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

Good day, and welcome to the Mayne Pharma Group Limited Results Half Year Call. At this time, I would like to turn the conference over to CEO, Mr. Scott Richards. Please go ahead, sir.

Thank you very much. Good morning, everybody. Thank you for joining us today to discuss Mayne Pharma's half year 2021 financial results. Joining me on the call is Peter Paltoglou, our Group CFO. As with past practices, I will provide an overview of the results, our key strategic priorities, how our operating segments have performed. And Peter will provide some additional detail on the financials, and then we'll open up the call for questions. Firstly, I'd like to give a quick update on COVID. Transmission still remains very high here in the U.S. and the communities in which we operate. The health and safety of our employees remains a key focus, and we continue to adapt to the evolving environment. Pleasingly, our manufacturing output has continued to grow inside our facilities, and we have seen minimal disruption to our third-party supply chain or prosecution of our R&D program. Further, our dermatology sales team has performed very well [ by ] on average a 50% drop in in-person office calls through effective utilization of various virtual engagement platforms, which have allowed us to maintain overall reach and frequency metrics close to the pre-COVID levels. Moving to the group results. Reported revenue and gross profits were down from the prior corresponding period, impacted largely by FX and weaker performance from our retail generics business. On a constant currency basis, the decline of 3% of the top line, and underlying EBITDA was $44 million, down 7% on the prior corresponding period. At the bottom line, we reported a net loss after tax due to the noncash intangible asset impairment of the Generic portfolio. Whilst this is obviously disappointing, it reflects our latest view on trends in what remains a highly competitive U.S. retail generic segment. Operating cash flow was solid at $46 million ahead of EBITDA and helped us to reduce net debt by $40 million over the half. Whilst ongoing challenges in our retail generics business continue to impact our group results, we are encouraged by the performance of our other business segments during this difficult operating environment. Slide 6 of the results presentation shows our gross profit, broken down into U.S. retail generics, contract services, dermatology, women's health and our rest of world business. Excluding the U.S. retail generics segment, the remaining business grew 7% on a constant currency basis at the gross profit line. And these categories now account for 77% of gross profit for the group, after the 46% 2 years ago. Going forward, we expect to see a further reduction in the retail generics business as a percentage of the group, and women's health will become the largest category following the launch of key pipeline products such as NEXTSTELLIS and generic NUVARING. We also realized significant spending reductions this half. Operating expenses and gross R&D spend decreased by $19 million, made up of a $12 million decrease in operating expenses and a $7 million decrease in gross R&D spend as we wind back development spending on retail generics and focused on progressing our proprietary or branded pipeline. Moving to the operational highlights. Our key near-term priority is, of course, the commercialization of NEXTSTELLIS, our novel oral contraceptive of the new estrogen, Estetrol or E4. The product is pending at both the FDA and the Australian TGA. In the U.S., the product is accepted for -- finally in June 2020 and has a target action date with the FDA in April of this year. We've had 2 positive meetings with the FDA in September and January as part of the dossier review, with no substantive issues identified to date. Subject to regulatory approval, we are planning to launch NEXTSTELLIS in the U.S. market around the end of this half and early next calendar year in Australia. Slide 8 outlines some of the key features of NEXTSTELLIS. If approved, E4 or Estetrol 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 estrogen. Our marketing strategy is focused on building awareness of NEXTSTELLIS in most key stakeholder groups, such as health care providers or prescribers, payers and consumers. In 2020, we conducted 4 advisory board meetings in the United States, and there was strong interest in the science, E4's mode of action and the clinical data from Phase II and Phase III trials that were conducted in over 4,000 women. In terms of the NEXTSTELLIS commercial team, we've made a number of key management appointments as outlined on Page 10. Many of these new appointments have significant experience in leading women's health companies, such as AbbVie, Allergan and Bayer. The new team will be supported by a field force of approximately 75 people, who will be focused on reaching high-prescribing OB/GYNs. If approved at our April target action date, the NEXTSTELLIS launch costs covering sales force, medical education and marketing activities are expected to be approximately USD 10 million in the second half of this financial year. As a reminder, NEXTSTELLIS will participate in the combined hormonal contraceptive market, which is valued at USD 4 billion, the largest branded product by revenue in this market, Lo Loestrin Fe, generating USD 500 million in annual net sales. Our business case for NEXTSTELLIS is targeting peak net sales of USD 200 million, which represents just 2% of the market by unit. Other key highlights this year include the launch of 4 new products in the U.S. Two branded products, SOLTAMOX oral solution and our new dose strength of DORYX and 2 Generic Products. Since the beginning of this calendar year, we've also launched 3 further oral contraceptive products that were sourced from our new partnership with Novast Laboratories. Two of the products are generic versions of the top 2 prescribed contraceptive products in the U.S. today, Ortho Cyclen and Ortho Tricyclen. In dermatology, we continue to assess further opportunity to license certain Generic Products to expand our portfolio in the specialty pharmacy channel. We do believe our go-to-market dermatology platform can offer a more effective distribution model that provides advantages in terms of greater convenience and price transparency for patients, reduced administration to the prescriber and improved economics of the dispensing pharmacies. We are currently in active discussions with pharmas for another 8 Generic Products to add to our growing portfolio. In terms of our pipeline products, we continue to advance our key programs with the FDA, who we expect to respond to our generic NUVARING CRL by the end quarter and have another 5 products pending approval, plus 3 other products that have been approved, which we are targeting to launch this calendar year. These 9 products -- pipeline products have a combined acuity of sales of USD 1.5 billion, of which NUVARING represents $800 million. Moving to the operating segment, starting with Metrics Contract Services. This business performed well in the half, with USD sales up 6% and gross profit up 12%, benefiting from new commercial manufacturing revenues and improved business mix. Commercial manufacturing grew strongly and now represents 14% of MCS sales versus 3% in the prior corresponding period. Metrics has 5 commercial clients, including 2 top 10 global pharma companies and is now approved as a manufacturer in 40 countries. Growth in the commercial business reflects the capital investments we've made at the Greenville, North Carolina facility. Most recently, we invested a further USD 10 million to expand capacity and support the pipeline of committed business. We continue to see favorable market dynamics in this segment, and it's benefiting from an increase in outsourcing just generally in development and manufacturing and the growing number of oncology compounds and clinical developments, which the Greenville facility is well suited for. The market continues to grow in the single -- in the mid-single digits, well above the board of pharmaceutical industry. And many businesses have been sold in this space for trailing 12-month EBITDA multiples in the mid- to high teens. Also, publicly traded contract services companies like Catalent, Lonza, Siegfried and Recipharm also trade on significantly higher multiples in the [ Florida ] pharma sector. Moving to our Specialty Products segment. USD sales were down 6% on the first half versus pcp but, pleasingly, were up 32% on the second half of fiscal '20, benefiting from some improvement in COVID-related access and underlying demand and also improved growth in that performance. The last few years have seen a significant increase in managed care cost as PBMs have consolidated and then leveraged their market position to demand higher rebates in return to commercial coverage. This dynamic effectively reduces the net summary price of branded products, which used to burden the manufacturers like Mayne Pharma to ensure patients can get their medicines at an affordable price. We've responded to these dynamics by making proactive copay card changes, restructuring the dermatology sales force and changing how we market our products. Direct operating expenses, which captures sales team, marketing and distribution costs, have decreased by USD 5 million or 28% this half, while prescription performance across the total dermatology portfolio of brands and generics has remained steady. Pleasingly, the direct operating profit from Specialty Products, which was disclosed on Page 20 of the presentation, has increased 40% versus the prior corresponding period as a result of these initiatives. Today, the dermatology sales team work with an extensive network of specialty pharmacies, and provide access to more than a dozen branded and generic dermatology products, and more than 85% of this segment's sales are through the specialty pharmacy channel. TOLSURA, our improved formulation of itraconazole, has faced a very challenging 2020, impacted more significantly by COVID-19 than our other businesses given many of our key customers and prescribers are hospital-based. Despite that, we're beginning to see signs of growth again in the final quarter of 2020 with sales of units and dispensed prescriptions above all prior quarters since launch. We're also making further investments this half in the field team footprint and various marketing initiatives to drive further awareness and growth in anticipation of emerging from COVID restrictions this year. And we do remain very confident in the potential of this product to capture meaningful share of the itraconazole market. We also seek broader application of this product in other fungal infections, such as valley fever and as a potential anti-cancer treated with our most-advanced program being in basal cell carcinoma nevus syndrome. Moving to Generic Products. USD revenue was down 8% on the prior corresponding period impacted by ongoing pricing pressure across the portfolio and limited benefit from new product launches. Product performance was mixed since growth in budesonide and carbidopa/levodopa offset by weaker performance of butalbital, methylphenidate and amiodarone. The future performance of the Generic segment will continue to be heavily influenced by the timing of FDA approvals and any competitor launches and withdrawals of key products. We continue to rationalize the Generic portfolio and discontinue unprofitable products. We're reducing stock obsolescence, and we're optimizing the cost base through the realignment of our supply chain with raw material suppliers and contract manufacturing, such as Novast Laboratories, where we've secured supply on more variable terms for 8 contraceptive products. Over fiscal '21, 12 product transfers is expected to be completed into our own facility or into new contract manufacturers, which is expected to improve our product cost base. The aggregate impact of these initiatives in new product launches will continue to offset expected ongoing price erosion in the base retail generic business. To underscore this last point, our largest retail generic product, liothyronine, saw a new competitive launch recently. Moving to our last segment, Mayne Pharma International. Our rest of world business reported sales growth of 10% driven by strong income from third-party development and manufacturing services to third parties. This third-party income increased 35% on the prior corresponding period and benefited from 7 new development projects and growth in contract manufacturing revenues. The stronger gross margin reflects overhead recovery benefits of our Salisbury site with dose volumes up almost 50%. With that, I'll now hand over to Peter, who will go into further details about the results.

Thanks, Scott. Good morning, everyone. I will now provide a high-level overview of the results and take you through the key profit and loss balance sheet and cash flow movements this half. FX has had material negative impact this half, with the average Aussie dollar exchange rate relative to the USD strengthening $0.04 from $0.685 in the prior corresponding period to $0.723 in the current period. FX has several impacts on the P&L, which I'll discuss in further detail as we work through these results. At the top line, reported revenues were $209 million, down $18 million versus the prior period. The softer revenues were a result of both the weaker U.S. dollar, which accounted for $11 million of the sales decline, along with continued challenges in the retail generics segment of GPD. On a constant currency basis, revenue was down 3%. Reported gross profit was $96 million, down $10 million. And the gross margin of 46.5% was essentially flat versus the prior corresponding period. Underlying EBITDA on a constant currency basis was $44 million, down 7% on pcp, with FX impacting this by $4 million. This FX loss comprised of 3 components: the revaluation of trading assets of $1.4 million, a translation FX impact of $2 million and the transaction currency effect for the balance. Reported EBITDA was $40 million, up $6 million or 16% versus pcp. Slide 5 of the presentation outlines the underlying adjustments to EBITDA. There are 2 adjustments that I wanted to call out: a noncash credit of $5.6 million arising from a decrease in fair value of earnout liabilities, and we also added back $1.4 million of setup costs for the establishment of the women's health platform for NEXTSTELLIS. This is consistent with the approach we adopted when we acquired DORYX and set up our branded dermatology platform and related organizational infrastructure. We will have a further adjustment taken up at the full year for these prelaunch activities, which will enable better look-through to underlying business performance for FY '21. Once approved, NEXTSTELLIS operating costs will be included in the underlying result. The bottom line, we reported a net loss of $181 million, which was largely due to $215 million noncash impairment of our generic intangible assets. This impairment was driven by the revised outlooks for the Generics business due to increased competitive pressures in certain on-market and pipeline products, along with additional pricing headwinds more generally across the retail generics portfolio. Moving to expenses. Pleasingly, our cost base continues to be effectively managed, with OpEx reducing $12 million or 18% versus pcp. Within OpEx, marketing and distribution costs were down $11 million, reflecting the restructure undertaken last year in the dermatology business, both to reduce costs and improve alignment with our go-to-market business model in this segment. Admin and other expenses were down $5 million to $56 million, although this includes a number of noncash and nonoperating items. Note 3 of the accounts provide a detailed disclosure on our admin expenses. Excluding these noncash items, admin and other expenses were down $1 million versus pcp. Gross R&D spend, including both capitalized and expensed amounts, was $13 million, down $7 million on pcp, whilst net R&D expense was $10 million, down $2 million on pcp. The R&D capitalization rate fell from 37% to 20%, reflecting the reduced generic R&D spend as we continue to pivot our development activities towards Specialty Products. Total finance expenses increased by $5 million, although this was due to the noncash discount unwind effect from the earnout revaluation associated with NEXTSTELLIS earnout liabilities. This will continue to be a component of our results given the structure of the NEXTSTELLIS product license with Mithra. Interest expense in the P&L, which captures the cash cost of the debt facility, was $6 million, down $1.2 million from pcp, benefiting from an improved cost of funds with lower LIBOR, BBSY rates reducing the average interest cost from 3.7% pcp to 3.3%. In terms of cash flow, operating cash flow was another healthy result with an inflow of $46 million, which was above underlying EBITDA, demonstrating strong cash conversion across the business. We've now had 7 consecutive halves in which operating cash flow has been above $45 million. The key investing items this half were $6 million of CapEx spent on our 2 manufacturing facilities, $8 million of earnout payments and $5 million on product acquisitions and capitalized R&D. After investing cash flows, the company produced free cash of $28 million, almost double the prior corresponding period. This was a strong outcome and has helped us further improve our balance sheet position across the first half. A key half of this -- key highlight of this result is the improvement in net debt, which has fallen by $40 million due to the production of this free cash and the strengthening Australian dollar. Our bank leverage ratio was 2x for the half versus a covenant of 3.75x, falling from 2.5x as at the end of June 2020. In December 2020, we completed a restructure of our debt facilities, creating more balance sheet flexibility. We extended the $100 million syndicated bullet facility by 4 years to November 2024 and also improved covenant terms, including the reduction of the shareholders' fund covenant to AUD 600 million. It is worth highlighting that over the last 2 years, we have generated almost $200 million of operating cash flow, of which $90 million was free cash flow and reduced our net debt position by 30% or $90 million. During this period, we have internally funded various important growth initiatives, including site expansion, key R&D programs and selected business development activities. We've invested more than $60 million in R&D, $60 million in product acquisitions and licensing activity and $20 million in our manufacturing facilities to set up the business for a more sustainable future in our selected markets. Looking forward, we will continue to remain focused on generating strong cash flows, further reducing our debt position and prudently controlling our spending. We have many programs underway to further strengthen our supply chain, reduce product manufacturing costs and optimize costs that sit between gross sales and net sales. We have 12 tech transfer programs expected to be completed this year, a number of programs underway to secure more efficiently priced API. And we also have process improvement programs at our plants to increase overhead recovery benefits and initiatives to further reduce stock obsolescence, returns and the cost of copay cards. And with that, I will now hand back to Scott.

Thanks, Pete. So look, in summary, Mayne Pharma's key priorities have not changed. We remain focused on the successful commercialization of the novel oral contraceptive NEXTSTELLIS, which is getting closer to our launch and is expected to be the key near-term transformational event for our company. We'll also continue to expand our dermatology and women's health portfolio through business development and R&D activity. We'll continue to accelerate our global contract services platforms. We'll continue to maximize the SUBA-itraconazole franchise and TOLSURA and also continue to optimize our cost base with a particular focus on our Generic portfolio product costs. So with that, I'll now hand back to the operator, and we're open for questions.

[Operator Instructions] And we can go ahead with our first question that is from Saul Hadassin from -- with UBS.

Scott, just a question for me regarding NEXTSTELLIS and the impending decision by the FDA. Can you talk to -- you mentioned sort of the aspirational revenue target, but I'm just wondering if you can give us a sense as to, realistically, just timing for those revenues to ramp, particularly, I guess, in the COVID environment in U.S. extending through this part of this calendar, your ability to get into -- yes, if you get a market into specialist rooms and I guess, yes, just a time frame as to how it might take to get to that $200 million in sales.

Yes. Thanks, Saul. Well, look, I mean, just in terms of access to physician offices, we see the OB/GYN base to be similar to dermatology. And in dermatology, we have good access, 50%, 60%, 70%, depending on which part of the country you're in, and that is getting better every day now. And further to that, when we can't be there in person, we're finding virtual engagement to be quite effective. So the vast majority of our dermatology positions, we have access to, and that's reflected in some of the comments that I made about our underlying demand and performance in the SBD area. So we expect to have a similar situation in the OB/GYN space. And given that the majority of the sales team that we'll be hiring will come from that space, they'll have the advantage of those existing relationships as well. In terms of the $200 million headline number, that will be generated over a number of years. We haven't been absolutely specific about that. The trajectory will depend upon, obviously, the effectiveness of our sales team. It will also depend upon the effectiveness of our interactions with managed care. We do expect this segment, based on other analogs, to be very well covered, certainly better covered than in dermatology that I referenced earlier today. So we don't expect headwinds there. So look, it will be a build but classic brands like this, I would expect us to be getting somewhere towards peak sales in year 3 or thereabouts.

And just one other for me. Just on NUVARING and noting again your comments as it relates to the feedback that you're anticipating. We've seen another generic entrant. Just your thoughts on that market as it stands today and your ability to compete if and when you do get a product into market in the U.S. I guess what have you seen in terms of the genericization of NUVARING to date from the brand and just your expectations on your ability to compete once you do -- once you are able to play in that space?

Yes. Well, look, obviously, there's an additional approval. We -- I mean from an internal business case standpoint, we did expect to be behind Teva. So look, we think we'll still be able to compete and we'll be able to compete in 2 ways. One, this is a very big market. So our ability to strike decent share, I think, is still very valid. That's our expectation. Clearly, an additional competitor versus not having an additional competitor does make this market smaller. But it's coming off, obviously, a very, very high base at over USD 800 million. The second thing to note here is, unlike any of our generic competitors, we will have a front-end women's health sales team, obviously focused on NEXTSTELLIS. But we do have a very large portfolio, which will then be complemented by NUVARING, our branded generic contraceptives. So you should expect to see from Mayne Pharma a game plan here where we'll compete in the retail space with the other generic companies in a classic way, but we will also complete in alternative channels, using our direct relationships with physicians in this space, which these other generic companies don't have, a bit like what we've done over the last 4 or 5 years in dermatology.

And we will go to our next question from Gretel Janu with Credit Suisse.

Firstly, just in terms of underlying EBITDA, I think at the AGM trading update, you did make the comment that underlying EBITDA was marginally ahead of the pcp, but it did end up down 7% from a constant currency perspective. So I guess what happened in November and December for it to be quite a different result between what we're saying in the AGM?

Yes, look, I'll let Pete add something here, but if I could just say to start, it would be fair to say that we didn't see some of the wholesaler buying patterns that you traditionally see as you enter the Christmas, New Year holiday period. Usually, there's an extra week or 2 of buying, which is not insignificant in our Generic business. That didn't happen this year. So our retail generic business came in, compared to this time of year and past years, it came in softer. I mean just to say that when we look at wholesaler inventory levels, whether it be at the end of December or even as we speak now, from a days-on-hand standpoint, we're at almost past the level that we were at, at the beginning of the financial year. So in that sense, we're hopeful that, that might be a good thing for us over the next few months. But we are seeing softness in terms of wholesaler buying patterns from a days-on-hand standpoint. So that's a primary driver of it. But Peter, I don't know if you have anything you'd like to add.

No, I think, Scott, that's right. Gretel, it's really the trading patterns inside of our retail generics business that sat behind the softer trading performance in November and December vis-à-vis the AGM statement.

And how has it performed into January, February? Anything different to what has historically been the case?

No, no, it's actually business in terms of trading performance because they didn't buy an extra week or 2 in the same -- but January is usually one of our weakest months from a trading standpoint in generics. And we haven't suffered from that December-January effect to the extent we have in the past times. But that said, when you look at wholesale inventory levels right now on a days-on-hand basis, it's still low versus historical points, probably by at least a week or 2 of days on hand.

Okay. Understood. And then just on TOLSURA, so how many possible networks are you currently in? I think back in August, I think you said 8 hospital networks. So have you been able to accelerate that during the last period? And then in terms of kind of the medium-term target, I think you did previously say roughly a 20% share of the $300 million market within the next 2 to 3 years. I guess do -- is that -- does that still stand currently?

Yes. Look, so in terms of the first part of the question, we are now on formulary at 10 IDNs. So look, it's slow -- it's a slow grind. It's not the only area we're focused for TOLSURA because there is business outside of the IDNs. Now the engagement with the IDNs is beginning to open up. I mean as you can imagine, these are hospital institutions and it's been very, very hard for anybody in the industry to engage with them through COVID. But again, we're seeing some green shoots there. So I would expect, based on what we're seeing around diminution in transmission rates here and various other things, I'm sure you're all aware of, that those IDN contracting activities are going to bear fruit in 2021. In terms of the overall outlook, we remain very confident, as I said, in the positioning of TOLSURA with -- to the -- and to that end, we've actually upped our investment in this product, whether it's in terms of sales footprint, marketing initiatives, medical education and the like. We've had an extensive clinical trial in these endemic fungal infections that's been recorded now, and we're able to use that information with doctors in our promotional efforts. And we think a 20% to 25% share of the itraconazole market over the course of the next couple of years is absolutely possible. We just need this emergence out of COVID to obviously continue in what appears to be a favorable way right now.

And we will go to our next question, John Deakin-Bell with Citi.

My question was just around the cost base going forward. Perhaps, Peter, you can help me on that Slide 17, and I'm comparing it back to your Slide 24 from the full year last year where you'd already started to take some costs out. Can you just give us a -- maybe X for NEXTSTELLIS cost, which is separate? But just a sense of how you think the FY '21 full year cost will compare to FY '20 in both the OpEx and the R&D.

Sorry, John, can you just clarify? You're looking for an outlook for the rest of '21? Is that...