Following the release of our
reports on Unilife (
), proponents of the long thesis have continued to defend the
extreme valuation of the business. In contrast, our research
continues to indicate that shares remain severely overpriced due to
the poor underlying economics of the announced contracts and the
extremely competitive landscape. Yesterday's Unilife earnings
seemed to corroborate our negative outlook as UNIS
just $3.6m of revenue and a GAAP loss of -$16.3m for the
quarter-ended December 31st. Management failed to provide new
detail on existing contracts and no new deals were disclosed.
Overall, the tone on the call was muted. The result should be
disappointment for investors that have bid up UNIS shares by 40%+
rise since the last earnings call.
Earnings Reveal Continued Operating Losses and an Unclear
Unilife's fiscal second quarter results was a harsh reminder to
shareholders that UNIS is an incredibly overvalued equity at best.
Unilife reported precisely zero cost of goods sold ("COGS"),
indicating that it failed to sell a single needle for the quarter.
The reported revenue of $3.6m wholly consisted of previously
reported milestone payments from Hikma and Sanofi in addition to
other non-recurring revenue. Management was also guarded about
potential new deals, stating that no new material contracts are
signed that haven't already been reported. This may have shocked
the many voices who flood
with daily Tweets promising "EXPONENTIAL
" or "2 CONTRACTS PENDING." The Twitter-chatter suggests that
Unilife's recent share price appreciation was entirely driven by
new contract announcements. Without a constant stream of new deals
to prop up Unilife's share price, retail investors could begin
abandoning the stock in droves.
Equally as alarming as the persistent lack of product sales is
Unilife's accelerating operating losses. Unilife reported $15.5m in
operating expenses and a negative operating loss of $11.9m. While
cash burn was temporarily lessened by $10m in upfront payments from
Hikma and Sanofi, Unilife still managed to burn $2.3m of cash
according to last week's Australian
. Over the last twelve months, Unilife has incurred more than $60m
of operating expenses. Even if Unilife shifts some of these cash
expenses into stock grants, UNIS is burning roughly $50m cash per
year on an ongoing basis. This leads us to believe that the
previously disclosed $20m in milestone payments for calendar year
2014 won't be close to covering Unilife's operating expenses.
Cantor Fitzgerald's analyst, who has been a UNIS bull in the
past, also appeared worried about the ongoing cash burn,
"[When] can we start to get approach of break-even point? Or is
the ramp still early enough that may get pushed out to next
(FQ2 2014 Call). Unilife management refused to answer the question
"we're not focused on the next quarter or the next quarter of
this year of every to midyear or the end of next year."
Unilife then had the gumption to compare itself to Amazon,
"And I think I've said this to you, Jeff, it's very similar to
the Amazon approach of not looking at that short-term."
We wish Unilife luck in becoming the next Amazon and gaining Wall
Street's acceptance with a business model of perpetual losses. But
we doubt that current investors had this strategy in mind when
speculating in UNIS shares.
Another glaring problem on the call was Unilife's lack of
familiarity with its own financial statements. Never have we seen a
supposedly half-billion dollar business fail to answer such
seemingly basic questions. One analyst asked why Unilife's interest
expense increased from $645k to $4.35m, a very reasonable question
since there was no new debt financing. Unilife's management could
"[CEO] Richard, can I pass that one to you? [CFO] If you don't
mind I do need to look at that and get back to you Keith."
A business with only $3.6m of revenue should understand the origin
of an expense that more than eclipses its entire revenue
Earlier on the call, another analyst asked Unilife to explain
how the upfront cash receipts were treated in the income statement.
Again, this concept would be understood in detail by a skilled
management team. In response to the question, Unilife instead
[CEO:] Obviously, will work on the and we work with Accounts
Department and other relations to deferred revenue. As you know,
I've been away the last 4, 5 weeks. I haven't been involved in
detail on that. [CFO:] As you might imagine, the deferred revenue
essentially is primarily in 2 areas and that has to do with the
nature of the revenue. So it's either milestone recognized or it
is amortized over a period of time. So that's actually what
you're going to see overtime and you're going to see a pretty big
buildup of deferred revenue.
The specifics of the question, which Unilife failed to answer,
are critical to Unilife's hypothetical growth story. Management
stated that it expects "sequential quarterly revenue growth"
through fiscal 2014. If this sequential GAAP revenue growth is only
due to the amortized benefit of the Hikma and Sanofi milestone
payments, then Unilife isn't actually growing. Instead, it would
only be reporting previously disclosed milestone payments. Until
this issue is clarified, we'd expect the sellside to become more
cautious with their revenue projections and price targets.
The Dilution Continues
Unilife ended December 31st quarter with just $6.7m in cash
reserves, covering about one month of operating expenses. This
critically low cash balance demanded an immediate cash injection.
In our most recent article, we argued that Unilife's secondary
could be priced below $3.50, which was a 15 - 20% discount to
Unilife's trading price at the time. While we were wrong on the
precise amount, we were broadly correct about the discount. The
secondary occurred on January 16th, with Unilife
1.5m additional shares at $4.25/share. This was well below the
$4.75 - $5.00 trading price. The result was that Unilife managed to
raise just $6.2m in proceeds after expenses, leaving it with about
$12.9m in pro-forma cash at the start of the quarter. Even this
adjusted cash balance remains well below Unilife's $10-15m in
quarterly cash burn, suggesting that another highly discounted
at-the-money offering could occur at any time.
Unilife attempted to ease these concerns with several hopeful
"It is also my intention to avoid using the ATM in the
(FQ2 Call), but we remind investors that UNIS has made similar
comments on past calls. Avoiding dilution has been a focus for each
of the past three quarters,
"With so many transformational agreements generating revenue
immediately, we have no intention of doing any secondary stock
offering that would cause dilution to existing shareholders"
(UNIS May 9th 2013
"What I want to do is minimize dilution, and that debt funding
that the -- financing that's available to us at any time we wish to
partake in it is another lever to which we may pull"
(UNIS Sept 10th 2013
; "We have no plans to conduct any significant secondary
offering, either now or in the foreseeable future"
(UNIS Nov 11th 2013
). After each and every one of these comments, Unilife has issued
stock under the at-the-money agreement. In the last four quarters,
Unilife has received proceeds of $13.4m, $10.6m, $12.9m, and $6.2m
from the issuance of dilutive secondary shares. Beware when
management teams say one thing and then perform the complete
Unilife also referred to a potential debt financing arrangement
with "a large healthcare investor." Given Unilife's high cost of
equity and its ongoing cash deficits, the lack of a secured bank
financing arrangement has always been a major red flag. When asked
about the healthcare investor, UNIS admitted that
"We had the option of putting a debt financing in place since I
announced pretty much I think around May of last year"
(FQ2 2013 Call). In other words, rumors of a new debt facility are
inaccurate in our opinion; this deal is likely identical deal to
the one mentioned in May 2013. Furthermore, we'd guess that a
private market investor would demand an equity-linked option, such
as warrants or a convertible. Private investors have a higher cost
of capital than a bank. Until Unilife reports a detailed term sheet
for this potential debt financing, investors should remain prepared
for further dilution.
We continue to believe that Unilife's fundamentals cannot come
close to justifying its $440m market capitalization. Past deal
announcements have been full of triumphant rhetoric, each time
boasting about transformative multi-billion dollar opportunities.
But Unilife's ability to translate these contracts into substantial
product revenue remains as elusive as ever. Once investors come to
realize that Unilife's contingent partnerships do not guarantee
meaningful product sales, the market should begin to focus on the
fundamentals of the business. And based on yesterday's report and
conference call, it's unclear that Unilife will ever produce a
profit, much less deliver an acceptable return to investors.
I am short UNIS. I wrote this article myself, and it expresses my
own opinions. I am not receiving compensation for it. I have no
business relationship with any company whose stock is mentioned in
This is not a recommendation to buy or sell any investment. We may
transact in the securities of UNIS at any time subsequent to
Dendreon: The Time Is Now