In the past couple of weeks fund managers have been asking, “What's with Mayne Pharma?”, referring to its 45 per cent return since Radar first covered it two months ago.
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And well should the fundies ask.
At 47 cents the specialty pharma stock has been on a ripsnorting ride since purchasing the US-based Metrics for $US120 million and has doubled in the past six months, but is well off its high of 77 cents in early 2011.
Until now, the Australian listed speciality pharmaceutical company Mayne Pharma stock (ASX code MYX) had been abandoned by brokers and most fund managers after being split up, diced and spliced to the point where the only winners were investment bankers and lawyers.
Enter Stephen “The Sheik” Aboud and his partner Marcus Hughes at LHC Capital, who tell Radar that they ignore brokers and only focus on “complicated” stories, which investors don't get.
These two put Radar onto this one, so it's interesting to see whether they think it will go further.
“You bet,” says The Sheik, “It's all about [chief executive] Scott Richards and Metrics. We are still buying.”
When Mayne said at its half yearly results in February that Metrics was operating to budget, its stock surged 10 per cent to 42 cents.
Fund managers complain that the Metrics acquisition was too expensive, trading on an operational earnings (EBITDA) multiple of just over 8 times. The US-based business is a manufacturer, developer and marketer of generic drugs in the US. It specialises in narcotics, or sedatives, which are heavily regulated and can only be produced domestically.
Hughes argues (quite successfully in Radar's opinion) that the acquisition is good value when accounting for the growth Metrics is achieving from its existing suite of nine products, which increased their earnings contribution by 50 per cent to almost $20 million in the six months to 31 December, compared with the same period a year ago.
“You have to look at the run rate of the Metrics business. In a couple of years the earnings multiple Mayne paid will be reduced to two times.”
A lot of bullishness is invested in its research pipeline of 17 drugs which have a potential market (according to the company) of $3 billion, five of which are pending approval with the US Food and Drug Administration. These drugs have a potential market of about $400 million, Radar understands.
Because these are generic drugs, or copies of those that have gone off patent, the regulatory process is much less arduous.
Behind all this change is Scott Richards, who originally came from FH Faulding, which Mayne Group acquired in 2001 prior to it being split into two. Richards is working Mayne's existing products harder by finding new markets and distribution partners.
“People are seeing [Richards'] success at negotiating distribution deals with international partners to bring in new products to Australia, as well as to sell Mayne's domestic portfolio offshore,” says Hughes.
Mayne might seem “complicated” but this provides opportunities, says Aboud: “Half the fun is finding things. Many of the companies we invest in have a terrible history, which means people give up on them.”
These people don't include the folks at LHC Capital and Under the Radar Report.
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