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Can these 2 ASX healthcare shares recover in 2020?

The Aussie sharemarket enjoyed a year of healthy returns in 2019. The S&P/ASX 200 (INDEXASX: XJO) was up 18% over the year while the S&P/ASX Healthcare index increased by 41%.

But not all healthcare shares offered such healthy returns in 2019. Here we take a look at 2 ASX healthcare shares that tanked last year, and ask if they can recover in 2020. 

Mayne Pharma Group Limited (ASX: MYX)

Mayne is a pharmaceutical company with a portfolio of branded and generic drugs across therapeutic areas including women’s health, oncology, dermatology, and cardiology. The Mayne share price finished 2019 having fallen more than 40% and shares are currently trading at 44 cents. 

Net loss 

The company reported a net loss after tax of $280.8 million in FY19 driven by intangible asset impairments. Generic products, which account for 45% of revenues, were impacted by competitive pressures on key products. Demand for generic products was 26% less between July and October 2019 than the prior corresponding period.

Reported sales decreased 1% to $525.2 million for FY19, although positive operating cash flow of $106.6 million was reported. Strong growth from specialty brands was reported with sales and gross profit doubling. Net debt was reduced by $18 million in the second half of FY19 with a bank leverage ratio of 2.0x. 

Generic drug market pressures 

The US generic drug market continues to have challenging dynamics. Three major buyer groups control around 90% of retail drug purchasing, leading to aggressive contracting behaviour and heightened price deflation. Mayne does believe there are signs of stabilisation appearing at a macro level in the generic market; reduced R&D spending has led to fewer applications being submitted to the FDA. Generic pharmaceutical manufacturers have closed manufacturing plants, restructured operations, and withdrawn unprofitable product lines. 

Portfolio rebalancing 

Mayne’s focus is on reshaping the business towards branded therapeutic segments to develop better protected and sustainable revenue and profit streams. Whilst the generic business will remain an important feature and Maybe will continue to introduce new products going forward, future focus will be on product categories and distribution channels where returns are more predictable. The aim is to broaden the speciality portfolio through focused R&D and business development. 

Mayne is seeking to actively rebalance its portfolio towards speciality products so that revenues are less dependent on generic products. The effort will be led by next generation combined hormonal contraceptive E4/DRSP. Two phase 3 studies have been conducted with positive results. Launch is expected in the first half of 2021 subject to FDA approval. The peak net sales potential is estimated to be in excess of US$200 million per annum. 

FY20 outlook  

In the first 4 months of FY20 (to the end of October), Mayne’s revenue was $154 million, down 16% on the prior corresponding period. This drop reflected additional competition on 2 key generic products. Operating and R&D expenses are being tightly managed across the organisation with $4 million in cost reductions achieved in the first 4 months of this fiscal year. 

Mayne’s results have been volatile in the last few years due to factors such as the timing of FDA approvals, competitor launches, and withdrawals of key products. Mayne therefore does not give earnings guidance. Nonetheless, Mayne advises its long term outlook has improved significantly over the past year. It has more than a dozen products pending at the FDA and in late stage development in its generics pipeline, including 4 with no generic equivalents today. 

Regis Healthcare Ltd (ASX: REG)

Regis Healthcare is an operator of retirement villages and aged care facilities. Regis shares are trading at $2.50, having dropped sharply in late 2019 on downward guidance.

Updated guidance 

Previous guidance for FY20 was normalised earnings before interest, tax, depreciation and amortisation (EBITDA) of ~$105 million and normalised net profit after tax (NPAT) of ~$38 million. Revised guidance of normalised EBITDA of ~$92 million and normalised NPAT of $28 million was issued in December. Downgrades were due to continued industry pressure on occupancy. Recent reports show industry occupancy in FY19 was the lowest in 3 years. Revised estimates assume no further significant decline in occupancy during FY20. 

Aged care and Regis 

At 30 June 2019, there were 213,000 residential aged care places in Australia, a number that is forecast to increase by 88,000 over the next decade. Regis accounted for over 8,300 of those places. Since listing in 2014, Regis has grown both through development (1,247 places) and acquisition (1,440 places). Regis’ growth strategy continues to combine these elements. 

Acquisitions 

Regis has contracted to acquire 2 homes from Lower Burdekin Home for the Aged Society and will take possession of the assets from 1 March. There are 173 residential aged care places between the 2 homes. More acquisition opportunities are expected to come on the market over the next 18 – 24 months. Regis intends to analyse all opportunities that come to market – both single homes and portfolios. 

Asset renewal 

Asset renewal is underway with a focus on older homes and shared rooms. Extensions are planned where land is available and additional scale makes sense with 2 preparing for construction in FY20. Two green fields developments are commencing in FY20 and FY21 that will support ~600 new places in urban locations. 

Outlook

It was a challenging year in 2019 for the aged care industry. Regulatory reforms and the Royal Commission into Aged Care have lead to significant changes in expectations and requirements. Regis has stated that it looks forward to working with the Royal Commission and Government to reshape the industry so that older Australians receive the care they deserve. Regis warns that FY20 will continue to be challenging. The focus will remain on care, improving occupancy, and positioning for growth. 

Foolish takeaway 

The outlook remains challenging for both Mayne and Regis. For Regis, improving occupancy will be key to improving financial outcomes, however the industry will remain in a state of flux while the outcomes from the Royal Commission are being established. For Mayne, a focus on branded drugs has the potential to increase profit margins, however this will depend on the pipeline and market take-up of new branded drugs. The market for generic drugs remains suboptimal. 

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Motley Fool contributor Kate O'Brien has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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Kate O'Brien