Pre-filled syringe company Unilife (UNIS) is losing millions and management is handing investors a minus 190 percent return on their money.
But its executives are living like kings.
They can thank the CEO’s brand of showmanship that puts P.T. Barnum to shame and likely contributes to the unwarranted share price that’s hovering around $4.60.
And they can also thank their compensation committee with its laugh-out-loud justification for overpaying the folks running a company that can’t seem to turn a dime in profit.
The lowest paid of the bunch is CEO Alan Shortall - the billiard ball-bald Irishman who practiced pitching Unilife to his ex-girlfriend over a decade ago by promising, according to court records, “You will be a rich woman …” after investing in the company.
Last year, Mr. Shortall received more than $690,000, including the $420,000 base salary and almost $45,000 to buy and maintain a vehicle (compared with $6 million including unrealized stock awards the prior year).
Including hefty bonuses and stock, the other four officers last year received about $1 million apiece.
Even more stunning is what UNIS pays its directors.
In that period, the unprofitable company generated just over $8 million in revenue.
So the non-employee directors handed themselves about 25 percent of the company’s revenues.
And new retainer fees and other compensation kicked in last December. Each director’s annual retainer fee alone jumped $10,000 to $35,000. All courtesy of the shareholder-approved pay scale created by the three directors on the compensation committee.
The perks for all directors include an extra 1,000 bucks whenever someone has to travel more than two hours to a meeting.
Additionally, each director will receive 35,000 UNIS shares every year for the next three years. In today’s market, that equates to just about $160,000 extra yearly compensation to directors.
Just for attending a few meetings a year.
*How does UNIS explain this level of self-enrichment?
An entertaining piece of prose gently tucked into the SEC filings tells the tale.
The company justifies the executive compensation by comparing itself to the likes of Natus Medical (NASDAQ:BABY) with its $700+ million market cap and $300+ million in revenue last fiscal year and Exactech (NASDAQ:EXAC) with its $317 million market cap and over $200 million revenue. Both profitable.
Compare those with UNIS, whose market cap exceeds $450 million and revenue for the year reached just $2.7 million . No profit.
It may get downright irritating when viewed in context with the following:
- While directors were busy trying to justify being overpaid, auditors were busy combing UNIS financials.
- KPMG auditors wrote the following going-down-in-flames statement on UNIS:
- “… the Company has incurred recurring losses from operations and has limited cash resources, which raise substantial doubt about its ability to continue as a going concern.”
*“Excessive and wasteful” legal claims pit a huge pension plan against UNIS as it struggles to continue as a going concern.
Indeed, efforts “to recover allegedly ‘excessive and wasteful’ compensation paid to the non-executive directors since 2010,” form the crux of the latest lawsuit filed against UNIS, as disclosed in its 10-Q filing with the Securities and Exchange Commission.
This litigation filed by Cambridge Retirement System is likely a substantial lawsuit.
Cambridge would obviously want to recover any losses on behalf of more than 3,000 Cambridge, Mass. employees and retirees.
The plan invests almost $1 billion.
So this is game on for UNIS. Investors must reasonably assume Cambridge will wage a very expensive battle for every single penny attorneys think UNIS owes the plan. Whose wallets will fund UNIS’ battle plan?
*More serious red flags are snapping.
If only the company issues stopped there. But since this Seeking Alpha article recently presented the threat of additional dilution, rapid cash burn and other investor warnings, TheStreetSweeper has unfurled additional red flags whipping this Aussie-rooted company.
Here are some of those, in brief:
1. U.S. Food and Drug Administration investigators suggest problems in UNIS
2. Realty falls short of hype
3. Interesting links to the still-active whistleblower lawsuit
4. Lawsuit says CEO advises: “Deny everything”
5. Challenging contract agreements
*FDA inspection report reveals problems
U.S. Food and Drug Administration investigators discovered “recurring systemic issues” and voiced “concern over the firm’s promotional materials,” according to an inspection report of the Unilife plant obtained by TheStreetSweeper.
Spurred by a consumer complaint, the FDA sent two investigators to York, a central Pennsylvania community, to spend four days last spring investigating the Unilife operations.
Mr. Shortall told analysts that the FDA had no findings and even called the company’s system “exemplary.”
But the report indicates things did not go smoothly.
Investigators noted “significant weaknesses with respect to production and configuration management of validation and verification (V&V) test articles.”
These are among the issues listed by former vice president Talbot Smith in his whistleblower lawsuit – a lawsuit that is still very much alive, though many people believe otherwise.
The FDA investigators also wrote about “poorly documented” non-conforming lots.
Investigators noted, “We observed some evidence of vendor performance issues as indicated by a relatively high level of in-process nonconformities …”
Investigators noted 26 complaints about UNIS products, including inability to deliver a 1 unit dose, rubber detached from a syringe and a spring popping out of a syringe plunger.
The agents were clearly dissatisfied with management’s explanation for why a full investigation was not done.
“(Another investigator) and I explained that there should have been a more reasonable explanation and investigation into the cause of the complaint instead of saying that they didn’t have the product to examine,” wrote the lead investigator.
During the closeout meeting with Mr. Shortall and three other employees, an investigator said that the device history records “were full of NCRs,” or non-conformance reports. Since the records dealt with the company’s discontinued legacy syringes, the agents didn’t press for further formal investigation of those products.
Investigators also told management that they were concerned about the company’s promotional materials targeting investors and shareholders, which “were collected for referral and subsequent review by the Agency.”
*Reality falls short of promotions
The never-boring Mr. Shortall shows off a promotional flare by frequently telling investors how great the company is doing, emphasizing the pipeline is “teeming.”
And he consistently promotes the same contract again and again, to try to ameliorate bad financial news.
During the May 9, 2013 earnings call, for example, Mr. Shortall said: "Thank you, Todd. Good afternoon and good morning to those in Australia. Before we discuss the quarter, I am excited to tell you that we are getting ready to announce our first major long-term supply contract for the Unifill syringe. This is a significant multi-year commercial supply contract with a major pharmaceutical customer that generates revenue immediately."
Almost everyone wanted to jump up and shout for what sounded like a brand-new, exciting development (which sounded much like one announced five years earlier). This time, an analyst with Jefferies & Co. wanted clarification amidst all the excitement.
Under the analyst’s questioning, Mr. Shortall admitted the company had already disclosed the contract and another one months earlier.
Before the Feb. 3 earnings call, the CEO claimed his company was “entering a period of hyper-growth,” with an upcoming “tsunami” of deals. He touted a dozen deals expected by the end of 2013. But when it came time to face eager investors during the earnings call, he couldn’t name a single new deal.
Unfortunately, UNIS got only half-way to the year’s goal of a dozen deals.
There are many other instances where hyped hopes and dreams simply failed to materialize, though we’ll mention just two more.
The company’s 2008 letter to shareholders promised “the first commercial sale of Unifill Prefilled Syringes to occur towards the end of 2010.”
That hasn’t happened. The company just signed its first supply contract but hasn’t executed on it four years after the commercial sales were expected to begin.
The letter also noted: UNIS ought to have the capacity to crank out 400 million units yearly at the end of 2013.
That hasn’t happened. The company’s latest 10-K states the current capacity is 60 to 70 million units.
It’s a company-killer, of course, if a business can’t meet the manufacturing requirements of customers. Analysts frequently question UNIS management on that issue, since they’re concerned that the company may not be able to crank out several 100 million units in time.
“We actually will have that equipment in place, in time, tuned, ready to go and fully operational to cover that product coming off the line …. for any of our pharmaceutical customers,” Mr. Shortall recently said, adding that customers usually give UNIS about one to two years to gear up production.
Should investors believe it?
FDA investigators noted, “The firm is not actively manufacturing any commercial product…” If the pharmaceutical companies demand the production levels required to maintain their exclusive contracts, will UNIS be able to meet the demand even though it’s never actually produced even the 60-70 million that the plant currently has the capacity to produce?
We recommend investors consider those comments and issues within the context of our investigation.
*Despite “absolutely incorrect” reports to the contrary, UNIS still deals with a former executive’s eye-popping lawsuit.
A lawsuit by former vice president Talbot Smith alleges he was fired because he reported regulatory violations to the feds. Based on the UNIS press release and reports in publications, many investors think this significant lawsuit was recently dismissed.
“Those reports are absolutely incorrect,” said Mr. Smith’s attorney Virginia Hardwick when TheStreetSweeper brought those reports to her attention.
In fact, Ms. Hardwick recently added a defamation pleading to her client's lawsuit.
“We stand by the allegations in the complaint,” she said.
The lawsuit that was actually voluntarily dismissed Jan. 8 is one filed by Byron Brandt, partially based on issues posed in the Forbes story, “How Is A $329M Syringe Company Still Unprofitable After 11 Years?”
The latest court record on Mr. Smith's case indicates the parties plan a conference call on April 17 to possibly schedule a settlement conference.
Mr. Smith’s lawsuit contains issues of interest to investors as they try to assess the company and its management:
- The lawsuit says the company directed employees to run scrap through production lines to make visiting investors think UNIS was churning out syringes when it was not. The company has denied this ever happened. However, we have sources close to the situation who have produced the dates that employees participated in fake production runs and other details of these “Potemkin villages.”
- The lawsuit also contains a complaint Mr. Smith filed with the UNIS board of directors shortly before he was fired. It alleges Mr. Shortall directed employees to break into a terminated research and development executive’s car and steal his computer. We have the police report – available here – showing this theft occurred. If this crime proves accurate, it would speak unflattering volumes about UNIS’ culture and management’s character.
- Syringe production costs were about twice what Sanofi would be willing to pay, according to the lawsuit. Mr. Smith, a Sanford University grad, reported to fellow executives that producing the Unifill syringes would cost about 90 cents apiece, yet UNIS expected to charge Sanofi only 50 to 55 cents apiece. Subsequently, Mr. Smith claims that an employee was told to create better-looking estimates.
The company denies those allegations and contends that its former vice president was wrong and uninformed.
- The company’s answer to the lawsuit says the Sanofi deal sets prices at just over 94 cents for high volume supply.
Here is what Mr. Shortall said during the Sept. 11, 2013 Morgan Stanley Healthcare Conference:
But what I can say is that I have said previously that we are expecting to get an average price on the Unifill of around $0.90. We've already done one transaction which is approximately at $1.50 per unit, and I still think that we can actually hit that target and that's what we'll be aiming for.
So here it is in a nutshell: if the syringes cost about 90 cents to produce and sell for about 94 cents – or even $1.50 - UNIS is in a heap of trouble.
*Lawsuit: CEO tells ex-girlfriend “deny everything.”
While the Smith lawsuit is more current, an earlier one is just as interesting to investors who want to size up the situation.
Mr. Shortall’s ex-girlfriend, the mother of two young sons, sued him in 2006 for breach of trust.
The girlfriend said she loaned Mr. Shortall a total of more than $47,000. He promised her 222,000 shares of the UNIS predecessor, Unitract PTY, in exchange for part of the cash he received, according to court records. However, the judge determined those shares weren’t transferred and awarded her $548,452.
Sometime after the couple split up, an Australian newspaper was about to run a story that portrayed Mr. Shortall’s background from his time as a consultant to car dealers selling car alarms, on through his association with three collapsed businesses. Mr. Shortall attempted to handle the situation with less-than-honest finesse, according to court records that state:
In about the middle of January 2004 the defendant rang the plaintiff and told her that there would be a newspaper story published which would be critical of him. He said, “if Ben Hills contacts you, you are to deny everything. I cannot transfer the shares to you now as everyone is watching me.” He also said to her “tell anyone who asks not to sell their shares, the price will probably drop, but it will go up again.” Ben Hills is the Sydney, Australia journalist who wrote the newspaper story.
At least as far back as 2004, Mr. Shortall happily hyped the needle biz.
“This is the Holy Grail of syringe technology,” he repeatedly told the reporter.
By the end of March 2004, he promised the reporter, “65 million of the retractable hypodermics will begin pouring off an imported assembly line in a sterile room at a factory at St. Mary’s in Sydney’s west … and Unitract (Unilife's former name) will be on its way to saving millions of lives around the world.”
That didn’t happen.
Ultimately, a China company undertook operations before Unilife operations were moved about six years ago to its current location in central Pennsylvania.
*Recent agreements are good news for UNIS but fall far short of the hype.
UNIS announced Unifill product supply contracts with Sanofi and Hikma. UNIS described this good news in the December filing this way:
“These two contracts alone instantly position Unilife to become the second largest provider of prefilled syringes in the world.”
Sounds impressive except that the braggadocio leaves out the fact that “second largest” is teeny. Again, in UNIS filings, the company admits that the syringe business is already sewn up.
Industry gorilla Becton Dickinson (NYSE:BDX) is one of five peers that have locked up 95 percent of the market. That is 95 percent of the market.
So BDX, provider of not just safety syringes but seven separate divisions of medical technologies, could obviously squash UNIS like a cockroach. Click here or see below to check the filing in which UNIS admits this:
We are aware of five companies which specialize in the production and supply of glass ready-to-fill syringes. These companies are BD, Gerresheimer, MGlas AG, Schott and Nuova Ompi. We estimate the market concentration rate for these five companies to be approximately 95%. We believe BD’s market share to be in excess of 50%, as it has supply relationships with most pharmaceutical companies and contract manufacturing organizations.
BDX reported $41 revenue per share and diluted earnings per share of $4.67.
But UNIS reported 9 cents revenue per share and -12 cents EPS.
*Contract and change issues pose red flags for the key product, Unifill.
Sanofi is in command of the arrangement with UNIS. The 150 million yearly Unifill order mentioned in the press release is simply the amount Sanofi needs to buy if it wants to maintain exclusivity. When and if UNIS gets ramped up about four years after market entry, according to company filings, the arrangement wouldn’t be a slam-dunk. If there’s a hitch or a company like Becton Dickinson undercuts UNIS, it’s an easy switch away from Unifill.
But there’s a potentially even bigger red flag wrapping around the deal to possibly use Unifill syringes to deliver Sanofi’s anti-thrombotic drug Lovenox.
The Lovenox patent has expired and generic competition overall has already punched the company in the nose, indicates Sanofi’s recent half-year report, here.
Lovenox is down almost a full 15 percent.
So UNIS is putting a lot of faith in a drug that’s plunged into an ongoing nosedive.
Also, a pharma company isn’t necessarily stuck with UNIS just because it has agreed to use limited numbers of its prefilled syringes in clinical trials. The FDA will allow the company to switch to another brand of syringe.
“As with any marketing application, a sponsor may make a post-market change in accordance with the application requirements,” said an FDA spokeswoman in an email.
“For example, typically post-market component changes require a prior approval supplement,” she said.
Couldn’t Unifill easily be picked up by another pharma should something go awry with the Sanofi deal?
No, not that easily. Unifill syringes are designed just for Sanofi, according to filings. Though the Hikma deal involves Unifill, it sounds as though a similar Unifill deal is unlikely. Federal filings state UNIS may not be able to satisfy the biocompatibility needs of other companies. So potential customers with different manufacturing processes may be unobtainable.
Check out this telling line from the filing about biocompatibility issues:
Such events may require design, material or process changes to our product, or restrict our ability to enter into supply relationships with other pharmaceutical companies and accordingly, may have a material adverse effect on our results of operations and financial condition.
Since auditors recently warned of issues that “continue to raise substantial doubt about the Company’s ability to continue as a going concern,” the last thing UNIS needs is more of the operating/financial troubles noted in the company filing.
UNIS’ troubles began even before its bumbling efforts to get off the ground in the U.S. The company fell into the Security and Exchange Commission’s bologna-meter repeatedly as the agency requested a total of 97 clarifications to UNIS registration papers before finally allowing the stock to be traded in the U.S.
The company really hasn’t grown up and learned much from its mistakes since then.
The lawsuits, questionable ability to produce millions of safe syringes profitably, poor investor value and history of sketchy management practices are big red flags tightening around UNIS like a noose.
* Important Disclosure: The owners of TheStreetSweeper hold a short position in UNIS and stand to profit on any future declines in the stock price.
- Editor's Note: As a matter of policy, TheStreetSweeper prohibits members of its editorial team from taking financial positions in the companies that they cover. To contact Sonya Colberg, the author of this story, please send an email to [email protected].