We believe that shares of Unilife (UNIS) are more than 75% overvalued as investors have once again over-reacted to deal announcements heavy on lofty potentials but light on detail. In a sequence reminiscent of the 2003 and 2009 episodic pops in Unilife’s price, shares climbed by over 50% following the announcement of a new supply agreement with Hikma. The stock appreciated a further 17% on December 3^rd after Unilife reported a nebulous supply arrangement with Novartis. While the Novartis arrangement offers nothing in guaranteed revenue, the Hikma agreement promises $5m of upfront cash. Unilife is also eligible for a $15m payment in 2014, assuming certain milestones are met, and another $20m from Hikma in 2015. At a discount rate of 10%, the present value of these payments is just $35m. This is just one-sixth of the $210m market capitalization gain Unilife has realized in the days following the announcement.

The market appears to have attributed $175m, or more than $1.70/share, to hypothetical future product sales to Hikma and Novartis. Sellside analysts, whose firms are typically enriched by Unilife’s frequent share issuances, have focused on the minimum unit volume figures reported in the Hikma announcement (the Novartis arrangement doesn’t include volume targets). However, we were surprised to see that Hikma itself failed to mention specific volume targets in its own press release. Given the discrepancy, we question whether the volume targets actually represent a guaranteed revenue stream, or if instead, this is merely a minimum buying threshold that Hikma must fulfill to maintain exclusivity. We ask the question because Unilife’s volume targets for Sanofi’s Lovenox only relate to exclusivity: “After the completion of the 4-year ramp-up period, Sanofi would be required to purchase a minimum of 150 million units per year from Unilife to maintain their exclusivity” (FQ4 2013 call).

An extreme degree of skepticism is warranted because Unilife has a long history of over-promising, missing production deadlines, and disappointing its investor base. This narrative extends back to January 2004 when Unilife gave assurances that 65 million retractable hypodermic needles would be “pouring off an imported assembly line” within months. This hyped up timeline produced a tenfold increase in Unilife’s share price, a gain reminiscent to the stock’s price reaction over the past few weeks. Shareholders who bought into this story ended up losing more than 90% of their investment as the production targets were never close to being met.

In July 2009, just ahead of its 2010 Nasdaq listing, Unilife excitedly reported their industrialization agreement with Sanofi. The original press release gave a completion date of late 2010. Under this timeline, a 2009 corporate presentation from Unilife boasted about the potential for “revenues of A$400+ beyond 2014.” Today, we are five months into fiscal 2014 and Unilife’s product sales are non-existent.

If Unilife’s history is any guide, the Hikma supply agreement should not be relied upon to produce near-term product sales. Considering this, along with Unilife’s $45m annual cash burn rate, we judge the 70% jump in Unilife’s shares over the past two weeks to be a severe overreaction. This is particularly true in light of competitors that trade at much lower valuations. For example, Retractable Technologies (RVP) is a syringe business that has long marketed its VanishPoint and Patent Safe assortments of retractable needles. RVP has over $30m of legitimate product sales and yet trades at a market capitalization of just $85m. By comparison, Unilife’s $400m market capitalization on $120,000 of F2013 product sales appears flagrantly overvalued. If we optimistically believe that Unilife can match the $30m of annual product revenue earned by Retractable Technologies, we think the business would be worth 3x revenue. At this multiple, UNIS shares would be worth about $1.00, or more than 75% lower than the current price.

The Novartis Announcement

As the euphoria from the Hikma announcement began to fade, resulting in UNIS shares plummeting by almost 7% on December 2^nd, 2013, Unilife felt compelled to report an exploratory-stage supply agreement with Novartis. Unlike the Hikma agreement, Novartis is not paying Unilife an upfront or defined milestone payment. If the agreement had included guaranteed economics, Unilife would have disclosed the terms as it has in past announcements.

Instead, Novartis only appears interested in testing Unilife’s syringe for a clinical-stage drug: “Under this agreement, Unilife will supply Novartis with a customized delivery device…to enable administration of a novel investigational Novartis drug into a targeted organ in clinical trials.” It seems reasonable that Novartis would test every syringe available on the market, especially for a compound still in early-stage trials. Assessing every available option in the market fits protocol and is far from a guarantee that Novartis will choose Unilife over Becton Dickinson, Covidien, or another industry leader in the future.

Unilife’s shares reacted by spiking 17% after the report before settling at $4.84 by the end of the trading day, thereby adding $70m of market capitalization. The Novartis announcement shouldn’t have surprised shareholders since Unilife reported a “Supply Agreement with Global Pharmaceutical Company” way back in November 2011. The connection is possible because the Novartis press release refers to a “development collaboration…that was commenced in 2011.” If the Novartis relationship is actually two years old, so far producing minimal returns for UNIS shareholders, then yesterday’s share price reaction appears completely unwarranted.

To put yesterday’s $70m one-day market capitalization gain in perspective, $70m is almost equal to the entire market capitalization of Retractable Technologies. It is also more than twice the amount that Sanofi paid Unilife over a four-year period for the initial industrialization agreement. This leads us to believe that Unilife’s shares trade purely on irrational exuberance without any regard for the underlying fundamentals of these contracts.

Business Overview

Unilife Corporation is a research-stage medical needle business founded in 2002 through a reverse merger into a publicly-traded shell. Unilife purports to have created revolutionary syringe designs that are differentiated from the wide range of safety needles produced by industry leaders like Becton Dickinson and Covidien. The world isn’t wanting for syringe designs; a simple search for “safety syringe” at the U.S. Patent and Trademarks Offices reveals 564 separate patents. Nonetheless, Unilife continues to tout a series of exploratory supply agreements even though the business has yet to prove it can effectively ramp production in a cost-effective, quality-controlled manner. Over the past five years, Unilife has generated just $9.4m in product revenue, all of which was derived from very basic contract manufacturing. In exchange for these meager results, Unilife has burned through nearly $200m of cash since fiscal 2006.

Viewed amongst its medical syringe competitors, Unilife appears to have little reason to exist. Unilife cannot compete with the cost, technology, and quality-control track record of the $20bn Becton Dickinson (BD) or $30bn Covidien (COV). Because syringe technology doesn’t change overnight, scale is critical to controlling costs and building a reputation for quality control. A pharmaceutical executive would be loath to risk damaging a pivotal clinical trial or damaging the safety record of a multi-billion dollar drug on a faulty needle. This makes the manufacturing prowess of industry leaders like Becton Dickinson almost impossible to replicate. One can witness the challenges of building a substantial syringe business from scratch by studying Retractable Technologies (RVP). RVP has long produced prefilled, retractable needle designs similar to Unilife’s retractable products. But RVP has been unable to surpass $40m in product sales because BD can always out-compete them on price and design quality. And yet RVP’s $30-40m of product sales dwarf what’s been generated by Unilife.

Unilife is run by Alan Shortall, a promotional CEO who peppers his language with buzz words like “game changer” and “Holy Grail” while regularly giving enthusiastic YouTube interviews and investor presentations. Dozens of articles have been penned about Unilife’s checkered past, including a 2004 Sydney Morning report on Unilife’s failed exploits in the Australian market, a 2006 article drawing attention to questionable share grants, and most recently, an October 2013 article featured in Forbes. These articles describe a management team that has repeatedly misled investors. As early as 2004, Mr. Shortall was called out by the press for his unbridled optimism. Shortall defended himself, saying, “This is not a rort, this is not a scam, we are building a legitimate business.” But nine years later, few signs of any meaningful revenues have emerged and shareholders have suffered the sorts of heavy losses endemic of stock promotions.

Unilife’s Slipping Timelines

Similar to a speculative biotechnology stock, Unilife has primarily been an equity-funded venture. Whereas the over-sized returns possible from discovering a novel, multi-billion-dollar, high-margin pharmaceutical compound might justify this funding model, it seems to make little sense for a sub-scale manufacturing business. After all, there are only so many iterations of a plunger, a barrel, and a needle that one can combine into a syringe design.

But this disconnect hasn’t prevented Unilife from leaning on an ever-morphing roster of shareholders to fund its aggressive cash burn rate. Unilife’s preferred method of raising equity is to announce a series of potential production deals just ahead of selling stock. This rhythmic sequence first began in 2002 after Unilife’s Australia-listed shares climbed to the equivalent of $13 after Shortall promised that Unilife would be producing 65m retractable needles by March 2004. After Unilife failed to reach this target and continued to burn investor’s cash at a rapid pace, Unilife’s shares crashed to below $2.00.

After Unilife’s pitch began to lose its appeal to a disillusioned Australian shareholder base, Unilife decided to take its show to the U.S. in late 2009. Just months ahead of its Nasdaq listing, Unilife stirred investor excitement again by announcing its industrialization agreement with Sanofi in July 2009. Shares quickly skyrocketed to over $8.00 as Unilife captured the imaginations of U.S. investors. But once again, after Unilife’s promises failed to materialize, shares began a multi-year decline and hit $2.50 in late 2012.

Historical insights like these are difficult to gather for two reasons: i) Unilife’s current website does not appear to archive press releases before 2008; and ii) Unilife listed itself on the Nasdaq exchange in 2009. To find history before this date, one has to go beyond SEC filings and search third-party news articles and reports filed on the Australian Exchange. We believe this historical context is important to understanding the Unilife story.

Where are the Expected Sanofi Revenues?

Long-time Unilife followers will be intimately familiar with the Sanofi partnership that Unilife has been chasing for more than half a decade. After signing the industrialization agreement in July 2009, an October 2009 article in BioMed Reports declared that commercial release of Unilife’s Unitract syringe was expected to commence in Q4 2009. Unilife was scheduled to commence production by the end of 2010 with a targeted annual capacity of “more than 40 million units” by the end of 2010. The addition of another high-volume facility was projected to be completed by the end of 2011.

Unsurprisingly, these hurdles were missed as Unilife couldn’t deliver initial supply until July 13^th, 2011. Unilife’s most recent 10-Q states that Unilife continued to recognize revenue from the industrialization agreement through September 3^rd, 2013. This was more than four years after signing the initial contract. But even so, Unilife continues to boast about its Sanofi relationship by recently reporting a supply contract for the drug Lovenox. Even after spending the past four and half years supposedly building out their manufacturing capacity, the Lovenox press release states that Unilife requires a brand new four-year ramp-up period. Leaving aside whether Sanofi actually needs yet another supplier of Lovenox needles, Unilife’s inability to meet their self-imposed deadlines portends continued delays in the future.

Around the same time it reported the initial Sanofi contract, Unilife was busy marketing its Nasdaq listing with a 36-page presentation. This presentation told investors that Unilife was targeting A$400m of revenue beyond 2014 with a high-production facility that could manufacture 400 million units per year. Now, just two months away from 2014, even eternally optimistic sell-side analysts can’t bring themselves to model $400m revenue targets in 2015 or 2016.