Australia | Oct 03 2019
A new specialty female oral contraceptive will grace the portfolio of Mayne Pharma, providing a substantial growth opportunity in the medium-long term.
-Theoretical oral contraceptive market is large while risk structure of the deal is low
-Mayne Pharma to be Mithra's commercial partner for its two largest women's health products
-Timing mismatch could mean earnings softness in FY20 stemming from generics
By Eva Brocklehurst
Mayne Pharma ((MYX)) will expand its women's health portfolio with a new specialty oral contraceptive, signing an exclusive 20-year licence and supply agreement with Mithra Pharmaceuticals.
Mayne Pharma will commercialise a combined oral contraceptive in the US for a total consideration of US$295m, assuming performance hurdles are met. The product should be launched in the second half of FY21 subject to US FDA (Food & Drug Administration) approval.
Credit Suisse believes that having a female specialty asset will allow Mayne Pharma to leverage patient distribution channels and further expand in women's health. The broker values the deal at $0.30 a share and expects earnings in FY22 and beyond will benefit.
The drug presented strong efficacy results in its phase 3 trials and Credit Suisse estimates around US$200m in sales by FY25. The broker includes this forecast in its modelling, resulting in a -9% downgrade for earnings per share in FY21 and a 43% upgrade in FY22.
UBS agrees the licensing deal makes sense in order to build the oral contraceptive offering. It is also attractive because this is a branded product which will not face generic competition before the end of 2029.
The theoretical market size is large, with the US branded combined hormonal contraceptive market valued at US$2.25bn. UBS notes a relatively low risk structure in the deal, with a modest upfront cash payment and equity issue and a manageable net debt position.
However, Mithra still needs to submit a regulatory file and obtain approval from the FDA, and then Mayne Pharma needs to commercialise the drug. UBS makes material downgrades to earnings per share estimates in FY20-22 because of the equity dilution and amortisation expense, with accretion of around 35% modelled from FY24 as revenue builds.
Assuming the drug is launched, Mithra will hold 9.6% of the Mayne Pharma share capital and Mayne Pharma would be its US commercial partner for its two largest women's health products.
Macquarie envisages the agreement provides an opportunity for both growth and diversification. In estimating the impact on valuation, the broker assumes peak sales are achieved in FY24 and there is an operating earnings margin of 50% with amortisation of US$15m per annum and contingent/milestone payments from FY24.
In sum, Macquarie estimates a valuation of $0.20 per share, raising the target to $0.66 from $0.51 and, with an implied total shareholder return of 5% based on the new target, upgrades to Neutral from Underperform.
Now Mayne Pharma has three core drugs that should drive earnings growth including Tolsura, generic NuvaRing and this latest one: E4/DRSP. Still, the market requires evidence of successful execution in some of these products, in Credit Suisse's view, before factoring in the full earnings benefit, particularly given the challenges over the short term and the volatility in generics.
UBS assesses growth in specialty brands can only partially offset the competitive pressures in generics and a timing mismatch could mean continued softness from generics in FY20 as several of the company's new specialty products take time to ramp up. E4/DRSP is considered unlikely to provide any offset until FY22.
E4/DRSP is a novel, new generation combined oral contraceptive with 50mg of Estetrol and 3mg of drospirenone. Why is this different? Estetrol is a native oestrogen produced by the human foetal liver during pregnancy. Mithra can now produce this at scale through a complex production process as a result of 20 years of R&D.
Because of the perceived safety and health concerns linked to hormone-related therapies many women continue to avoid oral contraceptives. Studies have underlined an unmet need for an oestrogen with an improved benefit/risk profile and the researchers indicated Estetrol could address this.
If launched, the combined drug will be the first native oestrogen approved in a contraceptive product in the US in the first new oestrogen introduced in the US in 50 years.
Mithra is also completing phase 3 trials for two other possible uses of its E4/DRSP, in peri menopause and menopause. Hence, Mayne Pharma could be in a strong position to win any potential supply & licensing agreements for other drugs in the pipeline.
FNArena's database has four Hold ratings for Mayne Pharma. The consensus target is $0.64, signalling 1.2% upside to the last share price. This compares with $0.54 ahead of the announcement. Targets range from $0.50 (Citi, yet to comment on the announcement) to $0.73 (Credit Suisse).
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