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Why I’m banking on Mayne Pharma Group Ltd (ASX:MYX) shares

Shareholders in Australian pharmaceutical company Mayne Pharma Group Ltd (ASX: MYX) have had a tough start to October.

Prior to this month, the price of shares in Mayne Pharma had surged almost 90% higher for the year to date, even briefly touching a 52-week high of $1.43 in late August. So far in October, however, shares in the company are down around 10%.

Volatility has returned to global markets recently, and this has caused the wind to go out of the sails of many of this year’s best growth stocks. Those hit hardest have been high profile tech companies like Afterpay Touch Group Ltd (ASX: APT) and Appen Ltd (ASX: APX), but market darlings from other sectors have also seen their shares trade deep in the red this month.

Despite rebounding on Friday, the share price of New Zealand dairy and infant formula producer The A2 Milk Company Ltd (ASX: A2M) is down around 13%. And the healthcare sector hasn’t been immune from the downturn either, with shares in Nanosonics Ltd. (ASX: NAN) sliding 10% lower, and Cochlear Limited (ASX: COH) dropping around 7%.

When confidence in global share markets turns sour, many investors see it as a sign that it’s time to de-risk and take some profits off the table.

So it is often those companies that have posted the strongest short term gains that are hit the hardest. However, if you still believe in the long-term growth potential of these companies, corrections like this can provide good opportunities to top up your holdings and decrease your average buy price.

Mayne Pharma is a prime example. The company has grown from its roots in South Australia into a pharmaceutical company with global reach. It has two product development and manufacturing facilities, one in South Australia, and the other in North Carolina, USA, and distribution partners in Australia, North America, Europe and Asia.

For Mayne Pharma, FY18 was a story of two very distinct halves. First half revenues were down 17% against 1H17 to $243.3 million, while EBITDA dropped 82% to $23 million.

A combination of asset impairments, stock obsolescence, restructuring expenses and a restatement of deferred tax assets due to changes in US tax rates meant that Mayne Pharma reported a hefty net loss of $174.2 million for the half, whereas profits for 1H17 had been $72.7 million.

However, the company worked hard to turn its fortunes around in the second half leading to a big surge in its share price. Second half FY18 revenues were up 18% on the first half to $287 million, reported EBITDA skyrocketed 307% to $93.8 million, and net income was $40.3 million. The company also took steps to strengthen its balance sheet in the second half by wiping over $16 million off its net debt, which was reduced to $286.9 million.

Foolish takeaway

It is important to maintain a long-term outlook when investing in growth companies. It’s an unfortunate effect of the risk return trade off that, over the shorter term at least, shares in these companies will experience much higher than usual price volatility.

You have to be prepared for big swings in their prices, especially during times when global markets are suffering through corrections. However, that doesn’t mean you always have to cut your losses and run.

Mayne Pharma is one company that seems to be gathering significant earnings momentum leading into FY19, and management’s outlook for the coming year is positive. If this is a company that’s been sitting on your watch list for a while, now might be a good time to think about finally adding it to your portfolio.

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Motley Fool contributor Rhys Brock owns shares of AFTERPAY T FPO and Cochlear Ltd. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. The Motley Fool Australia owns shares of A2 Milk, AFTERPAY T FPO, and Appen Ltd. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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