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

Good day, ladies and gentlemen, and welcome to the Mayne Pharma Group Limited Results Full Year Call. At this time, I'd like to turn the conference over to Mr. Scott Richards. Please go ahead, sir.

Thank you and good morning, everybody. Thank you for joining us today to discuss Mayne Pharma's Full Year 2020 Financial Results. I'm joined on the call by Peter Paltoglou, our Interim CFO and Chief Development Officer. What I'd like to do this morning is give you a brief update on the business and how our operating segments have performed and together with an update on our pipeline and strategic growth plans. Pete will then provide some additional details on our financial results. And then we will open up the call to questions. First of all, despite the challenges of COVID-19, our 2 key sites in Greenville and Salisbury have been fully operational, and our external supply partners have serviced us well. As a pharmaceutical business, we have a critical role during the health crisis to continue to manufacture and maintain an uninterrupted supply of medicines to our customers and patients around the world. Today, Mayne Pharma distributes some 29 medicines on the WHO Essential Medicines' list, of which 15 are produced in-house. Further, our new facility in Greenville produced record volumes this year, with units up more than 50% on last year, and we were able to maintain very strong customer service levels. In terms of our employees, we have spent significant time implementing new control measures at all of our sites to ensure the safety of our workforce. And I'm pleased to report that our employees are in good health despite a number of positive COVID cases amongst our U.S. employee group. We do remain vigilant, however, given the high virus transmission rates here in North Carolina and across the U.S. in general. The commercial impact to our business from COVID has been modest but mixed. The generic business has seen minimal impact. Our contract services business has traded well through this period and reflects its solid book of committed business. However, our branded business was impacted by a decline in prescribing, driven by physician office closures or reduced capacity at these offices and less patient-driven visits. Over the March to May period, dermatology prescriptions across the board fell approximately 15% with acute diseases impacted more than chronic diseases. That said, I'm pleased that 3 of our 4 -- 3 of our 4 dermatology brands have grown in script market share in the second half versus the first half of last financial year, despite COVID impact and also a markedly reduced sales force footprint that I'll talk about later. TOLSURA was also impacted heavily, given the focus of that prescriber base on treating COVID patients. As a reminder, TOLSURA script volumes were growing nicely month-on-month for the 6 months prior to March this year. And pleasingly, script volumes are now increasing towards pre-COVID levels across most regions in the U.S. in dermatology, in particular, and coming back also with TOLSURA in infectious disease. Moving to the group results for fiscal '20. Sales, gross profit and EBITDA were down on last year, but that shouldn't be a surprise as we have spoken previously about the impact of new competition in our generic division on key products such as liothyronine, dofetilide and BAC capsules. Pleasingly, and particularly taking account of the COVID situation, in the second half, our group results were stable at the sales gross profit and EBITDA line versus the first half. Given the challenging environment we've been facing over the last 3 years, driven by the significant contraction in the generic industry, we've focused hard this year on optimizing our cost base. Over fiscal '20, we've realized more than $30 million in spend reductions versus the prior year, with a $16 million decrease in operating expenses and a further $15 million decrease in gross R&D spend. On a constant currency basis, it is closer to $40 million due to the strengthening U.S. dollar. In terms of cash flow, we delivered a solid result with $100 million of operating cash flow. And we were able to reduce our net debt by $32 million over the year. Importantly, operating cash flow grew 16% half-on-half. Strategically, we continue to invest in R&D and business development activities that are focused on repositioning our business away from the more volatile retail generics segment into more sustainable areas in women's health, dermatology, infectious disease and contract services. Slide 6 of the investor presentation shows our sales and gross profit breakdown into specialty products, which captures our therapeutically aligned sales, including dermatology, women's health and infectious disease, together with retail generics, contract services and the rest of world business. This is an alternate view of our business relative to the formal segment reporting we do in our financial accounts. Retail generics accounted for 25% of gross profit in fiscal '20, down from 38% in fiscal '19. And we expect this ratio to continue to move favorably following the launch of our key pipeline women's health products that are pending with the FDA. Moving now to the operational highlights. The most significant event this year was the licensing of the novel oral contraceptive E4/DRSP, now to be called NEXTSTELLIS in the United States. That brand name has been conditionally approved by the FDA recently. As a reminder, NEXTSTELLIS contains a new estrogen, Estetrol or E4, and has a progestin, drospirenone. If approved, E4 will be the first new estrogen introduced in the U.S. for contraceptive use in 50 years. E4 is a low-impact estrogen with a unique mechanism of action that offers potential advantages over other estrogens. The Phase II and III trials conducted in over 4,400 women demonstrated contraceptive efficacy and safety and good bleeding control. NEXTSTELLIS also has a neutral impact on lipids and glucose compared to some other highly prescribed oral contraceptives, together with a neutral effect on weight gain. And further, a Phase II trial importantly showed a lower effect on certain markers associated with blood clotting. Being a native estrogen, NEXTSTELLIS has the potential to have a lower adverse impact on the environment. And this may be a key differentiator against other contraceptives in the market. NEXTSTELLIS will participate in the combined hormonal contraceptive market, which is fairly USD 4 billion. The largest contraceptive pill in this market is Lo Loestrin Fe, which generated almost USD 900 million in gross sales and reported net sales of USD 590 million in 2019. NUVARING, which is the largest contraceptive product by sales in the U.S., achieved USD 740 million in net sales in 2019 prior to the launch of generics at the end of last year. Our business plan for NEXTSTELLIS is targeting peak net sales of USD 200 million, which represents just 2% of the market by units. Bringing this product to market will be transformational for Mayne Pharma. In April of this year, we filed NEXTSTELLIS with the FDA, and we received filing acceptance in June. We have an FDA target action date in the second quarter of calendar 2021, and we are planning to launch immediately upon approval. So far this year, we've established a new women's health medical science liaison team who are working with thought leaders and other key health care professionals. We have a busy agenda coming up of conferences and publications, which is a critical part of the prelaunch education program. The launch of NEXTSTELLIS will be supported by a new dedicated women's health sales force of around 80 representatives calling on 14,000 high-prescribing OB/GYNs in the United States. Other key highlights this year include the addition of 3 new strategic partnerships to expand our dermatology and women's health portfolios. We partnered with Teligent for 2 topical dermatology products that treat dermatitis, generic LOCOID and generic CORDRAN, which we launched this year. And we've also partnered with Encube, a leading topical manufacturer and developer, to license generic TRIANEX, which we have launched recently. And we also have another product from Encube used to treat acne, which is pending with the FDA. Whilst all of these generic products -- whilst all of these products are generic, they do leverage the commercial capability we've established over the last 5 years in dermatology. We believe our platform can offer a more effective distribution model to get their products to patients in a way that offers them advantages in terms of greater convenience and price transparency, reduced administration for the doctor and improved economics for the dispensing pharmacy. And we continue to have active discussions with a number of other pharmaceutical companies around further collaborations in dermatology. We've also added 5 generic oral contraceptive products through the Novast supply agreement we announced in July. Four of these products are already approved and will be launched in fiscal '21 and include the top 2 prescribed contraceptive products in the U.S., Ortho Cyclen and Ortho Tricyclen. The addition of these products means our portfolio of oral contraceptives covers more than 85% of this market by volume. The Novast agreement also secures supply on more favorable terms for 8 products that we acquired originally from Teva and will enable us to be more competitive in those individual product markets. In terms of other pipeline products, we continue to advance our key programs with the FDA. We have target action dates on 2 key products this calendar year, mainly generic NUVARING and a potential first-to-market women's health product that according to IQVIA had sales of USD 160 million over the last 12 months. Regarding NUVARING, we note that today, there has only been 1 independent generic approval, and that manufacturer has had supply constraints. This is a very complex product. And the market remains highly attractive to Mayne as we continue to plan for the potential launch of both of these important women's health scenario products later this calendar year. In terms of our Specialty Brand pipeline, we've commenced a Phase II global clinical study for our novel retinoic, trifarotene, in patients with lamellar ichthyosis, which is a rare dermatological disorder that causes severe skin scaling upon birth. There are no approved treatments for this condition. The global study is expected to recruit 120 patients with top line results expected by the end of this fiscal year. We also continue to invest in our SUBA-itraconazole platform, which we believe has broader therapeutic application beyond the systemic fungal indications that TOLSURA has on its label today. Over the last 2 years, we have been conducting an endemic mycoses study comparing TOLSURA with conventional itraconazole in patients with a variety of systemic fungal infections. We expect the data out of this trial to be published later this calendar year, which will help to highlight the advantages of our formulation over conventional itraconazole. We also expect new studies to commence shortly studying TOLSURA in valley fever, another systemic fungal disease with an addressable market of approximately USD 100 million. In addition, itraconazole has been shown to have potential in anticancer applications in patients with a variety of different cancers, including prostate, bowel and ovarian cancer. And further, in fiscal '21, we expect to commence a Phase III study with SUBA-itraconazole in patients with basal cell carcinoma nevus syndrome or Gorlin syndrome following an end of Phase II meeting with the FDA, which is scheduled for this October. Moving now to the operating segments. Generic Products, whilst down year-on-year, performed well in the second half, with reported gross profit up 2% on the first half, benefiting from product transfers into Greenville and Salisbury and reduced stock obsolescence. The results across fiscal '20 were impacted by a number of one-off abnormal items such as product returns and stock write-downs from a number of unprofitable generic products that we discontinued. These abnormal items are not expected to repeat in fiscal '21. Specialty Brands was impacted by COVID, as I mentioned earlier. The dermatology business saw prescription volumes drop around 15% during the peak of the lockdown, with new prescriptions falling even harder. Encouragingly, leading-edge prescription data has improved across June and July with LEXETTE reporting its highest week in TRxs since March and FABIOR reporting its highest TRxs since January. Declining managed care coverage has also been a feature this year and reflects the change in commercial payer landscape, driven by the consolidation of TBMs, compounded by more than 35 million Americans filing for unemployment benefits since the COVID pandemic began. Many of these people will have lost insurance coverage, which is putting further pressure on payers and the coverage of our branded products. As a result of changing market dynamics in dermatology, we have restructured our sales team to take out costs with approximately USD 5 million of benefits achieved in fiscal '20 and further benefits of around USD 7 million are expected in fiscal '21. Through enhanced targeting and territory management, we are confident we can do this without a material impact on prescription volumes. Indeed, as stated earlier, our script market shares have actually grown half-on-half in fiscal '20. TOLSURA, our new formulation of itraconazole which we just launched last year, was also impacted by COVID-19, as I said earlier, as this product is typically prescribed by infectious disease and respiratory physicians who are heavily involved in treating COVID patients. Notwithstanding the COVID-19 situation, we do remain very confident about the growth potential of TOLSURA as well as its broader therapeutic applications. Metrics Contract Services, it performed very well, with sales up 15%, benefiting from new commercial manufacturing revenues, in particular. Metrics now has 5 commercial clients, up from just 1 in 2018, and has a solid pipeline of late-stage development projects that will continue to fuel this new recurring revenue stream. Metrics routinely supports the development and commercialization of around 50 new drugs each year, and 25 projects are in Phase II and 15 projects are in Phase III. Metrics is expected to support the commercial launch of another 4 products across fiscal '21 following FDA approval. Metrics remains a highly attractive business, participating in a growing market that has outpaced the broader pharmaceutical industry. The CDMO industry continues to benefit from an increase in outsourcing of development and manufacturing by pharma companies, large and small. And specifically, in Metrics' case, we benefit from growing number of oncology or cancer compounds in clinical development. Finally, Mayne Pharma International, our rest of world business, reported sales growth of 4% year-on-year. Contract revenues increased 11% on the prior corresponding period and benefited from new development projects and growth in contract manufacturing revenues. With that, I'll now hand over to Peter, who will go through some further details about the results.

Thanks, Scott, and good morning, everyone. I'll now provide a high-level overview of the result and take you through key profit and loss, balance sheet and cash flow movements across financial year 2020. Reported revenues were $457 million, which were down $68 million versus prior period. The softer revenues were a result of weaker performance from certain key product franchises, including liothyronine, dofetilide and BAC capsules in generics, and DORYX in Specialty Brands. The top 3 generic products accounted for $60 million of the sales decline versus pcp due to additional competition that emerged with these products over 12 months ago. Most of these sales impacts flow directly into margin as these key products typically have a higher-margin than the base of the portfolio. Results for Specialty Brands were impacted by COVID-19 and the tightening managed care environment that Scott has just spoken about. Looking at the 2 halves in fiscal year '20, the second half was consistent with the first half at both the sales and gross profit lines. This was a pleasing aspect of our result and highlighted the stability of our business in the context of a challenging operational environment and wider market dislocation introduced by COVID-19. Reported EBITDA was $80 million, and underlying EBITDA was $95 million. The difference between reported and underlying performance reflects 4 major items: a noncash credit of $19 million due to earn-out reassessments; $9 million of business restructuring charges to reposition and realign our U.S. operations with specific emphasis on creating a more sustainable cost base, and I note that the annualized cost savings from these restructures are around USD 14 million, with 40% of those savings achieved in financial year '20 and the balance expected in financial year '21. Other items include $15 million of gross-to-net adjustments, with second half amounts due largely to a onetime change of accounting estimate and related calculation methodology for our key balance sheet provision for returns; and an inventory adjustment of $5 million, relating principally to the discontinuation of certain nonviable generic products. At the bottom line, we reported a net loss of $93 million, which was impacted by the noncash impairment of our generic intangible assets. Moving to expenses. As noted, we have worked hard this year to reduce our cost base with gross R&D and OpEx reduced by $31 million or 16% versus pcp. Gross R&D spend, including both capitalized and expensed amounts, was $36 million whilst net R&D expense was $25 million, with the capitalization rate falling from 43% to 31%, reflecting the reduced generic R&D spend as we pivot those investments more into specialty products. For completeness, I note that we typically capitalize our R&D spend on generic development programs and expense branded programs given the more complex regulatory pathway and associated risks to approval. Within OpEx, marketing and distribution costs were down by $8 million, reflecting the restructure undertaken to reduce costs and create a more efficient commercial infrastructure. Admin and other expenses were down $49 million to $119 million, but this includes a number of noncash and nonoperating items. Excluding these noncash items, admin and other expenses were also down by $8 million versus pcp, benefiting from more controlled spending and a reduction in legal expenses. Note 4 of the accounts provide a detailed disclosure on these expenses. In terms of FX, the average Aussie dollar exchange rate relative to the U.S. dollar weakened from $0.71 in financial year '19 to $0.67 in the current year. This had a positive impact of around $6 million at the EBITDA line. Total finance expenses increased by $14 million due to the noncash unwinding of discounts associated with earnout liabilities relating largely to the NEXTSTELLIS transaction. Interest expense in the P&L decreased $2 million, from $16 million to $14 million, benefiting from an improved cost of funds with lower LIBOR and BBSY rates reducing the average interest cost from 4.5% in fiscal year '19 to 4.2%. Now moving across to the balance sheet. I would like to note upfront that despite the altered trading conditions due to COVID-19, our balance sheet and liquidity levels have remained stable over the latter portion of financial year '20, which has allowed the wider business to focus on important operational priorities. We finished the year with cash of $138 million, which increased $49 million year-on-year, and borrowings were up $29 million. This increase is partially captured by the new leasing accounting standard, AASB 16, which added $12 million of leases onto the balance sheet that were not included at 30 June last year. Encouragingly, after excluding the impact of AASB 16, net debt was down $32 million over the half, reflecting an efficient approach to the management of our capital resources and the underlying cash flow generation capacity of our businesses. In November 2019, we completed a restructure of our debt facilities, creating more balance sheet flexibility to accommodate the addition of NEXTSTELLIS. A key benefit from this process was to increase our financial leverage covenant to 3.75x through to the end of calendar year 2021. This will provide additional headroom and flexibility for the initial OpEx investments to support the NEXTSTELLIS commercial launch scheduled for the latter part financial year '21. Our leverage ratio was 2.5x at the end of this year, and we continue to retain significant headroom under all of our bank covenants. Other key movements on the balance sheet were the $165 million increase in intangibles and a corresponding $160 million increase in other financial liabilities, these increases largely reflect the impact of the NEXTSTELLIS transaction with the liability element a function of the contingent payment structure in place with our license partner. Moving to cash flow. Operating cash flow was strong with an inflow of $100 million, which was ahead of EBITDA, demonstrating strong cash conversion across the year. In terms of investing cash flows, we spent $56 million across financial year '20, with $27 million relating to payments for intangible assets, $9 million for earn-out payments, $11 million of capitalized R&D costs and around $9 million of CapEx to support our Greenville and Salisbury facilities. After these investing cash flows, the company produced free cash of $44 million. This was a pleasing result and highlights the opportunities we have to drive further balance sheet and capital management efficiencies for shareholders in future periods. And with that, I will now hand back to Scott.

Thanks, Pete. So look, in summary, Mayne Pharma continues to focus on repositioning the company into sustainable products, distribution channels and therapeutic areas. The successful commercialization of NEXTSTELLIS and our pipeline of generic products pending at the FDA will be the key drivers of this transformation. We have 2 potential near-term high-impact launches that we've spoken about today, generic NUVARING and a potential first-to-market women's health product. In addition, we have up to 8 further generic launches this fiscal year, including 4 approved contraceptive products from Novast and a further 4 generic products pending at the FDA. The total addressable market for the potential generic launches this calendar year is USD 1.8 billion, of which generic NUVARING makes up half of this value. The generic industry is also expected to benefit -- or business, sorry, is also expected to benefit from an improved cost base through greater operating efficiencies in our manufacturing network and cost savings through the realignment of our supply chain with companies such as Novast. We also continue to look for opportunities to broaden our portfolio and leverage our scalable infrastructure through further business development activity. The contract services business is expected to benefit from the pipeline of committed business and additional commercial manufacturing revenues. We're also making investments in new equipment and capabilities to accelerate growth of this key business. And finally, we are focused on improving the performance of Specialty Brands with its lean and more focused cost base, and we expect to benefit from a more stabilized market when it comes to prescription volumes, and we're beginning to see this across the months of June and July. With that, I'll now hand back to the operator, and we can take questions.

[Operator Instructions] We'll take our first question from Saul Hadassin with UBS.

Just a couple of questions. Scott, as you approach the NEXTSTELLIS approval, hopefully, next year, can you just remind us what's the aspirational target there as it relates to the revenue opportunity? It's obviously a large and, I guess, complex market, but just your thoughts on where you think NEXTSTELLIS would get to in terms of sort of revenues once it's rolled out and launched, really?

Yes, sure, Saul. So we've said this a number of times. I mean our business plan, our base business plan that supported this investment is targeting peak annual sales of USD 200 million per year. I did note in my earlier remarks that the 2 leading contraceptive brands in the U.S., Lo Loestrin and NUVARING, have sales of 3 to 4x that. And we think we've obviously -- and as I also mentioned, we think we've got a differentiated and exciting asset here. So obviously, we're going to strike the best possible market penetration and as quickly as possible. But we think it's a product that at least has that level of peak sales potential.

And then just one on NUVARING. We've seen a generic entrance. Can you comment on what you've seen as it relates to the pricing dynamics regarding the branded products?

Regarding the generic product or the branded product?

Well, I guess what has generic entry resulted in, in that price dynamic? And the $960 million of sort of addressable target market, I'm just wondering if that has come down based on price discounting.

Yes, sure. Sure. So look, at a public price of -- list price that we can see and everybody can see the independent generic and the AG have effectively come in at roughly a 10% discount, list price discount to the brand, which is typical. The real price, the contracted price with wholesalers and pharmacies, we don't have line of sight on, but I would expect the price discounts at the level of 50% to 60% and probably more towards 60% for the large buying groups is probably realistic at this stage. So I would say that the generic opportunity of Mayne Pharma is a branded market less 60% at this point in time. I mean the other thing to note that's important here is also the supply chain. The independent generic, Amneal, until recently has only been able to garner around 12% to 13% share in this market which is very low, and that's because it's a very complex and difficult product to make. Now we do expect that they will be able to increase their capacity to probably around 25% of the market. But clearly, that type of supply situation means that it's not an aggressive market, and it certainly gives a lot of opportunity for the next entrant or 2, of which, obviously, we hope to be the next.

We'll take our next question from Gretel Janu with Crédit Suisse.

Firstly, just on TOLSURA. How many hospital networks are you currently in? I think in the first half, you said that you're in 8 hospital networks. So have you been able to accelerate that during COVID? And in terms of your previous target, I think you had -- you want to gain 20% share of that $300 million market by '22, '23. Where do you currently stand on that?

Yes. So on the first point, we haven't been able to close any further formulary contracts, Gretel, in the second half. Simply put, we've got a lot of stuff pending. We had a lot of stuff pending coming into March that would have closed. But as you can imagine, institutions are not focused on bringing products -- new products into their formularies right now. We do expect that to open up. We are seeing the green shoots of dialogue. But again, it's slow at this point. And obviously, it will be -- I mean a great determinant there will be, obviously, what happens with COVID transmission rates and hospitalizations over the balance of this year and into next. In terms of our longer-range targets, we remain confident that we'll be able to eke out a significant share of the itraconazole market. And we're still confident in that 25% target by the end of fiscal '22. And as I said in my earlier remarks, we are about to embark on an interesting study in valley fever, which we think itraconazole, our itraconazole will have a great placing. And that will give us an incremental opportunity that's not in the original underlying addressable dollars, market dollars that we've previously talked about with this product. So look, it's disappointing that COVID has happened. We were -- at the point of March, we had 6 consecutive months in a row of growth, albeit off a low base, but we are beginning to get real momentum in what is a slow market in terms of adoption by definition. So we're beginning to see growth again. But obviously, we've been impacted by, obviously, the issues around COVID.

And then just in terms of Specialty Brands' revenue performance, can you tell us what happened in July and August? Has it improved since kind of the difficult months of March and April and May?

Yes. Well, August hasn't finished yet so I can't quite tell you August. But look, we had a situation where from the middle of March, the entire sales team was grounded for 2 months with all promotion done virtually, and done well. In field promotion, it resumed at some level in late May. And in-person promotion in the field has improved and increased month-on-month. As we sit here now, around 1/3 of our promotion is done in-person with salespeople calling on physician offices in-person, and the remainder is still done through virtual engagement, Zoom and various other mediums. So it's been obviously a very, very difficult time. But what I can tell you is that prescription levels right now and through June and July have returned to pre-COVID levels in dermatology, and for the majority of our products. We're seeing a little bit of softness on FABIOR. Our share of 3 of the 4 dermatology brands has actually increased over this period. And this is with also a smaller sales team, not just with the COVID situation. So it's sort of a testament to the stickiness of our brands, but also the capabilities of our sales force and territory management. FABIOR has come under a little bit of pressure. But when I talk pressure, I mean 1% in terms of market share, and that's because there's 3 new brands competing against FABIOR that have been launched over the last 6 to 9 months. So look, I'm pretty happy with where we are in terms of the underlying demand situation and our market share performance. The challenge for Specialty Brands, as I also indicated earlier, is the pressure from managed care that's driving higher costs that sit between the gross sale and the net sale line. And that's a feature that everybody in this industry is grappling with and we have a number of plans that we're implementing right now to mitigate that. But we did see some impact from that feature that it obviously affects our net revenue line through the second half as well.

We'll take our next question from Michael Gerges with Blue Ocean Equities.

Just extending on just your prior comments there, Scott, just with respect to FABIOR coming under a little bit of pressure there, obviously, with new market entrants. I'm just wondering, has there been any change to the pricing strategy with that product specifically?

No, not in terms of price as you would understand as we would normally define price. So the list price of the product, no. The thing that changes, Michael, and the different brand companies compete on is the things like the attractiveness of their patient support programs such as buying down the level with which you buy down, for example, what a patient would otherwise have to pay, a commercial insured patient would otherwise have to pay in terms at their out-of-pocket component. Also, people compete for coverage based on different managed care rebate structures and various other things like that. So the actual pricing of the product doesn't change. In fact, we raised price modestly year-to-year. We have the ability to do that within our managed care contracts, and we do it, but it's single-digit price increases. But it's about what happens between that list price and the net price.

Yes. No, understood. And then just on the cost side there. And it looks like you put in a hell of a lot of effort to bring those -- to reset that cost base. And noting that I think I saw somewhere in the presentation that there's a circa $20 million investment for NEXTSTELLIS in the upcoming year. Is that cost out bars that you've got there, is that -- should we be thinking of that as permanent? Or is there some cost-outs there that are associated with obviously the operating environment that you're in? Or how should we think about that resetting of the cost base?

Maybe I'll let Peter take that question.

Sure. So Michael, as I referred to, a lot of the restructuring efforts that we completed during fiscal year '20, we realized a portion of those benefits during the financial year. I think I quoted around 40% of the USD 12 million projected cost savings at the OpEx line. So we're projecting for the balance of those numbers to be fully realized in fiscal year '21. So those efforts have led to a USD 12 million reduction of our operating cost base. So that's how we'd encourage you to think about it.

Right. Okay. I mean just...

Sorry, I'd just to add to that -- sorry, I'd just add to that, Michael. We're continuing to look at other ways to sort of streamline and make our operations as efficient as possible. So that was our fiscal year, I guess, '20 output. But again, working with Scott and the team, we're continuing to focus on and how we can remain efficient on the cost side of our P&L.

Great. And then just finally, I guess, appreciating you don't have a crystal ball, but from where you sort of stand today, if you could perhaps just share with us how you feel about the operating environment for the remainder of the half?

So you're talking from a COVID standpoint or in terms of the segment?

Just in terms of sort of looking out into December as from where you are now, what the generics and specialty environment, assuming that things are stable at the moment and there's not too much variation from where you currently stand.

Yes. Well, look, I think -- as we sit here now, I think the contract services business has a good book business, as I said. So I'm expecting to see continued growth from that business across the year. And these comments are really around a year rather than just the next 6 months. But I expect Metrics to be a consistent performer, let me put it that way, across the next 12 months. On the Generic side, clearly, if we can -- through the launch of 1 or more of our very significant opportunities there with generic NUVARING and the other unnamed women's health care product where we think we could be first, the benefits there will accrue, obviously, from the second half, if they were approved in the first half, principally. We have a bunch of other products from Novast, the new strategic supplier, that are coming, and then 4 or 5 smaller generic launches. So the contribution of those sort of new revenue streams in the generic business are going to be skewed towards the second half, Michael. So in terms of the underlying generic business, we have come off a relatively stable 6 months or 2 consecutive 6-month periods. I'm hopeful, based on what I see, sitting here in mid- to late August, that we can enjoy, in terms of our base business before all of those launches, a generally stable period. But I would simply caution again that the retail generic business is not one that we have much control over, and I would expect the large generic buyers to continue to be pretty incessant and aggressive with their bidding cycles. I mean I must say earlier on, I talked about our great supply chain. The fact that through COVID, we've maintained extraordinarily good customer service levels, it is resulting in us continuing to obtain quite a bit of secondary business in the generic market, and that usually is at better prices. And it's certainly underwriting our reputation from a supply standpoint with our customers. And whilst price is now becoming a focus point again of the major buying groups, they are, obviously, right now, still very, very focused as well on supply chain and supply continuity. So net-net, I think Mayne is -- for its basket of products, is pretty well placed to take advantage of that. Again, hard to forecast. On the Specialty Brands side, as I signaled to Gretel, we're making some changes to our co-pay cards and various other things to respond to some of the managed care pressures we have seen. We're also -- we've also got a couple of small launches within our alternate channel space that are more branded generics than brands, but we expect those to start to be accretive later this year, calendar year. And as I said earlier, our market shares are strong. I mean, obviously, our operating margins will improve in dermatology. We've taken quite a bit of cost out of that business. And we've only seen a fraction of that accrue to us in fiscal '20. So we'll see a full 12 months of benefit of that restructuring in '21. So from an earnings contribution standpoint, I think the Specialty Brands business will be favorable. And of course, I expect growth from TOLSURA. My only caveat with TOLSURA is, as I said earlier, the principal prescriber base is very much involved in obviously the COVID-19 situation. And I do expect that there will be continued softness there for a period of time, unlike dermatology, where we see that physician group coming back online pretty well today.

We'll take our next question from John Deakin-Bell with Citi.

I was just interested if you could just elaborate a little more in terms of the restructuring of the sales teams, dermatology, you're saying $12 million annualized. What -- practically, how many less people are we talking about that you've got? And how are you expecting that change to impact the business going forward? And then maybe I'm just also interested in projecting forward when you launch NEXTSTELLIS. Exactly what -- how is that going to be sold within the group? Is that within the specialty sales team? Or is that in the generics business? Can you just kind of fill out how that might play out over the next 12 months?

Yes, sure, John. So the majority of the cost saving from the dermatology restructuring has come from the elimination of in-field representatives or district managers. That's 2/3 to 3/4 of the saving, together with beginning to rightsize or take a more efficient look at some of our marketing and other commercial support activities. The way we've done it is we're still covering the same amount of dirt, and you put it that way. We're not abandoning any significant material geographies within the U.S. But what we are doing is that we're asking people to carry more products in their bag. And based on the maturity of some of our products, such as the DORYX franchise, we think we can do that without seeing any material downward shift. In fact, what I can say is that we've taken out 30% to 40% of our heads over the last 12 months in dermatology in 2 -- at 2 different periods, 1 late last year and 1 late this -- I mean May, June. And through that period, we haven't seen any diminution in market share for our 4 brands. And just in terms of absolute scripts, underlying demand, when I normalize for the COVID situation, we haven't seen any drop and we've achieved that by just -- we're getting better and better at territory management, better and better at targeting. And we've got a bunch of rural doctors out there that we support very, very well and pharmacies that support them. So I expect that to continue. And then with respect to NEXTSTELLIS, I think that was your other question. How are we going to sell NEXTSTELLIS?

Yes.

So there we have, as I said earlier, we anticipate having a circa 80-person sales team. So this is a brand. So it's -- whilst it's a different cohort of physicians, obstetricians and gynecologists, they behave in terms of access and writing of scripts and how you promote them, they both pay quite similarly to dermatologists. We may see some cross-pollination between our dermatology sales team and our NEXTSTELLIS sales team. But right now, you should think about it as an incremental 80 salespeople and associated infrastructure. The exact number will get tighter on that as we get closer to market. But based on various analogs and obviously, some analytics that we've done, we think that's about the right size to have the reach and frequency we need with high prescribers to optimize the launch of the product.

Okay. And dermatology, I think that got to -- is that 120 sales people at some point? So that's back down to 60? Or just remind me of those numbers?

Yes. No, it got -- at peak, it got to about 110 in reality. And over the course of the last 12 months, we've taken 2 step changes down. And now we've got around 45 reps, plus we've repurposed some of our reps to call more on pharmacy. And these are the pharmacists that -- the independent pharmacies that are very closely networked with many of the dermatology offices so that we can get close to the patient and we could control their prescription, not just the writing of that product but also the dispensing of that product. That's a key part of our commercial strategy.

We'll take our next question from Martyn Jacobs with Canaccord Genuity.

Well done on a difficult second half. I was just wondering, you had a reasonable unwind in the working capital for the year. Do you expect that to continue to some extent in the year ahead?

Yes, I'll probably get Peter to comment on that.

Yes, Martyn. Look, we obviously had a good unwind of that working capital position in the second half. And it's a little bit subject to ordering patterns and trade with the big 3 customers. But I think we are projecting some further loosening of our working capital position in fiscal year '21, but probably not to the extent that we experienced in the second half. But again, we see that as a good guide that will continue to contribute to our cash position.

And what are you targeting for CapEx and R&D? I may have missed that on the opening part of the call.

There's -- we've designated $20 million of capital for both Greenville and Salisbury. And some of that is expansionary. And I guess, growth CapEx, Martyn, above and beyond just the regular year-to-year maintenance numbers. I would view the fiscal year '20 spend of $9 million as being a more typical sort of maintenance number. But in fiscal year '21, with the continued, I guess, success of MCS at Greenville, there's some targeted investments there. And equally, we have some targeted investments. It's all really to help us with some of our key product franchises in the U.S., particularly budesonide.

So is R&D on top of that? Or is the $20 million all of that?

R&D is on top of that. That's just the CapEx number that I was quoting then, the $20 million. In terms of R&D, I'll be thinking about, as a percent of sales, anywhere between 6% to 8%. And again, as we flagged earlier, there is an increasing bias to expensing R&D as we pivot more and more of our R&D activities into branded specialty products.

Yes. And so following the Novast deal, what do you think sustainable adjusted gross margin should be for the generic business as currently reported?

Well, I think we think about that -- you want me to go?

No. Go Pete. Go. That's fine.

I was going to say, we think high 30s to early 40s, are I think how we think about it from a percentage standpoint.

Okay. And just finally, is the current environment presenting any portfolio opportunities that weren't available previously?

Yes. Martyn, just, I mean, yes, is the short answer. We see it particularly in -- on the branded side. I mean, frankly, we're not that interested on the generic side, unless it has -- it's got to have -- it's got -- as I've said before, it has to have very -- our investment thesis hurdles are very high. On the branded side, we do see some interesting late-stage development assets in women's health. Obviously, we're focused on NEXTSTELLIS. But it is an interesting space in terms of what's maturing through the development pipeline that could be very synergistic with, obviously, NEXTSTELLIS. I mean our goal there, ultimately, isn't to have a 1 product women's health branded business, of course. And on the dermatology side, the challenges that I talked about earlier around managed care pressures, et cetera, I mean that's a pressure that everybody is feeling. And I suspect there'll be some other smaller or even larger broad-based dermatology players that will be looking for different solutions in terms of what to do with their businesses or their portfolios or past their portfolio. And look, I think we've got a -- as I said earlier, I think we've got a very scalable model that we've put in place, particularly the mature dermatology brand. So I think the environment, even without COVID, was heading in that direction. I think it probably could well accelerate.

Ladies and gentlemen, due to time constraints, we'll take our final question from John Hester with Bell Potter.

Just on the launch of NEXTSTELLIS -- the launch of NEXTSTELLIS next year, was that a critical point for your outlook? And I just wanted to get an idea on the timing. You said here, you've -- you're going to recruit the district managers and various other heads in the quarter prior to the launch. Can you just remind us of the timing of that? And what do you believe the cost of the 80-person sales team will be? Perhaps that's one for Peter.

Yes, I'll let Peter answer that one, John.

Yes, John, I think fully loaded, I think we flagged around a 25% OpEx line against that net -- peak net sales line. So on a run rate, I think we think of anywhere between USD 40 million to USD 50 million on an annualized basis will be the OpEx line. But again, that will be graduated and phased to tie up with the launch phasing and obviously, the success of NEXTSTELLIS in the marketplace.

So in other words, we shouldn't assume 80 heads on day 1 of the launch? Is that what you're saying?

No, no. We are. But there's other costs like DTC and other supporting costs, conferences, et cetera, other sales and marketing activities, sampling that's with it we'll ultimately, in a fully mature women's health supporting OpEx function, we'll incur. I think we're targeting around $20 million for fiscal year '21 just due to phasing and anticipated launch timing. But again, when it matures and in terms of all the other supporting expenses, and I mentioned DTC, sampling and other supporting activities, we expect it to be around 25% of our net sales line.

Yes. Okay. So $20 million for FY '21, so -- so sorry to harp on this, but is that, like, your actual cash number in your budget for FY '21 for the sales force? Or is that sort of a...

Yes, it is, John. That's correct. But again, I just want to stress that it depends on the FDA progress that Scott has referred to earlier. We have a PDUFA date in April. And if that date is hit, that's the number that we have in our budgets today for supporting the launch.

Okay. April '21. Okay. Scott, just back over to you. What are you thinking in terms of positioning the NEXTSTELLIS in terms of price relative to its relative to its branded peers?

Yes. Well, we're not going to be pricing it at a premium to branded peers. I mean based on the work we've done there, John, we'll be competitive. I mean we see most of the brands on the branded side of the contraceptive market are certainly within a reasonably narrow bandwidth in terms of their list prices. So we're not going to do -- we're not going to come out of the gate with anything that could tarnish the brand. The old contraceptive market in -- or the contraceptive market in the U.S. has had some has some features to it from a managed care and coverage -- insurance coverage standpoint that are certainly far more attractive than dermatology today. Because it's supported by the Affordable Care Act, Obamacare. So in many states, the actual patient cost for a contraceptive is 0 dollar. There's no co-pay associated with it. It depends on the state. But that's -- which obviously means that the pharmaceutical company is not funding that patient co-pay like we do, generally speaking, and we have to do competitively in dermatology. So we keep those dollars stay in our pocket. The other feature here is that contraception generally is very well covered by insurers. And there hasn't been really any real movement in that market. There's probably 2 reasons for that. One, there is enough $1,000 per month list price products, number one. Number two, unwanted pregnancy and family planning issues and whatnot is very much something that insurers and the broader public health market wants to avoid. So look, for those broad reasons, we think this is a market from an insurance and managed care standpoint that's far more stable and attractive compared to, obviously, some of the things that I alluded to in dermatology.

And just last one from me. What's the key selling message to OBs and gynecologists for this product? Is it the -- I mean low dose -- well, I think this is one of the low-dose products out there. It's obviously nice to grab a lot of share. I mean there's other merits of the NEXTSTELLIS product that I'm sure safety is one of them. What else would convince a prescriber to prescribe this product as opposed to any sort of generic?

I mean simply put, it's going to be a -- firstly, it's going to be a shiny new toy, John. It's going to be the first new estrogen launched in the U.S. in the contraceptive space for half a century, number one. So just the fact that it's new, and we will be putting significant share of voice into a market where, really, today, is purely Allergan with Loestrin. This is not a very competitive market, and this is a very promotion-sensitive set of physicians. So -- but that's not what really excites us. That sort of helps enable us and derisks where you believe the positioning of NEXTSTELLIS. But we don't just see it as something that's new. We see it as something that's differentiated. I mean it has a unique mechanism of action. I won't bore you with it now, but it really does. And it's a unique mechanism of action, which confers potentially safety benefits versus other oral contraceptives. I mean the vast majority of other oral contraceptives have a synthetic estrogen. This is a natural native estrogen. It's a weak estrogen. So that's good. So safety, efficacy with bleeding control. There's no weight gain with this product, whereas there is with many other oral contraceptives. So it's weight neutral. And we believe the native features of this and the environmentally friendly impact features of this is going to play very, very well with millennials in particular.

And ladies gentlemen, this does conclude today's question-and-answer session. I'd like to turn the conference back to your speakers for any additional or closing remarks.

Thank you, everybody, and good night from North Carolina and stay safe. Goodbye.

Ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may now disconnect.