Sale: Sold Mayne Pharma

I have sold all of my shares in Mayne Pharma (ASX:MYX), and despite the coincidental timing I swear it had nothing to do with Valeant.

I would in general call this purchase a failure, although I was lucky to sell out without loss.

Why sell?

I recently had my Mayne Pharma thesis challenged, which was great. Readers, please challenge more of my theses – that’s what I’m here for. The assertions were essentially:

  • Regulatory problems are coming
  • Doryx sales (Specialty Brands Division) are diving and profits will fall
  • Generic sales will plunge

 

I disagreed on all 3 counts. I think the US Pharma industry is a cesspool, but I did substantial work on this in a couple of years back, so I considered that I had an ‘edge’ here. In general I thought, and still think:

  • Regulatory problems will be limited by industry influence with congressmen, doctors, etc and even if not, Mayne is a much smaller player and doesn’t sell large amount of troublesome drugs (e.g. opiates) so it would skate below most regulatory notice (ongoing investigation notwithstanding).
  • Doryx sales are falling due to generic competitors, but introduction of Doryx MPC as well as ramp up of sales at the Glaxo foam products I expect at least see SBD division sales staying the same.
  • Generic sales would fall moderately but over the next 2-3 years Mayne would be in a position to buy more products from highly indebted majors that have to reduce debt. Additionally I thought bringing manufacturing in house would improve margins.

 

However I do acknowledge that the pharma industry is a very hot-button issue in the USA – much like electricity prices here, only more severe. While I think betting on things continuing as they are is a good probability bet, I also think the probability of unpredictable outcomes is definitely ticking up. There are enough concerns in the sector now that if I’m wrong, I’m not likely to be wrong within 10% – I will probably be majorly wrong, which is not ideal. So I have kept that in mind.

Additionally, as part of responding to challenges I usually try to revisit the entire thesis, not just the specific points being challenged. And I came to some concerning realisations.

Yeah but…why did you sell?

First, I thought my original thesis was rubbish when I re-read it last week. I would have been quite scathing if I had read that from a fund manager on Livewire, as it was not very clear. I spent a lot of time describing the company and relatively little explaining why specifically this company would win despite its problems.

(This is a persistent issue with my theses – it is hard to make a convincing case that a company is a buy without also explaining all of the information that led to you making that decision, which leads to a discombobulated presentation)

Second, the risk reward tradeoff was probably not good enough. I thought Mayne was worth around $1 and potentially more than that over the next couple of years if you assume that business will pick up, as I did. However I also thought it was conceivably worth around $0.30 in the worst case scenario.  So I was looking at a ~50% gain and risking a ~50% loss, not that ideal. I risk a 50%+ loss on most of my companies if everything goes tits up, but in this case I probably don’t have sufficient evidence to prove that Mayne would go in the direction I wanted.

Third, it was too complex. Despite my knowledge of the industry (I am not an expert, just familiar) there are a lot of moving parts and many of them (regulatory, public interest etc) are not business related. I can’t reasonably forecast them all, especially in context of public interest outcomes like I mentioned above.

Fourth, I failed to ask why will things continue in the future the way that they have been in the past?  Mayne could be an opportunity if you assume that the future will look like more of the same and you get a good price, or if there is some other dynamic that the market isn’t expecting, which you identified. I was basing the investment explicitly on the future looking like more of the same even though some things, like the power of buying agencies vs generic manufacturers, are starting to suggest that the future could be quite different.

Fifth, debt also becomes a concern if earnings fall. Mayne has an OK balance sheet, but excluding cash it has debt of 1.7x EBITDA so if EBITDA halves the company basically breaches its bank covenants. I am not forecasting that, and think that would be unlikely, but I don’t have enough specific proof (regarding all the moving parts in the industry) to prove beyond reasonable doubt that earnings can’t fall that far.

Sixth, I thought Mayne was probably around where the blue arrow is in the business cycle:

From Wikipedia

But if it wasn’t, and if Mayne was where the red arrow is instead, would I be willing to wear a 50% fall on the way to the bottom before waiting 3-5 years for a recovery? Even if I thought I would get a 50%-100% return in 5 years (I think this is conceivable), I am not confident enough in Mayne to sit through the falls if I am earlier to the story than I expected. Would I go to the wall for Mayne Pharma?  Well…no.

I would go to the wall for most of my companies in the absence of new information (I try to form strong theses and hold tenaciously), but Mayne is not on that list. (Neither is Crowd Mobile, for reference).

There are probably a few more reasons but those are the ‘mayne’ ones. I thought I had an edge but I probably don’t – so I sold my shares.

Ordinarily I have a policy of waiting 7 days after a trade before I comment publicly but I am aware that we are heading into earnings season so I am releasing this earlier to notify readers as soon as I can. As always, I disclaim that I am not a licensed investment adviser and you should always do your own research on any investment.

On 23/01/2018 I sold all of my Mayne Pharma  shares for $545.05, or $0.681 after brokerage. I earned a $0.10 profit vs my original purchase  at $544.95 on 30/08/2018, essentially breaking even.

I own shares in Crowd Mobile and have no financial interest in Mayne Pharma. This is a disclosure and not a recommendation. I formerly owned shares of Mayne Pharma until the 23rd of January 2017, when I sold them all.

10Foot Capital declares morals ‘non-core’, diversifies into fraud manufacturing

reprinted with permission from financialnews.net.com.network.au. 

Bringing you the hottest news in global finance

FNNCNAU reporter Fiona Mastodon recently conducted a live interview with Yeti Bigfoot, founder of controversial activist investment fund 10Foot Capital. 10Foot Capital is in the midst of a major restructuring program as it attempts to rectify market-lagging performance.

Yeti Bigfoot, founder of 10Foot Capital, at a gala event in late 2013.

Here’s the interview transcript for those who missed the original:

Financial News Network: Yeti Bigfoot, you stated in your recent market update that your performance has persistently lagged the wider market. We understand you’re divesting some core businessses as a result?

Yeti Bigfoot: Noncore businesses Fiona, but yes you are correct. We have determined that major parts of our ethics, morals, and compliance divisions don’t immediately contribute to our competitive offering, and may in fact be a burden relative to peers who are not weighed down by these cost-intensive, low-ROE legacy businesses. We will look to divest them in a way that maximises value for shareholders, such as via a trade sale or IPO.

FNN: Your latest quarterly report shows that you are up 3% since inception, versus 6% for the index. Are these legacy businesses a key cause of that? We understand that you’ve taken radical steps to turn your performance around.

YB: Yes, we’re lagging the market significantly, a common occurrence for value funds in the late stages of a bull market. However, unlike most funds we’re not forced to simply lay down in the face of the underperformance and outflows. I think it was you who reported several months ago that 1,700% of our listed shares were sold short. We have since conducted an extensive buyback – I now personally own 104% of 10Foot Capital’s common stock on issue – but due to regulatory issues in Uzbekistan we have not been successful in closing our discount to portfolio fair value. As a result we’ve turned to unconventional means to make up the shortfall. Fraud is a real area of expertise for us and we think we have an edge by focusing our attention on fraud manufacturing.

FNN: But fraud manufacturing?  Surely that carries risks?

YB: Quite the contrary. Most frauds persist far longer than those who identify it are ready to admit, and fraud carries a high bar to prosecution so it is difficult to convince the regulator to stir themselves to take care of it. You do have a point, a poignant one. However, I would point out that most frauds are artisanal and bespoke – usually created by a small handful of people and enabled by a few brokers or financial advisers. There is a limit here to both production capacity and ultimate size – most frauds collapse under their own weight once they pass a certain degree of mass or complexity. What we’re doing is industrialising fraud on an institutional scale. The ROI on these types of ventures is astronomical, and our proprietary algorithms have identified this as a real gap in the market and something that buyers will pay a premium for.

FNN: That sounds exciting. Can you give us a little taste?

YB: Sure, well, we’ll carry all the markers – mark to model accounting, opaque private equity holdings, ‘misunderstood’ tech investments, regular dividends, cash flow misalignment with revenue, hockey stick profit forecasts, routine equity raising to fund the dividends, and possibly an ICO if they’re still hot by the time we finish our white paper. We’ll have a handful of corporate advisors and other enablers posting suspiciously detailed analyses under nom de plumes on Hotcopper and SeekingAlpha. In due course we’ll also raise serious cash from large pension funds and use sophisticated cornerstone investors to rubber stamp our operating model.

The difference between us and other frauds is that we’ll own it and we’ll take it big. Most frauds try to stay small, thus sowing the seeds of their own destruction as I mentioned. What we’re looking to do is create a story so colossal that no one would believe that someone ‘could have the impudence to distort the truth so infamously’. Regulators are notoriously slow off the mark against large frauds, and research shows a direct inverse correlation between the size of fraud and likelihood of achieving convictions.

FNN: In our experience here at FNN we find that the media usually brings corporate skulduggery undone, not regulators. 10Foot Capital is already controversial, fraud manufacturing will just paint a target on your back?

YB: Disagree. Fraud against white collar and wealthier individuals is generally seen as more acceptable, so we expect minimal if any media outrage. One thing we do intend to do is found a charity to provide affordable home loans to those of humble means. We see this as an effective hedge against media risks, as it’s unlikely that a market reporter could convincingly attack a company that runs a charity that lets poor people leverage into the Australian Dream with irresponsibly large loans. We will, of course, lay off any risk via securitisation and special-purpose vehicles. Additionally we expect to attract a number of well-connected but not particularly skilled directors who we feel will bring additional security to the table.

Look, I’m not calling it a fraud here, but our goal is to create frauds the size of Valeant. I’d like to count Pershing Square as a co-investor one day.

FNN: Yeti, I’m not as familiar with Valeant as you are, but my understanding is that there’s been no fraud proven at Valeant, nor any criminal charges laid against its executives?

YB: Exactly.

FNN: Yeti, thank you for your time.  Everybody, Yeti Bigfoot.

 

I have no financial interest in, or relationship to, any person or company mentioned or implied. This is a disclosure and not a recommendation. This post is satire. Any resemblance to any individuals, living or dead, is strictly coincidental.

Getswift: The gift that keeps on giving

There was a pearler of an announcement from the Getswift (ASX: GSW) this morning. I paraphrase:

  • The share price didn’t move after we first announced the contract, therefore our Fruit Box contract was not material
  • When Fruit Box was cancelled, we hadn’t completely finalised our contract with Commbank, but we were sure hoping to, because if we did, then we wouldn’t have to report the loss of Fruit Box 
  • We signed the contract with Commbank shortly after and, given that it would take 12+ months to show revenues, this very large and so far non-contributing contract definitely means that Fruit Box is immaterial

 

ASX: ‘Has Commbank agreed to use the Getswift software?’ 

  • We see no reason why they wouldn’t
  • Because we see no reason why they wouldn’t, this means that we, unfortunately, don’t have to respond to your request that we justify our statements “revenue will commence in mid-2018” and that we will get “257,400,000 deliveries”. Sorry about that!

 

ASX: ‘You’re suspended.’

There is an issue of credibility when these things happen. Getswift could have, narratively, been a new company, understaffed, run off their feet, bit too optimistic in the forecasts – whatever – and got caught up in some problems with the ASX.  Now they realise “hang on, we’re in trouble here” and they take a step back, make extensive disclosures, share price does whatever, and Getswift lifts its game from here.

In my view, that was most definitely not the case with today’s announcement. Getswift ducked all the substantive issues and gave an unconventional explanation to justify why its contracts were not material. Share price movements are far from the only test of materiality.

Just because the share price didn’t rise on news of winning the contract, that does not mean that it would not fall on news of losing it so soon after. I think this is a strange argument because Getswift didn’t disclose the loss at the time, so there is no way to know if shares would have moved, and thus no way to determine the materiality of the announcement based on share price movements – which is the criteria Getswift used to judge materiality! As a result I don’t think the company can argue it was not material based on the share price alone.

I believe that the Fruit Box contract was almost certainly material in the context of the ASX’s continuous disclosure rules and I showed why in this post.

Then there was this:

A contract, or a contract?

“Regardless of any POC period, because the contracts are pay as you go; clients that no longer want to use the platform simply cease using it and this is then reflected in our periodic reporting of delivery transactions and revenue.”

What is the point of calling it a contract? Sure, there is an agreement on fees and payment terms. However this looks like a pretty soft contract that doesn’t reflect the locked-in revenues that the market has been assuming for Getswift. Getswift has been implying that there are locked in revenues and switching costs by forecasting a full 5 years’ worth of deliveries, even though their customers can stop at any time.

If you look at the prospectus there is another questionable bit relating to these ‘contracts’:

“Discounts are applied to larger clients using a tiered fee structure, based on the client’s monthly transactional volume and the length of contract commitment.” 

Why offer a discount for a longer contract if your client can quit at any time?  In my view this does not make a lot of business sense. Volume discounts, sure. But why offer a discount for length of commitment if your client is not bound by that commitment?  You are literally giving money away for free to any shyster who knows how to negotiate.

Getswift has forecast hundreds of millions of transactions from deals that apparently

a) won’t earn revenue for ~12+ months (Commbank) and,

b) have no switching costs and that,

c) clients can quit at any time.

How much hubris do you need to have to go out there and say that our new software solution with no switching costs, no exit fees, and currently in a pre-pilot phase will, fo shizzle, “result in over 257,400,000 deliveries on its platform over the next five years, with an estimated aggregate transaction value of $9 billion.”

What a fucking shambles.

Getswift earns 10foot’s highest accolade:

Speaks for itself, really.

I have no position in any company mentioned. This is a disclosure and not a recommendation.