Adam Gefvert, a self-identified shorter and former unemployed poker player at age 30, has written a (surprise) negative article about Unilife. I’m long on Unilife but would like to see more in depth discussion on the points Adam attempts to make concerning Unilife (rather than attacks on his character and motives, which I believe are now covered well). While Unilife surged this afternoon completely disregarding Adam’s allegations, I see value in performing continual fact-based due diligence.
Below is what Adam offered.
Sanofi:
Adam has three main contentions for why the Sanofi deal won’t materialize in his view.
1) Unifill increases the cost of the drug to the point insurance companies won’t pay up. This seems odd to me. Wouldn’t the cost of adding Unifill (30 cents or so) be nominal while providing a key differentiation from the generic? Anyone have a different take?
2) Selecting Unifill as its primary container would expose it to risk should there be a problem. My guess is Sanofi could continue to have back-up contracts with other companies for the prefilled syringes they currently use. No? I may be off base here but I’m curious what others think.
3) Adam writes, “According to the director I interviewed, Sanofi was interested in Unilife delivering the new syringe before a key Lovenox patent expired in 2012. For whatever reason, UniLife wasn't able to deliver in time, and now the deal isn't nearly as appealing for Sanofi.” I’m not sure anyone will have knowledge of this one way or the other. I will only note that I was disappointed that Sanofi and Unilife had not progressed further with stability studies but isn’t directly related. The Unilife press release announcing the deal does note “a minimum of $5 million and up to $15 million in milestone-based payments.” I do wonder why “up to $15 million” in milestone-based payments.
Hikma:
Adam essentially believes that Hikma is a fly-by-night operation with few “experts.” He believes the marketing department pushed this deal through without it being vetted by the operational/technical folks.
Beyond disparaging Hikma’s executives, Adam contends that the company will need to test Unifill with its product for 3 years before distribution can commence. He does leave himself an “out” by noting, “In my discussion with Unilife, they claim that the process will take a shorter amount of time than this because Hikma's drugs have very targeted indications in healthcare facilities so the stability requirements are shorter. And they say the Unilife syringe isn't introducing new materials into the fluid path. However, this is just what Unilife says it expects, so it is not guaranteed what will happen.”
However, the Unilife press release announcing the deal states, “Unilife will commence product sales to Hikma in early 2014. Under the terms of the contract, Unilife will supply Hikma a minimum volume of 175MM units per year following a rapid high-volume ramp up period.” That doesn’t sound like there is even 1 year of stability testing to me. We obviously don’t know what “rapid high-volume ramp up period” means in Alan’s vocabulary so there could be some risk there. But I suppose there is some sort of tell in knowing the final $20 million in milestone payments will be made in 2015. Any thoughts on what “rapid high-volume ramp up” will look like? Maybe not as robust as I’m hoping? We still haven’t heard anything about the new high-speed production line, which I understand will take 12 months to get up and running.
Novartis:
Adam’s claim here was surprising to me saying, “Novartis is testing an orphan drug in these trials. Novartis went to Unilife because it isn't worth other device makers' time to produce this device. An orphan drug is for a disease that affects less than 200,000 people in the United States. So if Unilife creates only 200,000 devices, how much profit would that be? And that is if the drug ends up getting approved, which won't be for another couple years.”
For me, the Novartis announcement was more about credibility than anything. Hearing that the development might be for an orphan drug does concern me because it could be a matter of the big boys not wanting to waste their time on it. But as Writer points out, a shoe in the door isn’t a bad thing. Also, the deal could generate needed revenue for Unilife but certainly not to the extent I was hoping for if the Orphan drug belief is true.
However, some have said the Novartis deal is an extension of the Nov. 29, 2011, announcement. If so, then the description (The current annual treatment costs for the disease exceeds $30 billion in the U.S. alone) doesn’t seem to match. Thoughts?
Medimmune:
Quoting directly: “For the medtech company, unit sales are much lower with the patch than with syringes. Instead of a patient injecting himself once a week with the syringe, they inject themselves once a month or once a quarter with the patch. Unilife can expect to have low unit sales if this deal goes through. Unilife can sell the patch for quite a bit more than the syringes, for $5 or $10. Or possibly more as Unilife claims. However, because the use is infrequent, it isn't required to constantly manufacture them. Therefore, Unilife needs people to put the parts together since it isn't cost efficient to have a machine sit idle. This increases the costs, so the margins are low.
"The business case for the patch is very, very low, it's almost not profitable", said a drug device specialist who wishes to be anonymous. "I have known many device makers who have tried to do it, but I don't know any who have succeeded in the last 15 years, because the business is not growing."
The quote from an anonymous specialist seems to fly in the face of what most of us believe and base some of our investment theory on. Indi, do you have information to add to this part of the discussion?
Biodel:
I simply say that I was extremely disappointed when I found out that Biodel was the company and learned more about the drug candidate’s development stage. I felt Alan oversold this announcement big time and I remain distrustful of the man, even after he has delivered more meaningful announcements since. Perhaps he was feeling too much pressure on the financial front while he knew big things were on the cusp.
As for EZ Mix, one would think that if the device were hard to develop, then the pricing would be good. Adam seems to suggest margins would be low even though barrier to entry is high. Any thoughts on this?
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