TPS Trade Alert – November 17, 2015

Recommendation:

Buy UNILIFE CORP. (NASDAQ: $UNIS) up to $1.05 per share.

 

The Opportunity:

Unilife is a health care company.  But it doesn’t manufacture drugs or treat patients.  It’s basically in the packaging business, and it competes in the health care equipment and supplies industry.

This is a $90 billion industry. It is also highly concentrated… the top 50 players out of the 11,500 companies in the sector pull in 60% percent of total revenue.

Unilife competes in a very narrow niche. The company’s core product is Unifill, a pre-filled syringe.  It is a combination of a drug container and a needle containment system.  Pharmaceutical companies buy empty Unifills from Unilife, fill them up with their drugs, biologics, and vaccines, and ship them to hospitals and physicians.

The benefits are safety and convenience.

The product has been on the market for years.  Unilife was founded in 2002.

But what we like about Unlife is a new product… an instant patch pump for insulin called Imperium™.

The patient gets a dispenser that works like a pen pre-filled with insulin.

Unilife will be marketing Imperium to the big insulin manufacturers like Eli Lilly and Novo Nordisk.  The pharma company will then sell the device through its own channels.

The product’s key advantage is convenience.  A diabetes patient who needs insulin can get a single prescription at a good price and a system that’s easy to use.

The product is positioned to have a positive impact on Unilife’s revenues.

 

Trade Rationale:

Unilife stock is on sale.  It is one of the most inexpensive stocks in the health care equipment and supplies industry, where prices are high.

A year ago, the stock traded at $5.27.  Today it’s at $0.92.  It has recently come off a low of $0.70.

With some traction for the new Imperium instant patch pump for insulin, revenue growth can soar.

The company is already a going concern, a viable business with blue chip clients such as Novartis and MedImmune, part of AstraZeneca.

 

Investment Risks:

The company is in trouble.  It’s losing money and it’s been laying off people.

We’re at a crossroads, and the company needs to turn the promise of Imperium into profits.

The key risk is that the lack of revenue will prevent a significant cash flow problem from being fixed.  The company’s financial footing is not as solid as we would like to see.

Long-term debt has more than tripled over the past three years and stands at $79.6 million.  There was an operating loss of $26 million for the most recent quarter.

Sales need to turn around quickly.  Unilife needs cash coming in.

A second risk is that the instant patch pump for insulin will be met with a yawn.  It may well be that Imperium doesn’t gain traction and the agreement the company needs to strike with a major pharma company never happens.

A third risk is the company’s future.  During the summer, it hired Morgan Stanley to “… help it review strategic alternatives, including a sale.”

Is there a takeover brewing in the background?  Unilife says it’s been approached by a potential buyer.

What does this mean for shareholders?  Tough to tell, but something to keep in mind.

To be clear, we aren’t recommending Unilife because of takeover speculation.  We’re recommending it because of the quality of its products and its potential to be a player in delivering insulin for patients suffering from diabetes.

Diabetes is one of America’s fastest-growing diseases.  Between 1995 and 2010, its rate increased by 100% or more in 18 states.

 

Potential Return: 

We see two different scenarios for potential returns.

The first one is conservative.  It is based on a slow rollout for Imperium and no deal struck with one of the major pharma companies.

In this scenario, we see a return of 100% or more as a result of sales of existing products rebounding and as a result of less strain on cash.

The second scenario is based on a deal struck with one of the big pharma companies to use the Imperium packaging.

This could send the stock into the $6-$7 range, where it was trading just five years ago.

As recently as the spring of 2014, UNIS was trading at just over $5.

We believe Unilife can trade at $2.50-$3.00 within the next nine months, without the impact of an Imperium deal.

Because major agreements like these always take longer than we would like, we see the impact of Imperium on the stock price hitting in late 2016.

One other thing you should know.

It’s not hard to find a penny stock where the only people making money are the executives.

At Unilife, executives cut their own compensation last month.

Chairman Alan Shortall has stopped taking a base salary and has eliminated all his perks.

 

Key Facts:

Company:                                                 Unilife Corp.

Ticker:                                                       UNIS

Recent Price:                                           $0.89

Buy Up To Price:                                      $1.05

Market Cap:                                              $118.8 million

Avg. Daily Volume (3 month):                1,044,000 shares

 

Chart:

 

Category: TPS Trade Alert