In the past few weeks, two ASX Healthcare stocks released news of funding efforts. On 19 March sleep apnea developer Somnomed Limited (SOM) announced a retail capital raise to raise $4.5 million upon completion on 22 March. Coupled with an institutional offer, the company expects to raise $10.4 million for operating capital. One day later diversified Medical Development International (MVP) announced the successful completion of a private institutional placement. The initial reaction to the news was positive, although far from overwhelming.
Healthcare stocks in general stand to benefit from the massive tailwinds spurred by baby boomer retirements. Of special interest to many investors are the pharmaceutical/biotechnology/life sciences sub-sectors. With those stocks the holy grail of news announcements are rulings from the US FDA (Food and Drug Administration), given the gargantuan size of the market there. In the last two weeks, two ASX companies released FDA-related news. CSL Limited (CSL) received approval on 15 March. On 20 March Mayne Pharma Group Limited (MYX) announced the FDA accepted the company’s ANDA (Abbreviated New Drug Application) filing for its generic contraceptive device NuvaRing®. Despite the differences between approval to market and acceptance of a drug filing, the share price of MYX got a bigger boost than that of CSL.
To shed some light on the discrepancy in market reaction to a news release with definite impact on fundamentals and one with possible impact, let’s examine the two companies.
The following table includes price and performance history along with forecasts where applicable for all the healthcare stocks in the news over the last week.
CSL has long been recognised as one of the top stocks on the ASX. The company operates in all three of healthcare’s hottest sub-sectors – pharmaceuticals, biotechnology, and life sciences. Best known for its blood plasma work, the company website lists multiple other areas of focus, including coagulation disorders, primary immune deficiencies, hereditary angioedema, inherited respiratory disease, neurological disorders, cardiac surgery, organ transplantation, burn treatment, and hemolytic disease of the newborn.
The latest product to successfully complete Phase III clinical trials and receive FDA approval for release to the market is Hizentra®, a treatment for an autoimmune deficiency known as CIDP (Chronic Inflammatory Demyelinating Polyneuropathy.)
CIDP impacts peripheral nerves outside the spinal cord and brain leading to muscle weakness, fatigue, numbing. The prognosis is not good as deteriorating conditions lead to drastically reduced activity levels, with about 30% of affected patients ending up in wheelchairs if the disorder remains untreated.
The disease is rare and difficult to diagnose but some estimate “the prevalence of CIDP is estimated to be around 5-7 cases per 100,000 individuals.”
As yet there is no information about the revenue impact of this newly approved treatment, but it should be noted it is the only treatment of its kind currently available.In the past few months CSL has soared to new all-time highs and exceeded analyst price targets. Cautious investors who heeded analyst warnings about the excessive valuations and bought on the dips have been handsomely rewarded. Over ten years the average annual rate of total shareholder return has been +18.1%; with 24.4% over five years; 22.8% over three years; and 34% year over year.
Mayne Pharma (MYX), like CSL, derives substantial revenue from the US, benefiting from the lowering AUD. The company has a long history of developing and distributing branded and generic pharmaceuticals in Australia and globally. It was the company’s entrance into the lucrative US generic drug market that grabbed the attention of the investment community. A July of 2016 article in the Australian Financial Review dubbed the company a market darling because of the company’s acquisition of a portfolio of 42 generic drugs from Teva Pharmaceuticals. The company had been on a tear, making eight acquisitions prior to the Teva acquisition. The article’s author listed what turned out to be a prescient concern, commenting on increasing scrutiny of US regulators on the exorbitant pricing of pharmaceutical companies in that country.
Attacks on “Big Pharma” from then candidate Donald Trump escalated the pressure and Mayne’s stock price began to fall. A Bloomberg article from June of 2017 referred to the US generic drug market as “in chaos”, with new threats of cheaper prices from a string of family-owned companies in India. Pricing wars have been slashing the profits of US manufacturers, with Mayne surprisingly avoiding some of the initial pain. Revenues and profit both more than doubled between FY 2016 and FY 2017. However, revenues fell short of expectations and the stock closing price was down about 10% upon release of the results. Mayne shareholders had been watching in alarm prior to the release on the seemingly never-ending dire news on plunging generic pricing in the US and a price-fixing lawsuit filed by 20 US states against six generic manufacturers, with Mayne among them.
The pain appeared in full force with the Half Year 2018 results where revenue fell 17% and the company posted a staggering loss of $174.2 million dollars.
However, despite the chaotic and competitive market in the US, on 1 December a research note from UBS reiterated its BUY rating on Mayne, although lowering the price target from $1.55 to $1.03. For value investors the company is cheap, although still risky. The P/E is 15.74, well below the average sector P/E of 21.46 and the Price to Book is 1.04, as of the most recent Quarter.
The NuvaRing® FDA ruling is positive news, launching the company on a path for a product launch in the first half of 2019. A few weeks prior to the NuvaRing® announcement Mayne announced the launch of two new generic products in the US – a generic alternative to the ADHD (attention deficit hyperactivity disorder) drug Ritalin LA®; and a generic alternative to Monodox®, an antibacterial treatment of several infections, including adjunctive therapy in severe acne.
With a three-month average trading volume of 74 thousand shares, Medical Developments International (MVP) appears to be well below the radar screen of most retail investors. The recent capital raise from select institutional investors suggests perhaps retail investors should take notice. The raise followed a road show presentation to 48 financial institutions in Europe, Asia, and Australia. The company’s historical performance adds to that argument. Over ten years the average annual rate of total shareholder return for MVP is a stellar +43%; with equally stellar returns of +33.1% over 5 years and +49.1% over three years.
The stock price is up 3000% over ten years.
Medical Developments operates in three sectors – pharmaceuticals; medical devices; and veterinary products. The company’s principal pharma offering is Penthrox®, a prescription inhaler for acute pain; hand-held for self-administration by the patient. Penthrox® recently received regulatory approval for distribution in Iceland, Slovakia, Latvia, Estonia, Austria, and Denmark. In total, the device has been approved in 26 European countries along with the United Arab Emirates, Taiwan and Mexico.
Medical devices focuses on asthma and COPD (chronic obstructive pulmonary disease) with the company’s Breath-A-Tech line, including the Asthma Space Chamber, a device designed as a delivery device for both Asthma and COPD medications. The company recently signed an agreement with Walgreens, the second largest retail pharmacy chain in the US, for initial distribution of its Compact Anti-Static Space Chamber to 2,000 Walgreens stores. The company’s existing deal with the smaller US Meijer’s Pharmacy chain propelled the Walgreen’s deal. Medical Device management highlighted the company’s “world class respiratory system device product range and significant price and reimbursement advantage over competitor products in the USA as reasons for confidence in the growth of its US business.” In addition, investors are eagerly awaiting approval of Penthrox® in the US.
Finally, the company makes and distributes a range of anaesthetic machines, vaporizers, and breathing monitors to the veterinary market in Australia, Europe, and the US.
Somnomed Limited (SOM) is a global company offering simple solutions for Obstructive Sleep Apnea (OSA). As opposed to machine devices, Somnomed devices are oral appliances designed to provide Continuous Open Airway Therapy (COAT). The company offers three versions of its principal product – Somnodent – an oral device consisting of two dental plates, resembling a mouth guard. Somnomed also offers Somnobrux in three versions for treating pain stemming from continuous teeth grinding; and SomnoSnore for treating snoring.
The company is adopting a consumer direct distribution system via its Renew Sleep Solutions(RSS) Centres, where consumer direct marketing will attract potential clients. Services at the centres are “turnkey”, beginning with sleep diagnosis, insurance applications and processing, device fitting, and patient follow-up. Seven centres opened in the US in 2016/17.
The company’s Full Year Financial Results were decidedly mixed, with revenues increasing to $49.3 million, but the company posted a loss of $3.3 million. However, management guidance was brimming with confidence, forecasting revenue growth of 60%; EBITDA (Earnings before interest, taxes, depreciation, and Amortisation) to rise from a -$1.7 million to +$5 million; and continued expansion of the RSS network.