Jeffries Upgrade: Key Take-outs

For those who haven't had the opportunity to read the Jefferies Report, I thought it might be worthwhile to list the key take-outs beyond the validation of the Sanofi deal

1. "...the value that Sanofi and others are placing in delivery technologies was abundantly clear....With deep pipelines in biologics and other large dose drugs, pharma is looking for scaleable solutions that can cross multiple therapeutic areas.

Sanofi and others want to insure they have unrestricted access to these technologies—meaning that they are purposefully not looking for exclusivity but rather want to ensure that they have access to technologies they
consider beneficial."

Remember during the January investor presentations  Alan said they were no longer offering exclusivity to potential partners? Here's the reason why. Funny how long some things take to play out, but all along he was telling us about this deal....and others, as indicated above by the reference to other pharmas.

2. "Taken at face value, this latest supply agreement with Sanofi carries significant financial
implications with expected upfront payments, up to $50mm in customization fees, and commercial supply device sales....the supply agreement calls for an upfront milestone payment that should be received in the quarter ending December (F2Q). It isn't clear if the deal was signed prior to the end of September, in which case some cash could have been received in 1Q."

The quarterly now confirms the company has "received additional cash receipts from customers" (plural) since the end of quarter.  Guess that means we can expect some "colour" in the CC on how much the Sanofi upfront was, and any other cash receipts - so more good news on the way shortly.

3. "Customization payments will follow on all future development programs, where UNIS
estimates that Sanofi has anywhere from 5 to 10 molecules under development that could
require wearable injectors as a delivery mechanism. Each program will generate fees over
18-24 month period with the first one expected to commence later this fiscal year (F15).

Collectively, UNIS expects customization fees just from Sanofi to reach $50 million over the 15 year supply agreement with upside from collaboration agreements between Sanofi and other partners."

Further re-iteration about "others", this time a specific reference suggesting Unilife is in the mix in potential deals with Sanofi's collaborative partners. Who would be...?

4. "Lastly and perhaps most important, the agreement calls for commercial supply of wearable injectors, which is now defined as units sold to Sanofi for the purposes of pre-clinical and clinical testing, followed by commercial consumption where pricing will be volume based.

Initial commercial sales for pre-clinical and clinical purposes are also expected to commence in F15. Looking ahead, each molecule that receives end-market clearance is expected to have a 12-15 year product cycle."





So, commercial sales revenue as distinct from 'lumpy' development/milestone fees to commence this financial year, providing greater clarity and certainty to the market. Presumably this will be the start of more detailed guidance and hence market understanding of Unilfe's potential.

But here's the real kicker - with each molecule expected to have a 12-15 year product cycle, this deal in reality has the potential to extend many years beyond the initial 15 year period. For example, a molecule approved in say year 15 extends out a further 12-15 years of lifecycle making it potentially a 30 year deal! Niiiice

5. "What is it worth? There are several large volume agents that could find their way into UniFill (sic) injectors, and at an assumed $25 a unit, ( we don't know the exact pricing terms of the deal), the revenue implications in the outer years could be significant.

We have made several conservative assumptions in assigning a value to the deal. We are assuming a new molecule goes into development every 24 months, which yields five commercial contracts over the next 15 years.

While Unilife has noted 5-10 possible candidates, we chose to be conservative given the risks around the development of these molecules but also to account for the fact that Sanofi could look for other delivery
technologies outside of wearable injectors (to be sure, Unilife might be a partner in those efforts as well, but again we've chosen to be conservative. The revenue ramp post approval is 1mn units per year growth to 5mn by year 3. "

The contribution margins are expected to eventually reach 60% and we have assumed no terminal value beyond 15 years (again a very conservative cut). We use 15% as a discount rate. The NPV of the Sanofi wearable injector contract is conservatively worth $5 per share in this analysis."

Thus, Jefferies forward PT of $9.00 is based on very conservative assumptions and could well be higher as the full scope of the deal develops with regard to additional molecules, Sanofi accessing delivery technologies outside wearable injectors, and perhaps most tantalizingly, the deal extending beyond the initial 15 years.

With revenue ramp moving rapidly from 1 million to five million units per annum within 3 years of launch, at $25 per unit multiplied by a minimum five molecule, we start to see that the forward sales/revenue/profit figures being talked about are indeed mouth-watering.

Little wonder there's a bit of a re-rate going on as the market finally twigs to what Alan is putting in place.

6. Is PCSK9 a possibility? While neither Unilife nor Sanofi has confirmed their inclusion in the agreement, there has been some conjecture that the deal could include the PCSK9 class of lipid lowering drugs which Sanofi is commercializing under the trade name alirocumab. In studies for alirocumab however, patients received the drug as a 1ml injection via auto-injector or prefilled syringe every 2 weeks.

The small quantity could make the use of wearable injectors unnecessary, and 1ml likely doesn't qualify it under the 'large dose volume drugs" covered under th deal. However there has been some discussion of higher volume dosing delivered less frequently - such as 3ml once a month. Such a protocol could make a wearable injector more appropriate though it still isn't clear that Sanofi will offer such a product, or when.

The data on monthly injection isn't expected before mid-2015, while Sanofi's FDA submission for initial alirocumab is expected by year end 2014."

If PCSK9 isn't  included in the agreement, it leaves open the possibility of an additional agreement. If it is included, then further upside to the Jefferies PT of $9.00

7. Cash is still a focus. While the growing stack of deals provides a level of comfort on sales and revenues in the outer years, the near-term remains more uncertain. Including the recently completed ATM facility, total cash was approximately $23mn at the end of 4Q.

For 2015 there are several additional sources of cash: 1. $20mm in credit available under the Orbimed financing arrangement; all of which will be tapped this calendar year; 2. a forecasted $25-$30mm in upfront payments from development programs (likely inclusive of the Sanofi deal); and 3. $5-10mn in commercial revenues for clinical trial and stability testing on a mix of products.

The total of all of that gives the company visibility on $70-$80mn in cash that can be accessed over the current fiscal year. This is matched against a burn that has been in the $12-15mn/Q range but which will likely trend higher given the expanding commercial operations. The company will likely need additional capital before it enters the steeper part of the revenue generation curve in 2016 and beyond."

These are very comforting numbers which raise the distinct possibility of there being no need for a capital raising in the near-term, as Alan has always said. Further, that when any additional rasing is conducted, it will be at higher levels, given the expected deal flow and market re-appraisal thereon, and thus at minimal dilution to shareholders.

So no likelihood whatsoever of the company falling apart financially, as certain heretics would have us believe

8. "Requirements under Orbimed financing seem achievable.

Unilife recently announced updated terms for its $60mn borrowing from Orbimed. The minimum cash receipts covenants are as follows for the next two years: (i) $20mn for the calendar year ended December 31, 2014 and $54.1mn for the calendar year ended December 31, 2015; for the six months ended June 30, 2015 the company's recei[pts must also not be less than $20mn.

Given our current projections for cash flows, the company should be in compliance at least through mid-2015 based on upfront and milestone payments from its partners , and if commercial sales begin to ramp as we model, the company should remain in compliance through at least all of next year and after."

How good is that

A seriously de-risked business entering a significant period of growth.

And that's just one deal!

The next re-rate following delivery of further deals promises fascinating reading....

Nice work, Alan