Why short interest is rising in Mayne Pharma Group Ltd

The share price of generic drug manufacturer Mayne Pharma Group Ltd (ASX: MYX) continues to oscillate in anticipation of tonight’s quarterly earnings report from the largest generic drug manufacturer in the world Teva Pharmaceutical Industries.

After bottoming in late November at 59 cents following a disappointing trading update at Mayne’s AGM, the stock bounced strongly hitting a high of 80 cents on January 17 before negative sentiment returned once again and it currently trades at 64 cents.

Short interest rises once again 

Short interest in Mayne has been high over the last 12 months as the company battles generic drug price deflation following the consolidation of wholesalers in the U.S. market which has resulted in the price of its shares falling 52% over the last 12 months.

After bottoming just below 7% in December, the short sellers are back with 9.81% of the float short as at February 1. The short sellers appear to be positioning themselves for a disappointing half yearly report which Mayne will deliver on February 23.

The earnings reports of Teva have also weighed heavily on Mayne and other generic drug manufacturers, which means tomorrow’s trading session is likely to be very interesting after Teva reports.

Latest reports out of the U.S. indicate that prices of generic drugs have not been as volatile as they were in 2017 according to the largest U.S. drug distributor McKesson Corporation, when it delivered its quarterly earnings last week. The quarterly result indicated that generic drug prices had not decreased further and have possibly stabilised, but were yet to show signs of improvement.

Whilst Mayne has underperformed other Australian healthcare stocks such as Cochlear Limited (ASX: COH) and Resmed Inc. (CHESS) (ASX:RMD) the company is still well positioned to address the ageing population, increasing rates of chronic diseases and preference for lower cost generic drugs.

Mayne also has an extensive pipeline of future products that are expected to receive FDA approval over the next couple of years which should boost earnings. The stock remains unloved with a high amount of bearish sentiment, but does offer a compelling risk to reward once the prices of generic drugs in the U.S. start showing signs of improving.

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