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Should You Buy Mayne Pharma Shares? (ASX: MYX)

This article was originally published at: MF & Co. Asset Management.

Mayne Pharma Shares (ASX MYX) is a leading Australian pharmaceutical manufacturer. The company is in the process of launching new products in the US market, with a product range consisting of six generic alternatives on shelves in 2018 and plans to launch one branded product in 2019 into the marketplace.

Price headwinds in the US generic drug market works to moderate the company’s revenue growth, largely due to the congressional investigations towards price collusion among distributors. Legislation on pervasive fixed-price products sparked aggressive price cuts amongst companies in alliance with the USA’s Congressional investigations.

About Mayne Pharma Shares (ASX MYX)

Mayne Pharma stock (ASX: MYX) is an ASX-listed company predominately manufacturing generic drugs, producing branded pharmaceuticals and delivering contract services to clients worldwide.

The company has two production facilities in Salisbury, South Australia, and also one plant in Greenville, North Carolina, USA.

Mayne Pharma’s capability to yield over 1 billion oral dosage forms has been guaranteed under FDA approval, including potent compounds and modified release products.

Mayne Pharma stock has a market capitalisation of $1.17 billion.

Within pharmaceutical manufacturing, CSL Limited (ASX CSL) was ahead of its peers with A$77 billion market capitalisation. CSL saw a solid growth in both CSL Behring (US$3.4 billion) and Seqirus revenue (US$0.8 billion). Another comparable therapeutic company is Acrux Limited (ASX ACR), with a $29.14 million market capitalisation.

Strong Potential Upside For ASX MYX Shares Due To New Trails and Cost Control

New pharmaceutical trial launches accepted by the FDA are expected to create strong profit growth of US$1,865m in the US generic market, with biosimilar accounting for 80% of Mayne Pharma sales.

Among new products, four genetics (US$145m) will be released in 2018 and two generics (US$1720) in 2019. Products cush as the FY19 SUBA®-Itraconazole capsules, used as a fungal infection treatment, and the brand portfolio expansion is expected to further diversify Mayne Pharma shares earnings.

Mayne Pharma stock’s operating expenses have been kept under efficient cost control while well-managed costs underpinned strong margins in the generic market helped keep prices low.

However, a $174 million negative PAT has caused some problems for Mayne Pharma stock financial performance mostly due to asset impairments (AS$183.5m).

Mayne Pharma’s generic production division (GPD) is slowly recovering by cancelling employee loan shares and management initiatives are helping recovery. Further cost cuts of $7.0 million Australia will be delivered through the restructure on an annual basis by 2020.

Long-term Growth Expected but Competition is Fierce The aging population, together with chronic disease has called for healthcare industry growth globally.

In the US, prescription drug spending is anticipated to experience growth of 6.3%, with the healthcare cost as a share of GDP ramping up to 19.9% by the year 2025.

According to Evercore ISI, Mayne Pharma has tapped the low end of the market with affordable bio-similar products. With over 90% products sold to America and with healthcare costs expected to blow out, Mayne Pharma is well positioned to take advantage of market growth.

Addtionally, Mayne Pharma has also tapped into cyclical opportunities as product patents expire. For example, Mayne Pharma will tap into the US$820m market of NuvaRing® when the patent expired by launching its therapeutic equivalent in 2019.

Generic Drug Demand Expected to Grow but Challenges Ahead

Savings from switching to generic brands triggered strong demand of generics with US$253 billion in 2016, based on information gathered from the Association for Accessible Medicines.

However, congressional investigations suggest that price hike conspiracies, along with price deflation, will lead to challenges with generic drug revenue.

Disappointing Financial Performance Led By Net Loss

ASX MYX shares have had a disappointing year with a net loss of 11.9c per share, down from a net gain of 5.15C EPS in FY 2016. Underperformance has pushed the stock to a Price to Book ratio of just 0.99.

ASX MYX shares is performing well below the industry standard, with the industry growing EPS at 9.84%, an average PE ratio of 29.52 and ROE of 44.93%.

Its competitor CSL Limited (ASX CSL) looks to potentially be a better buy for a Healthcare play, even though its PE ratio is on the high side at 36.25.

Long-term Growth Hindered by Short-Term Headwinds

Demand from an aging population and soaring chronic disease is leading to strong growth in the Healthcare industry. New drug discoveries and launching of generic drugs to replace expiring patented drugs can fuel strong growth for Mayne Pharma shares.

However, this is a double-edged sword. Other competitors can just as easily produce generic drugs in direct competition. For Mayne Pharma to succeed in the generic drug market, they will have to keep costs down to keep prices down.

Henry Fung is a Partner Managing Director and co-founder of  MF & Co. Asset Management. He is a highly experienced equities, derivatives and financial markets professional with over 12 years of experience. Henry specialises in building trading algorithms & systems, quantitative & qualitative analytics across macroeconomic, fundamental and technical disciplines and currently runs the MFAM VPAC AU/US models portfolios. The management Partners and Adviser team have decades of experience between them, with experience from major Investment Banks and Brokers. Their Advisers are highly experienced, having dealt with some of the wealthiest clients in Australia.



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