|Unilife Medical (ASX: UNI.AX) (UNIFF.PK): Recent Sell-Off Unwarranted, Quick Rebound Likely|
|Sunday, 13 December 2009 16:14|
Unilife Medical Solutions (ASX: UNI.AX) (OTC: UNIFF.PK) is emerging as a leading innovator in the medical device manufacturing space with a focus on safety syringes and business segments that include pre-filled syringes for pharmaceutical companies to deliver injectable medications, sharps safety devices for healthcare facilities, and contract manufacturing services.
Last Thursday afternoon, a large block of stock (over 1 million shares) hit the tape, sending Unilife's primary ASX stock listing from around $1 to 87 cents before recovering about half of this loss and settling back to the mid 90 cent range. While there is no fundamental reason for the initial 13% plunge given all of the positive developments at the Company, a large holder of Unilife's stock apparently had another, unrelated reason to unload the stock before year-end ahead of the holidays and expected slowdown in trading volume from the current average of about 1.5 million shares per day on the ASX.
The following are some key milestones that Unilife expects to achieve over the next year:
1.) the commercial release of Unitract 1mL plastic safety syringes in early 2010;
2.) complete negotiations with Sanofi-Aventis (NYSE: SNY) by end of February for Unifill therapeutic class exclusivity;
3.) redomiciliation to the U.S. (Central Pennsylvania) and NASDAQ stock listing (ticker will be UNIS) expected by end of February;
4.) complete the Unifill industrialization program by the end of 2010 (one year ahead of original plan) with initial production goal of 60 million units per year and projected increases to approximately 150 million units annually by 2012, and over 400 million units annually by 2014 and beyond; and
5.) agreement(s) are possible as early as mid-2010 with additional pharmaceutical companies for Unifill pre-filled syringes outside of the exclusive therapeutic categories agreed upon with SNY.
More than 2 billion prefilled syringes are currently used each year on a global basis and pharmaceutical companies are making the switch to products such as Unilife's safety syringe which are compliant with needle-stick prevention laws (e.g. Federal Needlestick Prevention Act, 2000) in the U.S. (enforced by OSHA) with Europe expected to follow with similar regulations by 2012 based on the model that is currently enforced in Germany. The Unitract product line-up includes plastic safety syringes as 1mL fixed-needle + 3mL and 5mL attachable needles while the Unifill product line-up includes a glass ready-to-fill solution with both fixed needle and attachable options for medications delivered by pre-filled syringes.
A strong resistance to change and high barrier to entry exists for competitors in the medical device / safety syringe market because once supply contracts are agreed upon and products receive marketing clearance; there is little incentive to change components (e.g. a pre-filled syringe) since this would require a new approval process to certify the new components being utilized. The unique features of Unilife's fully-integrated (within the barrel of the syringe) safety syringes are outlined below and the Company has a major advantage and pending customer in the form of SNY along with a strategic plan that targets companies with new products in development that are designed for delivery through pre-filled syringes.
1.) a passive needle retraction system that is activated inside the body
2.) healthcare providers / shot administrators control the speed of needle retraction
3.) auto-disabling prevents the re-use or tampering of used syringes
The market opportunity for prefilled syringes includes over 50 medications (primary anti-coagulant / hematology medications, vaccines, and other biological agents) that are delivered by injection, including a projected 3 billion prefilled syringes in use by 2012. Unilife has a distinct advantage with a disruptive technology since there are currently no prefilled syringes to deliver medications with fully-integrated safety features so pharmaceutical companies must add these features, adding to the manufacturing and shipping costs while significantly increasing the overall packaging size (i.e. Unifill reduces packaging volume for drug products by 60% without the need for ancillary safety instruments that must be attached / assembled as with standard prefilled syringes), resulting in both waste disposal and marketing issues.
In mid-August, Unilife announced that it has commenced U.S. production of the Unitract 1mL Insulin Syringe at its FDA-registered manufacturing facility in Pennsylvania. The Company's automated assembly system is now rated at up to 90% of efficiency and Unilife will continue to work towards achieving the optimum productivity rate for this assembly system of about 40 million units per year. Unilife is building inventory to fulfill current and anticipated orders for the Unitract 1mL Syringes, which has already received key regulatory certifications for use in major markets such as the U.S., Canada, Europe, and Australia.
The Company's strategic partner for exclusive manufacturing and distribution of sharps safety products is Shanghai Kindly Enterprise Development Group (KDL). This facility currently produces Unitract 1mL syringes and blood collection safety devices using semi-automated assembly systems developed and qualified by Unilife. KDL is the second largest medical device manufacturer in China and has two-thirds market share of the Chinese needle market, manufacturing over 5 billion needles and 600 million syringes per year while serving as a key partner for the Asia-Pacific region.
The key strategic business partner for Unilife is Sanofi-Aventis, which is the largest buyer of pre-filled syringes in the world for injectable products such as the blood thinner Lovenox and influenza vaccines such as Fluzone marketed by the Company (Griffin Securities estimates that SNY purchases 40% of all pre-filled syringes on a global basis). This key partnership provides Unilife with the necessary capital to expand its U.S. manufacturing capacity and will provide a major source of initial commercial demand for Unifill in 2011 with an initial production target of 60 million units per year.
In July, Unilife and SNY agreed to a five-year exclusive licensing agreement for Unifill. SNY is paying A$46M for the right to negotiate purchase of the Unifill RTFS (ready-to-fill syringe), consisting of fees and milestone-based industrialization payments with ongoing negotiations for exclusivity agreements by therapeutic class. While the therapeutic exclusivity agreement (expected by February) will not be disclosed to the public to protect Sanofi's R&D pipeline; blood thinners and vaccines are two major product segments for SNY that are obvious inclusions and agreements that are announced with other companies will provide this information over time.
The industrialization program was originally intended to be completed by the end of 2011, but it is proceeding ahead of schedule so that both parties have agreed to bring its scheduled completion date forward to the end of 2010 (an entire year ahead of schedule). Unilife is scheduled to commence supply of Unifill RTFS by the end of 2010. Initial supply of the RTFS by Unilife will utilize a fully automated assembly system, and the design of this first line will also be used to develop a higher-volume automated assembly system scheduled to be completed by the end of 2011.
In November, Unilife announced the appointment of Mikron Group as its contracted supply partner for the development and supply of automated assembly systems to support the commercial production of the Unifill ready-to-fill syringe. This high-volume automated assembly system is anticipated to have an annual production capacity greater than 100 million units and Unilife has a target production plan for the RTFS of about 400 million units per year beyond 2014.
Mikron was chosen after an extensive due diligence process by Unilife that began with the evaluation of 30 automated assembly partner candidates. The initial list was narrowed down to five suppliers that were each visited and asked to submit proof of principle samples for their high-volume, automated manufacturing systems before Mikron was ultimately chosen by Unilife. The high-volume manufacturing system is scheduled for delivery by October 2010 as part of finalizing the industrialization agreement between Unilife and SNY that is targeted for the end of next year.
In addition, the centralization of RTFS production activities within Central PA will reduce the Company's operational costs, further optimize its supply chain activities, and place Unilife in a more favorable international location to supply the RTFS to all of its anticipated customers while leveraging the Company's strong, mutually beneficial relationship with the PA government due to the generation of high quality jobs. In late October, Unilife announced the acceptance of a US$5.2 million offer of assistance from the Commonwealth of Pennsylvania to support the creation of 241 new jobs within York County as part of the Company's relocation of its global headquarters and manufacturing facilities to Central PA.
In late October Unilife also announced that CEO Alan Shortall purchased 479,800 shares of the Company's stock on the open market at an average price of A$1.026 per share and the CEO has authorized his broker to purchase additional shares that will bring the total number of shares purchased to over 500,000. Mr. Shortall commented that he elected to purchase the shares in the open market rather than participate in the Company's private placement from earlier in the month (conducted at a 7.7% discount to the market price at the time) as a sign of confidence to shareholders by purchasing at regular market prices.
Unilife announced a A$42.1M capital raise to accelerate the expansion of its operational capabilities, production facilities, and equipment requirements in the U.S., in addition to completing the industrialization program for Unifill. Unilife also plans to expedite the commercialization of additional pipeline products with other interested major pharmaceutical companies with whom the Company is currently in discussions. Finally, the proceeds of the capital raise will ensure adequate cash reserves leading to the U.S. relocation and planned NASDAQ listing for the stock.
The expected NASDAQ primary stock listing by February as ticker ‘UNIS' is not a capital raising event as Unilife already enjoys a strong balance sheet with A$55.7 million in cash and additional sources of revenue such as pending milestone payments from SNY, commercial release of Unitract syringes, and the pending sale of Unifill to SNY starting in 2011. Unilife has been listed on the Australian Stock Exchange (ASX) since 2002 with approximately 310 million shares outstanding and 8,000 shareholders at this time.
A shareholder meeting and vote will be conducted on 1/8/10 to approve a proposed transaction whereby Unilife USA will replace Unilife Australia as the entity which is listed on the ASX. Unilife Australia shareholders will receive common stock or CHESS Depositary Interests (CDIs) in Unilife USA. The CDIs will trade on ASX and are analogous to American Depository Receipts (ADRs), which represent ownership stakes in foreign companies that trade on U.S. financial exchanges. Unilife USA will seek a NASDAQ listing under ticker ‘UNIS' and six CDIs will be equivalent to one ordinary share in Unilife USA. Given the current foreign exchange ratio of approximately A$1 to US$0.91, a share price of $1 for the ASX stock listing would translate into $5.46 per share for Unilife USA when it begins trading on the NASDAQ (= $1 share price for CDIs on ASX * 6 * 0.91 for-ex ratio).
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Disclosure: No positions