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Treasure Chest: Time To Buy Mayne Pharma?

Treasure Chest | Apr 16 2019

FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. After a long period with a negative or neutral position on Mayne Pharma, Wilsons has decided now is the time to buy.

-Well-placed for opportunistic product development and/or acquisitions
-Specialty division profitability could double over the next few years
-More stable generic pharmaceutical environment assessed


By Eva Brocklehurst

Mayne Pharma ((MYX)) has provoked a change in attitude from Wilsons. The broker has held a negative or neutral position on the stock for nearly two years but now upgrades to Buy. The reasons for the change are the fact product management of generics has improved and sales erosion has been contained. Also, there are some market opportunities developing, with key product launches planned for FY20/21.

Wilsons considers the business is well-placed to return to what it does well, namely opportunistic product development and/or acquisitions (M&A). Specialty brands appear capable of driving improvements in operating margin, cash conversion and valuation.

Macquarie agrees the positive momentum should continue for the specialty brands amid contributions from key products in the pipeline and ongoing growth for Fabior and Sorilux. However, the broker has pointed out that competing product launches have contributed to a moderation of volumes in these two products.

Meaningful contributions from Lexette/Tolsura are expected, albeit in the medium to longer term. Wilsons expects specialty division profitability could double over the next few years as the sales teams are better utilised. Prescribing data in the March quarter signals a strong launch for Lexette, amid stable performance from dermatology foams Fabior and Sorilux.

Specialty Focus

Credit Suisse agrees the company's focus on higher-margin specialty products merits a higher multiple in the stock, maintaining an Outperform rating. UBS has a Neutral rating and considers there is little chance of a re-rating of the stock until there is evidence of an improvement in operating leverage.

UBS observed at the time the first half result was a big improvement on the previous half, albeit assisted by currency moves. Specialty brands have also come to the fore for the broker, although costs are notably elevated.

The company's profitable authorised generic versions of 200mg and 50mg of Doryx continued to do well in the March quarter, with Wilsons assessing 18% prescription growth for the former and 30% for the latter. This success is partially offset by a -15% reduction in branded Doryx volumes.

Mayne Pharma has indicated a more stable generic pricing environment, although brokers expect generic markets will stay competitive. Wilsons considers the US generics business is back on a profitable and competitive footing and earnings growth should be stable, although the composition may change markedly.

Wilsons believes the stock is cheap, given the promising profile over the next year. While generic earnings may still be volatile in the short term, growth is consistent in specialty products and contract business and, hence, the cash-flow and balance-sheet proposition is improving.

The broker, not one of the eight stockbrokers monitored daily on the FNArena database, has a $0.75 target and has lowered estimates for earnings per share by -10% over FY19-20, allowing for important competitive developments since the first half results in February.

There are new competitors for two of the company's leading generic products Wilsons points out. Teva Pharmaceuticals has confirmed plans to launch against one of the company's most prominent R&D assets, a generic version of Merck's contraceptive product, NuvaRing. Dr Reddy also expects to launch its version of Merck's contraceptive product in the second half of 2019.

FNArena's database shows two Buy ratings, one Hold (UBS) and one Sell (Macquarie). The consensus target is $0.87, suggesting 27.9% upside to the last share price. Targets range from 75c (Macquarie) to $1.00 (Credit Suisse).

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