional contracts entering the late stage of our commercial pipeline. Some of these contracts will expand our relationship with the existing customers. Other contracts will be completed with new customers. These contracts will be for a planned of approved and late-stage biologics drugs and vaccines.

Indeed, for the largest market segments of injectable drugs, we are already well positioned within biologics, antithrombotics and generic injectables. We are also pleased with the progress that we are making to establish a position in the last remaining large market category. That category is vaccines. For a number of pharmaceutical companies recognize the competitive benefits of our Unifill platforms of prefilled syringes.

Financial update. Now let's take a look at our financials for the second quarter fiscal year 2014. As I said before, we are targeting sequential quarter-to-quarter growth in revenue and we also expect significant quarterly compares to the same period of the prior year. That's just what has been achieved by Unilife this quarter. Compared to the first quarter fiscal year 2014, we have increased revenue by more than 12%, and compared to the same period last year, we have increased revenue by 411%. As we continue to invest in R&D, we are also reducing our SG&A.

Our operating expense for the second quarter was $15.5 million, compared to $14.7 million for the same quarter in fiscal 2013. This reflected an increase in R&D investment and $1.6 million reduction in SG&A. Total net loss for the second quarter ended December 31, 2013, was $16.3 million, compared to the net loss of $14.6 million for the same quarter last year. Again, the increase in net loss is primarily attributable to an increase in R&D and interest expenses. We have significantly narrowed our adjusted net loss from $9.7 million in the same quarter last year down to $8.3 million. We have achieved this by continuing to increase our investment in R&D.

Adjusted net loss excludes share based compensation, depreciation and amortization and interest expense. As of December 31, 2013, we had $6.7 million in cash. This does not include $6.2 million in cash generated by the use of our ATM facility with Cantor Fitzgerald in January 2014.

As I said during my opening remarks, we are continuing to manage our cash position to minimize dilution to existing shareholders. I had periodic enquiries from analysts about why we choose to run our balance sheet as lean as we do during the period of rapid business expansion.

By this [non-traditional], we are very confident in our recurring cash revenue from customers. This cash revenue generation is highly predictable in nature. We believe that these customer cash receipts combined with a debt financing program will be sufficient to meet our business needs moving forward and while I have no intention of using the ATM facility again, it's still a good option to have available should there be a strategic benefit in its use.

There is much work going on internally to build production capacity to fulfill customer demand for a range of programs that are either already underway or about to commence. In terms of expanding our operations, this is an ongoing process that generates the steady increase in production capacities over time, so we are currently expanding our manufacturing capacity across a number of product platforms. We are also working with our suppliers to prepare them for rapid acceleration in unit volume requirements.

I can advise that we have commenced the installation of new clean rooms at our facility in York, Pennsylvania. These new clean rooms will be completed in a few months and ensure that all production space within the current footprint of our 165,000 square-foot facility is in full operation.

In summary, I'd quickly repeat what I consider to be my key takeaways for this call. Our revenue per quarter is increasing. Our cash position is expected to continue to strengthen. Our losses per quarter are narrowing while we are continuing to invest in our R&D and expand operations in response to customer demands and we have a rich commercial pipeline that is chaining with new customers and upcoming contracts. In short, I believe that the strong momentum we have generated in recent months is step to continue moving forward.

I would now like to open the call up to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Dennis Hulme from BBY. Please go ahead.

Dennis Hulme - BBY
Good morning, Alan. Thanks for taking my question. I just had a question about the treatment of cash receipts. Firstly that your cash receipts for the half year were $12 million but you only reported revenue of $7 million. I see in some of the receipts are being treated as deferred revenue. Can you just talk about the policy going forward, the relationship between the receipts versus revenue?

Alan Shortall - Chairman and CEO
Dennis, yes. Obviously we work on the GAAP (Inaudible) in the US and we worked with our accounts department and auditors in relation to deferred revenue. As you know I’ve been away for the last four, five weeks I haven't been involved in the detail and so I will actually pass that question over to Ramin, if I may. Ramin, would you handle that?

Ramin Mojdeh - President and COO
Absolutely. Good morning. Yes. As you might imagine, the deferred revenue essentially is primarily in two areas and that has to do with the nature of the revenue, so it's either milestone recognized or it is amortized over a period of time, so that's naturally what you are going to see over time and you are going to see a pretty big build up of deferred revenue.

Dennis Hulme - BBY
Okay. Thank you. My second question is just about the deal -

Alan Shortall - Chairman and CEO
Sorry. Go ahead, Dennis.

Dennis Hulme - BBY
Yes. Can you give any guidance about what to expect from the deal pipeline? You have a great half year just past, do you think you can match that in the next six months or will it take 12 months to match that? What's your sense from what you can see?

Alan Shortall - Chairman and CEO
As I just said, Dennis, our pipeline is teeming. Much as I like to be able to stage these deals and transactions coming through in a nice neat manner of maybe once every two weeks or so it's not possible. We are often dealing with companies with 50,000, 80,000, 100,000 people in them, getting alignments to all the different departments and senior executives and getting signed off it takes some [inaudible] and the time is not always predictable. You look at the last quarter of the calendar year we have done three major transactions, Novartis, and also MedImmune and with Hikma. It's quite possible that we could have a quarter like that at any time going forward with this deal flow we have in our pipeline, but I just can't predict it, but I am very confident overall that 2014 is going to be a significant year for us in relation to the deals that we put on the table.

Dennis Hulme - BBY
Okay. Thanks very much. I look forward to seeing the deals come through.

Alan Shortall - Chairman and CEO
Thank you.

Operator

Thank you. Our next question comes from Jeremy Feffer from Cantor Fitzgerald. Please go ahead.

Jeremy Feffer - Cantor Fitzgerald
Hi. I guess, Alan, good morning and good afternoon for the others. I guess, I want to start on revenues. I know you are not giving formal guidance and timing of a lot of these pipeline projects is still up in the air. Can you give us sort of a sense of what kinds of revenues, order of magnitude we might expect to see in the second half? Meaning, can we start to get approach a breakeven point or is the ramp still early enough that may get pushed out to next year?

Alan Shortall - Chairman and CEO
Thanks. Look, again, and come back to reflecting on what we said and what we have actually demonstrated for this quarter sequential revenue growth over the last quarter. I think you will see that level of growth going forward. One of the competitive advantages we have as a company is that we are not focusing as an emerging companies building on revenues starting to grow. We are not focused on the next quarter or the next quarter, or this year or maybe mid-next year, or the end of next year, which is a bit of advantage we have is that we are actually building the opportunity that's on the table for us for the future. We have a [inaudible] positions where we are locking in long-term supply contracts 10, 15, 20 years, where we are actually locking off our competition in many ways. From that point of view R&D is [inaudible]. We continue to invest in that R&D and we continue to ram home the advantage that we have in many of these contracts and putting on the table, so our focus is not necessarily that shorter term. It's a longer term.

I think I have said this to you, Jeremy. It's very similar to the Amazon approach. It's not looking at that short-term, looking to building an [own a salable] [ph] position which we are now building so that we are taking full advantage of that opportunity we have over our competition, but if you look at the sequential growth that we are now delivering, I think going forward, you will see that as a trend.

Jeremy Feffer - Cantor Fitzgerald
Understood. Come back to the balance sheet quickly. Alan, you talked about pursuing this debt financing and you sort of held out for a little while, I think, as the pipeline has emerged I imagine your terms have started to swing more in your favor. What is going to be the final determining factor before you actually look to close a financing? I know you want to keep it lean, but just to provide yourself a backstop, do you want to announce some more deals or are you comfortable with how things look now just to be able to provide you with some additional cushion.

Alan Shortall - Chairman and CEO
Yes. Exactly right. We had the option of putting a debt financing in place. Since I announced it pretty much, I think around May of last year. Again, as our company has strengthened and we have put some significant deals on the table our position in relation to negotiating terms for a long-term debt financing has got better, so we are locking in long-term debt. Obviously those terms are very important to us. We are now positioned where I think we can get very favorable terms to meet our expectations, but again as CEO, the best thing I can have is to have choices and we have choices. With our deals coming, with [funding tax] [ph] and from that perspective, I am very comfortable with cash position and we can pull the lever on the debt funding at any stage and I believe we will do so, well it's a question of implementing –the strategy which is not obviously publicly at the moment, but in terms of what we know is coming through with the deal flow we’ll pull that lever at the appropriate time.

Jeremy Feffer - Cantor Fitzgerald
Okay. Then last one for me. I'll jump back in queue. I recognize the sensitivity working with some of your partners. I know that confidentiality tends to stem from their end. At what point in terms of timing do you expect to be able to disclose more on the Ocu-ject deal? Does it depend on your ability to sign further Ocu-ject deals or was this entirely dependent on your partner?

Alan Shortall - Chairman and CEO
It is both. We believe that Ocu-ject, because of its ability to accurately inject molecules and therapy into the eye will become the market standard, so from that perspective, we, as I said in my earnings call that we are pretty much dealing with everybody in that sector at the moment. Now, I believe we will become the standard, so we actually don't want to pre-empt that, so we are being very careful with those negotiations that were ongoing, but also we’re actually sensitive for our customer. I'll just give an example. I mean, two years ago, we announced the targeted organ delivery with a major global pharma. In November just gone by, we announced that that pharma was Novartis, at that stage Novartis were comfortable with us opening up that information, so it can be both.

Jeremy Feffer - Cantor Fitzgerald
On the Ocu-ject side, do you think at some point this year that partner and drug can be revealed?

Alan Shortall - Chairman and CEO
I don't know that. That will depend talking with the customer, but as I also said early on in the call that I believe we will [inaudible] a number of those [units] [ph] for Ocu-ject this year. Now, some of those we may well be able to announce the name of the customer and give some more detail, but this is a significant opportunity for us going forward. I believe that this device will become the standard in terms of pharmaceutical companies being in compliance with the regulatory label.

Jeremy Feffer - Cantor Fitzgerald
Okay. That's helpful. Thank you.

Alan Shortall - Chairman and CEO
Thank you.

Operator

Thank you. Our next question comes from the Keith Markey from Griffin Securities. Please go ahead.

Keith Markey - Griffin Securities
Hi, Alan and Ramin. Thank you for taking my question. I was just wondering could you first describe the reason for the sudden increase in interest expense and the second quarter without really concentrating increase in the debt outstanding.

Alan Shortall - Chairman and CEO
Ramin, can I pass that one to you?

Ramin Mojdeh - President and COO
If you don't mind, I need to look at that and get back to you, Keith.