EUR 850.00 For Business Accounts Only

Morningstar | Mayne Pharma Targets Sun Spots With Generic Efudex Acquisition

We raise our fair value estimate for no moat Mayne Pharma to AUD 1.30 from AUD 1.25  following the acquisition of generic Efudex (fluorouracil 5% cream), a cytotoxic, or anticancer, topical cream used in the treatment of solar keratoses or sunspots, from Spear Pharmaceuticals, for USD 20 million. We think the deal is attractively priced, given management guidance for low-single-digit EBITDA multiples. We also think the product is a good fit for the U.S. dermatological portfolio, and given direct marketing to dermatologists, it should allow for cost synergies. Branded Efudex is almost 50 years old and has attracted only two generic competitors to date, from Spears and Taro in 2008 and 2010, respectively, not including the holder of the authorised generic approval, Mylan Pharmaceuticals. We think this most likely reflects more complex formulation and relatively more onerous proof of bioequivalence requirements by the Food and Drug Administration, given its high potency and cytotoxic nature. As such, unlike oral generics, we consider the Efudex market less vulnerable to new entrants in the medium term. Despite the positive market reaction to the news, Mayne Pharma still trades at a significant discount to our valuation and therefore remains undervalued in our opinion, albeit with a very high fair value uncertainty.

We expect this deal to be modestly accretive and drive a 3% increase in our EBITDA forecast for fiscal 2019 to around AUD 182 million. Our modelling of Efudex assumes 5% pricing deflation, common in generic products, offset by volume increases of around 10%, given the increase of age-related skin cancers caused by cumulative sun exposure in the context of the ageing demographic. This incorporates our forecasts of mid-single-digit growth in the underlying market and market share gains achieved by leveraging the existing dermatology business.

The USD 20 million transaction will be funded by USD 16 million in cash and USD 4 million in new shares, which we estimate equates to around 4.6 million shares based on a 10-day average for Mayne Pharma shares of about AUD 0.87.

Our modelling of the deal incorporates USD 10 million in deferred payments over three years, contingent on the absence of new entrants to the market. Given the maturity of the branded product and the launch of Taro’s generic back in 2010, we think this is a reasonable assumption.

Efudex is a high-margin product compared with Mayne Pharma’s existing product portfolio; as such, we think it should be positive for group EBITDA margins. Management has guided to an implied acquisition EBITDA multiple in the low single digits for the transaction, which equates to an implied EBITDA of around USD 10 million. This translates to an EBITDA margin of about 83%, based on a run rate of around USD 12 million per year, compared with group EBITDA margin of 39% in fiscal 2017.