Generic Medicine Margins Pressure Mayne Pharma

By Glenn Dyer | More Articles by Glenn Dyer

A rather severe confession time yesterday from generic drug group, Mayne Pharma with a warning of a big slide in revenue and profit and a possible write-down of asset values.

And at the same time as the warning, the company hinted that there could be a major change in direction in the offing away from being just a generic drug company to a model with more reliable earnings, cash flow, and hopefully a higher less volatile share price.

It wasn’t the best of days to own up to a bit of very bad news given the market was under pressure from Trump’s latest trade war shots and had slumped 70 points at the opening.

In the trading update, Mayne warns sales of generic products are down 32% at $89 million for the first four months of this year compared to the same period in 2018. Gross profit for the period is down 20%.

The warning sent the shares down 15% to 56 cents. CEO Scott Richards told the market in yesterday’s statement:

“As foreshadowed at our half-year results in February, our generic business has faced a challenging start to calendar 2019 driven by competitive pressure on our key products including liothyronine and dofetilide.

“We have also faced typical wholesaler destocking in the retail channel in the first calendar quarter, one-off failure-to-supply penalties emanating principally from products supplied by third-party manufacturers, together with shelf stock adjustments resulting from price changes on some products.

“Pleasingly, all other segments have demonstrated good growth in the first four months of the half with Specialty Brands up 53%, Metrics Contract Services up 21% and Mayne Pharma International up 8% on the prior corresponding period (PCP).”

“Whilst recent trading reflects a challenging generic environment, the Company expects the 4QFY19 to be stronger driven by a rebound in Generic Products, combined with ongoing growth in Specialty Brands, Metrics Contract Services and Mayne Pharma International.”

“A positive by-product of the current generic environment is an increase in opportunities to capture value from supply disruptions and competitors exiting certain product markets. We continue to see a number of these opportunities ahead of us, some of which are temporary and others which are permanent market exits by competitors providing longer-term stability to our generic business.”

There was no idea of the size of any write-downs and all the company would say was:

“Given the prevailing US generic market conditions and outlook, the Company will be performing a detailed review of the carrying value of its generic acquired and development intangible assets at the full year ending 30 June 2019, the impact of which cannot be quantified at this time.

“Any impairment would reset the balance sheet, improve reported profit in future periods and is consistent with many US generic peers who have also made impairments of their generic intangible assets over the last few years,” the company warned.

That certainly sounds like big write-downs are coming. The results of that review will no doubt be issued well before the results (as companies now do with bad news) are released to soften the impact of the bad news.

So far as the company’s future is concerned, the warning included this comment hinting of a change in direction to come away from solely being a generics producer and marketer:

“The Mayne Pharma Board has recently reviewed the Company’s strategic direction and key operational priorities to deliver long-term growth. Whilst we have challenges and opportunities in the generics sector, the Board expects that generics will remain a substantial part of the Mayne Pharma business for the foreseeable future.

“The Board also supports continued focus on contract services, repositioning of the products businesses towards specialty branded products and sustainable generic portfolios/channels and related distribution activities, to capitalise on the Company’s innovative business model and established commercial capabilities.

“The ultimate aim of this shift is to produce more durable earnings streams with less volatility to maximise long-term returns for our shareholders,” the statement said.

In other words, there’s no money to be made long term in the cutthroat, slim margin generic drug business, so like all wannabee companies in this space, Mayne sees the fatter margins from finding, developing branded drugs, either through development or acquisition.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

View more articles by Glenn Dyer →