MYX - Mayne Pharma Group

[skc]

Agree with most of the above, I reckon its great buying at current prices.

Can you put on the devil's hat and see what might be the sell thesis?

The short's been rising pretty much since the stock peaked >$2 about a year ago, and it remains one of the most shorted stocks on ASX despite the share price being half of the peak. So someone is reasonably convinced of the downside. Not saying they are/will be right... just wondering if you can see what they see.

http://www.shortman.com.au/stock?q=MYX

Some of the known risk factors I am aware of: DOJ investigation, political pressures on generic margins, potential competitor product launch etc.

Yes I am aware that most of these risks I mentioned are fairly generic (pun intended).... but just wondering if you see anything else.

 

[JTLP]

ROE -
Any thoughts from you?

 

[JTLP]

SKC - yes the shorts are steadily rising, even the daily turnover on some days is 40% shorts. As I said before there might be people in the know, but it seems pretty beaten down. But who am I to judge?

 

[Klogg]

Can you put on the devil's hat and see what might be the sell thesis?

The short's been rising pretty much since the stock peaked >$2 about a year ago, and it remains one of the most shorted stocks on ASX despite the share price being half of the peak. So someone is reasonably convinced of the downside. Not saying they are/will be right... just wondering if you can see what they see.

http://www.shortman.com.au/stock?q=MYX

Some of the known risk factors I am aware of: DOJ investigation, political pressures on generic margins, potential competitor product launch etc.

Yes I am aware that most of these risks I mentioned are fairly generic (pun intended).... but just wondering if you see anything else.

The real concern is how hard the price deflation hits their products.

The operational leverage at play here is quite large... Putting it into perspective, $1 of revenue at the moment has an approximate 55% gross profit margin. Beyond that, there's about a 2-3% additional overhead cost before it hits the EBITDA line.

So you get:
$1 revenue
55c GP
52c EBITDA

Imagine you lose 10% (10c) of that:
90c revenue
45c GP
42c EBITDA

That equates to a 19.2% EBITDA drop, and it gets worse as you go through the fixed costs of depreciation and interest.

Operating leverage truly is a double edged sword.

 

[Faramir]

I topped up yesterday at $0.985. 2,035 shares. I brought some back in January at $1.23.

Cochlear and JB Hi-Fi were once heavily shorted. Can anyone think of examples of where Shorters get it wrong?
http://www.thebull.com.au/premium/a/68221-opportunities-in-top-10-shorted-stocks.html

From the article:

The remaining stocks on the Top Ten List have Hold recommendations although both Western Areas Limited (WSA) and Mayne Pharma (MYX) have double digit two-year earnings growth forecasts (+61.3% for WSA and +20.9% for MYX.)

The shorting maybe bad news for the share price in the short term but in the medium term, MYX will recover. You can tell me that I am wrong if you like.

 

[Klogg]

I topped up yesterday at $0.985. 2,035 shares. I brought some back in January at $1.23.

Cochlear and JB Hi-Fi were once heavily shorted. Can anyone think of examples of where Shorters get it wrong?
http://www.thebull.com.au/premium/a/68221-opportunities-in-top-10-shorted-stocks.html

From the article:


The shorting maybe bad news for the share price in the short term but in the medium term, MYX will recover. You can tell me that I am wrong if you like.

You also have to remember where shorters got it right.
Vocus comes to mind... and it hurts, lol.

 

[McLovin]

Can you put on the devil's hat and see what might be the sell thesis?

The short's been rising pretty much since the stock peaked >$2 about a year ago, and it remains one of the most shorted stocks on ASX despite the share price being half of the peak. So someone is reasonably convinced of the downside. Not saying they are/will be right... just wondering if you can see what they see.

http://www.shortman.com.au/stock?q=MYX

Some of the known risk factors I am aware of: DOJ investigation, political pressures on generic margins, potential competitor product launch etc.

Yes I am aware that most of these risks I mentioned are fairly generic (pun intended).... but just wondering if you see anything else.

So from a little bit of digging, the price weakness seems to be industry wide. The main argument appears to be that with the FDA ramping up approvals that will reduce the time that new generics have no generic competitors, as well as increase competition. On top of this, buying groups have reduced the number of large buyers in the US. How does this play out, Klogg, in your opinion?

And what about the DoJ investigation into price collusion? The Americans love doling out large penalties to naughty corporations.

Sorry for the jumbled post that's just a scratchpad of a few things I picked looking around the Google.

Here's MYX ttm with a few generic comps from India (Teva, Sun Pharma, Lupin, Dr Reddy and Aurobindo). It's certainly not MYX specific, they've copped a belting in the last 12 months, but they ran the hardest in the 12 before that.

 

[skc]

The operational leverage at play here is quite large...
Operating leverage truly is a double edged sword.

Yes and no.... but the fact that gross margin is large by most industry standards actually insulated reduces the operating leverage. Do the same calculation for a gross margin of 20% and the impact will be even greater.

The high gross margin is an invitation for competition... more on this point below.

So from a little bit of digging, the price weakness seems to be industry wide. The main argument appears to be that with the FDA ramping up approvals that will reduce the time that new generics have no generic competitors, as well as increase competition. On top of this, buying groups have reduced the number of large buyers in the US. How does this play out, Klogg, in your opinion?

Here's MYX ttm with a few generic comps from India (Teva, Sun Pharma, Lupin, Dr Reddy and Aurobindo). It's certainly not MYX specific, they've copped a belting in the last 12 months, but they ran the hardest in the 12 before that.

Thanks. Great chart.

I have a theory that generic drug companies don't deserve a high multiple. Yes they earn great margins on new products after initial launch and during the ramp up phase, but sooner or later drug sale plateaus, then enter new generic competitions and soon it is just competing on price / marketing efforts. Look at ACR (which has a single generic drug in the market) paints the picture of how the "life cycle" of a generic might evolve.

So a company like MYX needs an ongoing renewal of drugs to keep up sales and profits, let alone growth. Acquiring these drugs will require additional capital. So while a short term sugar hit from new drugs will see EPS growth over the forward estimate periods (most analysts do 3 year out), the earning profile falls off quickly thereafter and overly generous assumptions on terminal value can prove terminal. The question is whether the process of portfolio renewal can be financially self-sustaining...

ASX doesn't have many generic drug companies... and MYX isn't well covered. So perhaps there isn't much expertise in valuing MYX, leading to earlier over valuation. The shorts saw an opportunity, with the other industry headwinds and DOJ issue thrown in as bonus.

This theory sounded great until I see your charts... I can't say that there isn't enough expertise in the US market in valuing generic drug companies. So may be the shorts were just targeting the macro issues affecting MYX.

Cochlear and JB Hi-Fi were once heavily shorted. Can anyone think of examples of where Shorters get it wrong?

The shorting maybe bad news for the share price in the short term but in the medium term, MYX will recover. You can tell me that I am wrong if you like.

The shorts may not be correct but they will definitely have a solid reason for doing so. That's why I asked what's their thesis... it's free research they've done on your investment. The investor can then decide whether it is something they need to take into account or something that offers them an opportunity for cheap entry.

Here's the top 10 shorts from Oct 2013. Some worked well, some worked for a while, others not so much.
http://www.fool.com.au/2013/10/28/stay-away-from-these-top-10-shorted-stocks/

 

[luutzu]

2010 EPS 2.6cps
2017 1h 5.2cps

If that's empire building, build on.

Empire builder wannabe. No?

Don't worry, I'll make my case.

 

[Klogg]

The high gross margin is an invitation for competition... more on this point below.

It is, but it's also indicative of barriers to entry, if it's persistent.

So a company like MYX needs an ongoing renewal of drugs to keep up sales and profits, let alone growth. Acquiring these drugs will require additional capital. So while a short term sugar hit from new drugs will see EPS growth over the forward estimate periods (most analysts do 3 year out), the earning profile falls off quickly thereafter and overly generous assumptions on terminal value can prove terminal. The question is whether the process of portfolio renewal can be financially self-sustaining...

Agreed. It's somewhat like a mining company - you spend money on exploration, you find a mine and use it over an infinite lifespan. Meanwhile, you explore for further mining sites.
The question is whether or not the money spent exploring returns enough to sustain the business and return money to shareholders, and in this case, that depends on the drugs bought.

Something like an oral contraceptive is unlikely to be replaced. There may be more competitors, but these have existed for quite sometime without significant competition.
The same can be said of the Doryx franchise. Over time, sales dropped, so they added a modified polymer coating (MPC) and started selling it, on the basis that this causes a delayed release. Minimal investment, renewed sales.

Drug selection is super important in this case. Mayne won't go for a drug with a 2bn addressable market, they're mostly interested in niche drugs that have significantly less competition. This from their investor presentation:
"50% of portfolio have 2 or less generic competitors and 45% of the top 20 products have the leading market share position"

With three main distribution (Amerisource Bergen, Mckesson and Cardinal Health), there are more distributors than manufacturers, in at least 50% of the portfolio. Given Mayne are very small in the scheme of things (i.e. relative to most pharma companies), they have the luxury of seeing the impact of niche drugs on their P&L - whereas Teva couldn't do the same.

So from a little bit of digging, the price weakness seems to be industry wide. The main argument appears to be that with the FDA ramping up approvals that will reduce the time that new generics have no generic competitors, as well as increase competition. On top of this, buying groups have reduced the number of large buyers in the US. How does this play out, Klogg, in your opinion?

And what about the DoJ investigation into price collusion? The Americans love doling out large penalties to naughty corporations.

The FDA are ramping up approvals, but there's still a significant backlog. That said, those pharma companies with the best operations/R&D and the best drug selection will come out on top. I can't speak to operations vs someone say Teva, because I don't know it well enough - but the drug selection history speaks for itself so far. The Doryx acquisition is a great example of this, Fabior and Sorilux (so far) appear to be another.

As for the buying groups, that can only go so far. Distributors margins have been hit and manufacturers are next - but how far can they go? Drugs with one or two manufacturers can easily regulate supply so that price doesn't get hit too hard. The simpler to produce/lower barrier to entry/higher demand than supply situations won't be so lucky.

Finally on the DOJ - I have no real insights here, other than to say that I think its overblown. The Doxycycline case against Mayne (and 6 other pharma companies from memory) is only for the generic, not for Doryx. I don't know the volumes Mayne sell of the generic alone, so I can't be sure of the penalty, if there is one.
Price fixing is very hard to prove, but if they do prove it, the penalty won't be small (relative to the amount of drugs sold, that is)

 

[Value Hunter]

Well I do not know much about the company but looking at their last released half year report while the company showed a strong profit, the operating cash flow was a hugely negative figure.

Does anybody with more knowledge care to try and make a case for accounting fraud/overstated earnings?

Also as has already been pointed out on this thread a lot of their equity is goodwill and other intangibles. The NTA is tiny in comparison to total liabilities. Any future goodwill write-downs could decimate the balance sheet.

This is on top of all the industry headwinds already discussed. There just seem to be too many red flags.

 

[Klogg]

Well I do not know much about the company but looking at their last released half year report while the company showed a strong profit, the operating cash flow was a hugely negative figure.

Does anybody with more knowledge care to try and make a case for accounting fraud/overstated earnings?

Also as has already been pointed out on this thread a lot of their equity is goodwill and other intangibles. The NTA is tiny in comparison to total liabilities. Any future goodwill write-downs could decimate the balance sheet.

This is on top of all the industry headwinds already discussed. There just seem to be too many red flags.

The cash flow relates to the Teva portfolio acquisition. They essentially bought the ANDA approval to make the drug, but needed to spend approx. $180m on working capital to ensure enough inventory.

Not sure where the accounting fraud comes from.... They even stripped out the Forrest Labs settlement and clearly identified 'underlying earnings'.

And given the industry, the IP behind obtaining an ANDA approval is naturally going to be an intangible.

 

[galumay]

Can you put on the devil's hat and see what might be the sell thesis?

I can certainly invert the case for investing in MYX at current prices, but shorters' action has no influence on me at all - just as all the other traders taking long postions has no influence in my decision making.

I think most of the negatives have been covered through the last couple of pages of posts, my personal view is that the current pricing rather reflects a compounding of all the potential negative outcomes, with no consideration of the potential postives with the business. I see it as a classic case of emotions driving people's behaviour, the high % of shorters just feeds the nervous emotionalism and it becomes a downward spiral. This sort of irrational behaviour piques my interest!

I made my move a while ago, and I will happily wait patiently for the story to play out. I may well turn out to be wrong - it wont be the first or last time!

 

[skc]

Thanks guys for the robust discussion and generous sharing of your knowledge to casual observers like me who spend 20 minutes coming up with immature theories and asking stupid questions. It certainly warrants a closer study on face value. The full year report should be interesting with high hopes and high percentage shorted.

 

[galumay]

to casual observers like me who spend 20 minutes coming up with immature theories and asking stupid questions.

Seriously?!
skc, if what you post is "immature theories and stupid questions", i must be several degrees more of an ignoramous than I imagined! (and i already saw myself as having very little knowledge or wisdom!)

Its great to have one's perceptions and beliefs about a business and investment challenged and to read contrary viewpoints. Its hard work trying to manage my very human biases, but posts from the likes of you, klogg and McLovin help!

 

[McLovin]

Thanks. Great chart.

I have a theory that generic drug companies don't deserve a high multiple. Yes they earn great margins on new products after initial launch and during the ramp up phase, but sooner or later drug sale plateaus, then enter new generic competitions and soon it is just competing on price / marketing efforts. Look at ACR (which has a single generic drug in the market) paints the picture of how the "life cycle" of a generic might evolve.

So a company like MYX needs an ongoing renewal of drugs to keep up sales and profits, let alone growth. Acquiring these drugs will require additional capital. So while a short term sugar hit from new drugs will see EPS growth over the forward estimate periods (most analysts do 3 year out), the earning profile falls off quickly thereafter and overly generous assumptions on terminal value can prove terminal. The question is whether the process of portfolio renewal can be financially self-sustaining...

I think it depends. I think Klogg is right about choosing to invest in the *right* generics. Being able to run niche lines where you only have one or two competitors and the size of the market generally prevents a third or fourth entrant does create a competitive advantage, and is something that is much harder for Mylan, Teva, Sun to do and still power bottom line growth. The more I read about what's going on in the industry, the less I think it will affect MYX to any great extent. Also I think the DoJ thing is a non-event. Most of the commentary seems to suggest MYX was served so that the DoJ could ask execs questions.

I need to do more work on this.

The shorts may not be correct but they will definitely have a solid reason for doing so. That's why I asked what's their thesis... it's free research they've done on your investment. The investor can then decide whether it is something they need to take into account or something that offers them an opportunity for cheap entry.

Totally agree.

Not sure where the accounting fraud comes from.... They even stripped out the Forrest Labs settlement and clearly identified 'underlying earnings'.

Nothing looks out of the ordinary, but the full year will be better to get the full picture around accounting policies. But yeah, nothing really to see in the accountd.

 

[skc]

Seriously?!
skc, if what you post is "immature theories and stupid questions", i must be several degrees more of an ignoramous than I imagined! (and i already saw myself as having very little knowledge or wisdom!)

Well my theory was crafted part way through my post... so it's definitely immature.

@Klogg's knowledge of the company is far far more impressive.

 

[luutzu]

Dam it I'm in trouble. All the smart kids are here and they just don't see what I see.

 

[Miner]

Dam it I'm in trouble. All the smart kids are here and they just don't see what I see.

what do you see mate? Take the veil out and show the asset. Sorry for the pun. I really liked this thread and 15 minutes investment from SKC. What could be the hourly rate for SKC if 15 mins deliver so much? Maybe next to Mackenzie's rate.

 

[luutzu]

what do you see mate? Take the veil out and show the asset. Sorry for the pun. I really liked this thread and 15 minutes investment from SKC. What could be the hourly rate for SKC if 15 mins deliver so much? Maybe next to Mackenzie's rate.

Patience Ari. Got to check, double and triple check the figures... don't want to be looking like an idiot (again? ).