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I am a fund analyst seeking heavily undervalued small cap stocks for long term investment. If the opportunity presents itself I will also play the short side on companies that I feel are heavily overvalued.

Unilfe: New Contracts Will Triple Share Price


Update:

This article is to update the recent announcements and run up in share price since the last article that we published on Unilife (NASDAQ:UNIS) on September 19, 2014. Since this article UNIS has increased in value by about 50%. This is based on a new contract with Sanofi and the fact that UNIS has proven that it has enough cash to survive the ramp up period of many large contracts.

Background:

Unilife Corporation is a designer and manufacturer of injectable drug delivery systems worldwide. Unilife offers a diverse product line to satisfy the deployment of drugs ranging from stable vaccines to complex biologics. The whole delivery spectrum is covered by pre-filled syringes, dual-chamber syringes, auto-injectors, wearable injectors, intraocular delivery systems and novel devices. Unilife is focused on long-term partnerships with large pharmaceutical customers and customizes delivery devices based on the specifications of each company.

New Sanofi Contract:

On October 6,2014 Unilife announced a commercial supply agreement for wearable injectors with Sanofi (NYSE:SNY). Under this agreement Unilife will be the sole provider of wearable injectors for all of Sanofi’s large dose drugs for a term no less than 15 years. This agreement can be extended for longer than 15 years by Sanofi. Unilfe will receive about $50 million in customization fees for this deal with Sanofi in addition to about $25 per unit. The agreement also calls for an undisclosed milestone payment that could possibly be shown in Quarter 1. The Sanofi agreement is expected to begin generating commercial revenue this fiscal year.

We see this deal as a game changer for Unilife. Sanofi is entrusting Unilife with exclusivity for all wearable injectors for the next 15 years. This is a huge vote of confidence from a top 5 pharmaceutical company. Sanofi believes that UNIS is building the top wearable injector technology and entered into this deal to put themselves at the front of the line.

It is estimated that Sanofi has somewhere between 5 and 10 biologics that will be delivered by UNIS wearable injectors. Each of these biologics will have about a 15 year product cycle, generating 15 years of revenue for UNIS. In the chart below a conservative revenue projection is made with an assumed starting production of 1 million units to start ramping up to 5 million units at a price of $25. Using these figures it is expected that this deal will equate to approximately $750 million dollars in revenue per year by the 6th year of the contract.

Screen Shot 2014-11-05 at 15.20.28

Figures are in millions of dollars

Chart created by RightEdge Analytics

New contracts to show revenue in the upcoming earnings report

Unilife currently has 12 active customer programs. This count includes customers that they have entered into customization or supply agreements but have not generated any revenue from as of Q4 2014. Due to the nature of the pharmaceutical business, Unilife commits its resources to fulfilling long term, large orders for their customers. Unilife details 4 of their newest clients in their 10-K.

Sanofi

In September 2013, Unilife signed a long-term contract to supply Sanofi with Unifill Finesse. According to the press release, the terms include a purchasing minimum of 150 million units of Unifill Finesse per year. This contract period can be extended through 2024. At a unit cost of around $1, this single contract is worth $150 million per year that has not yet been realized.

Hikma (OTC:HKMPF)

In November of 2013, Unilife entered into a long-term supply contract to begin in 2015. The contract is to deliver Unifill syringes for 20 of its generic injectable therapies. Under contract terms, Hikma is required to purchase a minimum volume of 175 million units per year or approximately $175 million in revenues. Unilife also expects to receive $40 million in upfront and milestone payments that have not yet been shown.

MedImmune

In November of 2013, Unilife signed an agreement with MedImmune, a branch of AstraZeneca (NYSE:AZN). No numeric figures have been announced on the deal to protect the strategies of MedImmune. This contract is currently in the customization stage to develop a product for MedImmune’s specific needs. The primary product involved in this deal is Unilife’s revolutionary wearable injector technology.

Novartis (NYSE:NVS)

In November 2013, an agreement was signed with Novartis for the delivery of one of the injectable drug delivery systems. This system will be implemented in one of Novartis’ early stage products. Being an early stage drug, this agreement has the potential for much growth as the drug advances. Some revenues have been generated on this contract since the second quarter of 2014 and more are expected. All terms of this deal have been protected.

UNIS is mispriced by the market due to resolved risks

As of March 2014, UNIS was trading at over $5 per share. The company’s CFO, Richard Weiland, announced his departure on March 18, 2014 and since then UNIS has fallen to half its value. At the time, there were many speculations as to why Weiland left. Rumors were circulated by malicious short sellers that Weiland resigned to liquidate his holdings in the company and maximize his share value. The rumors also stated that UNIS was financially in trouble and bound to fail causing the CFO’s resignation. On April 22, 2014, Unilife responded to the rumors declaring that Weiland’s leaving was part of a succession plan and requested an SEC investigation into the matter. At this point, it was too late. The share price had already fallen by about 40% on this untrue slander.

The other cited risk involving an investment in UNIS is their recent financing deal with OrbiMed. This debt financing was done at above market rates for a total of $60 million. $40 million was received at the closing of the deal in March with the remaining $20 million to be divided between December 2014 and June 2015. This loan was closed above bank rates, which could be a money drain in the future. On the positive side OrbiMed is the world’s largest healthcare investor, and it can be assumed that they did adequate due diligence with this investment. On October 3, 2014 it was announced that this deal was refinanced, accelerating the cash that Unilife would receive. It can be reasonably inferred that this acceleration was to ramp up for the new Sanofi deal,

The final risk on an investment in UNIS involve deals in the pipeline falling through. These deals have been signed into contract. However, if one of the companies under contract should go bankrupt, this long-term revenue stream will vanish.

Earnings Announced on November 10, Another Deal Announcement?

Unilife announces earnings next week on November 10th. According to comments by the CEO, UNIS has 3 new deals in the pipeline. This comment was made months ago, with the recent announcement of the Sanofi in October. This means that there are still at least two contracts that are still waiting to be announced. If history is any indicator we believe that one of these deals will be announced the day of earnings release. Last year on the November conference call a contract was announced followed by another announcement the following week. This is definitely company to hold through earnings.

Jefferies Upgrade

Last week Jefferies came out and announced a price target increase on UNIS from $5 per share to $9 per share. Their analysts believe that the most recent deal with Sanofi is worth approximately $5 per share by itself, with the remaining stream worth $4 per share. The most telling statement in this whole report is given in their key takeaway:

“Earlier this month, UNIS announced an agreement with Sanofi for wearable injectors where Sanofi will only buy such products for large volume drugs from UNIS for at least 15 years. The unprecedented nature of the deal was validated for us in comments by Sanofi at a recent industry conference. Reiterate Buy and PT to $9.”

-Jefferies Report

Conclusion

In conclusion we reiterate our price target of $11 given in the prior article that we published on September 19. In the article we detailed that a few deals were still pending announcement, therefore this news was already baked into our price target. At the time of publish UNIS was trading at around $2.50 per share, and today it is trading around $3.70. We believe that UNIS will make another announcement on earnings date and the share price will trade back up to the 52 week high of around $5.80. With the announcement of more contracts, and UNIS showing revenues from its flurry of contracts from last year we believe this will trade up to $11 dollars per share in the next 12 months. Now is a great time to buy UNIS prior to this large expected price jump on sound fundamentals.

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