It's been a terrible 12 months for shareholders of Mayne Pharma Group Ltd (ASX: MYX), with the company's share price down 67%.
The price deflation of generic drugs occurring in the U.S. and the risk of legislative changes by the Trump administration have weighed heavily on the stock. This is because 94% of Mayne's revenues are earned in the U.S. with 73% of total revenue belonging to its generics division.
A year ago, Mayne was a $2 stock after announcing a FY16 net profit after tax of $37 million. Twelve months later, after earning a net profit after tax of $88 million in FY17 the stock trades around 66c.
A 67% decline in the company's stock price despite growing its profit by 137% is highly unusual.
When you look further into the numbers, 1H17 produced $72 million in profit, whilst the 2H17 profit of $16 million confirmed the market's fears. The high number of shorts have been correct with short interest rising sharply from around 1.5% in late September 2016 to today's level of approximately 9%.
Teva Factor
Mayne has fallen approximately 27% since early August after Israeli pharmaceutical company Teva (the largest generic drug manufacturer in the world) released a disastrous quarterly earnings report booking a net loss of $US6 billion.
The loss was mainly attributable to an impairment charge of $US 6.1 billion against its US generics division. Since that quarterly report, Teva shares are down approximately 45% and other generic drug manufacturers have felt the pain as a wave of negative sentiment and momentum sweeps across the industry.
Mayne does however remain in significantly better financial shape than Teva. Mayne's leverage metrics are well below their key debt covenants. In contrast, Teva is significantly indebted and has been forced to divest assets in order to pay down debt. Moody's has assessed Teva's credit rating as one level above junk.
The generic drugs industry is battling price deflation as wholesalers have consolidated and are using their large buying power for price reductions. These pressures on pricing are anticipated to continue into the near future. Generic drug manufacturers have battled price deflation before only for profitability and margins to improve when lucrative branded drugs lose patent exclusivity.
Foolish Takeaway
I think there is long term value here although not without some risk. The same could have been said when the stock was around 90c before declining further.
The knife has fallen sharply. Personally, I will wait for Teva's next quarterly earnings report due out on November 2 when they will provide an update on the industry's price deflation and if there are any signs of a trend reversal in the near future before considering whether to open a position.
