Are there any Healthcare stocks IML holds that have disappointed recently?
Mayne Pharma has been a disappointing holding for our funds in the last 12 months. What attracted us to the company was its diverse revenue streams from its three divisions - generics, branded drugs and contract services, as well as the company’s extensive R&D pipeline.
What we didn’t foresee was that in 2017, a number of large US pharmaceutical buying groups merged and then re-tendered all their generic purchases. This led to significant price discounting within the generics industry of circa 7-10 per cent. Mayne Pharma had expanded in the US generic market through an acquisition of a significant generic portfolio from Teva in 2016. The acquisition from Teva looked like a good one as the multiple paid looked low, as it came from a forced sale from Teva after the FTC (the US competition commission) forced the divestment of certain drug categories from Teva following its merger with Allergan.
While the last 12 months performance has been disappointing, and we expect generic price deflation to impact Mayne Pharma’s FY18 earnings, we are encouraged by the outlook of Mayne’s branded drug business and contract services business, which are both growing at 10-20per cent per annum. We estimate that these divisions will make up over 50 per cent of the earnings of Mayne Pharma in FY19. We also believe that US generic prices will stabilise in the next 12 months, with some early signs of stabilisation in this market now appearing.
Mayne’s US generic earnings division should also do better from the second half of FY 18 onwards assisted by Mayne Pharma’s extensive R&D pipeline, which should see a number of new products launched in the US market in 2H18, 2019 and 2020.
Mayne is clearly a stock that’s out of favour at the moment, however longer term we still believe that the company can do well thanks to its diversity of earnings streams and good balance sheet, and that the areas in which the company is involved are still witnessing good growth.
We continue to monitor the company’s progress closely and are looking to add to our holding once our indicators show a definite stabilisation in the prices of US generics. Chart 2: Maybe Pharma has disappointed of late
Source: Factset Date range: 03/01/13 – 04/01/18
MYX Price at posting:
63.5¢ Sentiment: Buy Disclosure: Held
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