Analyst Research
1 March 2020
COMPANY DATA
| Date of Report | ASX | Price | Price Target | Analyst Recommendation |
| 29/08/18 | MYX | A$1.09 | A$1.25 | BUY |
| Date of Report 29/08/18 | ASX MYX |
| Price A$1.09 | Price Target A$1.25 |
| Analyst Recommendation BUY | |
| Sector : Technology | 52-Week Range: A$0.59 – 1.43 |
| Industry: Pharmaceuticals | Market Cap: A$1,712.3m |
Source: Bloomberg
INVESTMENT SUMMARY
We rate MYX as a Buy due to the following drivers:
- MYX second half FY18 (2H18) results suggest generic industry is experiencing pricing stabilization after a period of significant price erosion.
- New product launches and healthy development pipeline.
- While generic brands are going through a tough trading environment at the moment, the long-term outlook remains positive given consumers and regulators need a healthy generics market to keep the price of medication down.
- Potential industry consolidation on lower growth outlook.
- Leveraged to a falling AUD/USD.
- MYX trades at a significant discount to global peer group average on the EV/EBITDA measure.
We see the following key risks to our investment thesis:
- Intense competition from new products.
- Lower demand.
- New product launches fail to deliver the growth expected by the market.
- Regulatory changes.
- Litigation
- Adverse currency movement.
ANALYST’S NOTE
MYX’s FY18 result came in ahead of market expectations at the earnings line, with the Company enjoying a significantly stronger second half relative to the first.
Revenue of $530.3m was largely in line with market estimates of $533.3m and underlying EBITDA $165.3m well above market expectations of $139.7m. The Company saw strong performance in the second half vs. first half, with revenue and EBITDA up +18% and +35%, respectively.
The outlook appears positive, with management noting that the U.S. market remains favourable and retail generic pricing environment has stabilized. Whilst price erosion remains, the industry is not experiencing the double digit decline it was experiencing in the prior period.
In our view, the near-term outlook for the Company remains position, driven by:
1. A strong pipeline of products with 15 products pending approval, targeting markets with sales greater than US$2.5bn;
2. Benefits from a lower AUD/USD;
3. The expansion of the Specialty Brand sales team to 114 reps; and
4. Steady performance in Metrics Contract Services and International.
Further, we note that despite MYX recent share price appreciation, the stock continues to trade at a significant discount to global peer group average on the EV/EBITDA metric. We have upgraded our earnings estimates predominantly in the generics and specialty businesses. This has seen our price target increase to $1.25. Maintain Buy.
- GPD drives group performance. After challenging first half of FY18, MYX had a significantly stronger second half of the year with improved earnings, operating cash flow and non-recurrence of extraordinary items. This was driven by a significant turnaround in the core value driver division of Generic Products Divisions (GPD), which saw 2H18 revenue up +4.4%, gross profit up +23% and GP margin expansion of 840bps. This was supported by improving performance in the Specialty Brands Division and ongoing strength in Metrics Contracts Services.
- Generics pricing environment. On the analyst call, in our view, management provided a pretty good summation of why an industry cannot stay irrational on pricing into perpetuity: “…so there’s still price deflation, and we’re still modeling going forward reasonably significant price deflation. But it certainly appears to be coming back to, dare I say, more normal historical levels. And it goes to a point I’ve made a couple of times over the last year to a lot of folks that are probably on this call, and that is that double-digit deflation in a sustainable way year in, year out in the generic industry is just not sustainable. And people will exit product families, or they’ll exit markets. They won’t invest in capacity, whether it’s R&D or manufacturing. And for those that are able to withstand all of that, the environment will get better. And at a very high level, we’re already beginning to see some of that…”
- Strong products’ pipeline. MYX’s development pipeline includes over 30 products, targeting U.S. markets with sales greater than $5.0bn. In FY18, MYX launched 6 products in the U.S. and 2 brands in Australia. The Company has filed 8 products with the FDA, including their first NDA application (New Drug Application) for SUBA-Itraconazole anti-fungal capsules. This means MYX now have 15 products pending approval, targeting markets with sales greater than US$2.5bn, of which 7 have no generic equivalents today and could be potential first-to-market opportunities.
FY18 RESULTS SUMMARY
Figure 1: MYX FY18 results summary
Source: Company, BTIG estimates; mat = material movement
GPD drives group performance. After challenging first half of FY18, MYX had a significantly stronger second half of the year with improved earnings, operating cash flow and non-recurrence of extraordinary items. This was driven by a significant turnaround in the core value driver division of Generic Products Divisions (GPD), which saw 2H18 revenue up +4.4%, gross profit up +23% and GP margin expansion of 840bps. This was supported by improving performance in the Specialty Brands Division and ongoing strength in Metrics Contracts Services.
Strong products’ pipeline. MYX’s development pipeline includes over 30 products, targeting U.S. markets with sales greater than $5.0bn. In FY18, MYX launched 6 products in the U.S. and 2 brands in Australia. The Company has filed 8 products with the FDA, including their first NDA application (New Drug Application) for SUBA-Itraconazole anti-fungal capsules. This means MYX now have 15 products pending approval, targeting markets with sales greater than US$2.5bn, of which 7 have no generic equivalents today and could be potential first-to-market opportunities.
Headline numbers. As noted above, MYX performance over FY18 really was a case of two halves – 1H18 versus 2H18. Revenue was $530m over the year, with 2H18 sales up +18% on 1H18. FY18 gross profit was $256.6m was driven by a +68% jump in gross profit in 2H18 vs. 1H18. Underlying operating earnings (EBITDA) of $165.3m for FY18 was down -20% year on year, however 2H18 EBITDA was up +35.5% on 1H18.
Generic Product Division (GPD). In FY18, GPD sales were down -7.9% to $385.7m on pcp, with the 1H18 being adversely impacted by rebidding activity in the early 2017. 2H18 sales were up +13.2% on pcp, with gross profit increasing +79% on the back of new product launches, normalized levels of stock obsolescence, improving business mix and cost savings from the transfer of manufacturing into Greenville and Salisbury from third parties. Dofetilide, MYX’s largest product, performed well with sales up +22% year-on-year, however expect increased competition going forward given recent competitor product launches.
Specialty Brands Division (SBD). Both sales and gross profit in FY18 were down on pcp, however this was largely due to abnormal Doryx returns in the first half. The segment saw much improved 2H18 with revenue up +122.8%. Removing the impacts of Doryx returns, segment sales were up grew +17% in the 2H18. Management noted improved performance was also driven by the expansion of the Specialty Brand sales team to 114 reps: “…this expanded team has begun to drive underlying prescription volume growth with the second half volume up 30% for Fabior and 75% for Sorilux versus the first half. The dermatology sales team are focused on growing our 2 foam products, and the business is significantly growing the number of individual prescribers by around 50% to 2,800 per month in the case of Fabior and 1,400 per month for Sorilux since we expanded the sales team late last year”.
Metrics Contract Services (MCS). The segment continues to deliver solid results, with management highlighting that it is outperforming industry sector growth rate. For FY18, revenue was up +9.2% (up +12.3% in 2H18 vs 1H18) and gross profit up +5% (up +13.8% in 2H18 vs 1H18) year on year, driven by repeat business with existing clients and increased late-stage development work.
International (MPI) saw FY18 revenue up +7.3% and gross profit up +17.6% on pcp, with key product contributions from Itraconazole and oxycodone and launches of Monurol and Urorec.
Our valuation...
We have only used our DCF methodology ($1.26) to arrive at our price target of $1.25. However, for the sake of transparency we note our EV/EBITDA valuation, based on global peer group average multiple, gives us a much higher valuation.
Figure 2: EV/EBITDA valuation
Source: Company, BTIG estimates
MYX global peer group trading multiples…
Figure 3: Global comps table
Source: Bloomberg
Figure 4: MYX Financial Summary
Source: BTIG, Company, Bloomberg
COMPANY DESCRIPTION
Mayne Pharma Group (MYX) Mayne Pharma is a specialty pharmaceutical company focused on applying its drug delivery expertise to commercialize branded and generic pharmaceuticals. Mayne Pharma provides contract development and manufacturing services to more than 100 clients worldwide. Mayne Pharma has an extensive portfolio of branded and generic drugs in multiple therapeutic areas, including women’s health, oncology, dermatology and cardiology.
Source: Company
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