Mayne Pharma: Short Term Set Backs, But Potential Remains

This story features MAYNE PHARMA GROUP LIMITED. For more info SHARE ANALYSIS: MYX

-Doryx manufacturing halted
-Oxycodone distribution now in-house
-Sharp earnings downgrades
 

By Eva Brocklehurst

Core products in Mayne Pharma's ((MYX)) portfolio have been plagued by weak sales. The company signalled at its AGM that it was halting Doryx manufacturing because of a build up of inventory, on the back of low volumes. Fundamental issues are not necessarily driving the sales performance but, in a competitive environment, brokers are well aware of the impact on near-term sentiment.

Moelis believes the update reinforces the key investment risk in the stock surrounding a lack of earnings visibility in the short term. A freeze on Doryx manufacturing exacerbates concerns, leading to a larger-than anticipated reduction in revenue of around $17m for FY15, on the broker's reckoning.

The company also signalled lower US third party distributed product revenue for liothyronine and oxycodone. Oxycodone sales were also below forecasts and should have a material impact on first half earnings. Revenues from this source are high margin royalties and Moelis observes the decline would flow straight to the bottom line. Mayne Pharma has served notice on the distributor and will now distribute oxycodone under its own label. Moelis considers the issues are a setback rather than a structural problem, but acknowledges they distract from the longer-term potential.

Moelis has a Buy rating and $1.00 target, observing that, as Mayne Pharma possesses the management expertise and capabilities indicative of a much larger company, this should support the roll-out and success of new products in the longer term.

The high fixed cost nature of the business and low absolute earnings means the magnitude of Credit Suisse's earnings downgrade for FY15-17 is substantial. In aggregate, the broker has downwardly revised earnings by 43-60% across the three years. Credit Suisse expects an update early in 2015 regarding plans for the Doryx franchise post expiry of the current Actavis licensing agreement. Mayne Pharma has 17 products on file for approval with the US Federal Drug Administration, 16 with Australia's Therapeutic Goods Administration, and has broadened the geographic distribution agreements for Lozanoc, so Credit Suisse considers the medium to long-term outlook is positive. An Outperform rating is retained. Target moves down to 81c from 97c.

UBS expected FY15 would be tough and reduces sales forecasts to reflect the flat outlook for Doryx in the first half. The broker considers the Pfizer lawsuit launched recently against the submission of Mayne's new drug application, Dofetilide,a generic of Pfizer's Tikosyn, is no cause for alarm. This is a normal process for generic drug approval. The lawsuit triggers a 30-months stay of approval but also reveals potential for Mayne to secure 180 days of exclusivity.

UBS is keen to signal that its Buy rating and 95c target does not advocate owning the stock for the short term. The potential in the portfolio is US$2bn over the next 3-5 years and this ultimately overshadows the near-term earnings volatility. Moelis is also less concerned for the longer term as new products, specifically US generics, will be approved and the reliance on the current suite of products will be reduced. 

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