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

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

Thank you, operator, and good morning, everybody. Thank you for joining us today to discuss Mayne Pharma's half year results for 2022. And joining me on the call is Peter Paltoglou, our Chief Financial Officer. Today, I will provide you with an overview of the results together with the business and strategy update, and Peter will provide further details on the financial results, and then we'll open up the call to questions. On Slide 5, we outline the key financials. Revenues were $196 million. Reported EBITDA was $49 million, and underlying EBITDA was $24 million. Removing the impact of our launch investment in NEXTSTELLIS from the results, underlying EBITDA was $44 million, up 11% from the prior corresponding period and up 35% on the second half of fiscal '21. Reported EBITDA was positively affected by the noncash reassessment of the NEXTSTELLIS earn-out due to COVID and the longer periods of physician and patient activation and the higher cost of payer coverage versus our original business case. Other key features of the result this half were the start-up investments in the U.S., commercial launch of NEXTSTELLIS, strong revenue and earnings growth across the dermatology, international and Metrics Contract Services businesses and ongoing competition and pricing pressure in the retail generic business. Today, more than 80% of our gross profit is in more durable and predictable businesses where we have a strategic basis to compete effectively. Excluding retail generics, the group reported revenue growth of 20%, highlighting the strong growth we are seeing across these more sustainable segments. In terms of retail generics, we do not anticipate a fundamental improvement in the competitive pressure going forward based on the leading-edge behavior of buying groups. Strategically, we are focused on evolving our U.S. products go-to-market approach by actively participating in alternative channels, and this is accelerating, that help us get closer to the patient and deliver better value, improve convenience and pricing transparency. In terms of the operational highlights on Slide 6, the business has faced headwinds this half from COVID, particularly impacting the growth trajectory of our U.S. branded products. Doctors are not seeing as many patients, rep access to doctors' offices has been impacted, and our sales team has also been directly impacted with increased absences due to COVID. For example, more than 30% of the [ Mithra ] field team have had periods for absences during the beginning of December through January as a result of the Omicron variant, but [indiscernible] and thankfully, this is beginning to now recede significantly. In terms of NEXTSTELLIS, there was solid growth in key performance metrics in the second quarter versus the first quarter despite these challenging COVID conditions. Metrics Contract Services delivered revenue growth of 20% on the prior corresponding period, with commercial manufacturing revenues more than doubling. International revenue growth was 29%, with all key business lines delivering double-digit growth. And our dermatology business was up 8% on the prior corresponding period and up 68% on the second half of fiscal '21, benefiting from the launch of 8 products, with isotretinoin now a generic of ABSORICA becoming our largest U.S. product by revenue. In terms of new approvals, NEXTSTELLIS was approved by the TGA in Australia and KAPANOL was approved by Swissmedic for Opioid Substitution Therapy. Both of these products will be launched later this year. Regarding generic NUVARING, we are moving closer to approval for this complex product hopefully later in calendar '22. This market remains large at more than USD 600 million at IQVIA level with only 2 active generic competitors today. And then finally, importantly, we also renegotiated our debt facilities to increase flexibility, and Peter will talk more about this later in the presentation. On Slide 7, we show our new reporting segments, which align with our current U.S. products operating model. The new reporting breakdown is split into branded products, which contains products in the launch or growth phase, such as NEXTSTELLIS, and portfolio products, which includes established brands and generics sold on a portfolio basis. We've broken our portfolio products into dermatology and retail generics so investors can model the business under the old or new segments. There is a detailed slide at the back of the presentation with historical segment data. This segment change was part of a recent organizational restructuring to simplify operations and improve visibility of each unit's performance, enabling the business to respond more effectively to ever increasing and changing market dynamics. I'll now provide an update on our key strategic priorities, starting with NEXTSTELLIS. As most of you know, we launched this product in the U.S. market in the middle of last year. The market that NEXTSTELLIS competes in is very significant. More than 10 million American women use short-acting contraceptives, and the market is valued at USD 3.4 billion according to IQVIA, with 60 million prescriptions dispensed per annum. We have a sales team of 70 reps in the field talking daily to high-prescribing obstetricians and gynecologists and allied nurse practitioners. As a reminder, NEXTSTELLIS contains the first new estrogen E4 introduced in the United States in more than 50 years. E4 is a low-impact estrogen produced from a plant source with a unique mechanism of action that offers potential advantages over other estrogens due to its selective impact on various tissues in the body. On Slide 10, we outlined some of the key NEXTSTELLIS metrics that we track. The sales teams have made more than 80,000 calls to physicians, hosted more than 9,000 educational lunches and 25 speaker events so far. Importantly, the sales team have reached 13,000 physicians or 88% of our overall target audience. In early launch phase, building awareness of the brand is critical. Amongst our target physicians, the awareness of NEXTSTELLIS is 79% from a baseline of 2% at launch. Unaided awareness is 31%, and this is double from the last research point we did in August last year. In terms of insurance coverage, which is a key ingredient to ensuring women can access the product at an affordable price, NEXTSTELLIS has approximately 55% unrestricted coverage and 70% formulary coverage for commercial patients. We are confident market access will further improve this half and be on par with other branded contraceptives in the marketplace across 2022. In terms of underlying demand, we have 2,100 prescribers who have written the product, which is 25% of our high-decile target audience. More than 18,500 scripts have been written and more than 10,000 scripts have been dispensed since launch. We estimate approximately 5,000 women are now using the product based on this data. Going to Slide 11 and 12, we show the performance of NEXTSTELLIS across a number of metrics, including weekly and monthly prescriptions and the number of writers. The product is showing consistent growth month over month through the first half and strong growth in Q2 versus Q1. We are currently averaging approximately 100 new writers per week. And of those that wrote in Q1, more than 90% have returned and written in Q2. Leading-edge total prescriptions were 950 in the last week. On a 4-week rolling basis, prescriptions were up 27% compared the prior 4 weeks. Gaining new writers and improving the productivity of each writer will have a compounding impact on the number of prescriptions dispensed going forward. A key ingredient in any new contraceptive brand launch is direct-to-consumer marketing. Currently, there is almost no awareness of NEXTSTELLIS amongst our target consumers as we have -- because to date we're focused on building physician awareness over the last 6 months. Patients play an active role in choosing their contraceptive method, and we know that 80% of the time that a consumer makes a brand request to a physician, they receive that requested prescription. We expect to launch the consumer campaign during 2022 when we've met certain thresholds around physician awareness, the number of writers and level of insurance coverage. One recent development in the contraceptive market was the release of new guidelines around the Affordable Care Act, the ACA or Obamacare. And that reminds the insurers and PBMs of their responsibility to comply with the ACA and provide coverage with no added pocket costs to women for prescribed contraceptive products. This new guidance takes effect from the beginning of calendar 2023 and could lead to greater patient access, reduced out-of-pocket costs and reduced abandonment rates. Our conviction on the potential of NEXTSTELLIS remains very strong, notwithstanding the launch has been adversely impacted to date by the challenging COVID environment that I've talked about. We're very excited about the potential of this product to become a leading brand in the contraceptive market in the United States based on the solid trajectory of our key performance indicators to date. Moving to our second key priority, which is driving growth of the dermatology business. Today, our dermatology portfolio is a mix of brands and generics which we market to an extensive network of physicians and independent specialty pharmacies. Our go-to-market approach is unique in the marketplace and is focused on providing greater convenience and price transparency for patients, reduced administration for the physician and improved economics for the dispensing pharmacy. We are gaining strong traction with our approach as demonstrated by the number of new partnerships we have signed recently. On Slide 15, we highlight some of these recent partnerships with the leading pharmaceutical companies, including Sandoz, Torrent, Upsher-Smith and Cosette. In the first half, we added 12 new products in the dermatology portfolio. These products are adding new earning streams and further diversification. Over the last 2 years, we have grown our dermatology portfolio from 9 products to more than 25. And the earnings from this portfolio in terms of direct contribution has increased from USD 10 million to USD 16 million. On Slide 16, we show the end market performance of one of the recent dermatology launches which has now become our largest product by revenue. In September 2021, we launched a generic version of ABSORICA or isotretinoin. Over the last 3 months, we have captured 39% share of this market in script terms and have also helped to grow the overall ABSORICA product by taking share from the broader isotretinoin market, which is 10x larger in terms of the number of prescriptions written. Our in-market execution has attracted interest from other parties. Most recently, we partnered with one of the world's leading dermatology companies to launch an authorized generic of one of the largest topical dermatology products in the U.S. with $250 million in IQVIA level sales. We expect this launch will be a meaningful contributor to our business in this current half. Moving to Metrics Contract Services, our U.S.-based CDMO, which is capable of early-stage development through the commercialization activities. Metrics has over 100 clients and provides services to 12 of the top 20 global pharmaceutical companies. The business supports 68 projects across the pharmaceutical value chain, including 62 novel molecules in development and 6 commercial stage products. Metrics continues to demonstrate a solid track record of double-digit revenue and earnings growth, which is well ahead of market growth rates. As the owner of this business for more than 9 years, we have continued to invest in the contract services platform to broaden both capabilities and capacity. The broader CDMO market continues to remain very attractive, buoyed by the growth of compounds in clinical development and growing outsourcing trends. M&A dynamics are strong, as outlined on Slide 19, with many businesses sold recently for trailing 12-month EBITDA multiples in the mid to high teens with AUD 45 million of operating profit or USD 30 million, Metrics is clearly a highly valued asset based on these multiples. The international business, which operates out of Adelaide, South Australia, has also demonstrated a solid track record of double-digit growth. This business is the largest Australian-owned full-service solid dose plant manufacturing TGA- and FDA-registered products. The outlook for international is positive with a solid pipeline of near-term launches, which will support further growth. The recent approval of NEXTSTELLIS in Australia and KAPANOL in Switzerland for Opioid Substitution Therapy are 2 key near-term launches. Our final strategic priority, our business -- our business and corporate development initiatives to accelerate our transformation. In women's health, we continue to explore opportunities to broaden our portfolio in areas of unmet need. Adding a second product to the women's health portfolio will be highly synergistic and leverage our established commercial infrastructure. In dermatology, we are looking to further expand our portfolio through partnering and exploiting our unique go-to-market model. And on the corporate side, we are looking at all of our assets across both geographies and exploring ways to unlock value in a non-dilutive manner for the benefit of shareholders. Ultimately, we are focused on creating a leaner, more simplified operating model to support our growth strategy. With that, I'll now hand over to Peter, who can go into further details around the results.

Thanks, Scott, and good morning, everyone. I will take a few minutes to provide a brief overview of our financial results for the half. At the top line, reported revenues were $196 million, down 6% or $12 million versus the prior period. Pleasingly, revenues were up $4 million as compared with the second half of fiscal year '21. The sales decline versus pcp was exclusively in retail generics, while all of the other business segments, Metrics Contract Services, international, dermatology and branded products delivered strong growth. Reported gross profit was $89 million, down 8%. And the gross margin of 45% was slightly down versus pcp. Reported EBITDA was $49 million but includes a number of one-off adjustments which have been removed from underlying earnings. Slide 25 of the presentation outlines the underlying adjustments to EBITDA. The most significant item is a noncash credit of $32 million arising from a decrease in the fair value of our earnout liabilities. $30 million of this relates to NEXTSTELLIS and the reassessment [indiscernible] sales milestones related to fair consideration would be payable. With the slower sales trajectory compared to our original business case, we have seen some of these payments move into later periods, which reduces the value of the liability on a net present value basis. During the period, we sold a vacant block of land in Salisbury, South Australia for $5 million. And the gain on this sale, $3.7 million, has been excluded from underlying earnings. Other adjustments include $5.6 million of costs related to the discontinuance of certain nonviable generic products, $3.4 million of restructuring costs and litigation costs of $1.6 million. At the underlying EBITDA level, we have provided 2 versions today to assist with assessing the first half performance. One excluding NEXTSTELLIS launch costs and one inclusive of those costs. Underlying EBITDA, including NEXTSTELLIS, was $23.7 million, down 38% on pcp and down 5% on the second half of fiscal year '21. When excluding NEXTSTELLIS, those -- that underlying EBITDA was $44.4 million, up 11% on pcp and up 35% in the second half of FY '21, demonstrating good earnings growth in the other parts of our business. FX has had limited impact on our results this period, so we haven't called it out in the materials presented to you today. The estimated impact of the EBITDA line was $200,000. At the bottom line, we reported a net loss of $50 million, which has been impacted by $56 million of noncash impairments of generic intangible assets. On an underlying basis and excluding the impact of NEXTSTELLIS, we would have generated around $9 million of profit before tax as Slide 26 outlines. In terms of our segment performance, Metrics delivered another impressive half of growth, with sales up 20% on pcp to $46 million driven by new commercial manufacturing revenues. At the direct contribution line, the business reported earnings of $22.1 million, up 37% on PCP. Metrics saw a significant expansion in its margins this half, reflecting the scalability of the Greenville platform and strong cost control measures. Commercial manufacturing revenues now represent almost 1/3 of revenue, up from 14% in the PCP. There are 6 commercial manufacturing clients, and we have another 5 clients nearing commercialization, with their products close to filing or filed at the FDA, which should lead to further recurring revenue streams in future periods. The business achieved double-digit growth in formulation development revenues and added 5 new customers and 23 projects in the half. This growth reflects the deeper investments we have been making into business development to support the Metrics platform. The international segment also delivered a strong half with revenue up 29% to $28 million and direct contribution up over 100% to over $4 million. International saw a double-digit growth across all business lines, with CDMO revenue up 39% to $17.6 million and Australian products up 15% to $10 million. CDMO revenues benefited from growing sales of KAPANOL in Canada and Switzerland and greater ASTRIX sales in Korea, whilst Australian products benefited from the launch of SOLARAZE to treat actinic keratosis and the PBS price increase on erythromycin. Branded products segment, which includes NEXTSTELLIS, TOLSURA and SOLTAMOX reported revenue of $4 million, and the direct contribution was a loss of $22 million, reflecting the investments made in the commercial launch of NEXTSTELLIS. TOLSURA, whilst it grew on pcp, still being impacted heavily by COVID with a lack of access to ID physicians who remain focused on treating COVID patients. NEXTSTELLIS sales were just USD 1.1 million and reflect the key customers, i.e., wholesalers working through their inventory levels from June 2021 when we launched the product. NEXTSTELLIS' operating expenses were USD 15.7 million in the first half and are expected to increase in line with investments in direct-to-consumer marketing later in the calendar year. The business remains focused on bringing a disciplined approach to these marketing activities and the timing and scale of these investments will be optimized to maximize ROI. The final segment is portfolio products, which includes our dermatology and retail generic products. Both are sold on a portfolio basis with alternative channels of fulfillment to patients increasing in importance. The dermatology portfolio was up 8% on pcp and the direct contribution was up 32%. The dermatology portfolio now includes more than 25 products that are marketed by our infield sales team. Retail generic sales were down 29% on PCP to $77 million impacted by ongoing pricing pressure and further competition on key products. We continue to rationalize this portfolio and discontinue unprofitable products, reduce stock obsolescence and seek efficiencies across our cost base through realignment of our supply chain with raw material suppliers and alternative manufacturing sources. Moving to expenses. Our cost base below gross profit reduced by $8 million on an underlying basis excluding NEXTSTELLIS costs. R&D expenses were down $3 million and operating expenses were down $5 million on pcp. The company continues to streamline its R&D and moved to a partnership-based risk-sharing model. The R&D capitalization rate has dropped to 10% of total R&D spend. OpEx savings were largely in the administration line, which were down $3 million. Total finance expenses decreased by $2 million, although this captures a number of noncash items, including the discount unwind on earn-out liabilities. Cash interest costs on the syndicated and receivables facilities reduced by $1.5 million, benefiting from improved cost of funds. The average cost of funds declined from 3.3% in the pcp to 2.7% in the current half. We continue to strengthen and diversify our sources of capital and recently upsized our receivables facility to USD 65 million from USD 50 million to fund our U.S. working capital requirements, in particular the new product launches. The receivables facility is nonrecourse and the cheapest source of funding with approximately 30 to 40 basis point margin benefit versus the syndicated facility and, importantly, is excluded from bank covenant calculations. In terms of cash flow, operating cash flow was down due to reduced earnings impacted by the investments we are making into NEXTSTELLIS and an increase in working capital to support the dermatology new product launches. Adjusting for working capital and favorable tax impacts in the prior period, operating cash flow was $19 million versus $42 million in the pcp. The key investing cash flow [indiscernible] $5 million of CapEx spent on our 2 manufacturing facilities, $12 million related to earn-out payments and $5 million inflow from the sale of the vacant block of land in Salisbury. In terms of cash, we held $115 million at the end of the period, up $17 million, and gross debt was up $40 million to $387 million. During the period, we renegotiated our syndicated debt facility to provide greater flexibility. Slide 34 outlines our current capital structure. In terms of bank covenants, our bank leverage ratio was 3.2x versus a covenant of 4.25x. And interest cover was 7.7x versus the covenant of 3x. The shareholders' fund covenant continues to have good headroom with over $154 million of cushion as at 31 December. Looking forward, we continue to remain focused on generating free cash flow, deleveraging the balance sheet and prudently controlling our spending. We do have many programs underway to further improve our cost base, strengthen our supply chain and reduce product manufacturing costs. And with that, I will now hand back to Scott.

Thanks, Peter. So look, in summary, Mayne Pharma's key focus, of course, is to turn NEXTSTELLIS into firstly a profitable product and then to make it one of the most successful oral contraceptive brands to have launched in the United States in recent times. We've learned a lot on NEXTSTELLIS over the last 6 months, and we're very encouraged by the recent momentum we are seeing in terms of underlying demand. Our other key drivers in the near to midterm are expected to be the growth of our dermatology portfolio, as I've talked about; the launch of a number of new products in international markets; and the potential launch of a generic version of NUVARING; and, of course, further growth in our Metrics Contract Services business. And with that, I'll now hand back to the operator, and we are open for questions.

[Operator Instructions] We will take our first question from the line of John Deakin-Bell from Citigroup.

I'm just trying to understand with NEXTSTELLIS and the deferral of [indiscernible] expectation of sales and the $30 million reduction in the payment for the product, so is your expectation now that the $200 million that you had discussed as a peak sales, that's going to be lower now because the price is now lower? Is that what I'm -- am I reading that correctly?

Yes, John, it's Scott here. No, look, ultimately, we are still very confident in our ability to drive that ultimate peak outcome. Now look, given what we've seen in the first 6 or 7 months and given what I said around COVID, it's going to take a little longer. Now it will also depend upon the response of the product to our direct-to-consumer campaign that we're going to do later this year. And obviously, we're still building momentum. I mean I've got to stress that we are very early in the launch of this product, and we're still understanding key performance indicators, but obviously they're all beginning to move in a very positive direction. So we're not pulling back from our overall ultimate expectations for this product. It's very hard for me right now to say exactly when that peak will be achieved. But in terms of the earn-out reassessment, as Pete said, it's got to do really with ultimately the timing of sales, milestone payments and other things like that as opposed to the ultimate financial destination of this product.

And maybe if I can just add. John, it is a significant number, the earnout liability and hence very sensitive on an NPV basis and fair value assessment to the phasing of those sales milestone payments. So hence, the number looks big. But as Scott said, it's more around the timing to peak and the phasing of those sales milestone achievements that's reflected in that number.

And so just so I'm clear, the -- your volume expectations, is it correct that the price that you are expecting to sell the product is now not going to be quite as high? So does that mean your volume expectation in those peak sales have to go up?

Yes. Well, I mean, I think we still have to wait and see where effectively our insurance coverage ultimately lands, John, where our co-pay charge cost lands. I mean I talked about, for example, some pretty fundamental changes in the Affordable Care Act that could, from 2023, reduce our -- the cost that the company bears around coverage of patients' out-of-pocket costs. That all goes through our gross to net profile. So there's a lot of water that needs to go under the bridge, and we're still building our payer coverage. So I think it would be fair to say where we sit now that we will need to achieve some incremental script volume to get the same end point. So yes, I think it would be prudent to model amelioration in the net pricing of the product. But I don't think it's material versus our original expectations, and there's a lot of water still to go under the bridge for the reasons I've just said.

And I'm just a bit confused about this [indiscernible]. In terms of -- within that what you're now referring as portfolio products, you've got both the dermatology and the retail and then all the generic sits there. They're quite different. Obviously, there's massive difference in the gross margins. But -- so are the same salespeople selling both products now? How does the actual go-to-market -- how does that work within that portfolio products division now?

Yes. No, thanks, John. Look -- look, I mean, they are different businesses in the sense that there are different commercial infrastructure supporting our retail generics business versus, say, our dermatology business. What is common about them is we do obviously commercialize both businesses under that division on a portfolio basis. It's a portfolio sell. So -- but of course, as I said, for transparency, we do break out retail generics from dermatology within that segment. So the dermatology business is supported by around 45 sales reps and the infield management and also people that deal with our network of independent specialty pharmacies day-to-day. Our retail generic business sales team is small because there's only really 3 big customers, and that is a discrete sales team.

Right. Okay. So the kind of go-to-market, nothing's changed there, it's just the way you're reporting that, that's changed?

Yes. But maybe, John, if I can just chip in there as well. Obviously, the key determinant of business segment reporting is around your chief operating decision maker and how he manages segments within a business. And there was a restructure we completed earlier in 2021, which involved Daniel Moore, who's an EVP, obviously sitting -- reporting to Scott, taking over the entire platform comprising dermatology and retail generics, and that was a key driver for why from an accounting perspective this segment was consolidated and that's how it's reported to the Board as well. And that's a key determinant of how the segment thing gets ultimately presented to the Street.

Got it. And just one final question. I think when we back solve the gross margin within that portfolio products division on our numbers, the gross margin for the generic business went from 35% to 25%, which is kind of halved from where it was. Is that the estimate of the gross margin going forward? Or do we think it's going to decline further from here?

Pete, do you want to comment?

Yes. Look, I think as we said in our presentations, John, that market continues to remain subject to competitive pressures. And the competitive pressures often can hit at the gross margin. So I think that's definitely a factor. However, the things that can offset that are new product launches and pipeline approvals, and we do have NUVARING and a couple of other products that can tilt the gross margin profile back the other way later in the calendar year. So the base portfolio will continue to be subject to that underlying price compression, but the offsets are the likes of NUVARING and other new product launches that we have slated for later in the year. So it's a bit of a mix in terms of the gross margin pressures and tailwinds, I guess.

[Operator Instructions] It appears there's no further question at this time. Thank you.

Okay. Well, if that's the case, I'm sure we'll be meeting with some of you over the next few days. So thank you very much, and speak to you soon. Goodbye.