Investment Thesis

• Any stabilization (competition or price) in the generic segment will be viewed as a positive.
• New product launches and healthy development pipeline.
• While generic brands are going through a tough trading environment at the moment, the long-term outlook remains positive given consumers and regulators need a healthy generics market to keep the price of medication down.
• Positioning the product portfolio to higher margin products.
• Potential industry consolidation on lower growth outlook.
• Leveraged to a falling AUD/USD.

Key Risks

• Intense competition from new products. 
• Lower demand. 
• New product launches fail to deliver the growth expected by the market. 
• Regulatory changes. 
• Litigation. 
• Adverse currency movement.

Key Highlights: Relative to the pcp and on a constant currency basis: 

• Revenues increased +6% to $424.8m, with Branded Products up +40%, International up +27%, Metrics Contract Services up +11% and Portfolio Products flat as strong performance in Dermatology benefiting from 12 product launches offset by continued erosion and underperformance of retail generics.
• Operating expenses increased +43% to $157.5m, due to the US launch of NEXTSTELLIS.
•  Reported EBITDA increased +32% to $87.4m, affected by the non-cash NEXTSTELLIS deferred consideration reassessment, stock write-downs and returns on discontinued, unprofitable retail generic products, transaction and restructuring costs. Underlying EBITDA of $45.7m, declined -28% and underlying EBITDA excluding NEXTSTELLIS increased +24% to $89.7m. 
• Reported net loss after tax widened +26% to $263.3m, driven by intangible asset impairments and deferred tax assets write-downs. 
• FCF was an outflow of $35.7m, due to earnout payments, primarily impacted by increase in working capital to support the launch of NEXTSTELLIS and the new dermatology products. 
• Net debt of $317m increased +27%, however, the company remained compliant with all bank covenants, with interest cover 5.1x (covenant >3x), shareholders’ funds of $562m (covenant >$400m) and liquidity (cash and undrawn debt) of $122m (covenant >$65m).

Company Description

Mayne Pharma Group (MYX) Mayne Pharma is a specialty pharmaceutical company focused on applying its drug delivery expertise to commercialize branded and generic pharmaceuticals. Mayne Pharma provides contract development and manufacturing services to more than 100 clients worldwide. Mayne Pharma has an extensive portfolio of branded and generic drugs in multiple therapeutic areas, including women’s health, oncology, dermatology and cardiology.

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

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Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

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Business Strategy & Outlook

Sonic’s “medical leadership” model recognizes the importance of the referring doctor as the company seeks to differentiate itself on service levels. Success in the model is evidenced by organic growth consistently tracking ahead of the market, suggesting market share gains. In an industry where absolute volumes are an important component in achieving greater cost advantage, organic growth supplemented by appropriate acquisitions continues to add value for shareholders. Sonic’s organic volume growth in its core laboratories segment has typically ranged between 3% and 4%. The volume growth is underpinned by population growth, aging demographics in developed markets, higher incidence of diseases, and wider adoption of preventative diagnostics to manage healthcare costs. In addition, the number of tests available is expanding. Increasing complexity of tests, such as veterinary and gene-based testing, is also resulting in average fee price increases. 

Laboratory medicine, or pathology, has a high fixed cost of operation and thus benefits from volume growth to drive lower cost-per-test outcomes. Sonic benefits from cost efficiencies by maximizing throughput through its network of laboratories and collection centers. Higher testing volumes result in a lower cost per test as labor, equipment, leases, transportation, and overhead costs are all leveraged. The company has historically been highly acquisitive, particularly overseas. Synergies from procurement and integrating IT are relatively easy to capture, and given its cost advantage, Sonic is well placed to boost its organic revenue with bolt-on acquisitions. The U.S. and Germany are singled out as the most likely sources of acquisitions given their fragmented markets. In addition to acquisitions, Sonic is sourcing more volumes to put through its laboratories from joint ventures with hospitals in the U.S., whose in-house laboratories are typically subscale and would operate at higher costs. Operating capacity within Sonic’s existing laboratories is highly flexible by adjusting operating hours.

Financial Strengths

Sonic is in a strong financial position. Free cash flow conversion of earnings prior to acquisition spend has averaged 99% over the last 10 years and has allowed Sonic to quickly repay the debt funding its acquisitions. In June 2022, Sonic reported AUD 797 million in net debt representing net debt/EBITDA of only 0.3 times, below the 2.0 to 2.7 times range targeted by management, and well below the 3.5 times covenant. A similarly strong cash conversion can be seen, and in the absence of major acquisitions, the company will be in a net cash position for most of the 10-year forecast period. The high cash conversion affords Sonic a generous dividend payout ratio, which is to be consistent with the historical average of approximately 75% of earnings. Sonic also has a progressive dividend policy which is communicated as a minimum of an equal dividend per share to the prior year.

Bulls Say

• Sonic has a leading market position in most of its geographies and as a result benefits from a cost advantage derived from scale. 
• On top of the base level of COVID-19 testing that is likely to continue, demographic factors, and the focus on value-based healthcare support global volume growth in preventative diagnostics. 
• Advances in technology and personalized medicine are increasing the number of complex and gene-based tests available to patients which are typically higher-margin.

Company Description

Sonic Healthcare is a global pathology provider. It is the largest private operator in Australia, Germany, Switzerland and the U.K., the second largest in Belgium and New Zealand and the third largest in the U.S. In addition to pathology, which contributes roughly 85% of group revenue, Sonic is the second largest player in diagnostic imaging in Australia and the largest operator of medical centers in Australia. The company typically earns about 40% of group revenue in Australia and New Zealand, 25% in the U.S. and 35% in Europe.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice. The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.