Small Caps | May 15 2019
Increased competition in generic drugs has caused a significant deterioration in Mayne Pharma earnings and the company is reviewing the carrying value of these assets.
-Specialty brands revenue and contract services up strongly
-Improved distribution model flagged as well as new contract manufacturing opportunities
-Focus on more durable earnings stream including women's health and specialty drugs
By Eva Brocklehurst
Mayne Pharma ((MYX)) has experienced a significant deterioration in generic product performance since the company's first half results. Revenue declined -15% in the period January-April, with gross profit declining -20%. Increased competition in certain products, such as liothyronine which experienced a decline in sales of -23% in January-April when Greenstone launched its 5mg generic product, was cited as the cause.
BAC and dofetilide have also experienced increased competition. Dofetilide sales were down -84%. Mayne Pharma is currently reviewing its carrying value for generic assets that could result in an impairment. Bell Potter suggests this could involve write-downs against acquired intangibles, internally developed products on the market and developments in the pipeline.
Excluding the generics, all divisions exhibited solid growth. While liothyronine revenue appears to have slumped this was a known risk, in Bell Potter's view, albeit the extent of the decline was more than expected. Moreover, gross profit margin declined to 45% from 57% because of price erosion as well as penalties for failure to supply product.
Limited improvement is expected in FY20 when the full-year impact of the erosion of pricing is offset by two new licensing agreements. The company has flagged an improved distribution model as well as new contract manufacturing opportunities that could drive a -US$15m reduction in the cost of generic goods sold.
Meanwhile, specialty brands revenue rose 53%, including Fabior up 45%, Sorilux up 4% and Doryx up 39%. The company expects Tolsura and Lexette to grow strongly in FY20. Yet Credit Suisse suspects Tolsura is likely to take time to emerge in the formulations of US hospitals.
UBS includes a full year contribution from Lexette from FY20 and a modest contribution from Tolsura as it is launched across the US. Yet the broker reduces revenue growth forecasts for Sorilux, noting a soft performance over the first months of this year.
Despite the weakness early in the year, May and June are seasonally stronger months and management expects a rebound in the final two trading months of FY19. UBS downgrades estimates for earnings per share across FY19-21 by -18-58%. Credit Suisse expects gross profit to be flat in FY19 and does not expect earnings to return above FY18 levels until FY21.
While, continuing to envisage merits in the company's strategy to move towards a more stable earnings profile in specialty brands the outlook is unclear and Credit Suisse downgrades to Neutral from Outperform.
Wilsons maintains a Buy rating but reduces the target to $0.67. The broker believes, while the update is disappointing, specialty brands and contract services performed well and were still capable of driving improvements in operating margins, cash conversion and valuation.
The broker, not one of the eight monitored daily on the FNArena database, acknowledges the upgrade in April was premature and it underestimated the impact of competitor launches against key products. Nevertheless, while generic earnings may still be volatile in the short term, consistent growth in other areas should improve the stability of earnings.
UBS agrees there is merit in the repositioning towards specialty brands and sustainable generic portfolios but awaits tangible evidence before incorporating any positive impact on earnings estimates.
Mayne Pharma also provided a strategy update, highlighting a focus on its more durable earnings stream which includes women's health and specialty drugs. There are potential product acquisitions and launches over FY20 in women's health.
Regardless, UBS believes the near-term outlook is likely to be challenging and the competitive pressures in generics will trump potential opportunities. Approval and successful commercialisation of a pipeline of products remains crucial to improving revenue in generics, the broker asserts.
Macquarie agrees the risks for the near term remain. While specialty revenue growth was robust it was below forecasts as well, although there were variations on a product basis. The broker's downgrade to estimates for earnings per share of -53% in FY19 and -43% in FY20 reflects lower generic revenues and tempered specialty growth assumptions.
Over the long-term, Bell Potter, not one of the eight monitored daily on the database, considers the future of doing business with large wholesalers is bleak. Generics manufacturers are at the mercy of large buyers with respect to pricing and terms, with penalties for failure to supply. The broker welcomes a focus on channels which bypass wholesalers.
Bell Potter downgrades to Hold from Buy and lowers the target to $0.62. FNArena's database has two Hold and one Sell (Macquarie) rating. The consensus target is $0.60, signalling 6.5% upside to the last share price.
See also, Time To Buy Mayne Pharma? on April 16, 2019.
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