Morningstar | Mayne Continues to Face Generic Market Challenges; FVE to AUD 1.00
The negative 10-month trading update provided by no-moat Mayne Pharma follows a challenging half-year result reported in February, and was largely factored into our base case for fiscal 2019. However, continued competitive forces in generic pharmaceuticals in the U.S. results in a reduction in our fair value estimate to AUD 1.00 from AUD 1.05. Revenue in the key generic products segment is down 15% year to date primarily as result of increased competition and the negative effect on pricing. We now forecast the accelerated decline to continue for the remainder of fiscal 2019 and the effects to remain through 2020. Nonetheless, at current levels, Mayne Pharma screens as offering value.At a group level our fiscal 2019 revenue estimate falls slightly to AUD 525 million from AUD 543 million and our gross profit margin forecast remains unchanged at 55.4%. However, the high fixed cost base and the associated negative operating leverage has the effect of a more pronounced decline in forecast fiscal 2019 net income by 20% to AUD 20 million from AUD 25 million. This equates to earnings per share of AUD 0.01 before potential impairments. We anticipate a management review of the business will bring impairments in the full-year results due out in August.
We also highlight the very high uncertainty rating we assign to Mayne given that 60% of revenue stems from the currently turbulent U.S. generic pharma market. The size of this market has contracted since 2016 as the number of FDA approvals has accelerated and price erosion ensued. We forecast no sales growth for the market, and it’s unlikely that Mayne can sustainably grow in an ex-growth market without a competitive advantage. However, the company benefits from rising contributions from its higher margin specialty brands and contract services segments and overall we forecast 5-year CAGR in revenue of 3.3% and earnings per share of 7.6%. Mayne Pharma doesn’t currently pay a dividend and we don’t anticipate this to change.
Mayne Pharma is a pharmaceutical company focused on applying its drug delivery capabilities to commercialize branded and generic pharmaceuticals. Co. operates in four business units: Generic Products, which develops, manufactures, markets and distributes generic pharmaceutical products in the U.S.; Specialty Brands, which markets and distributes specialty branded pharmaceutical products in the U.S.; Metrics Contract Services, which provides contract pharmaceuticals development services and analytical services to third parties; and Mayne Pharma International, which develops, manufactures, markets and distributes branded and generic pharmaceutical products globally, excluding the U.S.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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