This isn’t easy

This isn’t easy

Recently we have written much on the latest diabetes device fad the non-programmable patch pump or as we like to call them dumb pumps. Now we mean no disrespect by calling these patch pumps dumb rather since they are not programmable the patient doesn’t have to do any complex programming hence the name dumb pump. Most of these patch pumps have much in common – they are disposable – they have a pre-programmed basal rate – there is a bolus button and they are designed to compete against syringes and insulin pens. Finally they are targeted at Type 2 patients who follow multiple daily injection therapy. The general thought is that instead of injecting insulin multiple times per day the patch is attached just once every three days therefore eliminating several injections. Some seem to believe since the patch is attached to the patient it will also improve outcomes as the patient will not skip insulin injections.

Now it should be pretty clear given our comments on these systems we’re not exactly sure where they fit in. There are several reasons for this which we will not repeat today.

Although these dumb pumps don’t share much with real insulin pumps there is one thing they have in common- whether it’s dumb or smart – it’s not easy running an insulin pump company. As we have outlined on numerous occasions the insulin pump market – dumb or smart – is a highly competitive market with multiple dynamics which make the difference between success and failure. Yet even with overwhelming evidence of just how difficult this market has become start-ups continue to find investors who are eager to fork over millions. Investors who seem to believe that these companies have built a better mouse trap.

One such company is Unilife (NASDAQ:UNIS) which recently touted their Imperium patch pump. Just days after launching the Imperium the company stated they had retained Morgan Stanley as a strategic advisor as they had received an “expression of interest” from a third party. To whit we said the company should jump at this opportunity before it was too late, that they should sell run to the bank and hope the check doesn’t bounce.

Yesterday Unilife reported results which not surprisingly were less than impressive for as it turns out things aren’t going all that well. Here are just a few tidbits from yesterday’s call that accompanied the earnings release. Alan Shortall, boy could we have fun with that last name, the company’s Chairman and CEO stated the following;

“cash receipts during FY16 are expected to remain lumpy due to the milestone-based nature of these existing programs and the timing as to when additional upcoming agreements are formalized. While there is potential to receive up front or exclusivity fees associated with some of these upcoming agreements, we expect that existing and future customization programs will continue to represent the majority of our cash receipts this fiscal year.”

Now before we share more of what Mr. Shortall stated we must admit rarely have we heard anyone use the phrase lumpy during an earnings call, that my friends is a first for Diabetic Investor.

Yet Mr. Shortfall, and soon everyone will understand why that name is so appropriate, goes onto state-

“And as we recently announced, in response to third-party initiated expressions of interest, we have engaged Morgan Stanley to conduct a review of strategic alternatives to maximize shareholder value. This review may result in the acquisition of our Company as strategic investment with one or more parties and/or the licensing of one or more of our proprietary technologies. We cannot provide any commitment regarding when or if this review process will result in any type of transaction and we are continuing to operate our business as normal during this review process.”

Dave Hastings the company CFO then went onto state;

“Now to complement this new commercialization phase of our business strategy, we have implemented a cost reduction and business realignment initiative, effective today. As a result, we have reduced our workforce by approximately 50 employees, or approximately 17% of our workforce. Additionally, we have carefully streamlined operations throughout the company to allocate resources towards current programs and anticipated prospective customer collaborations. We expect that as a result of this initiative, R&D expense in FY16 is anticipated to decrease by 25% to 30% and SG&A expense by approximately 20% compared to the annualized run rate in the fourth quarter of FY15. Importantly, these reductions to our operating expenses will start to have effect beginning in the second quarter of FY16.”

So let’s see if we’ve got this right according to Shortall someone wants to buy the company, even with its lumpy cash receipts which seem to be so lumpy that they have to reduce their head count by 50 employees while at the same time doing whatever they can to conserve cash.

During the Q&A Mr. Shortall added this

“And oftentimes, I feel like our hands are tied behind our backs. But we’ve got to look at the long-term value and building of our shareholders and respect our customers’ requirements for the commercial sensitivity of these programs for them. And that’s how we will build long-term, really profitable relationships for our shareholders. And it’s challenging. And I understand it’s difficult for our shareholders, as well.”

With shares down over 11% today and approaching an all-time low he wasn’t kidding when he said it’s challenging and difficult for shareholders.

But wait it gets better as he goes onto state;

“Charles, all I can say is, again, Imperium is, we believe is game changing technology for instant delivery. It will provide our partner insulin provider or device provider the first complete therapeutic solution for the delivery of insulin in one delivery system at a very competitive price and allow them to target type 2 diabetics, particularly the uncontrolled diabetics that are not managing the disease very well. It’s so simple and easy to use.

What I’d say, when you talk about the collaborations, I’d say you could pretty much look across-the-board of the key players within insulin, and also slightly outside of that, because of the opportunity it creates. We’re working a number of parties in that arena. And typically, it’s been recognized, with the parties we’re speaking to, as it is game changing, to the extent that, in fact, some of those parties have actually completed or carried out extensive due diligence and reiterate the fact to us that they believe that this is game changing technology.”

Now we don’t know Mr. Shortall and we’re sure he’s a very nice guy but we’ll say this he like so many others in this space has learned the art of shoveling horse manure. Yep a partnership is coming – heck if we had a dollar for every time we heard this we would be retired already. Yep this is game changing technology – an even better retirement. Yes this deal is right around the corner due diligence is already being done – heck retirement with homes on multiple coasts.

Not done just yet –

“Raj, I’d like to add to that, as well, if I can, is that that timing that we’ve clearly stated has been two to three years, the benefit we get by that is that once our pharmaceutical customers commit to our delivery systems that are unique, it is for that reason and that timing that the benefit we get as a tradeoff is the 10- or 15-year supply agreements. So difficult as it is, and maybe a bit painful for our shareholders and challenging for us as a management team and you as an analyst of that two- to three-year timeline, the benefit is that recurring, predictable revenue with some of the biggest pharmaceutical companies in the world for the next 10 or 15 years. And longer term, I think that’s going to be a very valuable tradeoff.”

Yes this is just classical horse manure or as Scarlet said after Rhet walks out on her “After all tomorrow is another day.” Or as we like to say better to tout the promise of tomorrow than the reality of today.

What’s truly astonishing here is that no matter how many times these companies over promise and under deliver investors still willingly throw money at them. That they buy into the hype, fail to grasp reality and fall for the biggest scam going that since the diabetes market is huge and getting larger by the day that even with a small slice of this huge market they will be rich beyond their dreams. Never mind that even without their obvious problems the Imperium patch pump just might not have a market. Or that there are several others in this space also targeting the exact same patients.

Frankly it wouldn’t surprise Diabetic Investor if some company does come along and buy Unilife. That after due diligence which would seem to indicate this product doesn’t have a prayer they go ahead and do a deal anyway. This what Sanofi (NYSE:SNY) did with MannKind (NASDAQ:MNKD), what Roche did with Disetronic and Medingo and, what Johnson and Johnson (NYSE:JNJ) did with Calibra. The diabetes world is filled with deals that should have never been done, deals which backfired.

Listen these patch pumps aren’t the only thing that’s dumb.