Mayne Pharma (MYX) Yet Another Transformational Acquisition. FY16 Earnings Confirmed. The company did not provide guidance in respect of FY17.

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1 29 June 2016 Analyst John Hester Authorisation TS Lim Mayne Pharma (MYX) Merger Fallout Creates Opportunity Recommendation Buy (unchanged) Price $1.485 Target (12 months) $1.89 (previously $1.86) Expected Return Capital growth 27.3% Dividend yield 0% Total expected return 27.3% Company Data & Ratios Enterprise value Market cap $2,338m $2,184m Issued capital 1,471m Free float 100% Avg. daily val. (52wk) $3.1m 12 month price range $ $1.68 GICS sector Pharmaceuticals & Biotechnology Price Performance (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Yet Another Transformational Acquisition As widely theorised MYX has capitalised on the opportunity to acquire a portfolio of generic products for its US business for which it will pay cash US$652m (A$881m). We understand this transaction represents the 5 th asset sale by Teva following its merger with Allergan. MYX will fund the acquisition through a combination of new debt and equity. The company will raise $601m via a discounted 1 for rights issue to existing shareholders at $1.28 and a further $287m via a placement to institutional investors at $1.50. MYX will also extend borrowings by approximately $145m to provide additional funding for working capital, transaction fees and other items. FY16 Earnings Confirmed The company provided a trading update for FY16 in which it confirmed revenues in the range of $260m to $265m and underlying EBITDA in the range of $86m to $88m. This guidance is in line with our most recent published forecast. The company did not provide guidance in respect of FY17. Details of the portfolio of 37 approved products are yet to emerge, however, the commentary indicates the consolidated portfolio will be far more diverse while continuing to rely on complex technologies and building upon Mayne Pharma s expertise in modified release, potent compounds and controlled substances. The portfolio also includes 5 FDA pipeline drugs (in addition to the 37 approved products). One of the recently approved drugs is due for launch in 1H FY17. The earnings from this item are not included in the earnings forecast, hence there is potential for further upgrades. Retain Buy Rating, Price target raised to $1.89 FY17 and FY18 EPS are upgraded by 31% and 35% respectively following this transaction. Despite significant earnings upgrades our price target moves from $1.86 to $1.89. This follows a downward revision to the capitalisation multiple for MYX consistent with the re-rating of US peers that has occurred in recent months. Absolute Price $2.0 $1.5 $1.0 $0.5 $0.0 Jun 14 Sep 14 SOURCE: IRESS MYX Dec 14 Mar Jun Sep 15 Dec Mar S&P 300 Rebased Earnings Forecast June Year End FY15 FY16e FY17e FY18e Revenues EBITDA $m NPAT (underlying) $m NPAT (reported) $m EPS underlying (cps) EPS growth % -37% 128% 61% 1% PER (x) FCF yield (%) 0% 0% 0% 3% EV/EBITDA (x) Dividend (cps) Franking 0% 0% 0% 0% ROE % 2.3% 10.5% 6.7% 6.1% SOURCE: BELL POTTER SECURITIES ESTIMATES BELL POTTER SECURITIES LIMITED ACN AFSL DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 8 THAT FORM PART OF IT. Page 1

2 MERGER FALLOUT Issued capital on page 1 (i.e. 1,471m shares) assumes the transaction proceeds as described. We summarise the estimated FY17 earnings impact of the transaction as follows: Figure 1 Forecast earnings impact US$m A$m US$m Reported Normalised A$ Previous Forecast Consolidated Revenues Gross profit Implied GP Margin 54% 54% 55% 57% 56% Technology transfer Operating expenses EBITDA Margin 47% 47% 47% 33% 40% D&A EBIT Finance cost NPBT Tax NPAT Shares on issue 1,507 Normalised EPS 9.7 Pre transaction eps 7.4 EPS Accretion 31% SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES Key points: We assume 11 months of revenues in FY17 (from the acquired portfolio) as the transaction is yet to be ratified by the US Federal Trade Commission which is due in July We assume an implied gross profit margin in FY17 for the acquired portfolio of 54% which is in line with the guidance of greater than 50%, but less than the margin achieved in 1H16 by the generic products division. The technology transfer item of US$15m is assumed to be capitalised, hence no P&L impact to EBITDA. We normalise earnings for the impact of the ~US$33m amortisation of acquired intangibles. The detailed financials page includes this item as a non-cash abnormal item included in reported earnings. We assume there is no tax shield on this item. Operating expenses represent 7.8% of revenues, significantly higher than the company s guidance, however, in absolute dollar terms, still a modest number. In overall terms, the consolidated EBITDA margin remains a very healthy 40% (1H16:34%). In the company s view the acquisition price represents less than 6x projected EBITDA on the acquired portfolio. This implies an EBITDA of 45% relative to our estimate of 47%. Figure 2 - Summary of changes to earnings SOURCE: BELL POTTER SECURITIES ESTIMATES Old New % change Old New % change Old New % change Revenues % % % EBITDA % % % Normalised NPAT % % % EPS - normalised % % % The items driving these earnings changes are the acquisitions which are the subject of this transaction. Page 2

3 The balance sheet now reflects the appropriate changes to shareholders equity, intangible assets, debt and working capital. Shareholders equity increases by ~$854m inclusive of the $32m in transaction costs. Intangibles increase by a net $823m represented by the majority of the purchase price net of 11 months amortisation in FY17. Overall we estimate 31% EPS accretion in FY17 and 35% in FY18. OTHER KEY POINTS Latest twelve months (LTM) net sales for the acquired portfolio were US$292m. The company expects the portfolio to achieve net sales of US$237m in FY17 a discount of 19%. In Figure 1 above we assume this reduces to US$217m for the 11 months. Most of the adjustment relates to trading terms and at least some supply disruption during the transition period. It does not take into account the potential market share adjustment and price deflation associated with the introduction of additional generics. There is no visibility on additional generics at this time primarily because MYX has not yet disclosed the molecules acquired, however, we do know that at least two of these are delayed release formulations, and this is a significant barrier to further competitors. Looking forward, as MYX expands its market presence and improves trading terms with key partners, the gross to net discount on the portfolio may improve modestly, however, our 56% gross profit assumption for the generic products division in FY17 remains realistic. At first glance the quality of the portfolio of 37 molecules appears high. Revenues are highly diversified with the largest product representing just 12% of LTM revenues and the first 5 products maintain at least the number 1 or number 2 market share. Note that the total market value for revenues of $1.62bn is gross sales (as opposed to net sales). Depending on the number of generic competitors, investors should apply gross to net discounts of between 15% to 50% in each product in order to reach the net sales value in each market. The deal also included 5 pipeline products and 1 recently approved abbreviated new drug application. Consistent with our previous practice, the BP forecast does not include prospective revenues for drugs not yet launched. Looking at the recently approved product, the gross value of revenues is estimated at US$340m with 3 generic competitors. We assume the MYX generic will be the fourth albeit other generics may emerge. We estimate the net sales value at US$204m (i.e. a 40% discount to gross). Despite the discount, this remains a highly attractive new market and is likely to be strongly accretive to earnings in the latter half of FY17 and into FY18. The remainder of the pipeline molecules are significantly smaller markets ranging in size from US$10m to US$170m. We capture the value of these pipeline items as an additional asset in the valuation. Page 3

4 VALUATION SUMMARY Figure 3 - Peer Valuations as at 28 June yr fwd Company EV US$m EV/EBITDA Price Earnings Perrigo 18, Mylan 27, Impax 2, Allergan 131, Lannet 1, Sagent A$m Mayne Pharma (adj) 2, SOURCE: BELL POTTER SECURITIES, MYX MULTIPLES REFLECT US GAAP ACCOUNTING RATHER THAN REPORTED EARNINGS. Since last presenting this table some months ago, the sector has experienced a significant de-rating, driven primarily by some modest quarterly results in March The key issue driving the de-rating has been deflationary pressure in generic medicines, hence earnings growth is lower across the sector. Despite the sector downgrades we continue to attribute a premium to Mayne Pharma because of its high earnings growth. We summarise the revised valuation as follows: Figure 4 - Summary valuation Low High FY17 EBITDA Multiple Subtotal Pipeline valuation Enterprise value 2, ,099.8 Less net debt Equity value 2,698 2,940 Shares on issue ,471.0 In the money options Diluted shares on issue 1, ,507.0 Price Target price 1.89 Recommendation BUY SOURCE: BELL POTTER SECURITIES ESTIMATES The capitalisation multiple in the range of 10x to 11x is a premium to market peers with the exception of Allergan, a company many times the size of MYX. Our target price represents an aggressive price earnings ratio of 19.4x FY17 adjusted EPS. Our valuation includes only a modest increase in pipeline value following this transaction, potentially understating the valuation. Net debt is the forecast debt following completion. KEY RISKS: Yet another transformational acquisition for MYX. The company has raised a total of $1bn to fund this transaction relative to its previous market cap of $1.2bn. While the execution of the highly experienced management team has to date remained virtually flawless, FY17 also contains the key risks on execution of the Doryx strategy and the not insignificant risk associated with the transfer of the assets acquired as part of this portfolio. Page 4

5 Collectively these factors provide sufficient reason to revise our price target to $1.89 (from $1.86) despite the large earnings upgrades. Page 5

6 About Mayne Pharma Mayne Pharma is a developer, manufacturer and distributor of generic pharmaceuticals. The company has a portfolio of branded and generic medicines which it distributes in many countries around the world. In 2012 it acquired Metrics Pharmaceuticals in the US for US$105m (representing 2.3x revenues and 7.5x EBITDA). This was transformational for Mayne and elevated it from a small domestic based generics and OTC medicines business, into a larger player with a more substantial product pipeline, more development capability and with direct distribution into the USA. The market for generics medicines in the US is estimated at US$76bn and growing. Mayne Pharma has four divisions being, Generic Products Division, Speciality Brands Division; Metrics Contract Services and Mayne Pharma International. The US Generic business is currently the largest revenue generator, however the Specialty Brands Division is growing fastest. Mayne specialises in lower value generics markets and has particular expertise in the development of extended release formulations. Its most successful product is the Doryx delayed release formulation which it patented. It acquired the rights for US distribution in February The company has extensive R&D facilities at its manufacturing facility in Adelaide. It spends more than $22m annually on product development and life cycle management. The company s largest manufacturing plant is also in Adelaide where it manufactures Doryx, Kapanol and other over the counter medicines. It also has manufacturing facilities in the US. A significant component of the valuation of the company depends on the development pipeline. At any time the company may have numerous generic products awaiting approval by the FDA. Mayne Pharma provides little data regarding this asset and accordingly valuation is a challenge. The potential upside from being first to market with a new generic is potentially worth millions in earnings. Valuation we continue to use a capitalised earnings approach to set the price target for Mayne Pharma. Key Risks - include but are not limited to the following: Price Deflation - The generics industry is subject to ongoing price deflation as new generic products are approved. Mayne Pharma targets molecules generally with a market of less than $100m where there are relatively few generics. Product approval and regulatory risk the industry is highly regulated. New products require extensive development time and separate approval in every country. The company s top executives are involved in the key decisions on which products to develop and the selection of markets for those products. Competition there are many market participants and drug developers globally. New product innovation may render generic medicines obsolete in a short period. I Page 6

7 Mayne Pharma as at 29 June 2016 Recommendation Buy Price $1.485 Target (12 months) $1.89 Mayne Pharma (MYX) 29 June 2016 Table 1 - Financial summary Profit & Loss (A$m) FY14 FY15 FY16e FY17e FY18e Valuation Ratios (A$m) FY14 FY15 FY16e FY17e FY18e Year Ending June Year Ending June Total revenues Reported EPS (cps) Revenue growth 70.3% -1.3% 84.3% 132.8% -4.4% Normalised EPS (cps) COGS (68.2) (61.4) (98.8) (268.2) (259.7) EPS growth (%) 96% -37% 128% 61% 1% Gross Profit PE(x) GP margin 52% 57% 62% 56% 55% EV/EBITDA (x) EBITDA EV/EBIT (x) EBITDA margin % 28.2% 25.7% 32.9% 39.9% 39.9% NTA (cps) Depreciation (4.9) (5.0) (5.2) (8.7) (5.2) P/NTA (x) Amortisation Book Value (cps) EBIT Price/Book (x) EBIT margin % 24.8% 22.2% 30.9% 38.4% 39.0% DPS (cps) Net interest (3.9) (5.9) (2.5) (8.4) 1.8 Payout ratio % 0% 0% 0% 0% 0% Pre tax profit Dividend Yield % 0% 0% 0% 0% 0% Tax expense (6.8) (7.7) (27.3) (78.6) (79.7) Franking % 0% 0% 0% 0% 0% NPAT- normalised FCF yield % -0.9% 0.4% 0.3% -0.3% 2.8% Amortisation of intangibles (4.9) (8.5) (17.0) (57.0) (61.0) Other one off items - (5.1) (2.7) - - Performance Ratios Tax on adjustments ROA 8.0% 1.4% 6.4% 5.3% 5.1% Reported NPAT ROE 13.4% 2.3% 10.5% 6.7% 6.1% Cashflow (A$m) ROIC 12.1% 5.8% 13.7% 12.0% 11.6% Net cash from operations Working capital change (1.6) (44.3) 0.3 Net debt/equity 21.8% 0.8% 4.5% 2.6% -2.8% Net interest (3.6) (3.9) (2.4) (8.4) 1.8 Net debt/assets 13.0% 0.5% 2.8% 2.0% -2.3% Tax paid (3.7) (7.6) (25.3) (73.8) (79.9) Gearing 17.9% 0.8% 4.3% 2.5% net cash One off items (0.8) Net debt/ebitda (x) Operating cash flow Interest cover (x) net cash Capital expenditure (4.2) (4.1) (49.4) (104.8) (75.0) Capitalised R&D (30.8) (13.5) (25.0) (15.0) (15.0) Revenues by segment FY14 FY15 FY16e FY17e FY18e Earn out instalments (15.0) (11.9) (17.0) (5.0) - Specialty Brands Division Free cash flow Revenues Business acquistions (0.8) (66.0) - (881.0) - Gross profit Proceeds from issuance Margin 87% 80% 75% Movement in borrowings (5.4) 17.2 (72.5) Generic Products Division Other (0.7) - (0.2) Revenues Dividends paid Gross profit Change in cash held (4.8) 42.1 (19.2) GP margin 56% 53% 59% 54% 54% Cash at beginning of period Metrics Contract Services Cash at year end Revenues Gross profit Balance Sheet (A$m) FY14 FY15 FY16e FY17e FY18e GP margin 46% 50% 52% 52% 52% Cash Mayne Pharma Int. Receivables Reveues Inventory Gross profit Other assets GP margin 51% 56% 22% 22% 22% Property, Plant and Equipment Interco (3.3) (20.8) Intangible assets , ,088.0 Total revenues Deferred tax assets Other Interim results (A$m) 2H14 1H15 2H15 1H16 2H16 Total assets Total revenues EBITDA Trade payables EBITDA margin % 31% 24% 27% 34% 32% Provision for income tax D&A (2.4) (2.5) (2.5) (2.6) (2.6) Other financial liabilities Deferred tax EBIT Provisions Net interest (1.3) (2.1) (3.8) (1.4) (1.1) Debt - interest bearing Pre tax profit Total Liabilities Tax expense (4.6) (2.7) (5.0) (13.4) (14.0) Net Assets , ,387.9 NPAT- normalised Net abnormals 0.4 (2.5) (7.9) (7.4) (5.6) Share capital , ,109.4 Reported NPAT Retained earnings Reserves Reserves Shareholders Equity , ,387.9 SOURCE: BELL POTTER SECURITIES ESTIMATES Page 7

8 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Sam Haddad John O Shea Title/Sector Head of Research Phone tslim shaddad joshea Hold: Expect total return between -5% Chris Savage csavage and 15% on a 12 month view Jonathan Snape jsnape Sell: Expect <-5% total return on a 12 month view Sam Byrnes John Hester Tanushree Jain Healthcare Healthcare/Biotech sbyrnes jhester tnjain Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Such investments may carry an Financials TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Associates Hamish Murray Tim Piper Banks/Regionals Diversified Resources Resources Associate Analyst Associate Analyst tslim lsotiriou parden dcoates hmurray tpiper exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 8