Strong New Drug Sales Lift Mayne Pharma

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

Pharmaceutical distributor and manufacturer, Mayne Pharma, has bedded down its latest acquisition, while delivering strong earnings growth in the first half.

-Positive momentum expected based on strong dofetilide sales
-Strong growth and high margins in new products Fabior and Sorilux
-US Department of Justice investigation the main overhang on the stock
 

By Eva Brocklehurst

Manufacturer and distributor of pharmaceuticals, Mayne Pharma ((MYX)), is continuing its transformation and now has a portfolio of branded and generic medicines which have elevated it to a substantial player globally. The company has more development capability and directly distributes into the US. The market for generic medicines in the US is estimated to be at a US$60bn, and growing.

A low tax rate resulted in the company's underlying net profit being 15% above Credit Suisse forecasts. Compositionally, while sales and gross profit in the first half were ahead, administrative expenses were well ahead of forecasts. Credit Suisse expects positive earnings momentum in the second half based on a recent lift in dofetilide sales, an improved performance in the Doryx franchise and a contribution from the recently launched Fabior and Sorilux products.

The broker also expects a significant improvement in net operating cash flow, based on there being no additional working capital investment. The product pipeline is full, with several molecules expected to be launched over the next 12 months and 19 products currently on file with the US Food and Drug Administration. These have contestable gross sales of over US$1.3bn. Credit Suisse retains a Neutral rating and $1.55 target.

Teva Integration

Teva assets are on track to deliver revenue of US$237m in FY17 and gross margin is in line with expectations. Credit Suisse expects the Teva-acquired budesonide generic should be a significant contributor to generic product sales over time. The company has owned this portfolio for five months and this contributed US$100.5m at a gross profit margin greater than 50%. Bell Potter concludes that the vast majority of the integration risk associated with this acquisition has now eased.

Following the transformational acquisition of this portfolio, combined with the launch of Doryx MPC and dofetilide, the broker acknowledges there were bound to be some surprises in the result. The three main ones include a 97% gross profit margin in specialty brands, a 40% increase in operating expenses and the $170m increase in working capital. Nevertheless, earnings were in line with forecasts and Bell Potter expects momentum to continue in the second half.

Three out of the company's four business units recorded revenue growth. The broker notes the result was dominated by generic products and specialty brands. In specialty brands, revenues declined by -38% but the run rate in the second quarter was significantly higher than the first, Bell Potter observes, and momentum is accelerating because of the launch of the two foam-based topical retinoids (Fabior and Sorilux).

Dofetilide stood out among generic products, generating revenue of US$28.5m. Bell Potter upgrades earnings expectations for this product based on the run rate that has been established over recent weeks. The broker, not one of the eight stockbrokers monitored daily on the FNArena database, has a Buy rating and $1.91 target.

Fabior and Sorilux, meanwhile, reveal exceptionally high margins. Volumes are modest at this stage but growing. Bell Potter anticipates revenues from the two combined will be US$6m in the second half. In the case of dofetilide, average revenue per prescription was around US$288, which looks to have increased by around 26% over the last two months. Based on the revenue data presented, Bell Potter estimates second half revenues may reach US$41.6m.

UBS concurs with the sentiment surrounding dofetilide, noting the product is now the company's largest selling GP and market leader by volume, 61% of prescriptions. The broker warns further generic competition could enter the market in the medium to long-term despite this business being currently unchallenged.

The company has endured a major integration of an acquisition and is ahead of its targets, which UBS notes more than offsets the expected decline in Doryx. Gross margin was ahead of expectations while underlying operating earnings were up 158% (EBITDA).

The broker observes the company is in a solid financial position and has flexibility in its capital structure in order to pursue further acquisitions. Meanwhile, investment in facilities continues as well as in the product pipeline. Investments are on track to be finished in 2018 and support the in-house manufacturing of 11 products. UBS has a Buy rating and $2.20 target.

US Justice Investigation

The main issue for brokers is the US attorneys general lawsuit and investigation by the Department of Justice, although the company has played down any impact on earnings. The US DoJ is investigating price fixing. A civil complaint was filed late last year by 20 US states, which accuses six companies, including Mayne Pharma, of conspiring to artificially inflate prices on an antibiotic and diabetes drug.
 

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