unilife: parsing the debate , page-2

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Unilife Poised To Rally On Novartis Deal


Dec 4 2013, 13:51

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

A small biotechnology company landing a contract with the big player of the industry is reason enough for the stock prices to soar. This is the story of Unilife Corporation (UNIS), a manufacturer and supplier of injectable drug delivery system that supplies its devices to pharmaceutical companies developing injectable drugs. Unilife yesterday soared as much as 22.9% during trading hours and closed 16.63% higher, on the news that it will supply its devices to Novartis AG (NVS). The news was relayed after markets closed on Monday, and the shares soared 13.1% after hours.

Unilife products allow injecting drugs through its vast portfolio of devices that include prefilled syringes, drug reconstitution delivery systems, auto-injectors, wearable injectors, ocular delivery systems, and novel delivery systems for precision and accuracy. These products are differentiated and customizable, with the benefit of safety, simplicity, sterility, precision, convenient disposal and intuitive delivery. These devices are supplied to the pharmaceutical companies, where they are filled and packaged with the injectable therapy relevant to their therapeutic area.

The Deals

Unilife has continued its efforts to strike deal after deal for its drug delivery system. The recent addition is Novartis, a pharma giant, which will use the company's customized syringe, needle, tubing, controller, and pump in its early stage targeted pipeline drugs. 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.

This deal is the fourth for the company this year, and is a healthy step towards the company's goal of achieving profitability, most probably by the end of next year or in 2015. It currently has deals with Sanofi, a long term deal with up to $15 million in milestone payments and royalty on sales of syringes; with Hikma Pharmaceuticals, a 15 year contract with $40 million in milestone payments and royalty from product sales; with Medimmune of AstraZeneca for wearable injectors, expected to generate revenue in 2014; and with Biodel Inc. a 15 year contract with $110 million in revenues expected.

The deals with giant pharma companies speak for the strength in the company's product portfolio and also for the management's ability to advance such deals. It's competing in a $10 billion market of injectable drug delivery systems, which is growing at per year at a 10% rate and is expected to reach $16.6 billion by 2017. The company's lead product is in the $2.7 billion pre-filled syringe market, which is expected to reach $5 billion by 2017. This presents a major opportunity for the company, as its devices have a competitive edge over the competitors.

The Financials

The company currently has cash of approximately $17.4 million, with $7.4 million as of September 30, and $5 million from Sanofi and Hikma deals each, as known. This puts the company in a sound cash position, with definite future milestone payments of up to $160 million expected over the course of next few years. Other royalty payments, and future possible deals, will further help to improve the cash of the company.

Additionally, the company generated revenue of $3.1 million in third quarter, with a net loss of $11.2 million, which is lower than the previous quarter. However, the company does have a $22.47 million in debt, with a debt-to-equity ratio of 55.96. This ratio is slightly worrying since the company's interest coverage ratio is a negative 22.68, which puts a question mark on its ability to pay off the debt with existing resources. However, once the company earns large amounts from its operations, it will be able to offset the risks associated with this debt, since currently it has negative cash flow which results in lower interest coverage ratio.

The Bottom Line

The company's latest deal with Novartis has put it in the spotlight and has contributed to remove the negative sentiment associated with the company, and also increasing the expected milestone and royalty payments. The price target for the company was raised by Cantor, from $6 to $8, following the deal with Novartis. Analysts currently rate the company a strong buy, based on the potential of its pipeline and the possible supply agreements in the future.

The company however, does come with risks. Some of the most prominent ones include the disruption of supply if the company's sole manufacturing facility in Pennsylvania is faced with any mishap; inability to land future deals; a large debt; and dismal financial results that miss the analyst estimates.

Furthermore, the approximate 96 patents relating to the injectable devices expire between 2018 and 2032, which gives the company ample opportunity to generate major revenues from the devices. Overall, the company has long term potential and with new deals with major pharma companies, it may reach break-even earlier than expected.

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