Earnings Transcript for MYX.AX - Q2 Fiscal Year 2024

Shawn O’Brien: Thank you, operator. Hello, everyone, and thank you for joining us as we discuss the first half of fiscal year '24 results. This provides us an opportunity to share the Mayne transformation story to a higher margin growth business that operates on a lower level of net working capital than previously. With me on the call today is Aaron Gray, our CFO of Mayne Pharma Group. On our next slide, the disclaimer slide, we're excited to share the results with you today. But as stated on the disclaimer slide, I want to emphasize that the information provided today is general in nature and in summary form only. It should be read in conjunction with the company's financial statements, which have been reviewed and signed off by BDO and our market disclosures. We report on an Australian IFRS basis and not a GAAP basis. And all numbers reported here are in Australian dollars unless otherwise noted in U.S. dollars. The historic numbers represent the ongoing business. This presentation may also contain forward-looking statements that involve subjective judgment and analysis that are subject to significant uncertainties, risks and contingencies, many of which are outside of our control and unknown to the company. With that, let's turn to our first half '24 results. When we started FY '23 results back -- when we reported our FY '23 results back in August and at the AGM, I highlighted several goals we hope to reach by the end of fiscal year '24. They were

Aaron Gray: Thank you, Shawn. Before I go through the individual financial slides, I would at this point like to note that we've prepared a number of additional slides in the appendix to provide some of the information that's been requested by different investors. So I'll talk through a number of slides, but there are some additional slides in the appendix. Next slide please. As noted previously, we are focusing on the comparison of the first half fiscal '24 to second half fiscal '23 as that is the first period we had sales from the licensed assets, ANNOVERA, IMVEXXY, BIJUVA and the prenatal vitamins. For reported revenue, I will go through the detail in the segment discussion. But broadly, we are pleased with the progress made on Women's Health and Derm. Gross profit of $105.8 million represents a margin of 56% versus 52%, reflecting higher margin in Dermatology from new products in addition to some operational improvements and growth in the higher margin Women's Health portfolio. Direct contribution of $40.6 million is a strong turnaround taking into account growth. And I'm pleased that direct expenses are only up 1% compared to the prior half, including expenses for growth and new products, which is a good effort, reflecting some results from the USD 10 million cost out program that's been discussed previously and cost discipline across the business. Direct costs in the half were $65.2 million versus $64.6 million in the comparable period. Underlying EBITDA of $8 million reflects adjustments from statutory EBITDA of minus $21.9 million to remove noncash expenses relating to an increase in earn-out liability for NEXTSTELLIS, which is driven by the new patent, and the noncash mark-to-market on the convertible note, which is a function of the movement in our share price. It also adjusts for litigation and some small restructuring charges. We have worked very hard to simplify the business, and this can be seen in the reduced number of adjustments to underlying from our statutory numbers. There's more to do, but we think we have made real progress in presenting our financial performance and cash flow that is clearly reconcilable to our actual operating performance. The $8 million of underlying EBITDA is a significant improvement on the comparable period and sets us up well to deliver on our goal of returning the business to consistent profitability. Next slide please. Thank you. Okay. The purpose of this slide -- this was originally put together to help reconcile between our statutory accounts and a number of figures used throughout this presentation. In this view and in statutory accounts, depreciation is included in COGS, direct OpEx and indirect OpEx. We have footnoted the respective amounts on this slide. So this put together to help reconcile to the stat accounts and provide a clearer bridge between some of the numbers we'll speak about in the stat accounts. Now next slide please. Cash and working capital management are top priorities, as is close out and management of discontinued operations. This slide includes cash and marketable securities. Please note that the cash figure as presented in the statutory accounts excludes marketable securities. The sum of those 2 figures should be thought of as our cash balance. Our cash and equivalents balance stands now at $146.8 million, down from $220.1 million at 30 June. We reported that cash was $163 million at our 1Q balance date. So cash outflow has slowed in the second quarter. Cash from operations as per the statutory accounts is minus $28.7 million, adjusting for cash used for discontinued operations of $9.5 million. Continuing operations consumed $19.2 million in operating cash in the period. To provide some more detail on the operating cash use, we invested or built $25.7 million in working capital during the half. We invested $14.6 million in inventory to support new product growth and to mitigate some supply chain risks to ensure we have products available to maintain and grow the revenues. Our receivables balance also built by $9.7 million during the period, reflective of the substantially higher revenues. We have significantly improved the discipline on cash collection. And you should think of this build as being largely in line with our increased sales performance during the period, especially towards period end when sales were lifted by the new product launches. You can see that we spent $3.9 million and $4.3 million in earnout payments for continuing and discontinued operations, respectively. We have made real progress on closing out liabilities for discontinued operations, but the range of $10 million to $20 million net remainder to be concluded. We are focusing on closing out this as appropriately as possible, balanced by closing it out as quickly as possible. You can also see that we have used 50% of the cash consumed during the period on investing and financing activities. We closed out the receivables financing facility at $11 million. We have significantly improved trade terms and collections, and so that that facility has become redundant. The successful product acquisition of RHOFADE, which we completed late in September and launched in October, cost us $13 million. And finally, we spent $10.9 million on our share buyback program. Our intention is to continue that program in some form once we have released our results. Next slide please. This slide presents a different view of cash, separating cash to maintain the business from cash invested to grow the business for continuing operations only. We have invested in net working capital related to continuing ops primarily in inventory prepays and deposits related to future business and some business changes. Exclusive of investment, we estimate we converted underlying EBITDA to cash at a rate of 78% for this slice of the view. Moving down the slide, I spoke to the networking -- sorry. Jump back please. Moving down the slide, I spoke to the networking capital investments. The item that is growth CapEx and asset acquisition includes the capital spend that Shawn mentioned at the Salisbury site as well as the acquisition of RHOFADE. Next slide. Slide 11 shows our balance sheet. Key call outs here are that you can see the improvement in working capital particularly against the revenue. Our liabilities for gross to net stands at approximately $168 million, which is included in our payables balance. We've done extensive work around this topic to ensure that we are appropriately recognizing liabilities across each product and each channel. We have significantly changed our processes and tools and we have leveraged industry experts to validate our approach. Comparing to the past, as a consequence of some of these changes and these efforts, we expect to see significantly less volatility in management of these liabilities. We expect to build receivables going forward in line with growth and to make progress improving payment terms. The receivables relating to discontinued operations reduced by $15 million, which reflects good progress as part of the closeout. You will also note that marketable securities of $36.7 million is included in other assets. So the cash balance plus that $36.7 million ties back to the $146.8 million cash that we discussed. Next slide please. Moving on to the segment performance. Slide 13 or this next slide is our segment note from our statutory accounts in Australian dollars. It shows the progression from revenue through gross profit, direct OpEx and direct contribution across the 3 segments and for the group. We presented segment reporting on a local currency basis -- going forward in the next subsequent slides, U.S. dollar for Women's Health and Dermatology and Australian dollars for International. We've replicated the Women's Health and Dermatology slides in Australian dollars in the appendix to make it easier for those who want to see a single currency. Shawn has dealt with the operating highlights of each segment, so I will focus on the financial aspects of each segment. Slide please. For Women's Health, Women's Health, again stated in U.S. dollars, shows growth of 45%, which includes a 96% increase in NEXTSTELLIS revenue and 29% increase for ANNOVERA, IMVEXXY and BIJUVA compared to the prior half, which I should note was impacted by accounting adjustments as discussed at year end. Gross margin of 81%, reflects stable net selling prices and we believe is a good representation of the go-forward margin profile for this business, subject to some movements and mix. You can see that direct OpEx has reduced over the second half of fiscal year '23, which reflects roughly $5 million of cost taken out in headcount and marketing costs. We have delivered a strong turnaround in direct contribution to $11.8 million positive. As we showed at our 1Q update, we have tried to show cash proxy at segment level by adding back depreciation, which is included in direct OpEx. This relates specifically to the sales -- leases on cars. And we have also reflected the estimated earn-out liability of $3.4 million, which as before, as show prior, is the amount of earn-out liability matched to the revenue for the period. This number is not easily reconcilable to the accounts due to the way that our accounts have historically dealt with product acquisitions and licensing, and there are some timing differences to cash flow. However, we do believe this provides a reasonable proxy and provide some additional transparency on performance of the business.Next slide. You can see the development of the NEXTSTELLIS cycles for the first half, up 33% on the prior period. As you know, as we stated previously, net selling price was restored and improved across the half. The growth combined with improved net selling price and lower costs have allowed us to achieve a breakeven in the December. This view includes demand cycles through January of 2024. In January, NEXTSTELLIS reached 44,453 cycles. We are pleased with the continued growth of NEXTSTELLIS, particularly in context that January tends to be a soft month with a reset in patient out-of-pocket cost with admittedly more work to do. Going forward, we do not plan to make comment on individual product profitability as we manage the portfolio across contraception and menopause products to maximize the overall business sales while managing the operating costs and productivity across product and segment. The chart to the right reflects the half-on-half sales development by product and we believe represents a clean view in the sense that we now have our accrual liability processes in place. So we expect going forward that to translate to a clear correlation between volume, price and revenue reported. Slide, please. Moving to Dermatology. You can see growth in revenue as the core portfolio in Dermatology has continued to deliver solid results. We have strong discipline in place related to channel liabilities. New product launches has delivered a meaningful contribution as well. You will recall that at the year-end, we spoke about the initial disappointment in the fiscal '23 ORACEA launch as volumes from the previous licensee were worked out of the channel. That -- during the first half that has fully resolved and we have high expectations for ORACEA, realized in the first half and continuing in the second half, including a favorable COGS position that we've been able to secure. We did have some catch-up provisioning in the second quarter on ORACEA, which is reflected in the flat performance in Q2.We launched RHOFADE during the first half, as Shawn has mentioned, and it's performed very well for us. Strong sales and higher coverage than we had expected have led to a solid contribution to gross profit. Gross profit does reflect improved core performance and a shift in mix to a higher-margin product. As Shawn said, we have a number of bolt-on NPLs in the second half. Broadly, I expect margin rates to remain in the range of what we have seen in the first half. Direct OpEx has increased against the comparable period, reflecting costs associated primarily with the new product launches and the pilot of our disintermediation strategy. Overall, our Derm headcount is flat, but we do believe this demonstrates the model and the leverage that our strategy can deliver as we layer in more products. You can see that adjustments to the cash contribution are much lower than in Women's Health as this business, as we stated previously, tends to be driven and continues to be driven primarily by capital-light transactions, i.e., profit share included as a part of cost of goods sold. Now I'll hand it over to Shawn for the next slide.

Shawn O’Brien: Thank you, Aaron. Appreciate that. So we've been talking about disintermediation for quite a period of time, and we've had great success recently with the services pilot program that we did -- initiated in the first half. Due to Mayne's drug sourcing ability, extensive pharmacy network of over 400 pharmacies across the U.S. and our own mail order pharmacy, Adelaide Apothecary, which is licensed in all 50 states, plus an extensive provider and customer coverage, we have an opportunity to disintermediate the very inefficient pharmaceutical value chain and create a comprehensive frictionless, transparent and cost-effective experience for providers and patients. Dermatology was the ideal place to launch our pilot with GoodRx and Assistrx platform so providers of patients are able to see the product at the best available price and lowest out-of-pocket costs based on that patient's insurance program. If the patient's insurance plan does not cover the product, patients are offered the option to use Adelaide Apothecary to acquire the products at a cash price. The result is this channel strategy provides patients and providers with a seamless prescription at lower cost and improved margin per prescription for us. We plan to transition this program into Women's Health division very soon. Now turning to our International segment. Our International segment consists of 3 units

Operator: [Operator Instructions] Your first question comes from Andrew Goodsall from MST.

Andrew Goodsall: Congrats on the turnaround of the EBITDA. Just a quick one to start with on Dermatology. You spoke to RHOFADE and ORACEA, but not much to DORYX. So just looking for some color on what was happening to DORYX in the period? And I guess the second part of that question is, with the growth of the other drugs, how does that change the seasonality of that segment?

Shawn O’Brien: So the question I heard was good performance on ORACEA and RHOFADE, didn't hear much on DORYX, and is there any seasonality with the other products. On the DORYX, we're pleased that DORYX now with the launch of MPC 60, we've become the market leader at a prescription level for that product. So there's still growth happening there in a significant way. Relative to the seasonality, we're now in the U.S., what I would call, the acne season. It's -- you'll see Accutane tends to grow in volume use in January and April of each year, and we're right in the middle of that. So there's generally a softening of the use of Isotretinoin through either technology in the summer months, and then it seems to pick up. What we're really pleased with, Andrew, is normally the business sees a softening of prescription volumes in January due to co-pay increases for patients because of a reset of their health plan. And we didn't see that happen almost straight across the board both in Women's Health and Dermatology. So we're pleased with the kickoff that we have in the results we've seen in January. So we expect the Dermatology business on the acne to grow. And now that we have both Accutane and Isotretinoin, both in Absorica formulation and the original Accutane, we have opportunity to get along in that market. Is that helpful?

Andrew Goodsall: Yes. I was just trying to understand, particularly with some of the product ads whether you'll dampen some of the sort of seasonality when you get to the summer.

Shawn O’Brien: Yes. We don't -- go ahead.

Andrew Goodsall: Sorry. You go. Sorry.

Shawn O’Brien: No, go ahead, Andrew.

Andrew Goodsall: Just on Women's Health, obviously, a great trend with NEXTSTELLIS. Just trying to understand what the head count is looking like in the sales force to support that growth, whether you've got more to spend or you're getting towards the end of that build-out?

Shawn O’Brien: So we have 85 territories in the market right now. We just took on a new sales leader under Lynn's -- Lynn who has took over Women's Health at the beginning of the year. We have a new sales leader in place. And really, right now, it's about building the execution back to where we had it and when we showed significant growth this time last year when we changed the curve. And we have data where we weren't executing the way we wanted to. And that's why we made a change in the sales leadership. Relative to making the leadership change and taking Daniel's job and having it, it's really a reflection of the progression of the business. We have a big opportunity in Women's Health and we have a big opportunity in Dermatology and a big opportunity in our disintermediation strategy. And Daniel will continue to lead our Dermatology and disintermediation strategy going forward, and Lynn's taking over the focus on Women's Health. So it's really a move reflecting on our confidence of both those business units growing rapidly.

Operator: Your next question comes from Melissa Benson from Wilsons Advisory.

Melissa Benson: First one is just on NEXTSTELLIS. And I think you've guided us, now in December, you hit that breakeven run rate for that product as you were aiming to. Just a little bit of color on how we should think about the -- and we see the direct OpEx for the Women's Health business. But how much are you kind of attributing that to NEXTSTELLIS to kind of calculate that breakeven run rate, if you like?

Shawn O’Brien: So on that, we have always allocated -- I think we've communicated this previously that 60% of the commercial footprint is allocated to NEXTSTELLIS and the other 40% to the remaining portfolio of Women's Health on the cost base. So that's how we -- that whole stuff. Does that answer the question there?

Melissa Benson: Yes, it does. That's helpful. And thinking about that cost out, that $10 million cost out and a portion of that being the NEXTSTELLIS marketing force. I mean is there more of that to come in the second half in terms of efficiencies in that OpEx base? Or a lot of that was delivered in this first half?

Shawn O’Brien: So we delivered $5 million in the first half of the identified $10 million. $8 million was Women's Health that was identified and $2 million was cost of goods that we identified in the first half. And the $2 million in cost of goods won't be -- wasn't seen at all in the first half. That's going to be seen in the second half. The $5 million really was driven, as you saw, by our numbers in the segment. The data, it shows you we're down $5 million roughly directly in Women's Health. And the cost out, the majority, like 80% of the cost out was focused on NEXTSTELLIS. It was important for us to get the brand to a level that we had confidence to invest properly in the brand. As you know, there's been many women's health companies who have failed in this marketplace, over investing and getting -- not getting the return. Going forward, we're going to continue to look at not just NEXTSTELLIS, but ANNOVERA, IMVEXXY and BIJUVA, how we want to invest and drive growth. And now with the new patent in place, it gives a level of confidence and the opportunity that we didn't have previously.

Melissa Benson: That's helpful. On the International business, you called out it was a little bit softer at the top line, and that was kind of customer mix impacts there that you sought some efficiencies in the business. I mean, how should we think about revenue growth in that business? Or rather a little bit more color on customer mix? And I guess if some of those operating efficiencies now have been reached? If we think that pending top line growth, the cost base is fairly stable from here?

Shawn O’Brien: I would look at the second half, and right now, it's going to be roughly flat growth on the cost side. We just secured a new contract on procuring our API, which is going to give us a $500,000 annual saving over previously for one of our products. So that's a significant change that will go into the bottom line there. We are diligent right now on some opportunities, but most of those opportunities will not give revenue to the business in the near term.

Melissa Benson: And a quick clarification. Just -- any NEXTSTELLIS sales from the International business, is that captured in Women's Health or that's separate?

Shawn O’Brien: No, it's captured in the International business. It's part of Australian pharmaceutical, MPA, Mayne Pharma Australia.

Melissa Benson: And final question for me was just around the JPMorgan conference in January. I think, Shawn, you was speaking to revenue run rates and the potential for this business to do over $400 million this year at the top line. I mean is that still how you're thinking you're tracking? Is that still an achievable goal for us to be thinking about?

Shawn O’Brien: Well, if you look at the run rate we have right now, $188 million times 2, it puts you into the $375-plus million range, $377 million. And then if you look at our -- the scripts that we just showed you in January for NEXTSTELLIS, the run rate we're getting on RHOFADE and the run rates we're getting on ORACEA, obviously, we think we're going to be north of that $375 million level.

Operator: [Operator Instructions] Your next question comes from Elyse Shapiro from Canaccord.

Elyse Shapiro: Quickly on NEXTSTELLIS. It looks like we've seen some improvements in terms of pricing. How much more room do you think we have to go there in terms of pricing power?

Shawn O’Brien: The only pricing -- I think we've done a very good job of using RIS RX to make sure that our co-pay cards are used efficiently and as intended and reducing the abuse. So that's given us productivity. And then all the other activities we've done are in place. So we more than restored the price than what we had on average last -- this time last year. However, the real opportunity for price expansion or margin expansion on the net selling price will come out of ACA, and that will result in volume and price opportunities. But until that solidifies, we're not giving any guidance on the exact impact ACA could have. That's the Affordable Care Act. It is the law and it's really about getting the payers to follow the law. Recently, the Congress had, what, 130-plus signatures from Senators and Congressmen about this particular issue and sent to the payers community, asking them to abide by the law. So hopefully, we'll see some traction on that. In the near term, as I mentioned previously, the state of Vermont is suing payers and the government of not using this law as intended. So the law is intended to ensure that anybody getting a birth control method, whether it's a pill, an IUD or et cetera, has no out-of-pocket expense for products that are -- do not have a substitutable product.

Elyse Shapiro: And then just in terms of Derm, historically, you've kind of talked to potentially making as many as 10 new product launches there. Is that still something that you're kind of on track to do? And in terms of like revenue and earnings capacity, how are you framing those product launches?

Shawn O’Brien: So yes, we're on track to do that. We launched RHOFADE, [indiscernible], WYNZORA, Accutane so far, and we have 5 more launches in front of us. And so we're pleased with that. Obviously, RHOFADE has been a great win for the company. We are realizing a better net selling price than we expected than the business plan. And so that's really why we've been able to drive that margin into the business in the first quarter. But overall, it's really -- you have to not just look at the product offering, but how this disintermediation strategy is working. And as I communicated previously, this is resulting in us getting a higher margin per prescription and being able to sell product into patients who are not covered under their plan at a cash price that drives profit for us at the same time. So it's a reflection of volume and margin mix that is driving the growth in Dermatology and the volume coming from new product launches and penetration. As I said, we're #1 now in DORYX in prescription volume. And now that we have both Accutane and Absorica formulations of Isotretinoin, we have an opportunity to gain market shares in that sector.

Operator: There are no further phone questions at this time. I'll now hand over for webcast questions.

Unidentified Company Representative: We have a question from [Mark Whitaker]. Thanks, Mark. The first question is, are you pleased with the run rate for NEXTSTELLIS? Breakeven is a good result, but how do you accelerate sales?

Shawn O’Brien: It's a good question, Mark. So if you look at the exit rate of the number of -- take the script data and look at the exit rate of number of cycles we did to achieve that breakeven rate in December, that would provide with no extra growth a 36% increase in cycles in the second half. And we did 33% in the first half growth over the prior period. However, you can see that with the monthly scripts that we just shared with you today, at 44,453, that momentum that we achieved at the back end of December is carried through. And so we're expecting that. As I said previously, Lynn brought on Tony into the business. And it's really about making sure we execute on our plan that we have for NEXTSTELLIS, ANNOVERA, IMVEXXY and BIJUVA. And we weren't fully on plan on our execution. And I guarantee you that's going to change. So really, right now, the focus for NEXTSTELLIS and Women's Health is all about our sales and marketing execution and delivering the growth expectations. So we think we can move it faster with greater discipline in place.

Unidentified Company Representative: Pleased but not satisfied, I would say.

Shawn O’Brien: That's how -- yes. I'm a continuous improvement person. So let's -- we got to always do things better.

Unidentified Company Representative: Next question also from Mark is the Dermatology revenue level. The question is, what should we think about for the full year given the strong 1H performance?

Aaron Gray: So I'll take that one. So from my perspective, the first half benefited obviously from some turnaround activities that we've engaged, improvement in pricing, launch of new products, co-pay monitoring, et cetera. What I would say for the second half is that we would expect the new products to give some level of lift. We would expect the additional months of the RHOFADE, which we launched during the first half and obviously we'll have for the full 6 months of the second half, we would expect that to give some level of lift. And I'm optimistic that a national launch of the disintermediation strategy provides us a good hedge against potential price erosion, which we might have seen in the past. In the past, we had obviously channel inventory issues, which we -- as I communicated, we've changed processes, had our results validated by third parties, et cetera. So we don't believe we'll see a repeat of that. We also suffered because of the mix and the pricing pressure on some of the different assets. If we look at Epiduo Forte as a case study, the price pressure that came to the marketplace really impacted Mayne at the end of fiscal '22. We don't have the same profile of products. We've got better -- products with better protection, better IP protection and less competitive pressure. And so I would believe that we'll see growth in the second half over the first half as a function of all those factors.

Shawn O’Brien: And from a headwind standpoint, there's pressures [Doxy]. And in addition, we communicated previously that we are getting a better selling price for RHOFADE than expected on plan. So there could be some headwinds against the net selling price in that.

Unidentified Company Representative: Yes, compared to the first half. That's right. So it will be additional months of revenue, potentially a slightly lower net selling price on RHOFADE. Next question from Michael [Noem] is, you have previously spoken about a possible U.S. listing. Pending further improvement in financial performance, what does that look like?

Shawn O’Brien: What does the U.S. listing look like.

Aaron Gray: It's part of our plan, but there's no immediate action here on that. It's just a reflection of where our business is. We're 80-plus percent of our revenues out of the U.S. And it's a way to attract health care focused investors of the future.

Shawn O’Brien: Any other questions? Operator, I believe that is all our questions we have online and the oral questions. And I'll send it back to you. Thank you very much.