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)