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Edited Transcript of MYX.AX earnings conference call or presentation 23-Aug-19 12:00am GMT

Full Year 2019 Mayne Pharma Group Ltd Earnings Presentation

Sep 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Mayne Pharma Group Ltd earnings conference call or presentation Friday, August 23, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Nick Freeman

Mayne Pharma Group Limited - Group CFO & Company Secretary

* Scott Anthony Richards

Mayne Pharma Group Limited - MD, CEO & Executive Director

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Conference Call Participants

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* David Bailey

Macquarie Research - Research Analyst

* Gretel Janu

Crédit Suisse AG, Research Division - Research Analyst

* John Deakin-Bell

Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand

* John Hester

Bell Potter Securities Limited, Research Division - Senior Healthcare Equities Analyst

* Saul Hadassin

UBS Investment Bank, Research Division - Executive Director & Research Analyst

* Shane A. Storey

Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst

* Simon Conn

Investors Mutual Limited - Senior Portfolio Manager

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Presentation

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Operator [1]

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Good day, everyone, and welcome to the Mayne Pharma Group Limited Fiscal Year 2019 Full Year Results Call. Today's call is being recorded.

At this time, I would like to turn the conference over to Scott Richards. Please go ahead, sir.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [2]

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Good morning, everybody. Thank you for joining us today to discuss Mayne Pharma's 2019 full year financial results.

I'm joined on the call today by Nick Freeman, our Group CFO. And what I'd like to do this morning is give you a brief overview on the results and the operational highlights, including an update on our strategy to rebalance our portfolio towards more sustainable cash and profit flows in our chosen therapeutic areas and distribution channels. I'll then give you an update on segment performance. Nick will provide some additional details in our financial results, and then I will open the call for questions.

Turning to the actual results. Revenue was $525 million, down 1% on the prior corresponding period. Reported gross profit was $290 million, up 13% on pcp. Reported EBITDA was $112 million, down 4% on pcp. Underlying EBITDA was $131 million, down 20% on pcp. And at the bottom line we reported a net loss of $280 million, which was impacted by an intangible asset impairment of $352 million. And operating cash flow was $107 million, down 12% on pcp.

We achieved double-digit revenue growth in 3 of our segments, with Specialty Brands more than doubling its sales and gross profit. GPD, our generics business, was impacted by competitive pressure on key products such as dofetilide and liothyronine, as I outlined in the recent May trading update. Whilst reported gross profit was up strongly, EBITDA was impacted by greater investment in brand R&D, which is generally not capitalized under accounting standards, as well as further investments we made in commercial infrastructure to support our Specialty Brands business. In January last year, we doubled the dermatology sales team. And this year, we added a new hospital-based field team to market our new antifungal brand Tolsura. These investments are expected to deliver further earnings growth in our Specialty Brands segment in fiscal '20 and beyond.

As we indicated in the recent trading update, we completed the review of our intangible assets, taking into account current projected market dynamics, which led to an impairment of our generic assets. This impairment resets the balance sheet and is expected to improve reported profit and earnings per share in future periods. It is also in line with many of our U.S. generic peers who have undertaken sizable asset impairments in recent times. Our balance sheet remains robust, with our debt leverage around 2x, which is significantly less than many of our U.S. peers.

In terms of the operational highlights this year, we launched 2 new specialty brand products in the U.S.: Tolsura, the antifungal capsules, which is a patent-protected formulation of itraconazole incorporating our proprietary SUBA technology to improve the bioavailability of poorly soluble drugs; and also LEXETTE or halobetasol foam, used to treat moderate to severe plaque psoriasis. LEXETTE is an ultra potent steroid and is the cornerstone of treatment for psoriasis patients and is highly complementary to our dermatology portfolio and specifically our Sorilux brand.

We also launched 5 generic products, including generic Efudex, another dermatology product used to treat actinic keratoses, as well as fentanyl buccal tablet, which was the first generic to launch against Fentora.

Metrics Contract Services added 3 new commercial clients, who are expected to launch products manufactured at our Greenville site over the next 12 months. One of these clients received Japanese approval in June, which was our first international drug approval, with Greenville qualified as the manufacturing site. As part of the regulatory approval process, Greenville was successfully audited by the Japanese regulatory authorities for the first time.

While the U.S. generic market has faced a challenging few years due to competitive pressures, we've undertaken a number of actions this year to better align our business and refocus on sustainable channels in core therapeutic categories such as Dermatology, Women's Health and Infectious Disease. As Slide 5 in the presentation shows, we are making good progress with our strategy to pivot the business to more durable earnings streams. Our Dermatology, Women's Health, Contract Services and MPI businesses now represent 55% of our sales. And they grew 19% on the prior corresponding period.

Turning to dermatology. We have a scalable commercial platform with a national field team that allows us to add additional products with limited incremental operating expenditure. We've also developed strong relationships with our customer base, which has led to a higher proportion of our sales in dermatology moving through alternate distribution channels. During fiscal '19, we added 4 products to the dermatology platform. LEXETTE and generic Efudex were acquired and launched in the first half. And we in-licensed 2 approved dermatology products from a partner wanting to leverage our established channel infrastructure, namely generic Locoid Cream to treat atopic dermatitis; and generic Cordran ointment, a corticosteroid used to treat a variety of skin conditions. Both of these products are due to launch in fiscal '20.

Turning to Women's Health. We have an extensive portfolio of more than 20 oral brand and generic contraceptives and a pipeline of 3 further contraceptives, including a generic to NuvaRing, the largest contraceptive product sold in the U.S., which is pending at the FDA. To date and despite NuvaRing losing patent protection more than a year ago, no generics have been approved to date. We are working closely with our partner Mithra to bring our product to market. Based on our progress, I believe Mayne will be close to the forefront of this significant generic opportunity when it emerges in calendar 2020.

During fiscal '19, we established a small-scale direct sales team in the U.S. to market these Women's Health products to obstetricians and gynecologists. We plan to continue to add to this infrastructure in fiscal '20 based on the growth opportunities we see. Our Women's Health portfolio performed well in fiscal '19, benefiting from reduced stock obsolescence and better net pricing for some products. Going forward, the company expects to further optimize this portfolio through realizing significant cost savings from product transfers to new contract manufacturers, together with broadening our channels to market, as we have done successful in dermatology. Our branded and generic dermatology and Women's Health franchises -- or across our branded and generic and Women's Health franchises, we continue to have meaningful discussions with a number of parties around potential product collaborations, product in-licensing and acquisitions to leverage the front-end commercial platform we have built.

Turning to our Metrics Contract Services business. This business unit has enjoyed steady growth for many years now and participates in a highly attractive market that has been growing at single to mid-single-digit rates, driven by the increase in outsourcing of development and manufacturing activity by big pharma and the growing number of small molecules progressing through clinical development. Pleasingly, small molecule approvals trends remained solid, with 34 new chemical entities approved by the FDA in 2017 and 42 approvals in 2018.

Metrics is one of the few U.S.-based solid -- potent solid oral dose CDMOs that has a single site that can handle early-stage development work through to commercialization. Its client base includes around 100 active customers, and it supports 7 of the top 15 global pharma companies. Metrics' ability to attract a high-quality client base is largely due to its scientific and technical capability at Greenville focused on highly potent drugs and oral drug delivery technology. In fiscal '20, we expect to expand our workforce and add around 20 formulators and chemists to support our growing pipeline of committed business.

I will now turn to a quick update on segment performance. Turning to the Specialty Brands Division, which promotes our specialty products such as Fabior, Sorilux and Doryx and the recently launched LEXETTE and Tolsura. SBD sales were up 105% to $92 million, and gross profit was up 113% to $80 million. All products contributed to the growth, with Fabior up 54%, Sorilux up 26% and the Doryx family up 150%. Two foam products benefited from expansion of the dermatology sales team last year, and the strong growth of Doryx reflects the elimination of abnormal one-off Doryx returns in the prior period and favorable sales mix within the Doryx family of products. LEXETTE also performed well following its launch in February, capturing around 700 scripts per week in the final quarter of fiscal '19.

Whilst marketing and distribution costs for Specialty Brands have increased by USD 6 million or 18% year-on-year, this segment earnings, after operating expenses, are growing at a significantly faster rate than costs, highlighting the leverage we are now getting from this division. We expect this trend to continue over fiscal '20.

Tolsura, which launched in the second half of fiscal '19, has begun to get some wins with key hospital formularies. This includes the largest hospital network in terms of itraconazole usage in the United States. Tolsura is under active review by 24 major hospital networks, and many of these accounts are expected to list Tolsura over the remainder of this calendar year. Gaining formulary access is a key step in the process to capture new patients. We are very confident that Tolsura will be a strong product for the company in fiscal '20 and beyond. We see the immediate addressable market for this product at around USD 300 million, and we are forecasting that the business will capture at least 25% volume market share of this addressable market by the end of fiscal '22.

Moving to Metrics Contract Services. Sales were up 14% to $72 million, and gross profit was up 6%. This result was somewhat subdued, as we worked through integrating our new manufacturing footprint into Greenville. With those challenges now firmly behind us, Metrics is beginning to benefit from the facility expansion at Greenville which came online just over 12 months ago. This expansion has helped Metrics win more late-stage development work as well as build a solid pipeline of commercial manufacturing leads. Metrics now has 4 commercial clients from just 1 in the prior period and has a number of clients with products in late-stage development or pending approval at regulatory agencies around the world. Specifically, a dozen products are in Phase III development and 4 products have been submitted to various regulatory agencies, including the U.S. FDA. The pipeline of commercial manufacturing leads remains very solid, which should be a key growth driver going forward.

Moving to GPD, our generics division. Sales were down 17% on the prior corresponding period to $321 million, and gross profit was down 7% to $165 million. Dofetilide was impacted by new competition, with sales down more than 80%, driven by market share loss, pricing pressure and shelf stock adjustments. Liothyronine was also impacted in the second half by new competition, with sales down 42% versus the first half. The generic gross profit margin improved, though, versus the prior period due to favorable product sales mix and reduced stock obsolescence.

As mentioned in the May trading update, our generics business had also incurred a number of one-off charges in the second half of fiscal '19, such as abnormal failure-to-supply penalties from products supplied by third-party manufacturers; and shelf stock adjustments from pricing changes, which we expect to be more normalized across this fiscal year. This, together with enhanced operating efficiency and significantly greater manufacturing output, will materially improve overhead recovery benefits and the financial performance at Greenville. As noted on Slide 15 of the presentation, we have lifted batch output at Greenville by approximately 50% over the last 12 months. And across fiscal '19 and projected for fiscal '20, we expect more than 20 product transfers into the site, further enhancing performance.

Finally, Mayne Pharma International captures our sales outside the U.S. Revenue was up 10%, and gross profit was up 25%. The stronger performance reflects the growth in Kapanol and SUBA-itraconazole, as well as new contract services income and milestone payments from the out-licensing of key specialty brand products globally.

With that, I'll now hand over to Nick, who will go into further details about the results.

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Nick Freeman, Mayne Pharma Group Limited - Group CFO & Company Secretary [3]

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Thanks, Scott. And good morning, everyone on the phone.

I'll now provide a quick overview of the financials for the year, starting with total revenues, which were $525 million, down 1% or $5 million on last year. The second half performance was softer than the first half, with sales down 9% versus the first half, largely driven by dofetilide and liothyronine which faced additional competition this half as we outlined in our May trading update. At the gross profit line, performance was up 13% or $33 million on last year. Gross profit benefited from growth in Specialty Brands and reduced levels of stock obsolescence in GPD or generics and Doryx returns in SBD this year which had impacted the prior period.

In terms of exchange, the average exchange rate weakened. And Aussie dollars weakened from $0.7753 in FY '18 to $0.7153 in the current year. This had a positive impact of around $38 million at the sales line and $10 million at the EBITDA line. This impact does not include the revaluation of the company's U.S. balance sheet, which goes through the foreign currency translation reserve, which was positive $53 million. The balance date exchange rate declined from $0.7407 to $0.7022. And with 90% of our assets and revenue in U.S. dollars, a strengthening U.S. dollar or a weakening Aussie dollar is positive to earnings and net asset values.

Moving on to expenses. Gross R&D spend, including both capitalized and expense amounts, was $50.3 million, up $2 million from last year. Net R&D expense was up $29 million, which was 85% increase from last year, and the capitalization rate reduced significantly from 68% to 43%. The type of R&D spend has changed significantly this year and driven that reduced capitalization rate, as the company is now spending more R&D on specialty brand programs which did not meet the tests for capitalization.

As foreshadowed in the May trading update, the company has undertaken a detailed review of its intangibles and recognized a $352 million asset impairment, which has driven a net loss after tax. As Scott mentioned, these impairments relate to the generic business and were driven by the revised outlook, which in turn is driven by the increased competition and continued price pressure experienced over in the U.S. generic market. As part of this impairment, we also impaired $38 million of specific generic pipeline assets that relate to nonviable projects largely due to the changed market conditions. One point worth noting is that, while we've made a number of impairments of pipeline assets over the last 2 years, we've also made about $250 million in generic gross profit from internal generic programs over the last 6 years versus around $100 million invested. This is detailed in Slide 25 of the investor presentation, and a full disclosure of the impairment has been made in Note 14 to the accounts.

Marketing and distribution costs were up $14 million and respect -- reflect the expansion of our U.S. dermatology sales team in January last year as well as the new hospital-based field team to market Tolsura which came online this year, and also there was the impact of exchange rates.

Admin and other expenses grew $26 million to $172 million, but this includes a number of noncash and nonoperating items. Note 6 to the accounts provides a detailed disclosure in these areas. Key items include an $8 million noncash fair value restatement of the HPPI warrants and $5 million of noncash revaluation of earnout repayments. The admin expense also includes amortization, which increased $9 million to $79 million from the prior year. Following the impairment we made this year, we expect future amortization to decline by around $19 million at constant exchange rates. Excluding those and the amount in the note called other admin expenses, there was an increase of $11 million. This was impacted by currency; some unabsorbed building costs in bringing the Greenville facility online last year, which we expect to be absorbed in F '20; as well as $2 million in additional leading -- legal expenses, which include the patent litigation for Doryx MPC which was settled this half.

Total finance expenses remained steady. However, there is a bit going on in this number because of the renegotiation of the syndicated facility in December, movement of some borrowings into Aussie dollars and changes in LIBOR and BBSW. In cash terms, net interest paid has remained steady over the last 3 halves, with the exception of the first half in '19 where it was lower as there was a one-off gain on some interest rate swaps that were closed out after the syndicated facility was renegotiated. We extended our debt facilities in December and introduced a new $50 million nonrecourse receivables finance facility at the same time. Both of these provide greater operating flexibility with improved margins which were around 35 basis point reduction. In terms of tax, we reduced $21 million in tax refunds this year relating to overpayments in prior years. And going forward, we expect our effective tax rate to remain between 25% and 30%.

Operating cash flow was an inflow of $107 million, which was down 12% on pcp. This was a good result considering one of our major customers extended their payment terms from 60 to 90 days which had a negative $44 million impact on operating cash flow in the first half. In terms of investing cash flows, CapEx dropped by $42 million to $12 million, as we've now completed the strategic investments in Greenville and Salisbury. There were $49 million in acquisitions for the products of LEXETTE and generic Efudex and $22 million for capitalized R&D.

Despite these investing cash flows of $92 million, net debt was down $6 million over the year or $23 million on a constant currency basis. We had cash balances of $89 million, and debt outstanding was $369 million. Our bank debt-calculated gearing ratio is 2.0x on a net debt-to-EBITDA basis, which was slightly lower than at 30 June 2018, and we will -- we remain well within our covenant positions.

And with that, I'll hand back to Scott.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [4]

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Thanks, Nick. The U.S. market remains extremely dynamic with ongoing consolidation across the sector at all levels, restructuring by manufacturers, vertical mergers of drugstore chains, PBMs and insurers, together with potential regulatory and legislative changes. This dynamic environment is creating many opportunities and partnerships. New pharmacy distribution channels are also evolving, and innovative digital technology providers are entering the market. Our key strategic priorities are to grow our on-market portfolio through improved sales force effectiveness; expand our channels to market to find more cost-effective ways of getting our products to patients, optimizing our supply network and improving our product costs; and broadening our pipeline through internal product development, in-licensing and acquisition and, of course, launching new products that provide real value to patients and prescribers.

In terms of outlook, the company expects fiscal '20 to be stronger, driven largely by the specialty brand launches of Tolsura and LEXETTE; growth of our generic and branded dermatology and Women's Health portfolios; and growth of Metrics Contract Services, benefiting from a larger pool of chemists and formulators as well as the growing pipeline of commercial manufacturing contracts. The company is targeting 8 new generic product launches by the end of calendar '20, of which 2 are already approved. The addressable market for this cohort of products is USD 1.4 billion. As mentioned, various initiatives at the company's manufacturing sites in Greenville and Salisbury are expected to drive greater operational efficiencies and improved financial performance across fiscal '20. The company also expects to further optimize its cost base through reducing operating expenses via more controlled spending, together with realizing significant cost savings from product transfers in-house or to new contract manufacturers.

The company will continue to reposition the business towards specialty branded products, contract services and sustainable generic portfolios and channels to produce more durable earnings streams with less volatility to, of course, maximize long-term returns to shareholders.

And with that, I'll now hand back to the operator, and we can take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first, we'll go to Gretel Janu with Crédit Suisse.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [2]

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Firstly, just on Sorilux. It seems to have slowed in second half and particularly even since the trading update in May, so what's the reason for this? And do we expect any return to stronger growth levels in FY '20?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [3]

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Yes, thanks, Gretel. Look, I think Sorilux has had some challenges for 2 reasons: one, our focus on LEXETTE through this period, which has grown significantly, but also due to other launches in the psoriasis space, namely from Ortho Derm which has come to the market with BRYHALI and DUOBRII.

Having said all of that, we think Sorilux has a -- we've still got great conviction about a place in therapy for Sorilux as a steroid-sparing agent. And we're going to continue to invest in the promotion of the product and potentially in further clinical trials to extend our ability to talk about the combination benefits of LEXETTE and Sorilux together. But look, it is a challenging market and bringing Sorilux back to growth from its recent choppiness is a priority for the company.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [4]

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Okay. And then just on the generic business, so apart from liothyronine and dofetilide. So can you give us any color around the competitive environment for the other key products? So do you expect to be impacted by further competition in the next 12 months from any of the other products there?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [5]

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Well, look, I mean the crystal ball is who knows? I mean obviously this is an evolving market. I mean we've still got a very good cluster of products that have inherent barriers to entry. I can't tell you exactly when further competition will come on various products. I mean clearly, given how dofetilide and liothyronine have come off from their highs, there is less opportunity, I suppose, relative to our past, for further significant erosion. But having said that, if further competition comes, we will see further step-down in prices and pricing pressure.

But we've got over 60 generic product families, and the vast majority of them are quite stable. And we are taking price in certain areas where there's been market disruption. We've seen that on some of our oral contraceptives that I talked about earlier, and we've seen it on some of our nonhormonal products as well. And we'll continue to do that as we see further disruption in this market. So I think the tale of the tape over the next year is going to be really the balance between those 2 factors, competitive disruption and our ability to take advantage of it, which we've done well in the past, offset by further emerging competition that could come. But I don't have any line of sight on it right now. The portfolio as of today is quite stable from a competitor change standpoint, but of course, 12 months is a long time in the generic industry.

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Gretel Janu, Crédit Suisse AG, Research Division - Research Analyst [6]

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Yes, so -- but just to confirm, there's no other, like, FDA approvals from competitor products that could cause greater competition for you guys at this point in time?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [7]

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I think nothing that I see right now on materially significant products in our portfolio.

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Operator [8]

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(Operator Instructions) Next, we'll go to Saul Hadassin from UBS.

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Saul Hadassin, UBS Investment Bank, Research Division - Executive Director & Research Analyst [9]

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Scott, Nick, can I just start with a question on the impairment of the development expenditures, the pipeline expenditure or pipeline products, the $38 million? 1H '19, I think the value of the pipeline that hadn't been filed was around $2 billion, with $3 billion filed products with the FDA. I'm just wondering, of that impairment, are you able to like sort of quantify the theoretical target market that may no longer be applicable? How much did that $2 billion -- by how much is that $2 billion impacted by this impairment, if at all?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [10]

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Yes. Maybe -- I mean it's a good question. Maybe one way I can answer it with what I said earlier on the call on projecting 8 new product approvals in the -- out of our pipeline, generic pipeline, over the course of the next 15 to 18 months, with an addressable market of USD 1.4 billion. So maybe that comment might help you with that. And of course, we can talk to you in more specific terms about that over the course of the next few days.

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Saul Hadassin, UBS Investment Bank, Research Division - Executive Director & Research Analyst [11]

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Okay. And then can I just ask about the generics division? Either Scott or Nick. Just looking at the sort of puts and takes to the COGS line at a group level, I'm just cognizant that there was an uplift in inventory write-off for the year but also the fact there's a pretty material reversal of the inventory provision for obsolescence. And so as we look at the gross margin for that division, particularly second half gross margin -- and I'm aware there's been pricing competition on liothyronine, et cetera. And there's been a lot of pressure, but just the gross margin in the second half of that division was about 44% on our numbers, and I'm just wondering. Is that a reasonable run rate, do you think, into FY '20? Or is the expectation that you might actually see some improvement in that gross margin on the back of better revenue performance? Just some guidance or color there would be great.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [12]

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Yes. Look. So firstly, we do expect better margin ratios for our generic business in fiscal '20 versus the experience of the second half of '19. And that's mainly driven by, yes, product mix, but it's also driven by some of the things that depressed margin to 44% in the second half, which I think I talked about on the trading update as well in May around stock obsolescence, shelf stock adjustments. And we did have some significant failure-to-supply penalties through that period that are now behind us. Our service levels have come back to very robust levels. And those issues were mainly driven by third-party manufacturing issues. And so we're in a much better position today in terms of our safety stocks and inventory levels and things like that. So I mean, in short, this is a business that's been generally achieving margins at 50% or above, and I have no reason to think we can't be back in that place in across this financial year for the reasons I've said.

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Saul Hadassin, UBS Investment Bank, Research Division - Executive Director & Research Analyst [13]

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And then last one for me, just looking at the halobetasol script trends since July 1 this calendar year. We've seen sort of script volumes around 400 versus the average 700 that you did in the second half of fiscal '19. Any commentary there, Scott, on what might be happening? Is that just a -- is that a timing or a seasonal issue? What's happening with that product?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [14]

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Yes -- no. Look, I mean, our total script count is north of 700. In fact, a week ago -- 2 weeks ago, we had our second highest level of scripts since the launch of LEXETTE. And I think the issue is you're probably seeing a mix of scripts recorded as LEXETTE the brand or halobetasol foam because, when we initially launched this product, it was launched under the generic name for reasons we couldn't avoid and then we subsequently launched the product under the name LEXETTE. It's the same product. So I think, if you look at that in combination, you will see that this product has maintained a strong prescription performance, and we expect that to continue. It certainly hasn't dropped to 400 scripts. Let me put it that way.

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Operator [15]

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And next, we will go to Shane Storey from Wilsons.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [16]

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Scott, I might return to the competitive environment in generics, if you don't mind. Because at the first half you did foreshadow some potential market share opportunities developing for that business in certain categories, that they might be material enough to mitigate some share losses also across the portfolio. I was just interested to know whether your view of the land now is -- I mean, are those opportunities still available to the business over the next 12 months, would you say?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [17]

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Yes, those opportunities are still available, for sure. I don't have -- the business doesn't have full line of sight in terms of exactly when and to what extent those incremental opportunities will be on 1 or 2 products. And we should know a lot more by the time we get to the end of this quarter. I mean I'd love to be more specific and -- but I can't be. And on one product in particular, there's a -- it's a very fluid situation in terms of how that market will be serviced. And it's a complex product. And frankly, Shane, we're on the cusp of a few dominoes sort of falling, and when they fall, I'm hoping that they're going to fall in the right way for Mayne Pharma. We're certainly doing everything we can to take advantage of the situation we see in front of us.

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Shane A. Storey, Wilsons Advisory and Stockbroking Limited, Research Division - Senior Analyst [18]

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I think I can read through the tea leaves there. The second question I have, though, is just wondering about the -- just picturing the moving parts in specialty sales growth this year. And specifically I'm sort of interested in any trends that you're seeing with the Doryx family? And then, secondly, just any observations around the pricing outcomes that you're seeing with Fabior you're having out of some pretty decent script growth.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [19]

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Yes, Fabior is going very well. Certainly, of the 2 products we acquired from GSK, Fabior and Sorilux, it's certainly the darling of the pack right now. And look, I expect to see further growth from Fabior.

And there is nothing really going on, on the pricing front with Fabior. I mean, as I think you've either heard from us or I'm sure read, the ability to take significant price increases in the U.S. specialty branded market these days is -- has been curtailed significantly in the current managed care environment. And so whilst there is some opportunity [from] price optimization [in these] markets. It's somewhat modest relative to the past, but there's certainly no price depression. And so I'm expecting script -- good script growth on Fabior going forward.

And as far as the Doryx family goes, whilst the headline script data that I think is in the presentation will show a decline and we've actually -- as I said in my earlier comments, one of the reasons we've seen strength in Doryx, other than some year-on-year abnormals coming out on returns, has also been the mix across our franchise. The profitability per prescription across our various members of the Doryx family is quite different. And to put it in simple terms, through some excellent execution, we've been able to shift a greater proportion of our Doryx business into SKUs where profitability is much more favorable, and that's been a benefit to the overall family. And I don't expect to see that sort of pop in Doryx, going forward, that we've seen in the last 12 months. But I do think it's going to remain a very significant contributor to Specialty Brands and an important contributor.

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Operator [20]

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And next, we'll go to David Bailey from Macquarie.

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David Bailey, Macquarie Research - Research Analyst [21]

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Scott, Nick, just from me, just interested in the commentary around keeping operating expenses flat in FY '20 in constant currency terms. I'm just wondering if you can talk to how you're hoping to achieve that in a bit of detail. That'll be great.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [22]

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Well, I think I've said actually we're looking to reduce operating expenses. And I don't want to put a -- too high a bar on this, but I mean clearly the company has invested a lot of money, David, over the last couple of years, particularly on our branded side of our business and manufacturing capacity and all of that sort of stuff, and chemists and formulators and contracts services and the rest of it. So it's a more complex, bigger business now from that perspective. But clearly given we've got one of our divisions that -- our generic divisions that is obviously continuing to be under some earnings pressure, we have to look at that growth. And we have to look at our expenses both in terms of what's happening within our business units, what's happening in our manufacturing facilities and what's happening in R&D, and what's happening in, I suppose, corporate overhead to get fit for purpose. So management is working very hard across the board, not just me and Nick, the entire executive team to make sure that we're very focused on cost management just in a very basic way. But also getting the efficiencies in some of the optimization initiatives, the product transfers I talked about. So it's above-the-margin line and below-the-margin line cost improvements over the course of next year or 2. And I think there's a fair bit to go after here. I'm not going to give you a number, but I think there's a lot to go after here and across all of those dimensions. That is going to help mitigate or risk-balance obviously some of the uncontrollable elements that we still face in that business around obviously principally generic industry dynamics.

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David Bailey, Macquarie Research - Research Analyst [23]

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Okay. I got that. Just -- and then just maybe in terms of on the pipeline. I mean, as you say, I appreciate there's a lot of moving parts, but in terms of some of those pipeline launches you're expecting for this year, do you think that's enough to offset some of the pressure you're seeing for some of the more important generic products such that you might start to see a bit of normalization in the pipeline?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [24]

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Yes, look, I think there's a reasonable chance of that, David. I mean I'd love to be -- I'd love to give you something a little bit punchier than that comment. I mean I think it would be hard for any CEO in the U.S. generic market to look out 12 months and look at the balance of cost savings, new launches, price optimization, additional competition and look at that blend and say, we're going to be flat or growing or declining.

I mean I think overall we have a reasonable chance of having a relatively stable generic business in fiscal '20, but we're going to have to be nimble. We're going to have to continue to look to -- I mentioned earlier on the call we've just done a partnership with another company that -- on 2 generic dermatology assets that are going to be accretive to our earnings base this year. I've got a bunch of other things like that in the hopper because there's plenty of folks out there that are interested in leveraging what we're doing in the dermatology space in the generic sense because they're getting smashed in the retail market. So we're offering a more, if you like, stable incremental solution for them that obviously mitigates their exposure to the more uncontrollable retail market. So if I overlay some of those things, there certainly is an outlook that suggests this business, this generic business, will be more stable, but as I think you said, it's a very dynamic situation and there's a lot of moving parts.

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David Bailey, Macquarie Research - Research Analyst [25]

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Yes. Okay. And then just in relation to the generics portfolio again, in terms of those write-downs, is that done, as far as you can tell now for the next 12 months? And have you had a pretty good look at where things sit and you think that, that's --there won't be anything else that we can sort of foresee at the moment in relation to further write-downs?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [26]

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Yes. Well, look, the -- I mean we don't impair. I mean we haven't done this -- I mean this is a very serious, obviously, exercise we've been through. We don't take this lightly. We obviously have now had 2 years to look at what's happening in this market, to look at the sustainability of the behavior of the buy side. We've been able to observe trends over time. We've been able to observe what's happening with our competitors. And because of all of that, I think our forward forecasts here that are underlying this impairment charge in our generic business, I think, are robust. I mean I can't guarantee that there wouldn't be further impairments, but as I sit here now, I think we've taken our medicine, for want of a better term. And I'm confident that we've got a carrying value for this business that's appropriate, not just for the market today, but for what we see in the future.

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David Bailey, Macquarie Research - Research Analyst [27]

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Okay. And then if I can just sneak one more quick one in just in relation to Doryx, just any impacts from Seysara since its launch earlier this year [that explain parts of -- partial reasons] for some of the slowing volume trends that we can observe.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [28]

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Yes. Look, Seysara has had some impact. I mean we watch Seysara very carefully. I -- our view of Seysara is that, just like any new launch in the space, it's -- it certainly captures share of voice. The company that's marketing Seysara is obviously trying to do everything they can. They've paid a lot of money for this asset.

It's worth noting that their growth has slowed considerably, and we feel very good about the position of Doryx here. In fact, we're seeing Doryx begin to turn in some of our key areas. So look, I'm confident Doryx is going to weather the Seysara storm, if you like. And this is not a highly differentiated product. It's a new tetracycline, yes, but I mean I don't think it's a product that's going to materially disrupt Doryx going forward.

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Operator [29]

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And next, we will go to John Deakin-Bell from Citi.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [30]

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I just had a couple of questions to try and understand what was happening in the generics side a bit more. Maybe Nick can help me, but in that Slide 5 you've got the gross profit. So the generic sales fell $65 million, but the gross profit fell $13 million. The gross margin on the decline or the sales that you've lost is only 20%. And then on Slide 19, you're saying that most of the sales -- the decline was in dofetilide. Is that -- am I reading that correct? Is that exactly what's happening, that dofetilide's margins were that low?

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Nick Freeman, Mayne Pharma Group Limited - Group CFO & Company Secretary [31]

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Yes -- no. Look, the exchange is -- this is Slide 5, is in Aussie dollars, and obviously the exchange had the strong beneficial impact going the other way. So if you go to Slide 19 and sort of have a look in the U.S. dollar area. So I think sort of this all was back, where generic margins have dropped, 57% to 44%. And that's really probably the best metric to look at. And the drop in those is, as Scott has alluded to, the shift in the sales mix, with dofetilide and lio being the key kind of ones, which were positive in the first half and they've come off. And to a degree, some of the sales have been replaced by lower-margin sales in the second half. Plus we've got those failure to supply, shelf stock adjustments, et cetera, that we called out in the May trading update.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [32]

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Understood. And I think previously you've talked about Women's Health being maybe 25% of the -- on the generic portfolio. Is that still -- and it's probably a little bit more now, given the decline in some of the other products? Is that right?

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Nick Freeman, Mayne Pharma Group Limited - Group CFO & Company Secretary [33]

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Yes, that's about right, yes. That's about right.

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John Deakin-Bell, Citigroup Inc, Research Division - Director & Head of Healthcare in Australia and New Zealand [34]

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It's because I note -- right. And I haven't had time to go through, so apologies, but on Page 49 of your Annual Report, where you go through that [note in end] and go through the write-downs, I see that you -- it doesn't look like you've written down any of the carrying value of the Women's Health. All of the write-down is in the other. Is that -- am I reading that correctly?

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Nick Freeman, Mayne Pharma Group Limited - Group CFO & Company Secretary [35]

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Yes, you're reading that exactly correctly. The Women's Health actually has had an improvement over the last year or so. So yes, you are reading correctly.

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Operator [36]

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And next, we will go to John Hester from Bell Potter.

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John Hester, Bell Potter Securities Limited, Research Division - Senior Healthcare Equities Analyst [37]

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I just want to come back to your comments on Tolsura and its prospective growth. So 24 networks in the U.S. reviewing this product. You've quoted an addressable market of $300 million, and you expect to get 25% of that by 2022. Doing the math sort of puts that at around a USD 66 million product within 3 years.

So can you just maybe talk about that a little further? And in particular what you expect to see from that in this current fiscal FY '20? And so yes, if you could address that one, please.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [38]

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Yes, sure, John. I mean I'm not going to give you an exact number for fiscal '20. And I mean clearly the product is in its launch phase still because of the nature of the hospital or institutional market and the fact that you need to get listed on these formularies first. And I mean I can tell you that we haven't had one example yet of a hospital formulary not being encouraged or excited about the potential of Tolsura on their formulary. In fact, as I said earlier, we've already won, and this was last month, the listing of Tolsura at the biggest single hospital network in the United States. It represents 10% of the market for itraconazole in the systemic market. So that was a great first win. So -- and we've got obviously a lot to come, not of that concentration, though.

So look, I expect to see -- in fiscal '20, I expect to see a bit of a tale of 2 halves. I mean the expectation is this product will start contributing meaningfully into calendar '20, into the second half of this financial year. And if it does and it exits the way that I hope it will based on these formulary wins and patient [directives that I think --], then I think we're on a trajectory that is -- yes. I think we're on a trajectory that's very consistent with the headline comments around 25% of a $300 million addressable market.

I mean, exactly how that trajectory will play out, we will have to wait and see. It could be faster. It might be a bit slower, but the next 6 months will be critical to giving, I suppose, a better prognosis of that.

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John Hester, Bell Potter Securities Limited, Research Division - Senior Healthcare Equities Analyst [39]

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Just a follow-up question. It's got a couple of indications. That estimate around $300 million, is that assuming reasonably significant off-label and -- use as well? Or is that just the need for the indications you've got currently?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [40]

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No, it's not.

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John Hester, Bell Potter Securities Limited, Research Division - Senior Healthcare Equities Analyst [41]

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Okay. Okay...

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [42]

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It's for the indications we...

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John Hester, Bell Potter Securities Limited, Research Division - Senior Healthcare Equities Analyst [43]

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And so is there any expectation of broad off-label use for this product? I mean it's got -- certainly got plenty of potential.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [44]

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Well, obviously it's hard for me to comment on that. I mean there clearly is off-label use of various drugs in various markets. We can't promote to that, John, as you know. So we'll just have to wait, clearly.

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John Hester, Bell Potter Securities Limited, Research Division - Senior Healthcare Equities Analyst [45]

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Just have a follow-up question on the NuvaRing product as well. It's reasonably well known that, around about 12 months ago, your European partner developer had a complete response letter from the FDA. Have they completed the responses to that now? And otherwise, what other update can you tell us about the NuvaRing generic?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [46]

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Yes. So look. I mean it's, I mean, the time frame for us is consistent with what I said, I think, for the first time this time last year, which is that we've received a complete response letter. We're working through that with our partner very, very closely. That work is still in process and it's on track. Nothing's changed. And we expect to respond later this calendar year. So obviously we're in late August now, so it's not far away. And it is -- and it still remains a calendar year '20 launch opportunity.

The other interesting thing, of course, is there's a lot of information out there from some of our competitors around the status of their programs. And you may have read with interest that there have been some delays that some of our competitors have also suffered. And they're probably dealing with some of the issues that we're dealing with that the FDA have put up in front of us. So that's why I made the comment earlier that I think Mayne Pharma is going to be close to the mark. We'll have to wait and see, but certainly I feel better about our order entry position into this market today than I did even 3 months ago, let alone 6 months ago.

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Operator [47]

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(Operator Instructions) We'll take our next question from Simon Conn from Investors Mutual.

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Simon Conn, Investors Mutual Limited - Senior Portfolio Manager [48]

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Scott, quick question. Can you just -- given you're -- I think you're still on the board of the Generics council in the U.S. Can you just talk to the political and regulatory environment in the U.S. in response to the investigative journalist piece that was published in that book, Bottle of Lies? Because obviously it's a hot topic in the U.S., in the unlevel playing field that U.S. companies play versus developing country manufacturers. I mean theft of IP is obviously the issue, but can you just talk in terms of what the regulatory and political response has been in light of the allegations made in that book and how you're being [that effective on the cupboard of] people who don't play by the same rules as U.S. manufacturers?

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [49]

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Yes. And well, look, the Generic industry association in the U.S. that I'm on the board of -- and probably 50% or more of its membership are Generic companies that are based in the subcontinent. So -- but they have significant U.S. forward operations, so that makes very interesting discussion vis a vis that book which has got a lot of press and coverage.

The regulatory response, the FDA has been quite silent, to date, around this. It's rooted in the issue of the degree of oversight that FDA gives from a compliance standpoint, good manufacturing practice standpoint, to domestic U.S. manufacturers versus foreign manufacturers; and the fact there is not a level playing field, i.e., U.S. manufacturers are under far more scrutiny and pressure than foreign manufacturers, albeit probably 50% of all generic medicines that are consumed in the U.S. today are coming from outside of the U.S. So therein lies the political dimension.

There is some -- there is growing political pressure on this topic. Certainly, Trump's agenda around supporting domestic manufacturing also plays into this, and to that extent, Mayne Pharma is well positioned given the investments we've made in Greenville. So look, we'll just have to wait and see. I mean, at the end of the day, it'd be fair to say that the conundrum here is that such a vast significant percentage of pills sold in the U.S. today are coming from India and other jurisdictions, that doing anything dramatic around that supply chain would result in drug shortages. So there's a balance between, if you like, regulatory action and obviously the pragmatic side of drug shortages and the like. So I don't think we've seen the end of this. I think we're pretty well positioned for it at a very macro level because of our -- where we make product. So we'll just have to wait and see.

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Simon Conn, Investors Mutual Limited - Senior Portfolio Manager [50]

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All right. And just a follow-up question then. Scott, just in terms of your portfolio of businesses, if we're thinking of [fall] prices and whether their current mix is correct. Or if -- is this something you think could be more valuable to someone else? Or if this current structure makes sense with the 3 businesses together.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [51]

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Yes, sure. Well, I mean, clearly I'd like to have -- I don't -- we haven't fallen out of love with the generic business. I mean I think, at the end of the day, the generic industry in the U.S. has been a spectacularly successful segment, notwithstanding obviously some of the recent challenges that the manufacturers are facing.

And of course, the degree of our exposure to the generic business is still too high. It's obviously moving in the right direction. I'd like it to move faster. So there's only 2 ways of doing that really. One is to do something structurally with your generic business, if you like. And the other way is to supercharge or transform your other growth businesses. And obviously outside of our generic business, I think we're well positioned for growth everywhere else. And we're well positioned for inorganic growth in these other areas, provided we see the synergies on specific transactions and provided, of course, we have a suitable mechanism to transact and fund them, given our current context.

I mean one thing is for sure. As I said earlier, this market is -- there's a lot of disruption out there at the product level, at the enterprise level, and there's a lot of opportunity as a result. You've just got to be careful about what moves you make. And one thing I'm not going to do even despite obviously some of the pressure in our generic business, we're not panicking. We're not going to throw ourselves at something to maybe go from the frying pan and into the fire. We've got to be disciplined around that, and we continue to look at everything and even more than look. And so nothing's changed.

I mean the dermatology business, the Women's Health business, the contract services businesses are in good shape. Tolsura is going to be in good shape. And leveraging those assets, leveraging that infrastructure, leveraging what we've done at Greenville organically and inorganically is our core focus, together with obviously doing everything we can through new product launches, cost savings and the like and cost optimization to stabilize the generic business through that journey.

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Operator [52]

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And at this time, we have no further questions. I'd like to turn it back to Scott Richards for closing remarks.

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Scott Anthony Richards, Mayne Pharma Group Limited - MD, CEO & Executive Director [53]

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Okay. Thanks, everybody. And I'm sure I'll see some of you over the course of the next few days. Have a good day. Bye-bye.

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Operator [54]

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And that concludes our call for today. Thank you for your participation. You may now disconnect.