The Mayne Pharma Group Ltd (ASX:MYX) share price continues to struggle to escape the bearish sentiment that has surrounded the stock over the last 12 months. After posting a net loss of $174 million for the December 2017 half year, Mayne's share price rallied over 10% on the day of its earnings release to close at 77.5 cents.
The bump occurred after the company's results showed an operational improvement in 2Q FY18 as the company battles generic drug price deflation in the United States.
However, since then the share price has once again come under intense selling pressure and has lost almost all those gains, closing at 70.5 cents in Wednesday's trading session. Short interest still remains high at 11.22% as at March 1.
On the surface, the first half result was poor for Mayne. Revenues for the first half of FY18 were down 17% on the prior corresponding period to $243 million with adjusted gross profit margins falling from 58% to 50%. This led to adjusted earnings before interest, tax, depreciation and amortisation falling 36% to $70 million.
Mayne's statutory net loss occurred because of a $184 million pre tax impairment against its U.S. generics portfolio reflecting the material change in market dynamics. Moreover, a number of one-off items were also expensed. These included an unusual level of Doryx product returns and sample write-offs, abnormal inventory obsolescence, restructuring expenses and a restatement of deferred tax assets and deferred tax liabilities following new U.S. tax legislation.
As a consequence of the impairment and one off items, Mayne's bottom line blew out from a $16 million net profit to a $174 million net loss. Despite the weakness of the headline result, there were noticeable signs of improvement in the underlying numbers that could indicate the beginning of a turnaround.
Adjusted revenues for 2Q FY18 were up 27% over the first quarter to $143 million with gross profit margins also rising from 47% to 53%. Management also confirmed that the upswing had continued into January with revenues up 13% on the average monthly Q2 result. The improving quarterly operational performance was attributed to new product launches, expanding avenues to market, portfolio optimisation and gains in market share.
Foolish takeaway
The second quarter performance of Mayne should give some cautious optimism for investors. However, I would look for at least another quarter of improved operational performance to confirm the trend. The company is positioning itself to grow over the next several years to address the ageing population, rising rates of chronic disease and increased demand for generic drugs to lower healthcare costs. Mayne's FY19 pipeline with the potential launches of NuvaRing and Ranexa could also drive significant earnings growth.
Institutional investors have also started seeing value in the generics space. Fund manager Lazard Asset Management has become a substantial shareholder of Mayne over the last couple of weeks and Warren Buffett's Berkshire Hathaway acquired a US$358 million stake in the world's largest generic drugs manufacturer, Teva Pharmaceutical Industries.
