MYX - Mayne Pharma Group

[luutzu]

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.

MYX shares hasn't gotten any beating at all since last June, 2016.

You're right that Generic pharmas have been beaten lately... i know one because I bought it for my sister at 20 pound and it's now some 14 pound. Bought some more for her so hope she doesn't get too upset.

Now, MYX has 809M shares [diluted] at end of FY2016. Its share price then was around $1.42 on 27th June, then jump to some $1.80 at close of FY on news of more empire building. $1.80*809m = $1.456B market cap.

Its latest Appendix 3B released a couple weeks ago put its shares outstanding at 1,512,592,738 [1.5B]. At $1 a share that's $1.5B []... So a slight rise... but let's go with its Annual Report 2016 that its market cap was $1.5B then.

Share price gone down by half, but increase in number of shares by about 2x... appear like a bargain but nope. That's unless we think it was a bargain at $2 a share back a year ago.

 

[Quant]

Share price gone down by half, but increase in number of shares by about 2x... appear like a bargain but nope. That's unless we think it was a bargain at $2 a share back a year ago.

Nice digging there Lu , pretty well explains the price drop to perfection , I thought there had to be something .. makes perfect sense timeline wise looking at the revision chart now

 

[Klogg]

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

Dont worry, I make an idiot of myself all the time.
Feel free to post your thoughts, I'm not going to start calling you name if you're wrong - and if you're right, you are doing me a huge favour

 

[Klogg]

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.

If these questions are stupid, then keep asking stupid questions.
Nothing better than having your investment thesis questioned/examined. If it results in a flaw in my research, then I can potentially save myself a world of pain.

 

[Klogg]

Nice digging there Lu , pretty well explains the price drop to perfection , I thought there had to be something .. makes perfect sense timeline wise looking at the revision chart now



View attachment 71831

Sorry for the large number of posts, but I thought I'd mention that I've seen Wilson's research on this. They list SBD's GP for 2H17 to be weaker than 2H16. Yet, the investor presentation states:
"SBD expected to have a significantly stronger 2H17 versus 2H16 following the launch of Fabior and Sorilux foams" (Slide 107)

FWIW, Wilsons have 2H17 SBD Gross profits at 33.3m, and 2H16 SBD Gross profits at 35.3m.

Also, Wilson's EPS estimates have dropped as the share price is sliding. Seems like they're afraid to be too far from the pack.

 

[McLovin]

You're right that Generic pharmas have been beaten lately... i know one because I bought it for my sister at 20 pound and it's now some 14 pound. Bought some more for her so hope she doesn't get too upset.

Now, MYX has 809M shares [diluted] at end of FY2016. Its share price then was around $1.42 on 27th June, then jump to some $1.80 at close of FY on news of more empire building. $1.80*809m = $1.456B market cap.

Its latest Appendix 3B released a couple weeks ago put its shares outstanding at 1,512,592,738 [1.5B]. At $1 a share that's $1.5B []... So a slight rise... but let's go with its Annual Report 2016 that its market cap was $1.5B then.

Share price gone down by half, but increase in number of shares by about 2x... appear like a bargain but nope. That's unless we think it was a bargain at $2 a share back a year ago.

They almost doubled their shares on issue, but more than doubled their EBITDA buying ~$110m in EBITDA. Pre-acquisition EBITDA in 2016 was $88.5m, NPAT was $37.4m. If that purchased EBITDA falls to bottom at the same rate (it will be less, I assume, because of the purchased intangibles – but the amortisation around the customer contract stuff can be disregarded, imo) they bought ~$46m in NPAT. Add the existing NPAT of $37.4, so the new company is earning $83.4m, in FY16. On the expanded share base eps rises from 4.6cps to 5.5cps post acquisition. If the outlook of the acquired business is materially different to the existing business, then it's possible the market is discounting it, which explains the sp fall.

 

[Ves]

They almost doubled their shares on issue, but more than doubled their EBITDA buying ~$110m in EBITDA. Pre-acquisition EBITDA in 2016 was $88.5m, NPAT was $37.4m. If that purchased EBITDA falls to bottom at the same rate (it will be less, I assume, because of the purchased intangibles – but the amortisation around the customer contract stuff can be disregarded, imo) they bought ~$46m in NPAT. Add the existing NPAT of $37.4, so the new company is earning $83.4m, in FY16. On the expanded share base eps rises from 4.6cps to 5.5cps post acquisition. If the outlook of the acquired business is materially different to the existing business, then it's possible the market is discounting it, which explains the sp fall.

What is the lifecycle of the earnings?

Think it was skc that mentioned that these can have limited lifecycles. Not sure if true.

But if it is true there is heaps more valuation risk if you're trying to construct a valuation that includes any kind of earnings multiple (whether it's EBIT or PE based, or even a DCF model with a perpetuity embedded into it). If there is a need to outlay capital to buy more drug lines, niche or not, at some stage then these are known unknowns that are basically impossible to value. Execution risk + valuation risk.... it's all a bit of a headache. I can see why it was heavily shorted after the initial market exuberance. Given the unquantifiable factors the share price is always going to be a wild ride.

 

[McLovin]

What is the lifecycle of the earnings?

Think it was skc that mentioned that these can have limited lifecycles. Not sure if true.

Unless they're superseded they don't really stop being used, but in order to get the earnings growth they need to be constantly bringing new generics in as patents expire. With a well diversified portfolio how much risk is there in bringing any single drug to market? I would have thought that with the the margins they have they can probably afford a few duds without any harm coming. Probably also worth remembering they aren't just a generics business.

 

[Klogg]

Unless they're superseded they don't really stop being used, but in order to get the earnings growth they need to be constantly bringing new generics in as patents expire. With a well diversified portfolio how much risk is there in bringing any single drug to market? I would have thought that with the the margins they have they can probably afford a few duds without any harm coming. Probably also worth remembering they aren't just a generics business.

The real test case for the lifecycle of a generic will be dofetilide. There was a Paragraph IV challenge, which they won, and ultimately gave them approval to manufacture the first generic of dofetilide with 180days market exclusivity.

This resulted in a HUGE boost to the generics business, and won them a huge amount of market share in that time. Now that others can produce generics (180days has expired), it will be great to see what competition can do to the incumbent and what that means to prices (if they give us that information).

 

[McLovin]

The real test case for the lifecycle of a generic will be dofetilide. There was a Paragraph IV challenge, which they won, and ultimately gave them approval to manufacture the first generic of dofetilide with 180days market exclusivity.

This resulted in a HUGE boost to the generics business, and won them a huge amount of market share in that time. Now that others can produce generics (180days has expired), it will be great to see what competition can do to the incumbent and what that means to prices (if they give us that information).

That's interesting, Klogg. You've sure done your homework on this. When did/does the 180 days expire?

 

[Klogg]

That's interesting, Klogg. You've sure done your homework on this. When did/does the 180 days expire?

Well they announced it on the 7th of June, 2016. So it basically expired in Jan this year.

To give you an idea of how big it was, dofetilide provided 17% of GPD revenues ($29m USD in the half year). And since it was launched, check out what happened to the branded product:

They've given specifics on dofetilide market share on slide 32 of the presentation:
"62% product market share, 2 generic companies"

So even after another generic was launched, they've maintained 62% market share, of which generics have about 85%. It really seems that once a generic exists, the incumbent maintains market share unless there's significant price differences.



And to skc's point on pricing, from the investor presentation:
"Average generic price is 60-70% below brand upon introduction and reaches 80-90% after 2-3years"

So the price of the generic halves after the first 2-3years of existence. If you apply this general rule to dofetilide, the same volumes would produce approx. half the revenue. That's IF it follows the general rule, rather than it being a niche product. Time will tell.


EDIT: Not sure why that image has remained as an attachment...

 

[craft]

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

Understanding where this business sits today with what they have already pulled together through acquisitions is tough. That opaqueness, integration risk and intangible balance sheet pretty much puts the debt market out of reach. Yet it's very arguable that competative advantages for a generics business lay in scale. More acquisitions and more equity capital probably still required, unless they can wait for transparency on current integrations before continuing to build scale, cheap equity will be probably be available from the company itself down the track. That puts a real damper on current market price. Is incentive for potential institutional buyers to wait.

Just guessing, I basically don't know anything about the company, too hard basket for me.

 

[Ves]

Unless they're superseded they don't really stop being used, but in order to get the earnings growth they need to be constantly bringing new generics in as patents expire. With a well diversified portfolio how much risk is there in bringing any single drug to market? I would have thought that with the the margins they have they can probably afford a few duds without any harm coming. Probably also worth remembering they aren't just a generics business.

Also a relevant point. I don't think they're at the diversified stage quite yet and a 'dud' could be quite damaging.

Klogg has quite a lot of good information in this thread, my reading of it is probably a bit different, more along the lines of that there isn't enough of a track record to see how competent they are when their product lines have increased competition after a more prolonged time period of being 'generics.'

Also agree with craft's comments about scale. Think they're a long way from it. Will need a heap more capital yet. No idea where it comes from. It feels a bit like a quasi 'roll-up' in that sense. They will reach a point where acquiring new product lines doesn't swing the needle as much earnings wise.

 

[luutzu]

Dont worry, I make an idiot of myself all the time.
Feel free to post your thoughts, I'm not going to start calling you name if you're wrong - and if you're right, you are doing me a huge favour

Thanks Klogg. Appreciate that.

I don't claim to be right or wrong, not in terms of the market share price or MYX future price performance. Like APA and other companies, MYX has shown it's been able to both raise new money and borrow more to grow and expand. If it can continue to do that, then it will probably continue to increase its share price.

But as to the company's business performance itself, it's a pretty crap. Poor quality business ran by a bunch of empire-builders wannabes who will bankrupt it soon. But they'll do alright for themselves though, as they have had seeing all those millions in options and incentives.

Here's one chart that kind of speak volumes

See that black bar? That's contributed equity from shareholders. See how it's a few times above the retained earnings [green] bar?

No dividend since 2012, barely making any money yet raised and borrow like they'll do great with new and bigger acquisitions.

And that does not even include the new $888m equity they raised last August to pay for Teva.

A quick look at Teva show they've overpaid for it too. Practically paying $1B for a portfolio of generic drugs that earn some $285m in revenues, with "only" some $700m of potential new revenue in an entire market from 6 drugs in the R&D pipeline. And about 99% of the assets they bought are intangibles.

Compare that to Hikma who paid $US2.1B a year or so ago for Roxane Laboratories. For that price they only dilute their ownership by 16.7%... and that's from issuing new shares to pay to the parent company who want to offload that division. Revenues from Roxane existing portfolio is expected to be some $700 to $750m USD for FY2017. Its R&D pipeline has some 89 potential products with an addressable market of $41B... and they get to bring the entire R&D team, the labs etc.

From that perspective, Mayne made a pretty bad deal.

While I don't know enough about the drug portfolio they bought from TEVA and Allergran... they might very well bring with them some miracles... I doubt that very much for a generic drug.

 

[luutzu]

They almost doubled their shares on issue, but more than doubled their EBITDA buying ~$110m in EBITDA. Pre-acquisition EBITDA in 2016 was $88.5m, NPAT was $37.4m. If that purchased EBITDA falls to bottom at the same rate (it will be less, I assume, because of the purchased intangibles – but the amortisation around the customer contract stuff can be disregarded, imo) they bought ~$46m in NPAT. Add the existing NPAT of $37.4, so the new company is earning $83.4m, in FY16. On the expanded share base eps rises from 4.6cps to 5.5cps post acquisition. If the outlook of the acquired business is materially different to the existing business, then it's possible the market is discounting it, which explains the sp fall.

From its presentation, p.17, the new portfolio's expected revenue for FY2017 is $US237m. With operating margin at 50% (they claim greater, but let's be conservative), that put EBITDA (i'm assuming that's what they meant with operating profit, from memory we don't include DA but it's late and I'm drunk)... so that's $US118.5m...

Doing a simple NPAT scale down as 2016s figure (before synergies as they say), that put additional NPAT at 1.42*118.5 = $US50m. At xchange rate of $1.2, say... that's $60mAUD.

First, paying practically $1b, or some 16.7x earnings seems a bit stiff.

But that's a total of some 60+37.4m = $97.4m in NPAT... or 15 time earnings.

Not a bargain, or reasonable, at $1 a share. And that's if everything goes as planned.

 

[McLovin]

Here's one chart that kind of speak volumes

View attachment 71848

See that black bar? That's contributed equity from shareholders. See how it's a few times above the retained earnings [green] bar?

No dividend since 2012, barely making any money yet raised and borrow like they'll do great with new and bigger acquisitions.

That chart is totally meaningless without some understanding of the business. There is a difference between growing earnings through acquisitions funded by cap raisings and raising capital to keep the lights on. There are plenty of issues around the growth through acquisition strategy (there's even a thread about it), but you need a bit more meat on the bone than "company growing through acquisitions issues lots of shares". That's just the bleeding obvious.

You seem to just cherry pick whatever data point will satisfy the view you have already reached. Like below with your use of revenue...

A quick look at Teva show they've overpaid for it too. Practically paying $1B for a portfolio of generic drugs that earn some $285m in revenues, with "only" some $700m of potential new revenue in an entire market from 6 drugs in the R&D pipeline. And about 99% of the assets they bought are intangibles.

Compare that to Hikma who paid $US2.1B a year or so ago for Roxane Laboratories. For that price they only dilute their ownership by 16.7%... and that's from issuing new shares to pay to the parent company who want to offload that division. Revenues from Roxane existing portfolio is expected to be some $700 to $750m USD for FY2017. Its R&D pipeline has some 89 potential products with an addressable market of $41B... and they get to bring the entire R&D team, the labs etc.

From that perspective, Mayne made a pretty bad deal.

MYX paid 6x EBITDA for Teva and Hikma paid 8.3x EBITDA for Roxane ($US2.1b for US$725m revenue at 35% EBITDA margin), they were initially going to pay 10x EBITDA. So who got the better deal? Like I said, Sharebase dilution is pretty meaningless stat on its own, all it does is tell you the company issued shares. Like everything else it needs context, not a pre-conceived narrative. Hikma diluted their share base by 16.7% (again itself not that important a number without some context), but also forked out $600m in cash.

I'd expect any company whose business is in pharma to have the overwhelming majority of their assets in intangibles.

 

[Knobby22]

Bought in today at 94c. It just seems insanely cheap. EPS of 9.7c forecast + growth.
Will stand ready to buy more if results are good. Reporting season soon which is good as I am a bit bored at the moment.

 

[luutzu]

That chart is totally meaningless without some understanding of the business. There is a difference between growing earnings through acquisitions funded by cap raisings and raising capital to keep the lights on. There are plenty of issues around the growth through acquisition strategy (there's even a thread about it), but you need a bit more meat on the bone than "company growing through acquisitions issues lots of shares". That's just the bleeding obvious.

You seem to just cherry pick whatever data point will satisfy the view you have already reached. Like below with your use of revenue...



MYX paid 6x EBITDA for Teva and Hikma paid 8.3x EBITDA for Roxane ($US2.1b for US$725m revenue at 35% EBITDA margin), they were initially going to pay 10x EBITDA. So who got the better deal? Like I said, Sharebase dilution is pretty meaningless stat on its own, all it does is tell you the company issued shares. Like everything else it needs context, not a pre-conceived narrative. Hikma diluted their share base by 16.7% (again itself not that important a number without some context), but also forked out $600m in cash.

I'd expect any company whose business is in pharma to have the overwhelming majority of their assets in intangibles.

No, if there's one chart that could immediately tell the investor whether a company has been good for their wealth or not, it's that one. It's a given that when investors contribute cash to a business, they ought to get a return - that the company makes money.

Mayne has made a few cents on the dollar for their shareholders all these years.

True that an investor need context, need to understand the business, know where it is in its life cycle to make a more "understanding" interpretation of why shareholders haven't made any profit yet. But...

For a 7 year old company [I'm ignoring the Halcygen years, the other years of operations from businesses/products MYX acquired]... After all those years, with $1B of shareholders equity, we're still asked to kind of ignore the past performance, look to that brighter future full of possibilities?

It's a $1.5Billion company. Its main business is selling boring, generic drugs with established markets and a customer base. All it needs to do is be good at manufacturing and logistics... and a few bucks here and there for R&D to differentiate through different dosage or colouring.

So for a $1.5b company operating in an established market, taking in $1B of shareholders fund over years... for that company to ask us to wait for it to bloom. That'd be like me asking you to put money into my training for the Olympics 100m sprint. Possible, I wouldn't put my money on me qualifying though.

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Hikma's purchase was far more superior to Mayne's Teva/Allergran. For one thing, Teva gave Mayne the IPs. No inventory, a year's consultancy on that pipeline of work and technical transfer for $35m?

Sales from the new portfolio being some $US235m? Compare that to Roxane's FY17 estimate of $US700-$US750m.

The Roxane purchase push Hikma to 6th place in the US generic market by sales. It comes with all the labs and the brain trust that's been working on the new portfolio just acquired, as well as the R&D team currently working on that 89 or so products with a market potential of some $US41B [vs Teva's potential of $US7b].

Then there's the 16.7% ownership from Roxane's parent company. It's a bit safer for Hikma's shareholders' sleep if the seller is willing to climb into bed with them too. To hit and run like Teva/Allergran... possible that they're "forced" to sell their best products and Mayne is lucky to be getting it. That's remain to be seen... all shareholders have seen is that they've just had their ownership diluted by about 40% from the acquisition.

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There are circumstances where dilution of shares can be reasonable. But to do it year after year so that the company can have money to acquire, expand and "grow". That's not a $1.5B company.

 

[luutzu]

....

I'd expect any company whose business is in pharma to have the overwhelming majority of their assets in intangibles.

Possibly.

MYX will have another $800m in intangibles with the Teva purchase this coming report. So that put their intangibles at $1.13b? On a $1.5b market cap company?

Jesus! Is this a generic drug company or a CocaCola with its secret formula still hidden?

 

[galumay]

Bought in today at 94c. It just seems insanely cheap.

With some patience, I think that will prove to be the case. It may take a couple of positive reports before the SP really recovers but I agree its very cheap at less than a buck.

Not that it means anything, but a couple of big, successful investors I know have taken large positions in MYX, prior to the current lows, and they are confident MYX will be a very strong performer in their portfolios going forward. The common factors in their confidence were beliefs that the business was set for strong growth and the market had completely misjudged the potential negative impacts on the business.

Mind you I know a few big, successful investors who are now small, unsuccessful investors so I wouldnt read too much into it!