** The story is just beginning to play out but certainly for...

** The story is just beginning to play out but certainly for those with a longer term framework, the current controversy creates some nice entry points and certainly a trading position here.



Unilife: Parsing The Debate


Dec 4 2013, 16:01

Disclosure: I am long

Over the past few days, shares of Unilife (UNIS) have been on a volatile tear due to controversy regarding recent contract announcements. Several articles on SA have appeared, offering at times detailed but often misleading positions on either side. I have gone through these, as well as the Sell side reports (that were often cited but not explained) and wanted to offer my take on the investment outlook and risk/reward at current levels.

I expect robust debate on the stock to continue but it is, as always, critical to separate fact from fiction in making an investment decision, particularly with a company with so much riding on future pull through relative to current revenues.

First, the set up

UNIS, a medical needle business founded in '02, creates syringe designs and has generated $9m in revenues over the past few years due to contract manufacturing. Over the past several months, UNIS has announced numerous high profile contract agreements with major players, leading to a significant stock price appreciation based on revenue prospects.

My own article on 9/9, written right after the Sanofi agreement, was written to rebut some of the claims in the salacious Forbes Article that hammered the stock. At the time, I believed UNIS could be worth $5+ a share based on the contracts announced to date. I think the set up , now with more contracts with higher profile players under the belt, is significantly better and de-risks the story materially.

Recent Contracts

Novartis contract: The Novartis (NVS) contract, announced on 12/2, provides for UNIs to supply NVS with a customized delivery device and an option for exclusivity. The financial terms of the deal have been kept confidential; however, Unilife is expected to receive revenue from the clinical product supplies as well as from the clinical development activities. As is not lost on Bulls, the deal is the 4th this year for UNIS and follows a nice string of success.

Hikma Pharma (GM:HKMPF): The 3rd deal in 2013, offers a 15 year contract with $40m in milestone payments & product sales royalties. An initial upfront payment of $5 million will be paid toUnilife immediately, with an additional $15 million in payments expected during 2014. The final $20 million in milestone-based payments will be paid the following year. Hikma has selected an initial list of 20 of its generic injectable products to be used with Unifill products. Unilife has granted Hikma exclusive global rights to its Unifill products for use with these specific generic injectable products. Additional injectable drugs may also be added to the exclusivity list subject to agreement by both parties.

Sanofi Contract: The Sanofi contract (SNY) runs to 2024- including $15m in milestones, with $5m expected in 2013. As per the Jefferies note that I saw out today, Sell Side is currently pricing in about 450mm units of Lovanox a year, with $0.70 per syringe, whichi s about >$100m a year in revenues once ramped up (could be a few years).

Biodel (BIOD) Contract: The one that started the run off. In June, UNIS announced that it had inked a 15-year EZ-Mix contract with Biodel (that had previously been reported in April) - for a novel glucagon rescue drug for treating severe hypoglycemia. The product can likely rapidly penetrate the $125m US glucagon rescue market [based on IMS - and split between Novo (NVO) and Lilly (LLY) … with 15% of high risk patients with an unexpired glucagon kit]. I expect product launch in 2016, based on an IND filed by year end '14, and a pivotal trial starting by YE14, with 505b(2) in mid '15, and then 10 month approval process leading to launch in mid '16. Sensitivity for revenue for UNIS are roughly $10m per year, based on pricing at $10 per EZ-Mix. The contract is actually worth up to $100m+, based on $6m up front for EZ-Mix testing guaranteed, plus royalties of $30m+, and revenue potential of $70m+ over the 15 year contract period.

Bear Argument

As posited by several articles on SA, bears believe that due to a combination of factors, UNIS is moderately to severely overvalued. I will summarize the views into several points:

1. Deal announcements are heavy on potential but light on details: Bears point out that the specifics of many of these deals are not clear relating to volume and/or pricing, and that it is hard to infer anything about revenue prospects from the press releases alone.

2. Company has a history of overpromising and under-delivering: Bears point to promises made in the past, some salacious deals of CEO's behavior and press attracting comments, and other such missteps over the past 15 years.

3. UNIS' technology is not sufficient in a market already crowded: Large players like Becton Dickinson (BDX) and Covidien (COV) already service the market to a point where there is no need/ angle for new entrants to gain meaningful market share

Refutation of Bear Points and A Plausible Risk/Reward Scenario

As is the case with highly controversial stocks [Tesla (TSLA) comes to mind] with potentially ground breaking technology, sky high valuations based on expected growth and earnings potential over a long period of time, there will be considerable nay-sayers at the outset of the hockeystick curve potential. The question of how to trade the stock in the short term will be a mix of trading the volatility and the sentiment, and trading for the fundamentals. Over the extremely short term, sentiment will dominate fundamentals. However, over a longer term horizon, a rigorous analysis will trump emotion.

In this vein, I am evaluating UNIS for its fundamental prospects. The bearish arguments that highlight a perhaps spotty history of performance stretching back decades (?) perhaps miss the fact that in the PRESENT, management has started to deliver on its promises. While this may be a break from a poor track record, it is now incumbent for the bears to prove why the CURRENT execution path will be broken.

At current level, UNIS has a market cap of $500m at a price of ~$5 per share. Cash balance as of last quarter was about $6m. Revenues (quarterly) to date have been de minimus, at <$1m a quarter, but looking ahead to 2014 with the newly signed contracts, the ramp should proceed nicely with updated sell side estimates looking for about $45-50m in sales in '14 (still negative EPS though). I think the best approach is likely a forward P/S metric, as to get a real P/E multiple you'd have to look likely to 2016, which is a bit too far ahead for my tastes.

Judging by the growth profile and trajectory, as well as comps, when looking at MedTech companies with market caps of $50-500mm and annual sales of >$5m (using a Bloomberg terminal) you can pull up about 130 companies- with average multiples of 3.5x on forward sales. Some comps could be Antares (ATRS), Insulet (PODD) and West Pharma (WST) for comparison purposes. These companies have EV of $500m, $1.5b, and $800m respectively.

Notably, however, the forward P/S metrics here are 20x, 8x and 5x on forward, yielding a much higher average here.As such, I construct a bear/bull outlook based on this comparison set, leaving aside the cash value from the ATM facility on a per share basis. Thus my updated outlook on that $50m of sales in '14 would yield market caps of $250m (-50% from today's prices) to $800mm (+60% from today's prices).

The story is just beginning to play out but certainly for those with a longer term framework, the current controversy creates some nice entry points and certainly a trading position here.

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