Mayne Pharma ((MYX)) aims to transition away from its generics business, which is under increasing pressure, outlining at the company’s AGM aspirations for more than 60% of FY24 revenue to be generated by US specialty products.
This rebalancing will be led by the commercialisation of the licensing deal with Mithra, ramp up of new specialty products and optimising the women’s health portfolio.
UBS believes the plan makes strategic sense, with the Mithra deal regarding E4 DRSP, in particular, providing a branded product that will not face generic competition before the end of 2029. The theoretical market size of this product is large, although execution will be key, the broker adds.
Yet Credit Suisse asserts the market needs evidence of successful execution in some of the company’s product launches before factoring in the earnings benefit, particularly given a short-term earnings profile that remains challenging and volatile.
The generics division accounted for 61% of revenue in FY19, as per financial statement, compared with 45% in the AGM presentation. Citi attributes the difference to the classification of some generic products as part of its US specialty division for the purpose of the presentation. The broker considers this categorisation significant, given generics are more susceptible to competition.
Generic sales are down -26% over the year to date and the company provided a cautious outlook regarding its generics business, which remains the largest division of 58% of sales. Credit Suisse expects first half earnings will be down -54% given the competition in liothyronine, dofetilide, BAC capsules, methylphenidate and generic Acticlate.
Gross profit was down -33% and gross margin reduced to 47% from 39% in the year to date. Excluding an FX benefit, Credit Suisse estimates revenue declined around -21%. The broker expects less contribution from new products in development in the outer years, assuming greater price erosion. Gross margin assumptions are reduced on continued stock obsolescence.
UBS believes growth in specialty brands can only offset competitive pressures in generics to some extent. Moreover, a timing mismatch could mean continued weakness in FY20-21, as competition and erosion of base prices in generics has an impact. The timing of Lexette and Tolsura to ramp up could also take longer.
Multiple Downgrades
Wilsons, not one of the seven stockbrokers monitored daily on the FNArena database, noted some disappointing aspects of the AGM update could be reversed but these remain emblematic of the broader issues that the company faces.
If revised FY20 forecasts are met, the broker calculates Mayne Pharma would have averaged -55% sequential declines in underlying net profit over three years without any significant changes to board or management.
Moreover, while there are interesting growth options, the balance sheet is too weak to transform at a pace that can benefit investors. Wilsons downgrades to Underweight and reduces the target to $0.36 from $0.62, anticipating re-engaging with the stock when it reaches the target. The database has four Hold ratings and the consensus target is 54.3c, suggesting 10.7% upside to the last share price.
The company is rationalising operating costs and has guided to lower costs in FY20 vs FY19. It remains to be seen what the net impact on the Australian dollar conversion will be, Citi notes, given a large portion of operating costs are in US dollars.
The broker initiated coverage of the stock in January 2019, when FY20 operating earnings (EBITDA) of $219m were forecast. This forecast now stands at $98m, which highlights the difficulty of forecasting, the broker asserts, particularly for generics. As a result, Citi agrees consecutive earnings downgrades may cause the market to question whether a change is needed to execute on the business plan.
Specialty Brands
The company is focused on developing dermatology (Tolsura) and women’s health franchises, with the US approval of the Nuvaring contraceptive pending in 2020. Citi believes these products should make a positive contribution, but there are execution risks.
The broker was disappointed with the performance of the existing product portfolio of Doryx, Sorilux and Fabior, which more than offset the contribution from new products Tolsura and Lexette.
Credit Suisse notes both Sorilux and Doryx have been affected by product launches, including a new tetracycline antibiotic for treating acne, and does not anticipate any significant improvement in these products going forward. Moreover, Tolsura is yet to show any significant prescription volumes.
The bright spot, in Citi’s view, is the contract services revenue, which grew 16% in the year to date and increases sales forecast for this division by 3% for FY20-22, expecting Mayne Pharma will continue to supplement its R&D pipeline with partnerships.
The company has recently licensed the rights to market a generic topical dermatology product from Encube Ethicals in the US which will start selling in the second half of 2020. The product is already generic and generates sales of more than US$40m per annum.
Macquarie suggests the delivery on products in the pipeline will be a key catalyst in order to offset competition. The broker expects modest growth over FY20 in specialty brands with increased revenue in FY21 in line with the assumed launch of E4 DRSP. Any delay would present downside risk.
