The Mayne Pharma Group Ltd (ASX:MYX) share price has fallen 57% to $0.845 this year – but is the company a turnaround opportunity, or should it be avoided entirely? Here's my take:
- Mayne acquired a generics portfolio from Teva for nearly A$900m, with these products now a sizeable chunk of Mayne's business
- Teva generics are underperforming due to competition, resulting in lower sale prices
- Despite the lower sales, Mayne has extracted greater than expected cost-savings from the acquisition, resulting in a likely immaterial change to full year earnings
Mayne is one of the most short-sold companies on the ASX, with nearly 12% of its shares held for short sale. The concerns reflect the importance of the Teva portfolio to the business going forwards, as well as Mayne's reliance on a handful of key drugs for which competition and/or lower prices could disproportionately hurt earnings.
Investors may also be sceptical about how much free cash flow Mayne can generate, given that the first half saw a huge cash outflow as the company built up its inventory in the Teva portfolio. Management expects the second half to see a return to more normal cash flows.
Mayne could be really cheap
On the other hand, Mayne could also prove a bargain, with the company expected to have earnings of 8 cents per share for the full year, potentially valuing the company at just 10x earnings.
Likewise, if Mayne is able to get most of its underlying operating cash flow of $100 million (in the first half) to come out as free cash flow, without additional spending on machinery and/or working capital, the business could prove surprisingly cheap. Speaking for myself, I will be waiting until the company's full year results on 25 August before making a decision.
