Mayne Pharma Group Limited (MYX) Earnings Call Transcript & Summary

Good day, and welcome to the Mayne Pharma Group Limited results half year call conference. At this time, I'd like to turn the conference over to Mr. Scott Richards. Please go ahead, sir.

Thank you. Good morning, everybody. Thank you for joining us today to discuss Mayne Pharma's half year 2020 financial results. I'm joined on the call today by Nick Freeman, our Group CFO. What I'd like to do this morning is give you a brief overview on the results and our growth strategy. Nick will provide some additional details on our financial results, and then we will open up the call to questions. In terms of the results, we previously foreshadowed a softer half at the AGM last year due to the competition we faced on our key generic products. The last year has been very challenging with our top 3 generic products, liothyronine, dofetilide and butalbital, all facing new competition, which has impacted the performance of our generic division during a time when we had very little contribution from new product launches. Of course, I'm very disappointed in this outcome. But with that said, I'm very confident in the future growth prospects of the company, which I will now explain. While the company is, as we have stated many times, pivoting its business more towards its Specialty Brands segment, our Generic business remains a significant and important trading platform for the company. The U.S. retail generic market continues to be challenging particularly in markets with multiple competitors. At a macro level, there are signs of stabilization with reductions in R&D spending, withdrawal of products and plant closures. These dynamics should lead to an improvement in the overall generic marketplace, and I expect that our generic business should benefit from some of these macro trends over time. Specifically, however, and near term, the company is fighting back in its Generic business, and you can see this in terms of the significantly reduced rate of gross margin decline in this segment over the last 3 halves. I expect this trend to continue based on the status of our generic pipeline and the maturation of a number of product cost improvement programs, which we've been working on across our on market portfolio. In terms of our generic pipeline, we have a dozen products pending at the FDA, including several potential high-impact launches. Our most significant pipeline product is our filing of generic NUVARING, which is the largest contraceptive product sold in the United States today. We submitted our response to the FDA's review questions last year and continue to plan for approval and launch of this very important product later this calendar year. We also filed 3 generic products with the FDA this half, and added 4 topical generic dermatology products through business development activities, targeting markets with a combined value of USD 400 million in sales. Three of these topical products have been recently launched, including generic LOCOID, generic CORDRAN and generic TRIANEX. We expect to see meaningful sales from new product launches in the second half of this calendar year. We also have more than 25 product cost improvement projects underway that cover active drug ingredient savings, overhead recovery benefits in our manufacturing network, renegotiated supply agreements and product transfers to new contract manufacturers. We expect to realize meaningful benefits from these programs over the next couple of years, which will impact positively our gross margins. Furthermore and given challenging environment we've been facing, the company is working hard at optimizing its operating cost base. To that end, more than $20 million in cost savings, on an annualized basis, have already been achieved and we've also rationalized our generic portfolio, discontinuing a number of unprofitable products. The cost savings have principally come from commercial and admin areas. Strategically, Mayne Pharma is reducing its exposure to retail generics going forward, repositioning the business into its core specialty areas such as women's health, dermatology and infectious disease. Our R&D and business development activities are focused on expanding our specialty portfolio in therapeutic categories where we believe we have a more sustainable business model and a basis to compete. Slide 6 of the investor presentation shows our sales breakdown into specialty products, or therapeutically aligned sales, and retail generic products. Retail generics, which is the most volatile part of our portfolio, of course, represented 37% of sales in the half and 28% of gross profit. And specialty products, which represents the dermatology, women's health and infectious disease portfolio, also represented 37% of sales but importantly 51% of gross profit. We expect specialty products to continue to grow as a proportion of our portfolio, following the launch of generic NUVARING and our novel oral contraceptive E4/DRSP, together with the growth of TOLSURA and our broader dermatology-branded portfolio. In terms of the other 2 U.S. reported operating segments. Firstly, Metrics Contract Services. Our third-party business continues to perform well, benefiting from the investments we made at Greenville over the last few years to build new manufacturing capacity and capability. This business operates in an attractive market, which has outperformed the broader pharmaceutical industry. The CDMO industry continues to benefit from an increase in outsourcing of development and manufacturing by big pharma and a growing number of oncology molecules in clinical phases of development. We've now executed global supply agreements with 2 Top 10 global pharmaceutical companies to manufacture FDA-approved oncology medications. Metrics supported both of these clients with drug product formulation services, analytical method transfers, clinical trial supplies and now, commercial manufacturing. The number of commercial clients continues to expand, with Metrics expected to support the launch of several products this calendar year. Moving to Specialty Brands. This segment grew sales and gross profit on the prior corresponding period and pleasingly had a much stronger second quarter with sales up 50% on the first quarter, with DORYX and SORILUX rebounding together with continued growth in LEXETTE. TOLSURA, our new formulation of itraconazole, which was launched 12 months ago, continues to gain momentum in the market with quarter-on-quarter growth in new patients and script volumes. Importantly, TOLSURA is now approved on 8 hospital networks, with another 18 under active review. We expect TOLSURA to be a key growth product for the company over the next few years and to take meaningful share of the underlying itraconazole markets. I would now like to make some comments about our branded pipeline and specifically, our recently completed transaction to license E4/DRSP, a new and novel combined oral contraceptive in the United States. I believe that E4/DRSP, which I will call E4 for simplicity for the remainder of this call, will be a game changer for the company. The vast majority of combined oral contraceptives, or COCs, contain a synthetic estrogen, ethinyl estradiol or EE, and the increased blood glucose levels, triglyceride levels, have weight-increasing effects and can result in low level but serious adverse events related to cardiovascular events, stroke and VGEs. In addition, bleeding profile still represent a challenge for the women on ethinyl-estradiol-containing COCs in terms of unscheduled or breakthrough bleeding. A COC is needed in the market that mitigates potential metabolic and cardiovascular side effects of the current COCs whilst also delivering similar efficacy for the prevention of pregnancy but with excellent cycle control and bleeding profile. This is where E4 comes in. E4 is a new, novel, low-impact estrogen with a unique mechanism of action compared to other estrogens currently approved in combined oral contraceptives. It does not cause significant increase in blood glucose levels and other metabolic issues. Similarly, E4 does not increase triglyceride levels, is neutral on weight gain and demonstrated a comparative decreased impact on a key hemostatic market compared to ethinyl-estradiol-containing COCs whilst, of course, exhibiting comparable efficacy and better bleeding control with chronic use. E4 is a native estrogen that Mithra, our partner, has been able to synthesize and produce at scale through a plant-based production process. This natural, or native element, is expected to be a key differentiator against other COCs on the market containing ethinyl estradiol, as I said earlier, a synthetic estrogen. Since completing the transaction in November, we've been working hard on the commercialization strategy. We expect to file E4 with the FDA later this half and are tracking towards a potential approval and launch in the first half of calendar 2021. The commercialization of E4 is a top priority for the company. At a minimum, we expect to target peak net sales of more than USD 200 million, which represents approximately a 2% share by units of our addressable market. We think this target is very achievable when looking at competing products marketed in the U.S. and their product features relative to E4. With that, I'll hand over to Nick, who will go into further details around the financial result.

Thanks, Scott, and good morning, everyone. I'll now provide some high-level features of the result and take you through some of the key P&L, balance sheet and cash flow movements. Starting off in the P&L. Total revenues were $227 million, down $47 million on the first half of '19 and down $24 million on the second half of '19. The softer performance, as Scott mentioned, was driven by the generic division with liothyronine, dofetilide and butalbital accounting for almost $40 million of the sales decline versus the pcp after they faced new competition. We also had higher gross-to-net charges and expected this half, particularly in product returns and rebates. Most of these impacts flow directly into margin with 2 of the products having had a much higher margin than average in the portfolio. Looking towards gross profit performance. Again, down $55 million against the first half of '19 and $19 million on the second half of '19, and again the Generic division with the main impact with the top 3 products accounting for $34 million of the decline. Gross profit was also impacted by the gross-to-net impacts. And on top of this, we undertook some restructuring to discontinue some unprofitable product lines, which drove some stock write-downs of $5.5 million. Reported EBITDA was $34.6 million and underlying EBITDA was $47.4 million. And as usual, we've provided a full reconciliation of this in the Directors' Report in the 4D. The main items of this, firstly, a noncash credit to the P&L, being the changes that we've got in earnings liability revaluations; $10.8 million of restructuring charges, of which 5.5 million was the stock obsolescence that I just mentioned; and $5.3 million related largely to workforce restructuring to realign our cost base, which I'll come to in a sec. The remaining $5.5 million was the gross-to-net adjustments relating to the higher returns and rebates that I also just mentioned. At the bottom line, we reported a net loss of $17.5 million, impacted by the weaker sales and margin, the restructuring charges and some relatively small asset impairments. Moving towards expenses. The pressure in generics and the competition from the new launches in the specialty areas have meant we took decisive action on our cost base this half. Against the second half of last year, gross R&D, which is before capitalization, was reduced by 17% and OpEx was reduced by 11%. It was actually 13% on a constant-currency basis because of the decline in the Australian-U.S. dollar exchange rate. The half-on-half decrease reflects more controlled spending and also the restructuring that we have undertaken, and these savings are expected to continue into the full year. The impact of the new leasing standard, AASB 16, is neutral with essentially there being $2 million of lease expenses now treated as depreciation but remaining in the same expense line. Within OpEx, marketing and distributions were slightly up on the prior comparable period, reflecting the new TOLSURA sales team but importantly were down on the second half of last year, with further run rate benefits expected from the restructuring. Admin and other expenses were down $27 million to $64 million, but this does include a number of noncash and nonoperating items. Note 3 of the accounts provide the detailed disclosure on these admin expenses. If we look at these admin expenses, excluding the noncash and nonoperating items, admin and other expenses reduced by $6 million on the prior comparable period and $4 million on the second half, again benefiting from the more controlled spending and restructuring. In terms of exchange, the average Australian dollar exchange rate weakened from $0.7241 in the first half of '19 to $0.6846 in the current year. This had a positive impact on EBITDA of around $2.5 million. Turning to finance expenses. There's a little bit of noise in this due to the E4 transaction. So our finance expenses increased by $4 million, but that was mainly due to the discount unwind effect from the earnout revaluations relating to the E4 transaction. This is a noncash impact. This will increase into the second half, as we only had 1.5 months of the E4 transaction in the current -- in the first half and we expect the full year discount unwind effect of USD 6.5 million in relation to the E4 transaction. This item is noncash and we'll exclude it from any underlying earnings that we provide going forward. Within the total finance expenses that I've just talked about, if you actually look at the interest expense, the P&L decreased from $7.5 million to $6.4 million, benefiting from lower LIBOR and BBSW, which reduced -- which assisted in reducing the average interest cost from 4.3% to 3.8%. Looking though at cash interest. And again, I said there's a little bit of noise, so this is why we're just going through it. There was an increase in cash interest but that was mainly in relation to the prior comparable period where we had a $1.8 million cash benefit from the cancellation of interest rate swaps when the syndicated facility was renegotiated. Moving across to the balance sheet. We had cash of $99 million, which is up $10 million, and borrowings were up $19 million, again a bit of noise here because of AASB 16. So the increase in borrowings of $19 million was impacted by $13 million, due to the new leasing standard, with the balance being exchange rate impact and also a small increase in the receivables finance facility because of the timing of receipts and payments. There was no change in borrowings from the syndicated facility, and net debt, excluding the impact of AASB 16, was down $4 million over the half. During the period, we did restructure our debt facilities to provide some additional flexibility in anticipation on the E4 transactions. Key changes, include, excluding some noncash items from covenant calculations such as earnout liability revaluations and share-based payments. And we also temporarily increased covenant levels to allow headroom for the initial OpEx investment relating to the E4 transaction. Our leverage ratio was 2.5 for the half versus a covenant level of 3.5. Other key movements in the balance sheet were $250 million increased intangibles and $150 million increase in other financial liabilities. These increases largely reflect the inclusion of the E4/DRSP transaction completed in November. Moving to cash flow. Operating cash flow was an inflow of $46 million, in line with the underlying EBITDA, again a strong conversion as we had in the first -- the second half of '19. In terms of investing cash flows, we spent $39 million with $19 million relating to payments. For intangible assets such as the E4 transaction, we had $8 million in earnouts relating to historical acquisitions such as the generic EFUDEX transaction last year, $7 million of capitalized R&D costs and $4 million of CapEx, the lower CapEx being reflective of the CapEx spending on the facilities in Greenville and Salisbury having ceased. After these investing cash flows, the company had free cash flow of $7 million. And with that, I'll hand back to Scott.

Thanks, Nick. So look, in summary, Mayne Pharma has a clear strategy for growth going forward despite its obviously challenging travails in the generic market over the last couple of years. The successful commercialization of E4, generic NUVARING and TOLSURA will be the key drivers of this transformation, together with the continuing -- together with continuing to build out our established dermatology business with a leaner and more focused commercial footprint. Our global contract services platform is expected to benefit from expansion of the technical team that we've got there and the growing pipeline of committed business. In terms of retail generics. We are seeing some near-term positive competitive dynamics, which may benefit us over the coming year. Looking beyond this financial year, our generic portfolio is expected to benefit from a number of high-impact launches as well. We have a dozen products pending at the FDA, with up to 6 that could launch later this calendar year, targeting markets with sales of USD 1.4 billion. The company will also continue to tightly manage and optimize its cost base and continuously search for greater operation, operating efficiencies and savings in our manufacturing network and supply chains. And with that, I'll now hand back to the operator, and we are available for questions.

[Operator Instructions] We will now take our first question from the line, Gretel Janu from Crédit Suisse.

So just firstly, just on the generic portfolio, that's a normal gross-to-net adjustment, can you just explain a little bit more in terms of why this occurred? And do you expect any of this to occur further in the second half?

So the -- I mean the 2 major impacts around the returns and rebates, and what we do is we've got a process for estimating what we expect those returns to be, but we're estimating them based on what the current -- what the sales were from a year or 2 ago, because what happens at the wholesalers is that when you sell out to the wholesalers, the wholesalers don't sell that product through. They then have the opportunity to return it. But they don't return it really anywhere -- or they've got the opportunity to return it anywhere between 12 and 24 months, hence in terms of the overall product dating. So you're really looking back to what your historical sales were in estimating what those returns coming back from the wholesalers will be. And looking at that and what we had occur especially in the latter half of the half -- or the latter part of the half was an increased amount of returns from those wholesalers.

So was it on any particular product? Or was it just the whole portfolio in general?

It's always spread out across the portfolio. There were some larger returns on particular products where we were DC-ed. And so those came through. And again, just as a little more color, what can happen in that case is when you get deleted from a product, either the wholesaler may look to sell that product through or they can just send it straight to what's called the morgue, where you can lose visibility of that and then they increment supply. So occasionally, you do get some larger returns coming through when that happens.

And do you expect it to -- there to be more of normal charges in the second half?

We've got our best estimate in there at the moment. But again, this risk, I think, will be present in the second half. It will decline. As sales decline, then the product returns will decline. That's a function. It's just really a matter of the lag effect.

Okay. And then just on the generic sales, it seems to have -- the deterioration has seemed to accelerate particularly after the AGM update for the November, December months. So was there anything else that's happened in those months for greater deterioration in sales?

Well, the -- I mean the [ GTN ] effect, of course, was part of that in November and December, and then on margin, the DC-ed products and the stock write-downs. So -- but November was a weaker trading month and December was okay and -- but the November and December were acquired and then we'd anticipate, but there was a major impact from that [ GTN ] effect.

And then what has happened in January and so far in Feb?

I think January was ahead of our expectations.

Okay. Okay. So why don't I just ask another question on specialty, so just on TOLSURA. So has it generated any meaningful sales yet? And then can you also give us an update in terms of how quickly you expect the sales to ramp up to kind of a peak sales number?

Yes. Gretel, I think in terms of the peak sales number, I mean this is a slow build. I mean this is the hospital market, institutional market. You have to contract with each individual major hospital that has share, that uses itraconazole. As I said in the call, we're making solid progress on the contracting front. The thing that we really track here is new patients because unlike dermatology where you will get a new patient but you may only get 1 or 2 additional scripts from that patient, and there's a lot of churn, this business is very sticky. So once you have this patient, they are, generally speaking, chronically treated for months and months and months, sometimes even years. So new patients is the key. And what we are seeing is a solid cadence relative to the contracting cycles that we're in, a solid cadence of the quarter-on-quarter growth in new patient numbers. I mean I think -- so it's still very early in the journey in a market that traditionally takes time to build. I mean we're very confident here. We've got patent protection here out beyond 2030. The product is resonating fantastically with clinicians and -- but it's a pretty small patient base and it takes time to get to that patient base as they present. So I think in terms of peak sales, we are probably at least another 2 or 3 years away from peak. And then we have said in the past that by the end of fiscal '22, that's a little way off, we do expect to have a meaningful share of this market, which would make this a very attractive product. I mean one other bit of -- I think positive views out of TOLSURA at this early juncture is that the coverage of the product is, at this stage, better than we expected. So in terms of payer coverage and the profitability of the covered prescription of TOLSURA is very, very strong and certainly ahead of expectations. So that's very good. So obviously, the key is to get share penetration, script penetration, covered prescription penetration, doing that through our sales team and through our contracting team with hospitals, working closely together. And we're very excited about this. We'd obviously like it to be as quick as possible, and we're doing everything we can to potentiate that.

We will take our next question from Shane Storey from Wilsons.

Scott, if we can begin maybe by reflecting on the competitive headwinds you saw in specialty in the first quarter. And then you called out a materially strong second quarter there particularly for doxy and SORILUX. Just -- I'm interested to know what -- tactically what changed? We had to reverse that situation. And are you confident that, that can be sustained over the second half?

Yes. Look, I mean as we've said before, 2019, across our acne portfolio and our psoriasis portfolio, [ branded ] portfolio, 2019 was somewhat characterized by some significant launches of competing therapeutic products in that space from some of the major dermatology companies in the U.S. Almirall with SEYSARA, competing with DORYX and Bausch, the biggest dermatology company in the U.S., competing with us in the psoriasis market with BRYHALI and DUOBRII. In simple terms, part of the impact on the company has been whenever big companies put their full promotional weight behind new launches like this, there will be a change -- a fundamental change in share of voice dynamics and dermatologists will try. They'll try and trial these products. And of course, we saw the impact there. The good news is that since that period, we've been able to fight back. The trial period has happened, and there is softening of growth. In fact with SEYSARA, a significant decline. And the BRYHALI and DUOBRII, certainly, a flattish performance. And as a result, we've stayed the course with our promotional efforts. We've also done some things tactically in the second half of the year with our market access strategies around patient support programs and the like. But it's a combination of those 2 things that has allowed us to fight back. We basically weathered the storm, a share of voice storm, and we've made some tactical changes that have allowed us to compete better in terms of market access across our brands. I expect -- based on our exit rates, particularly for the DORYX franchise in calendar '19, I do expect and based on what we see here now in the middle of February, that I'd be disappointed if we didn't see ongoing improved performance of DORYX relative to the sort of calendar 2019.

The second question I had was -- I just wanted to dig back into TOLSURA. Can you sort of work out what it did in the first half? But I was sort of more interested in digging into the market access questions. I mean we saw a couple of formulary exclusion for PBMs in January, which happens. But I just wondered if you could speak about how to overcome those. And maybe some color on how the product's being marketed and were they sort of happy of the pricing outcomes that you're getting.

Yes. Well, look, we've got a small team out there at this point. This is -- the primary indication is for some endemic fungal infections that are only prevalent in certain parts of the country. So -- and they're quite low in terms of their incidence. So -- but they're very serious conditions. And based on what we're seeing in terms of higher support, we're seeing that a large majority of these scripts, when written, are being covered and being covered well. And that goes to the underlying disease in particular. I mean this isn't another product for acne, for example. So we are seeing a very different market access or access environment than -- and higher attitude, if you like, at this stage, relative to, say, our dermatology portfolio. Look, I expect that to continue. I expect that to continue. There's always some, I suppose, headwinds early on in the launch in terms of government patients without going to that in detail on the Medicare, Medicaid side of things. Access is not -- is spotty particularly on the Medicaid side, but Medicare and also covered commercial lives. We're seeing very, very, very good coverage and very strong. As a result, the per prescription profitability of this product is performing above expectations at this point.

[Operator Instructions] We will take our next question from Saul Hadassin from UBS.

Scott, Nick, a couple of questions from me. Nick, just the gross cash conversion and particularly the swing in working capital, that positive impact, which looks like receivables was the key or driver there. Just -- can you talk to the sustainability of that through the rest of FY '20, please?