Mayne Pharma Ahead Of Itself?

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

-Bells wants more disclosure on pipeline
-Specialty pharma may be more rational
-CEO central to execution and performance
 

By Eva Brocklehurst

Specialty drug manufacturer, Mayne Pharma ((MYX)), has performed strongly in recent months but one broker has initiated coverage with a Sell rating, wanting to see more disclosure on the pipeline of products in the portfolio.

Mayne Pharma focuses on the manufacturing, formulation and distribution of both generic and branded pharmaceuticals. The company's strengths are in complex oral dose formulations, including delayed release and highly potent compounds. The company also manufactures by contract.

Bell Potter has initiated coverage with a Sell rating and 84c target. This rating is in contrast with the ratings of two brokers on FNArena's database which cover the stock – UBS (Buy) and Credit Suisse (Outperform). To Bell Potter, a significant portion of the stock's valuation is dependent on the future earnings from its development pipeline. The company's generic medicines, in which it has businesses in the US, Australia and Europe, are continually under threat from price deflation and the broker believes this requires constant topping up with new and improved products.

The stock is trading at 29 times FY15 earnings, based on Bell Potter's forecasts. With poor visibility on the longer term growth and associated risks, the broker is lukewarm, especially at the current share price. Bell Potter acknowledges that, in order to obtain scale, Mayne Pharma made a transformational acquisition of Metrics in the US, funded via a well-supported capital raising. To date the execution on this acquisition has been successful, judging by the share price performance. The company has acquired extensive distribution capability in the US and increased the product offering in that market via acquisitions and organic growth. Still, Bell Potter argues the development of new product is the most important asset on the balance sheet and, given this is where the growth comes from, there is not enough disclosure.

UBS takes a different view. The broker notes the existing portfolio of compounds has around five years to maturity and could yet be dwarfed by over 44 drug compounds in the pipeline. Specialty pharmaceutical companies focus on the development side and differentiate drugs through complexity of disease, or novel features in their formulation and manufacture. This differs from classic, high volume and solid-dose generic drugs. UBS observes specialty pharmaceuticals are normally characterised by more rational markets, with up to 60% of the original price retained.

Both Bell Potter and UBS acknowledge that the company has blossomed under CEO Scott Richards, appointed in December 2011. As a long-time player in the global pharmaceutical industry Mr Richards leverages credentials and personal networks, and has built a global footprint for Mayne Pharma. UBS rates the CEO as central to the company executing on its strategy and unlocking value for shareholders. Moreover, the broker believes companies such as Mayne Pharma do not exist in Australia because of the competitive intensity of global pharmaceuticals. Hence, the broker thinks the stock has potential as a takeover target, given its rapid growth and meaningful portfolio.

UBS initiated coverage in April with a Buy rating and $1.10 target, stating the stock's organic growth is being undervalued by the market and current sales represent only 30% of the company's pipeline.The broker is forecasting a 3-year compound annual growth rate of 29%. Credit Suisse also likes the diversity on offer and the upside in the pipeline of new products, retaining an Outperform rating and $1.05 target.

See also, Mayne Pharma Pipeline Reveals Upside on November 23, 2013.
 

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