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.
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:
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.