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

Thank you, operator, and good morning in Australia and good evening in the U.S. Thank you for joining us today to discuss Mayne Pharma's first quarter update call. As the operator indicated, I'm Shawn Patrick O'Brien, CEO and Managing Director for Mayne Pharma Group. I'm also joined here on the call today by Aaron Gray, our Chief Financial Officer. Our disclaimer slide is here for your review, but I would like to bring to your attention that these Q1 results are unaudited. We're excited to share this market update as the results demonstrate we are progressing with our transformation journey for Mayne Pharma. There is work that remains in front of us to realize the full potential of our 3 business units, and we're pleased so far with the Q1 results. As we've noted, we're in the rebuild and transition of our company and must admit that it hasn't been without some bumps along the way. We've taken in the feedback, and we're committed to make our operating performance as simple and as transparent as we can. We have a full agenda across all aspects of the business, so I'll step right into it. As mentioned on the disclaimer slide, the financial results presented today are unaudited. Aaron and the finance team have invested significant time putting systems and processes in place to ensure confidence in our reporting. We adopted a conservative stance as we transitioned through the impact of 3 large transactions that we undertook in FY '23: MCS sale, acquisition of the TXMD assets through a license and the selling of our U.S. retail generics business. Also note that all of these results here remove the impact at the group level of discontinued operations and reflect the dermatology restatement of FY '22/23. We are pleased that our Q1 results show the momentum with each of our segments delivering positive contribution margin. We will show comparisons to both the fourth quarter of '23, which we'll talk to, and have shown period -- comparable period for completeness. We'll also talk in Aussie dollars at the group level but in U.S. dollars at the segment level, which removes the currency impact on prior periods. Net sales of AUD 92.3 million were up 35% in the fourth quarter -- over the fourth quarter '23. The gross margin is up 82% Australian to $53 million, and the underlying EBITDA is effectively a breakeven for the quarter. BPD, mostly known as women's health, net sales were up 72% on the fourth quarter. And women's health, which represents 96% of BPD, are up 71%, where we saw growth in NEXTSTELLIS and the license portfolio of IMVEXXY, BIJUVA and ANNOVERA. NEXTSTELLIS net selling price has recovered back to prior levels during the quarter following the actions we described at the full year result that we initiated back in May. Script growth are not tracking as strong as we'd like. Although there is a slowdown during the high vacation season in the summer, we still see good momentum. The license portfolio is improving, and we remain conservative in our GTN accounting as we finalize the integration of the assets. We are pleased with the turnaround of the Dermatology business after a lot of work by the team to get the business back on track. Sales are up 53% on the fourth quarter, and the margin is recovering, thanks to better performance of the core portfolio and the new product launches. We've initiated a cost and efficiency program to reduce the cost in absolute terms where possible, offset inflation and ensure we get the ROI we need from the sales and marketing investments. We have said that we're adopting a conservative approach to capital as we work through the transactions, and there is a lot of progress with cleaning up outstanding items and working capital. We acknowledge the comments regarding the pace of the on-market share buyback, and I want to stress that there are periods where our Board considered it prudent to pause the execution where commercial or legal circumstances might prevent the company from dealing in our own securities. Taking into account our business momentum and the views of a wide range of stakeholders, the Board believes that buying back our stock is currently the most effective and attractive capital management approach we can take. And as such, we're going to seek approval at the AGM to increase the buyback up to 15% and seek to execute our buyback program in a more aggressive way. I will pass the mic on to Aaron who will take us through the group results. Aaron?

Thank you, Shawn. As Shawn noted, these numbers are in Australian dollars. We have applied certain adjustments to exclude discontinued operations to be able to show proper historical figures. Key callouts in the first quarter fiscal '24 results are the sales growth driven by women's health and dermatology, the gross margin in women's health reflecting a normalization to the 80% range and the improvement in dermatology gross margin to 45%. This is a little bit different view than what we've showed in the past. We've been working to simplify our financials and to improve transparency. So as we show figures going forward, we will be taking contribution margin from the statutory accounts that includes the direct segment OpEx and then showing indirect OpEx, including the shared functions and other costs between segments. From that number, we deduct royalty liabilities, which have arisen based on the sales for the period. In the stat accounts, this royalty number appears in earnouts and amortization. And then we adjust for other noncash operating items to yield a number that we are currently calling cash EBITDA. The intent of that number is that it acts as a proxy for operating cash generation. One thing I would note is that there are some timing differences based upon the actual payments of some of those liabilities. But the idea is to show the revenues created and all of the costs, whether above or below EBITDA associated with creating those revenues. I do expect going forward with the simplified business structure, the statutory accounts and the view to fully reported earnings should be clearer. Back to Shawn.

Thanks, Aaron. Looking at our Branded Products Division, which women's health makes up 96% of the net sales. On the women's health, the key callout here are that sales have recovered, as I said earlier, and you can see the development of NEXTSTELLIS in the license portfolio on the right-hand side. Performance is building, and we're confident that we now over the one-offs and other issues that negatively impact the second half of our fiscal year '23 results. You will see on the cost out, which we talk to later -- and remember that we said we'd added annualized investment of $20 million on the licensed portfolio of products. So when you look at the cost, the net increase in Q1 versus Q4 reflects good cost control in women's health already. As Aaron discussed, the contribution margin of $2 million is what you'd see in the segment note, and the accounts here are showing that -- the royal liability associated with those revenues. This reflects progress on cash generation as well in women's health. Importantly, NEXTSTELLIS cycle growth is no mystery for you, though, who follow the various data providers on a weekly and monthly basis on the prescriptions for NEXTSTELLIS. I will say that script growth in the early part of the quarter, the U.S. summer was seasonally slower as it is across the entire industry, but we're still driving NRx and repeat Rx, so the compounding effect builds. To reiterate, the refreshed marketing strategy is building, and the addition of medical affairs is important to the education of NEXTSTELLIS, which is a big gap in the early days of the original NEXTSTELLIS launch. Visits, signature samples, that's what it's about in front of our customers. Clinically, this is an excellent product, and the user experience really enforces that. We're confident in our strategy. We're sharpening our focus on return on investment and sales productivity as part of the balance in any product launch. The balance of costs, return on investment and sales are the focus, and we still are still confident in achieving our breakeven run rate by December, the caveat being that we'll get there on lower investment levels, lower number of cycles with excellent net selling price. The disappointment of the net selling price in the second half has been acted on in the quarter and has rebounded. So let me share you a little more on net selling price. Back in November 2022, we took actions on copay levels to make NEXTSTELLIS more competitive in the market for oral contraceptives and reduce the abandonment rate of our prescriptions that we generated, that is, reducing the number of scripts that are written but not filled for economic reasons usually. We've been successful and now are down to the industry norm for branded oral birth control pills on the abandonment levels. However, we did see signs of copay card misuse and managed care rules not being followed in a way that benefits the patient or Mayne Pharma. Back in May, we contracted with RIS Rx to help ensure copay cards were used as planned to drive profitable growth. This action has been productive as we have seen a net selling price increase in July, further increased in August and further increased in September for NEXTSTELLIS. So we are now above the net selling price level we demonstrated in the first half of fiscal '23 for NEXTSTELLIS. Our objective is to continue to improve on our entire portfolio of net selling prices, not just NEXTSTELLIS and our new licensed women's health portfolio but dermatology as well. We have a multipronged approach, and it's producing sustainable results for women's health, and we expect this approach to start to pay off for dermatology in the next quarter. In addition, with all these changes in gross to net, we take a conservative approach to recording of our net sales in FY '23. As we develop more reliable history with our products, adjustments to our accounting procedure may become more favorable. Lastly, as per the ACA law, when it comes to birth control, out-of-pocket expenses for patients being 0, on the heels of President Biden's executive order designed to enforce this law, recently, we've seen the state of Vermont take action favorable for the patient and the industry. If enacted on uniformly across the country by government and commercial payers, this represents a significant upside to net selling price for both NEXTSTELLIS and ANNOVERA. This NEXTSTELLIS chart shows unit sales by quarter, with Q1 up 10% in units versus Q4 and net sales up 69%, showing the productivity of our net selling price improvement. We've also reviewed all OpEx to ensure we're getting a positive return on investment. We continually evaluate the full marketing mix and the return on investment we're achieving for each element. Unfortunately, while all the DTC activity drove increased website clicks, not all DTC led to increased prescriptions. Therefore, combined with our changes in our GoodRx partnerships, we've made a significant reduction in our DTC spend going forward and limited now to social media where we do see a positive ROI. We reviewed our territory productivity and have reduced this head count accordingly where we didn't see the performance and the opportunity delivering the returns we require from these sales territories. As of this week, we've now taken out USD 8 million in women's health costs for fiscal year '24. The addition of more medical education, more sampling and calls is what we know will deliver growth, so we can deliver on our December breakeven run rate for NEXTSTELLIS and continue to drive growth in the second half of fiscal year '22. I wanted to let Aaron take you through for the performance of our licensed assets from TXMD and demonstrate how they're delivering value from the country -- company. Aaron?

Thanks, Shawn. Next slide, please. Thank you. In this view, we provide an update on the performance of the licensed portfolio, answering questions that we have fielded to date about the transaction. If we look at the contribution margin over the 9 calendar months that Mayne has had these assets and then deduct royalties paid or due, we come to a cash return figure of USD 24.3 million over that 9-month period. Our net sales have run below the average levels reported by TXMD, the previous owner of those assets, in the last 3 reported quarters, so Q3, Q4 and now Q1. But we have reversed the declining trend. We are continuing to work on growing those assets, working on sales force effectiveness and are constantly reviewing the investments that we are making, as you would expect. We previously communicated a plan to add USD 20 million incremental cost to support these assets when we entered into the transaction. I am confident, 9 months in, that the annualized cost associated with that activity will be less than the $20 million on a go-forward basis. We're continuing to work on manufacturing and supply chain to ensure that we have security and efficiency of supply for these products, both of which are critical elements to ensure that we have continued success of the products. Having wrestled the gross-to-net topic over the past year, I would also note that we are maintaining some conservatism as we manage through all of the various agreements, calculations and data sources that have to be analyzed and merged in order to come up with proper gross-to-net estimations. In summary, I would say we are confident of the growth in this portfolio, and we will resolve all of the outstanding working capital issues remaining from the transaction within the next year. Back to Shawn, please.

Thanks, Aaron. Let's look at our Dermatology business and how it continues to grow since we took significant actions since our last AGM in November. We said in the second half of last year that we've fixed our Dermatology business, and we made great progress, but the result fell a little short with authorized generic ORACEA and DORYX MPC 60 having only 3- and 4-month sales, respectively, in the second half, and the core product fulfiller didn't actually perform to full expectations. So I'm pleased with the first quarter results. Sales are strong, both from the core portfolio of dermatology products, and the new product launches are delivering. And importantly, all the work that's been done by the finance team to manage product profitability has paid off. Margins are now 45%, and we are working hard to improve upon that level. OpEx is closely managed, and the contribution margin and cash contribution are excellent turnarounds with what has been a tough period. And as I've said in the past, there's sales and channel discipline being acted on here. Now you can see the GTN profile has stabilized on this graph, the top green line, now at 69% in the month of September. And the development of sales, which have now have a regular and sustainable cadence, seem to be growing. Authorized generic ORACEA is performing well after a slow start that we talked about at the full year result as all of the Prasco inventory in the channel has been used up. We have commenced the pilot of our enhanced prescriber patient fulfillment process, i.e., our disintermediation strategy, a partnership with GoodRx and AssistRx. And given that the most medical dermatology products are regular script refills and cash paid, there's a good opportunity here for our model to be really effective. We recently acquired RHOFADE and launched it on October 2, a low cost outlay and a good opportunity in an adjacent product to authorize generic ORACEA for rosacea patients. Reported prescription levels are above expectations. As Aaron noted, we're ensuring we get the right economics right across the various channels, leveraging our partnership with RIS Rx and our pricing rules, and we're making sure our copay program benefits our business. Let's take a look at the international business, which consists of 3 major areas of business. Our domestic specialty prescription products, including NEXTSTELLIS, along with our OTC business in Australia is what is known as Mayne Pharma Australia. Secondly, our international sales of products that we make in Salisbury and sell in Canada, South America and Europe and Asia. And third, our CDMO making products for pharma customers globally, including our U.S. business, Dr. Reddy's, and who recently acquired our U.S. generic business from us. We've made solid progress on the work down in Adelaide. As I've mentioned in the past, our Salisbury facility has been neglected over the last 5 years, and we've taken action to improve the productivity and the quality of the products we produce under Grant Swart's leadership. Sales are down due to the timing of production runs, and gross margin would have been even lower but for some inventory revaluation benefits. Costs continue to be managed, and target CapEx programs and the ongoing productivity initiatives are designed to deliver benchmark outcomes in pharma manufacturing. The new business pipeline to drive large and long run volumes through our FDA and TGA-registered Salisbury facility is building, and we are focused on converting these into real opportunities. The value of an FDA, TGA-accredited plant and the security of supply and supply chain from an Adelaide facility are attractive features for the business. Our CapEx program to renew and build capacity is underway. I'm going to turn it now back to Aaron to provide more detail on capital management and how we're reducing costs while we drive growth. Aaron?

Thank you. Okay. The company is focused on driving profit and cash with the assets we have in hand. We are working 3 different areas to accomplish this. First of all, we are reducing the cost required to operate the business. And I've got a subsequent slide to talk a little more about that. Second of all, we are trying to leverage the infrastructure that we have in place to do more business with minimal or no additional capital investment. And third, we are optimizing the channels and the products that we have. We are focused on all 3 of these areas with the overriding goal to see how much cash and profit we can drive following the transformation of the company. We do believe we have a considerable opportunity. Thank you, Trevor. Specific on cost, the way to read this slide is basically to look at what was the -- what we've done is split the slide up into 2 pieces. What is the U.S. dollar-denominated total OpEx, so indirect as well as direct? And what is the Australian dollar-denominated total OpEx, likewise direct and indirect? We do that again to avoid the currency topics. On the U.S. dollar slide, we've reflected this a little bit differently and included a run rate because of the additions that the company made related to the TXMD, the TherapeuticsMD license transaction. For the company, the base without the TherapeuticsMD transaction for USD OpEx would be USD 102.2 million. During fiscal year '23, we spent an additional approximately USD 5.8 million, which is the total actual figure recorded. That $5.8 million ramped throughout the second half and so resulted in a run-rated figure if you had that investment in place for the full 12 months, which includes the $13,921,000. The focus on OpEx is to reduce from that level. Last year, we talked about cost out delivering $5.8 million with more to come. What we said previously was we cut where we can and invest where we should. We have prioritized across the business costs, cost efficiency and return on invest of any spend. Like all companies, we are facing a number of inflationary pressures, but our focus generally is to compensate those pressures and reduce the costs required to operate this business. This doesn't necessarily happen quickly, but there are a lot of pieces already in work. And as Shawn noted previously, $8 million of reductions have been executed. $8 million of fiscal year '24 benefits have been executed. We are acting across procurement and supply chain. We are focused on external provided costs. And as Shawn mentioned, we are focused on sales and marketing efficiency. Any added spend that we have has high hurdles. We are spending money on accretive elements such as copay monitoring and analytics, but we are spending very judiciously. You heard Shawn talk to reduced cost assisting the breakeven target for NEXTSTELLIS. As always, there are various views as to the right balance between cost to drive growth and net profitable results. But what I can say is any investment we make in sales and marketing has to have a definite payback. And one example there is the adaptation that we've made specifically to the DTC spend. Thank you. A little bit more on capital management. You can see that the quarter end cash balance was $163 million, total cash in bank. That's down from $220 million at fiscal year-end. The quarter was a busy quarter spent -- result in a number of outstanding items. We paid -- we had a number of financing outflows. We paid the receivable facility off in full, our last source of debt. We spent $14 million on catch-up payments related primarily to chargebacks. And we incurred a number of charges in discontinued operations and on legal matters, which we will continue to unwind and manage throughout fiscal year '24. The Board has made it very clear that as we continue to transition the business, we will maintain a conservative balance sheet and capital structure. We've made significant progress improving working capital management with receivables and inventory down more than 50% even in the face of the revenue growth figures that we're reflecting. We have paused M&A as we drive value leveraging the existing portfolio, and we are reviewing the appropriate capital structure and mix of facilities as part of completing the transformation of the company. As Shawn has noted, we would like to increase the pace of the share buyback as well. That is at times out of our hands based on our ability to be in the market and based on certain other restrictions. That being said, given the business improvements and recognizing the various views of shareholders, we are going to accelerate the buyback. Our expectation is that the group will be operating cash flow positive in fiscal year '24 driven by all of these various improvements. Back to Shawn.

Thanks, Aaron. So as you can see, we're pleased with the results that we've delivered in the first quarter. We reconfirm our previous outlook that each segment will deliver positive contribution in fiscal year '24, and I think we're off to a great start. We're also reconfirming that we expect to be EBITDA positive and generate positive operating cash flow for the year. Our focus on costs, return on investment and growth is all about improving our position so we can deliver sustainable EBITDA growth for FY '24 and beyond. We remain committed to our run rate breakeven target for NEXTSTELLIS by the end of this half, in December, noting that -- earlier comments regarding scripts, cycles, net selling price versus our direct investment costs. With M&A firmly on hold, we're driving sales and returns at each business, and we are now doubling down on costs, efficiency, return on investment on all spend, as you would expect us to do. As mentioned, we're committed to executing the share buyback program as soon as we can, and we'll seek shareholder approval to increase the buyback up to 15% at the AGM in November. With that, I'd like to thank you for your attention and turn it back to the operator for any questions that there are on the call. Operator?

[Operator Instructions] There are no questions on the phone line or the webcast at this time. I'll now hand the -- apologies, we have a question registered on the phone. This comes from Philippa Weekley with Canaccord.

Shawn, just looking at the TXMD portfolio that's still -- the sales there is still sort of well below what was forecast when the portfolio was bought, do you have any comment on that at the moment?

Sure, Philippa. Thanks for your question. So as you know, when we were looking at the assets, they had done USD 28 million in Q2 as reported by TXMD in the calendar year. And in the third year -- third quarter, they did $20 million, and that's where we saw the run rate at that time. But back in April, they finally reported on their Q4 result of $10.4 million. When we put the products in our channel, we were able to improve that, and we've improved the script level for it. There is quite a bit of variability that you're seeing there because the integration and the impact of our conservative approach on gross to net on this product. So as we get more and more familiar with the history in our hands with these products, we expect that we'll be able to make gross-to-net adjustments going forward, but in this time, it's premature. And that will drive significant growth we expect in combination with the demand we're creating now and gross-to-net adjustments going forward. Is that helpful?

So you're expecting those sales to improve further?

We are, correct.

Okay. And can you -- another question. Can you comment on what we break even -- yes, sorry.