MAYNE PHARMA GROUP LIMITED — Interim / Quarterly Report 2017

Feb 23, 2017

Friday, 24 February 2017

Manager, Company Announcements ASX Limited Level 4 20 Bridge Street SYDNEY NSW 2000

Via E-Lodgement

Dear Sir/Madam

Mayne Pharma Group Limited Interim Results

Please find attached the Appendix 4D Half Year Report, Directors’ Report, the Financial Report and Auditor’s Independent Review Report relating to the results for the half-year ended 31 December 2016.

This information should be read in conjunction with Mayne Pharma Group Limited’s 2016 Annual Report.

This announcement comprises the information required by ASX Listing Rule 4.2A and the statement required by Rule 4.2C.2.

Yours faithfully, Mayne Pharma Group Limited

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Mark Cansdale Group CFO & Company Secretary

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Appendix 4D Interim Results Half Year Report

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RESULTS FOR ANNOUNCEMENT TO THE MARKET APPENDIX 4D – HALF YEAR REPORT

		% Change	Dec 2016 $’000	Dec 2015 $’000
	Revenue from ordinary activities up	132%	294,831	127,261
	Profit from ordinary activities before income tax expense up	237%	90,811	26,986
	Profit from ordinary activities after income tax expense up	298%	71,323	17,905
	Attributable to: Equity holders of the parent Non-controlling interests up up	278% 6%	72,736 (1,413)	19,231 (1,326)
		298%	71,323	17,905
	Other comprehensive income after income tax expense		57,781	6,889
	Total comprehensive income after income tax expense		129,104	24,794
	Attributable to: Equity holders of the parent Non-controllinginterests		130,245 (1,141)	25,551 (757)
			129,104	24,794
	Net tangible assets per ordinary share		$0.051	$0.040

	2016 Cents	2015 Cents
Basic earnings per share Diluted earnings per share	5.15 5.03	2.46 2.39
Final dividend in respect of the financial year ended 30 June per share Interim dividend in respect of the period ended 31 December per share	Nil Nil	Nil Nil

No dividend has been declared in relation to the period ended 31 December 2016.

Refer to the Directors’ Report and the accompanying ASX announcement dated 24 February 2017 for a brief commentary on the results.

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MAYNE PHARMA GROUP LIMITED ABN 76 115 832 963

HALF-YEAR FINANCIAL REPORT

FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

(Prior comparable period: Half-year ended 31 December 2015)

Appendix 4D Interim Results Half Year Report

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CONTENTS

CORPORATE INFORMATION ............................................................................................................................................... 3 DIRECTORS’ REPORT .......................................................................................................................................................... 4 AUDITOR’S INDEPENDENCE DECLARATION ......................................................................................................................... 8 CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME ................................................... 9 CONSOLIDATED STATEMENT OF FINANCIAL POSITION ...................................................................................................... 10 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY ....................................................................................................... 11 CONSOLIDATED STATEMENT OF CASH FLOW .................................................................................................................... 12 NOTES TO THE FINANCIAL STATEMENTS ........................................................................................................................... 13 DIRECTORS’ DECLARATION ............................................................................................................................................... 26 AUDITOR’S INDEPENDENT REVIEW REPORT ...................................................................................................................... 27

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Appendix 4D Interim Results Half Year Report

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CORPORATE INFORMATION

DIRECTORS:	Mr Roger Corbett, AO (Chairman)
	Mr Scott Richards (Managing Director and CEO)
	Hon. Ron Best
	Ms Nancy Dolan
	Mr William (Phil) Hodges
	Mr Bruce Mathieson
	Prof Bruce Robinson, AM
	Mr Ian Scholes
COMPANY SECRETARY:	Mr Mark Cansdale
REGISTERED OFFICE	1538 Main North Road,
	Salisbury South
	South Australia 5106
PRINCIPAL PLACES OF	1538 Main North Road,
BUSINESS:	Salisbury South
	South Australia 5106
	1240 Sugg Parkway
	Greenville
	North Carolina 27834 USA
AUDITORS:	Ernst & Young
	8 Exhibition Street
	Melbourne VIC 3000
SOLICITORS:	Minter Ellison Lawyers
	Rialto Towers
	525 Collins Street
	Melbourne VIC 3000
SHARE REGISTRY:	Computershare Investor Services Pty Ltd
	Yarra Falls
	452 Johnston Street
	Abbotsford VIC 3067
	Telephone: (03) 9415 4184
	Facsimile: (03) 9473 2500
BANKER:	Westpac
	150 Collins Street
	Melbourne VIC 3000
ABN:	76 115 832 963
DOMICILE AND COUNTRY
OF INCORPORATION:	Australia
LEGAL FORM OF ENTITY:	Public company listed on the Australian Securities Exchange (MYX)

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Appendix 4D Interim Results Half Year Report

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DIRECTORS’ REPORT

The Directors of Mayne Pharma Group Limited (“the Company” or “Mayne Pharma”) submit their report for the half-year ended 31 December 2016.

DIRECTORS

The names of the Company’s Directors in office during the half-year and until the date of this report are set out below. Directors were in office for this entire period unless otherwise noted.

Mr Roger Corbett, AO, Chairman Mr Scott Richards, Managing Director and CEO The Hon Ron Best Ms Nancy Dolan (appointed 21 September 2016) Mr William (Phil) Hodges Mr Bruce Mathieson Prof Bruce Robinson, AM Mr Ian Scholes

REVIEW OF RESULTS

The Consolidated Entity’s net profit attributable to members of the Company for the half-year ended 31 December 2016 was a profit of $72,736,000 (half-year ended 31 December 2015: profit of $19,231,000).

The Company announced on 28 June 2016 that it had entered into an agreement to acquire 37 approved and 5 FDA filed products from Teva Pharmaceutical Industries Limited (“Teva”) and Allergan plc (“Allergan”). The Teva and Allergan products acquisition was completed 3 August 2016 and significantly transformed the scope and breadth of the Generic Products Division diversifying Mayne Pharma’s earnings across more products, therapeutic areas, dosage forms and complex technologies. The acquisition created new opportunities for further growth through the launch of pipeline products, expanding channels to market and optimising the supply chain through transferring products in-house or to contract manufacturing organisations.

The acquisition was funded by a fully underwritten A$601m 1-for-1.725 entitlement offer, a A$287m placement and an extension of existing debt facilities.

A more detailed analysis of the operating performance is included in the accompanying Investor Presentation dated 24 February 2017.

Operating performance

The Consolidated Entity operates in four operating segments being, Generic Products (GPD), Metrics Contract Services (MCS), Specialty Brands (SBD) and Mayne Pharma International (MPI).

Generic Products Division (GPD)

The Generic Products Division distributes generic pharmaceutical products in the United States of America (USA). Revenue increased by 399% to $222,634,000 ($44,633,000 prior comparative period or “pcp”) and gross profit increased by 377% to $125,838,000 ($26,377,000 pcp) for the period. In US dollar terms, sales were up 420% to US$167.8m driven by the acquisition of the Teva product portfolio, the launch of dofetilide in June 2016 and the strong performance of the underlying business.

Metrics Contract Services (MCS)

The Metrics Contract Services segment provides contract pharmaceutical development services to third party customers principally in the USA. Revenue increased by 20% to $28,105,000 ($23,501,000 pcp) and gross profit increased by 25% to $15,445,000 ($12,363,000 pcp) for the period. In US dollar terms, MCS’ sales were well ahead of industry growth rates with sales up 25% to US$21.2m. The growth was driven by increased repeat business from existing customers and an increase in late stage development work.

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Appendix 4D Interim Results Half Year Report

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Specialty Brands Division (SBD)

The Specialty Brands Division distributes branded pharmaceutical products in the USA. Revenue decreased by 38% to $26,829,000 ($43,372,000 pcp) and gross profit decreased by 31% to $26,141,000 ($38,128,000 pcp) for the period. In US dollar terms, SBD’s revenue was US$20.2m down 36%. The decrease in performance on pcp was driven by the entry of generic competition on the Doryx 50mg and 200mg products.

Mayne Pharma International (MPI)

The MPI operating segment’s revenues and gross profit are derived principally from the Australian manufacture and sale of branded and generic pharmaceutical products globally and the provision of contract manufacturing services to third party customers within Australia. Revenue increased by 10% to $17,263,000 ($15,755,000 pcp) and gross profit increased by 6% to $3,750,000 ($3,532,000 pcp) for the period, driven by increased sales of several products around the world.

Gross margin

Gross margin as a percentage of sales revenue was 58%, compared to 63% in the pcp. This decrease was driven by product mix with the decline in SBD sales and the increase of generic sales for Dofetilide which has a profit share arrangement and the Teva portfolio of products all contributing factors.

Expenses

Net research and development expense after qualifying capitalisation (of $10,997,000) was $5,169,000, an increase in the expense of $725,000 (16%) on the pcp. This category includes HPPI research and development expense of $1,303,000 ($1,086,000 pcp).

Marketing and distribution expense was $20,378,000, an increase of $2,505,000 (14%) on the pcp. The major increase was due to the expansion of the GPD portfolio and scaling up for the launch of the SBD foam products.

Administration and other expenses were $75,982,000, an increase of $43,758,000 (136%) on the pcp. This includes amortisation of intangible assets which was $28,815,000, an increase of $20,335,000 on the pcp largely due to the Teva products acquisition in August 2016. Increased head count and insurance costs contributed to the increase to support the expansion and growth of the business. Administration and other expenses includes legal costs (including the US Department of Justice matter) and transaction costs for the Teva/Allegan product portfolio acquisition.

Finance expenses were $5,312,000, an increase of $3,634,000 (217%) on the pcp as a result of increased borrowings supporting the Teva portfolio acquisition.

Tax

The tax expense of $19,488,000 comprised:

• Current period income tax for the six months to 31 December 2016 of $67,367,000; and

• A reduction of $47,879,000 relating to the movement in net tax deferred tax assets and liabilities.

The split between current and deferred tax has been influenced by the timing of assessable income compared to accounting income, particularly the treatment of gross to net sales adjustments and rebates in GPD and SBD.

REVIEW OF BALANCE SHEET

There were a number of significant changes to the Company’s balance sheet since 30 June 2016 with the major changes related to Teva portfolio acquisition.

At 30 June 2016, the Company recognised “Contract rights relating to the Teva transaction settled post year-end” (as an Other Current Asset) and a “Settlement obligation in relation to the Teva transaction” (as a Current Payable) as the Company had entered into an agreement to acquire 37 approved and 5 FDA filed products from Teva Pharmaceutical Industries Limited (“Teva”) and Allergan plc (“Allergan”) for cash consideration of US$652m.

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At 30 June 2016, the contract was subject to conditions which were subsequently met and settlement occurred on 3 August 2016. As a result of contract completion, the contract obligation was extinguished (by paying the cash amount due) and the Company de-recognised the Contracts rights asset and recognised the intangible assets acquired (A$866m), the inventory acquired (A$15.9m) and an amount for capital equipment (A$0.7m) acquired.

On 18 August 2016 the Company acquired a portfolio of on-market dermatology Foam Assets from GSK for A$65.3m. This amount has been recognised as intangible assets.

Total Intangible additions were $946m for the period. Currency movements added $46.7m to the value of intangible assets in AUD terms for US assets due to the AUD / USD exchange rate declining from 0.7442 at June to 0.7226 at December. Amortisation of intangible assets was $28.8m for the period.

The Company funded these acquisitions (and part of the resulting working capital investment) via an extension of its existing debt facility, and a fully underwritten equity raise of A$601m, in the form of a 1-for-1.725 accelerated non-renounceable entitlement offer and a A$287m placement.

As a result of the Teva portfolio acquisition and GPD base business growth, the Company invested approximately A$66m in additional inventory (which includes the $15.9m acquired directly as part of the Teva portfolio acquisition noted above). Additional levels of safety stock were purchased to ensure that no stock-outs occurred in the transition to Mayne Pharma distribution.

With the increased level of sales from the Teva portfolio and growth in the GPD base business, the level of trade receivables increased from $89.9m to $209.5m. The level of accrued rebates and allowances (included in Trade and Other Payables) also increased as a result of the increased sales values.

The capital works program, as previously announced, continued during the period with $6.5m of additions capitalised relating to the Salisbury site in South Australia and $41.4m of additions capitalised in relation the Greenville site in North Carolina.

REVIEW OF CASH FLOWS

A summary of the net operating cash flows is as follows –

Operating cash flows before working capital movements Less Working capital investment Net Operating cash flows	A$000’s 103,462 (170,573) (67,111)

The Teva/Allergan portfolio acquisition was the main reason for increased working capital investment. This represents the net impact of increased receivables, increased inventory and increased trade payables and accruals.

Cash on hand at 31 December 2016 (net of restricted cash held as security for letters of credit on issue) was $80,820,000, representing an increase of $33,339,000 from 30 June 2016. Notable cash flows during the period included:

• $47,886,000 in capital expenditure across the Group mainly relating to the facilities upgrades;

• $10,997,000 in capitalised development expenditure;

• Earn-out and deferred settlement payments totalling $4,481,000;

• Payment of $865,984,000 to Teva/Allergan for the acquisition of the product portfolio;

• Payment of $65,288,000 to GSK for the acquisition of the foam products;

• Payments of $4,071,000 relating to the purchase and development of other intangible assets;

• Receipt of $26,175,000 as a result of the litigation settlement (included in operating cash flows);

• Equity raised of $860,487,000 (net of equity raising costs) to fund the Teva products acquisition; and

• Proceeds from borrowings of $234,282,000 (net of fees) to partially fund the Teva and GSK asset acquisitions and the incremental working capital requirements to support these product acquisitions.

Dividend

The Directors have not declared an interim dividend in relation to the period ended 31 December 2016.

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Appendix 4D Interim Results Half Year Report

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ROUNDING

The Company is of a kind referred to in ASIC Legislative Instrument 2016/191 issued by the Australian Securities and Investments Commission, relating to the “rounding off” of amounts in this report and in the financial report. Amounts in this report and in the financial report have been rounded off in accordance with that Legislative Instrument to the nearest hundred thousand dollars or, in certain cases, to the nearest dollar.

AUDITOR’S INDEPENDENCE DECLARATION

The Auditor’s independence declaration is included on page 7 of the Financial Report.

EVENTS SUBSEQUENT TO REPORTING DATE

No other matter or circumstance has arisen since the reporting date which is not otherwise reflected in this report that significantly affected or may significantly affect the operations of the consolidated entity.

Signed in accordance with a resolution of the Directors.

Dated at Melbourne, this 24th day of February 2017.

Scott Richards Director

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Appendix 4D Interim Results Half Year Report

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AUDITOR’S INDEPENDENCE DECLARATION

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Auditor’s Independence Declaration to the Directors of Mayne Pharma Group Limited

As lead auditor for the review of Mayne Pharma Group Limited for the half-year ended 31 December 2016, I declare to the best of my knowledge and belief, there have been:

• a) no contraventions of the auditor independence requirements of the Corporations Act 2001 relation to the review; and

• b) no contraventions of any applicable code of professional conduct in relation to the review.

This declaration is in respect of Mayne Pharma Group Limited and the entities it controlled during the financial period.

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Ernst & Young

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Ashley Butler Partner Melbourne 24 February 2017

A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards

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Appendix 4D Interim Results Half Year Report

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CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

	Notes	31 December 2016 $’000 31 December 2015 $’000
	Sale of goods Services revenue License fee revenue Royalties revenue Revenue Cost of sales Gross profit Other income 3 Research and development expenses Marketing and distribution expenses Administrative and other expenses 4 Finance expenses 4 Profit before income tax Income tax expense 5 Net profit for the period Attributable to: Equity holders of the Parent Non-controlling interests Other comprehensive income for the period, net of tax Items which may be reclassified to profit/loss Unrealised gain on cash flow hedges Income tax effect Exchange differences on translation Income tax effect Items that will not be reclassified to profit or loss in future periods Exchange differences on translation Income tax effect Total comprehensive income for the period Attributable to: Equity holders of the Parent Non-controlling interests Basic earnings per share Diluted earnings per share	261,335 98,420 32,966 28,182 81 142 449 517
		294,831 127,261 (123,657) (46,861)
		171,174 80,400 26,478 2,805 (5,169) (4,444) (20,378) (17,873) (75,982) (32,224) (5,312) (1,678)
		90,811 26,986 (19,488) (9,081)
		71,323 17,905
		72,736 19,231 (1,413) (1,326)
		71,323 17,905
		3,741 - - - 53,768 6,320 - - 272 569 - -
		129,104 24,794
		130,245 25,551 (1,141) (757)
		129,104 24,794
		5.15 cents 2.46 cents 5.03 cents 2.39 cents

This statement should be read in conjunction with the accompanying notes to the financial statements.

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Appendix 4D Interim Results Half Year Report

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CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2016

Notes	31 December 2016 $’000 30 June 2016 $’000
Current assets Cash and cash equivalents 6 Trade and other receivables 7 Inventories 8 Income tax receivable Other financial assets Other current assets 9 Total current assets Non-current assets Property, plant and equipment Deferred tax assets 5 Intangible assets and goodwill 10 Total non-current assets Total assets Current liabilities Trade and other payables 11 Interest-bearing loans and borrowings 12 Income tax payable Other financial liabilities 13 Provisions Total current liabilities Non-current liabilities Interest-bearing loans and borrowings 12 Other financial liabilities 13 Deferred tax liabilities 5 Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity 14 Reserves Retained Earnings Equity attributable to equity holders of the Parent Non-controlling interests Total equity	80,820 47,481 215,028 92,117 108,851 38,943 - 7,399 5,074 3,458 16,862 887,653
	426,635 1,077,051
	142,336 84,449 82,278 31,799 1,296,692 332,483
	1,521,306 448,731
	1,947,941 1,525,782
	141,709 988,954 372 503 47,791 12,308 10,209 13,273 9,516 9,287
	209,596 1,024,325
	313,075 76,331 5,352 5,814 48,188 41,640 1,069 1,451
	367,684 125,236
	577,280 1,149,561
	1,370,661 376,221
	1,125,331 263,161 98,463 39,058 134,266 61,530
	1,358,060 363,749 12,601 12,472
	1,370,661 376,221

This statement should be read in conjunction with the accompanying notes to the financial statements.

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Appendix 4D Interim Results Half Year Report

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CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

Balance at 1 July 2016 Profit for the period Other comprehensive income Foreign exchange translation Cash flow hedge Total comprehensive income Transactions with owners in capacity as owners Shares issued (net of issue costs) Change in equity investment in subsidiary Equity contributions by non- controlling interests Share options exercised Tax effect of employee share options Share-based payments Balance at 31 December 2016 Balance at 1 July 2015 Profit for the period Other comprehensive income Foreign exchange translation Total comprehensive income Transactions with owners in capacity as owners Shares issued (net of issue costs) Share options exercised Tax effect of employee share options Share-based payments Balance at 31 December 2015	Contributed Equity Share- Based Payment Reserve $’000 $’000	Foreign Currency Translation Reserve	Cash Flow Hedge Reserve $’000	Other Reserve Retained Earnings Total Non- Controlling Interests Total Equity $’000 $’000 $000’s $000’s $’000 1,180 61,530 363,749 12,472 376,221 - 72,736 72,736 (1,413) 71,323 - - 53,768 272 54,040 - - 3,741 - 3,741
		$’000
	263,161 7,950 - - - - - -	30,792	(864) - - 3,741
		-
		53,768
		-
	- - 861,895 - - - -- - 1,785 (1,785) (1,510) - - 6,194	53,768	3,741 - - - - - -	- 72,736 130,245 (1,141) 129,104 - - 861,895 - 861,895 (2,513) - (2,513) 490 (2,023) - - - 780 780 - - - - - - - (1,510) - (1,510) - - 6,194 - 6,194
		-
		-
		-
		-
		-
		-
	1,125,331 12,359	84,560	2,877	(1,333) 134,266 1,358,060 12,601 1,370,661
	255,834 3,230 - - - -		- - -	- 24,175 310,870 11,332 322,202 - 19,231 19,231 (1,326) 17,905 - - 6,320 569 6,889
		27,631
		-
		6,320
	- - 156 - 62 (62) 2,660 - - 2,341	6,320	- - - - -	- 19,231 25,551 (757) 24,794 - - 156 - 156 - - - - - - - 2,660 - 2,660 - - 2,341 - 2,341
		-
		-
		-
		-
	258,712 5,509	33,951	-	- 43,406 341,578 10,575 352,153

This statement should be read in conjunction with the accompanying notes to the financial statements.

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Appendix 4D Interim Results Half Year Report

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CONSOLIDATED STATEMENT OF CASH FLOW

FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

CONSOLIDATED STATEMENT OF CASH FLOW FOR THE HALF-YEAR ENDED 31 DECEMBER 2016
Notes	31 December 2016 $’000 31 December 2015 $’000
Cash flows from operating activities Receipts from customers Payments to suppliers and employees Interest received Interest paid Tax paid Patent infringement settlement Payments for research and non-capitalised development expenditure Transaction and DOJ costs Net cash flows (used in) / from operating activities 6 Cash flows from investing activities Payments for plant and equipment Payments for intangible assets Payments for capitalised development costs Earn-out payments Net cash flows used in investing activities Cash flows from financing activities Proceeds from issue of shares Equity raising costs Equity contributions from non-controlling interests Repayment of borrowings Proceeds from borrowings (net of fees) Net cash flows from financing activities Net increase/(decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Effect of foreign exchange changes on cash held in foreign currencies Cash and cash equivalents at end of period 6	201,483 94,109 (259,771) (46,822) 221 253 (4,318) (1,101) (22,733) (13,137)
	(85,118) 33,302 26,175 - (4,591) (2,782) (3,577) -
	(67,111) 30,520
	(47,886) (6,603) (935,343) (5,186) (10,997) (11,447) (4,481) (17,712)
	(998,706) (40,948)
	890,252 156 (28,357) - 780 - (183) (103) 234,282 (47)
	1,096,773 6
	30,956 (10,422) 47,481 59,201 2,383 956
	80,820 49,735

This statement should be read in conjunction with the accompanying notes to the financial statements.

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Appendix 4D Interim Results Half Year Report

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NOTES TO THE FINANCIAL STATEMENTS

FOR THE HALF-YEAR ENDED 31 DECEMBER 2016

1. BASIS OF PREPARATION AND ACCOUNTING POLICIES

Basis of preparation

The financial report for the half-year ended 31 December 2016 has been prepared in accordance with AASB 134 Interim Financial Reporting and the Corporations Act 2001 .

The half-year financial report does not include all notes of the type normally included within the annual financial report and therefore cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as the annual financial report.

Under AASB 134 Interim Financial Reporting, measurement is generally made on an annual reporting period to date basis. However, it is recognised that the interim period is part of a larger annual reporting period not an independent reporting period. Accordingly, interim period income tax expense can be accrued using the estimated average annual effective income tax rate that would be applicable to expected total annual earnings.

It is recommended that the half-year financial report be read in conjunction with the annual report for the year ended 30 June 2016 and considered together with any public announcements made by Mayne Pharma Group Limited during the half-year ended 31 December 2016 in accordance with the continuous disclosure obligations of the ASX Listing Rules .

Where required, items in the June 2016 comparatives have been reclassified to reflect the current presentation and enable better comparison between periods.

The accounting policies and methods of computation are the same as those adopted in the most recent annual financial report.

Changes in accounting policy

From 1 July 2016 the Group has adopted the relevant standards and interpretations mandatory for annual reports beginning on or after 1 July 2016. Adoption of the standards and interpretations did not have any effect on the financial position or performance of the Group.

Change in functional currency

During the period, a subsidiary – Mayne Pharma LLC changed its functional currency from AUD to USD. The change of functional currency was due to the settlement of the Teva products acquisition.

New accounting standards and interpretations

The list of standards issued not yet effective includes three issued standards which are likely to have some impact on future financial reports – AASB 9 Financial Instruments (effective 1 July 2018), AASB 15 Revenue from Contracts with Customers (effective 1 July 2018) and AASB 16 Leases (effective 1 July 2019). Management has not yet completed a full assessment of the impact of these standards and are therefore unable to comment on the impact on future financial reports.

2. SEGMENT REPORTING

The Group has identified its operating segments based on the internal reports that are reviewed and used by the CEO (as the chief operating decision maker) in assessing performance and in determining the allocation of resources.

The operating segments are identified by management based on the nature of revenue flows and responsibility for those revenues. Discrete financial information about each of these operating segments is reported to the chief operating decision maker on at least a monthly basis.

The Consolidated Entity operates in four operating segments being, Generic Products Division (GPD), Metrics Contract Services (MCS), Specialty Brands Division (SBD) and Mayne Pharma International (MPI).

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Generic Products Division

The Generic Products operating segment’s revenues and gross profit are derived principally from the distribution of generic pharmaceutical products in the US.

Metrics Contract Services

The Metrics Contract Services segment’s revenue and gross profit are derived from providing contract pharmaceutical development services to third-party customers principally in the United States.

Specialty Brands Division

The Specialty Brands operating segment’s revenues and gross profit are derived principally from the distribution of branded pharmaceutical products in the US.

MPI

The MPI operating segment’s revenues and gross profit are derived principally from the Australian manufacture and sale of branded and generic pharmaceutical product globally and provision of contract manufacturing services to third party customers within Australia.

The Consolidated Entity reports the following information on the operations of its identified segments:

	Generic Products Metrics Contract Services Specialty Brands MPI $’000 $’000 $’000 $’000	Total Consolidated
		$’000
Half Year ended 31 December 2016 Sale of goods Services income License fee income Royalty income Revenue Cost of sales Gross profit Other income Amortisation of intangible assets Fair value movement in earn-out liability Other expenses (refer Statement of Profit or Loss and Other Comprehensive Income) Profit before income tax Income tax expense Net profit for the period	222,634 - 26,829 11,872 - 28,105 - 4,861 - - - 81 - - - 449
		261,335
		32,966
		81
		449
	222,634 28,105 26,829 17,263 (96,796) (12,660) (688) (13,513)	294,831
		(123,657)
	125,838 15,445 26,141 3,750	171,174
		26,478
		(28,815)
		(536)
		(77,490)
		90,811
		(19,488)
		71,323

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	Generic Products Metrics Contract Services Specialty Brands MPI $’000 $’000 $’000 $’000	Total Consolidated
		$’000
Half Year ended 31 December 2015 Sale of goods Services income License fee income Royalty income Revenue Cost of sales Gross profit Other income Amortisation of intangible assets Fair value movement in earn-out liability Other expenses (refer Statement of Profit or Loss and Other Comprehensive Income) Profit before income tax Income tax expense Net profit for the period	44,633 - 43,372 10,415 - 23,501 - 4,681 - - - 142 - - - 517
		98,420
		28,182
		142
		517
	44,633 23,501 43,372 15,755 (18,256) (11,138) (5,244) (12,223)	127,261
		(46,861)
	26,377 12,363 38,128 3,532	80,400
		2,805
		(8,480)
		4,759
		(52,498)
		26,986
		(9,081)
		17,905

Geographical segment information

eographical segment information
Revenue from external customers	31 December 2016 $’000 31 December 2015 $’000
Australia United States Korea Other Total external revenue	12,692 12,930 277,570 111,506 1,872 381 2,697 2,444
	294,831 127,261

Product information

roduct information
Revenue by product group / service	31 December 2016 $’000 31 December 2015 $’000
Contract manufacturing Analytical and formulation Oral and other pharmaceuticals Other revenue Total external revenue	4,861 4,681 28,105 23,501 261,416 98,562 449 517
	294,831 127,261

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3. OTHER INCOME

THER INCOME
	31 December 2016 $’000 31 December 2015 $’000
Interest income Patent infringement settlement Net gain on foreign exchange Other income	221 253 26,175 - - 2,462 82 90
	26,478 2,805

The Patent infringement income relates to the settlement agreement reached during the period with Forest Laboratories LLC (“Forest”) following the Company’s patent infringement lawsuit against Forest.

4. EXPENSES

XPENSES
	31 December 2016 $’000 31 December 2015 $’000
Finance expenses Interest expense Unused line fees Amortisation of borrowing costs Change in fair value attributable to the unwinding of the discounting of the earn-out liabilities Total finance expense Depreciation(1) Employee benefits expense(2) Wages and salaries Superannuation expense Share-based payments(3) Other employee benefits expense Total employee benefits expense Administration and other expenses Administration and other expenses include the following: Foreign exchange loss Settlement costs relating to a distributor dispute Transaction and DOJ related costs Share-based payments additional expense due to the rights issue(3) Amortisation of intangible assets Fair value movement in earn-out liability Movement in undiscounted fair value of earn-out liabilities	3,065 705 1,238 396 605 104 404 473
	5,312 1,678
	3,169 2,616
	39,856 29,458 1,794 1,382 6,194 2,340 4,093 4,254
	51,937 37,434
	2,123 - - 6,668 3,577 - 1,971 - 28,815 8,480 132 (5,232)

The movement in the undiscounted fair value of earn-out liabilities relates to the re-assessment of the final payment to the former shareholder of Libertas.

• Notes: 1. Depreciation expense is included in R&D expenses and cost of sales 2. Employee benefit expense is included in various expense categories and cost of sales.

• Share-based payments includes $1,971,000 expense relating to the additional expense incurred due to the change in the exercise price of employee options (9.43 cents each) due to the 1 for 1.725 rights issue to fund the Teva products acquisition in accordance with ASX Listing Rule 6.22.

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5. INCOME TAX

• (a) The major components of income tax expense are:

	31 December 2016 $’000 31 December 2015 $’000
Current income tax Current income tax Adjustment in respect of current income tax of previous years Deferred income tax Relating to movement in net tax deferred tax assets and liabilities Income tax expense in the consolidated statement of profit or loss and other comprehensive income	(68,162) (18,949) 795 - 47,879 9,868
	(19,488) (9,081)

• (b) Numerical reconciliation between aggregate tax expense recognised in the consolidated statement of profit or loss and other comprehensive income and tax expense calculated per the statutory income tax rate

	31 December 2016 $’000 31 December 2015 $’000
The prima facie tax on operating profit differs from the income tax provided in the accounts as follows: Profit before income tax Prima facie tax (expense) at 30% Effect of R&D concessions Over provision in respect of prior years Non-assessable items Non-deductible expenses for tax purposes Amortisation Share-based payments Other non-deductible expenses Effect of higher tax rate in USA US State taxes US Domestic Production Activity Deduction Tax loss of HPPI not recognised Restatement of DTA & DTL re US state tax rate changes Income tax expense	90,811 26,986
	(27,243) (8,096) 367 174 795 - 12,790 1,192 (926) (1,291) (493) (219) (1,816) (57) (2,000) 323 (2,097) (431) 2,726 - (805) (701) (786) 25
	(19,488) (9,081)

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C. Recognised deferred tax assets and liabilities

	31 December 2016 $’000 30 June 2016 $’000
Deferred tax assets Intangible assets Provisions Payables Inventory Receivables Employee share options US state taxes Earn-out liability Equity raising costs Other Reconciliation to the Statement of Financial Position Total Deferred Tax Assets Set off of Deferred Tax Liabilities Net Deferred Tax Assets1 Deferred tax liabilities Property, plant and equipment Intangible assets US State taxes Other receivables and prepayments Unrealised foreign exchange gains Other Reconciliation to the Statement of Financial Position Total Deferred Tax Liabilities Set off against Deferred Tax Assets Net Deferred Tax Liabilities2	3,911 1,883 2,509 2,542 7,141 6,624 14,613 14,497 58,768 12,320 4,453 7,296 5,561 2,789 496 496 867 1,145 1,534 55
	99,853 49,647
	99,853 49,647 (17,575) (17,848)
	82,278 31,799
	5,177 4,468 52,967 46,805 5,455 5,286 1,998 - - 663 166 2,266
	65,763 59,488
	65,763 59,488 (17,575) (17,848)
	48,188 41,640

Notes: 1. Represents Australian and US Deferred Tax Assets that cannot be offset against US Deferred Tax Liabilities.

1. Represent US Deferred Tax Liabilities that cannot be offset against Australian Deferred Tax Assets.

Deferred tax assets and deferred tax liabilities are presented based on their respective tax jurisdictions.

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6. CASH AND CASH EQUIVALENTS

(a) For the purpose of the consolidated statement of cash flows, cash and cash equivalents are comprised of the following:

	31 December 2016 $’000 30 June 2016 $’000
Cash at bank and in hand	80,820 47,481

(b) Reconciliation of net profit after income tax to net cash flow from operating activities

	31 December 2016 $’000 31 December 2015 $’000
Net profit after income tax Adjustments for: Depreciation and amortisation Share-based payments Movement in earn-out liabilities Asset impairments Net unrealised foreign exchange differences Changes in tax balances: (Increase) in deferred tax assets Decrease in current and deferred tax liabilities Operating cash flows before working capital movements Changes in working capital: (Increase in receivables (Increase) in inventories (Increase) in other assets Increase in creditors (Decrease) in provisions Total working capital movements Net cash flow (used in) / from operating activities	71,323 17,905 32,592 11,153 6,194 2,340 536 (4,759) - 1,137 (3,938) (1,402) (49,512) (12,073) 46,267 8,055
	103,462 22,356
	(115,377) (33,152) (65,696) (5,215) (5,535) (2,790) 16,362 49,384 (327) (62)
	(170,573) 8,164
	(67,111) 30,520

7. TRADE AND OTHER RECEIVABLES

		31 December	30 June
		2016	2016
		$’000	$’000
	Trade receivables (net of charge-backs)	209,472	89,895
	Trade receivables – profit share	1,066	1,670
	Provision for impairment	(24)	(23)
	Other receivables	4,514	575
		215,028	92,117

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8. INVENTORIES

	31 December 2016 $’000 30 June 2016 $’000
Raw materials and stores at cost Work in progress at cost Finished goods at lower of cost and net realisable value	28,268 11,301 11,754 11,525 68,829 16,117
	108,851 38,943

9. OTHER ASSETS

	31 December 2016 $’000 30 June 2016 $’000
Prepayments Contract rights relating to the Teva transaction settled post year-end	16,862 11,509 - 876,144
	16,862 887,653

10. INTANGIBLE ASSETS AND GOODWILL

	Goodwill Customer Contracts, Customer Relationships Product Rights & Intellectual Property $’000 $’000	Development Expenditure $’000	Marketing & Distribution Rights Trade Names Total $’000 $’000 $’000
Six months ended 31 December 2016 Balance at beginning of the period net of accumulated amortisation Additions Amortisation Exchange differences Balance at end of period net of accumulated amortisation As at 31 December 2016 Cost Accumulated amortisation Accumulated impairments Net carrying amount	60,115 85,312 - 934,393 - (23,262) 1,782 41,534	72,048 10,997 (1,282) 2,056	57,402 57,606 332,483 950 - 946,340 (1,056) (3,215) (28,815) 1,195 117 46,684
	61,897 1,037,977	83,819	58,491 54,508 1,296,692
	61,897 1,098,133 - (60,156) - -	90,412 (3,397) (3,196)	61,840 69,007 1,381,289 (3,349) (14,444) (81,346) - (55) (3,251)
	61,897 1,037,977	83,819	58,491 54,508 1,296,692

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11. TRADE AND OTHER PAYABLES

	31 December 2016 $’000 30 June 2016 $’000
Trade payables Accruals and rebates Other payables Settlement obligation in relation to the Teva transaction	72,730 64,050 61,665 39,859 7,314 8,901 - 876,144
	141,709 988,954

12. INTEREST-BEARING LOANS AND BORROWINGS

	31 December 2016 $’000 30 June 2016 $’000
Current Lease liabilities	372 503
	372 503
	31 December 2016 $’000 30 June 2016 $’000
Non-current Syndicated loan Borrowing costs (net of amortisation) Lease liabilities	318,291 76,999 (5,344) (836) 128 168
	313,075 76,331

Syndicated loan

The syndicated loan facility was restated and amended in July 2016. The loan facility is now supported by nine individual banks. The loan facility limit was increased to US$400m with working capital facilities of A$10m and U$20m also available. The loan facility can be drawn down in either USD or AUD with USD expected to be the major currency drawn down. The amount drawn at 31 December 2016 was U$230m.

The facility is unsecured and incurs interest based on either LIBOR (for USD) with no floor, or BBSY (for AUD) plus an agreed fixed margin. The loan is subject to certain covenants and has an unused line fee payable based on the undrawn amount.

The Group is in compliance with the covenants at reporting date. The Directors believe there is no risk of default at reporting date.

At 31 December 2016, the variable interest rate was 2.98% (2015: 1.94%). During the period, the Group entered into additional interest rate swap contracts to hedge the interest rate risk exposure with 48% of the outstanding loan amount hedged at 31 December 2016 (30 June 2016: 41%). The interest rate risk is managed using interest rate swaps in which the Group agrees to exchange, at specific intervals, the difference between fixed and variable rate interest amounts calculated by reference to an agreed-upon notional principal amount.

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13. OTHER FINANCIAL LIABILITIES

	31 December 2016 $’000 30 June 2016 $’000
Current Earn-out liability – Libertas’ former shareholder Earn-out liability – Oxycodone Earn-out liability – Liothyronine Earn-out liability – various other products/distribution rights Deferred consideration - Liothyronine	- 1,343 4,832 5,230 2,020 3,252 1,281 1,432 2,076 2,016
	10,209 13,273
	31 December 2016 $’000 30 June 2016 $’000
Non-current Earn-out liability – Liothyronine Earn-out liability – various products/distribution rights Deferred consideration – Liothyronine	650 1,314 2,773 2,829 1,929 1,671
	5,352 5,814

Earn-out liabilities represent the net present value of estimated future payments. Any changes in fair value in the net present value of estimated future payments are recognised in the statement of profit or loss. The earn-out liabilities at reporting date include a charge representing the unwinding of the discounting of the earn-out liabilities of $404,000 (31/12/15: $473,000) for the period representing the change in fair value as a result of the unwinding of the discounting.

The value of the earn-outs has been determined based on expected future cash flows required to be paid for the balance of the earn-out period.

14. CONTRIBUTED EQUITY

(a) Issued capital

	31 December 2016 $’000 30 June 2016 $’000
Ordinary shares, fully paid	1,125,331 263,161

(b) Movements in share capital

	31 December 2016 Number $’000
Balance at beginning of period Teva products acquisition funding1 Exercise of employee options Tax effect of employee share options Shares issued to employees under the LTI non-recourse loan funded arrangement (subject to risk of forfeiture) LTI shares exercised (and loan repaid) Balance at end of period	810,046,346 263,161 661,048,634 860,487 6,671,000 3,067 - (1,510) 21,164,820 - - 126
	1,498,930,800 1,125,331

Notes: 1. Shares issued are net of $28,357,000 equity raising costs.

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15. DIVIDENDS

The Board has decided to preserve the Company’s capital and no interim dividend has been declared.

16. COMMITMENTS AND CONTINGENCIES

There were no material changes in commitments.

Mayne Pharma is one of numerous generic pharmaceutical companies to receive a subpoena from the Antitrust Division of the US Department of Justice (“DOJ”) in the past few years seeking information relating to the marketing, pricing and sales of select generic products. Mayne Pharma has also received a subpoena from the Office of the Attorney General in the State of Connecticut seeking similar information. These investigations are ongoing. Civil complaints have been filed in the past few months by a number of US states and purchasers alleging anticompetitive conduct in the doxycycline hyclate delayed-release market. External counsel has been engaged and the Directors’ current assessment remains that these investigations will not have a material impact on Mayne Pharma’s future earnings.

17. FINANCIAL INSTRUMENTS

Set out below is an overview of financial instruments, other than cash and short term deposits, held by the Group as at 31 December 2016:

	$’000
Financial assets Current Warrants Derivatives designated as hedges Financial liabilities Current Earn-out liabilities Non-current Earn-out liabilities Syndicated loan
	900
	2,877
	3,777
	10,209
	10,209
	5,352
	312,947
	318,299

Trade and other receivables, trade and other payables, other financial assets and other liabilities are considered short term and their fair values approximates the carrying values.

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Fair Value

Set out below is a comparison by class of the carrying amounts and fair value of the Group’s financial instruments that are carried in the financial statements.

hat are carried in the financial statements.
	Carrying	Amount	Fair Value
	31 Dec 2016	30 June 2016	31 Dec 2016	30 June 2016
	$’000	$’000	$’000	$’000
Assets
Warrants (options) - HPPI	900	2,918	900	2,918
Market to market valuation – interest rate
swaps	2,877	-	2,877	-
Liabilities
Earn-out liability - Libertas’ former shareholder	-	1,343	-	1,343
Earn-out liability – Oxycodone	4,832	5,230	4,832	5,230
Earn-out liability – various products	6,724	8,826	6,724	8,826
Market to market valuation – interest rate
swaps	-	864	-	864
Interest-bearingsyndicated loan	312,947	76,163	318,291	76,999

Warrants, as at reporting date, represent options to purchase an additional 23,504,236 shares (30 June 2016 71,957,138) in HPPI at an exercise price of 12.0 US cents per share. As at 30 June 2016 the warrants available had various exercise prices – 8.78 US cents, 7.5 US cents and 12 US cents per share. During the period, the Company exercised 10,250,569 warrants at 8.78 US cents each, 33,333,333 warrants at 7.5 US cents each and 4,860,000 warrants at 12 US cents each.

Interest rate swaps represent the Mark to Market value of open contracts at reporting date.

The earn-out liabilities payable utilise present value calculation techniques that are not based on observable market data. The key inputs are forecast sales. Based on current data and normal market variations, no reasonable possible change in inputs is expected to have a material impact on earn-out liabilities.

Fair values of the Group’s interest-bearing borrowings and loans are determined by using the DCF method using the discount rates applying at the end of the reporting period. The own non-performance risk at reporting date was assessed as insignificant.

Fair value hierarchy

The Group uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

• Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

• Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.

• Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

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Assets and liabilities measured at fair value

As at 31 December 2016, the Group held the following financial instruments carried at fair value in the Statement of Financial Position:

	Level 2		Level 3
	31 December	30 June	31 December	30 June
	2016	2016	2016	2016
	$’000	$’000	$’000	$’000
Financial Assets
Warrants (options) - HPPI	-	-	900	2,918
Market to market valuation – interest rate
swaps	2,877	-	-	-
Financial Liabilities
Earn-out liability - Libertas’ former
shareholder	-	-	-	1,343
Earn-out liability – Oxycodone	-	-	4,832	5,230
Earn-out liability – various products	-	-	6,724	8,826
Market to market valuation – interest rate
swaps	-	864	-	-

Reconciliation of fair value measurements of Level 3 financial instruments

The Group carries earn-out liability classified as Level 3 within the fair value hierarchy.

A reconciliation of the beginning and closing balances including movements is summarised below:

	2016 Warrants $’000 2016 Earn-outs $’000
Opening balance Fair value movement Warrants exercised Currency fluctuations Payments Closing Balance	2,918 15,400
	- 336
	(2,018) -
	- 301
	- (4,481)
	900 11,556

During the six-month period ended 31 December 2016, there were no transfers between Level 1 and Level 2 fair value measurements. The fair value increase of $336,000 was recorded in determining profit before tax.

18. EVENTS SUBSEQUENT TO REPORTING DATE

No other matter or circumstance has arisen since the reporting date which is not otherwise reflected in this report that significantly affected or may significantly affect the operations of the consolidated entity.

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DIRECTORS’ DECLARATION

In accordance with a resolution of the directors of Mayne Pharma Group Limited, I state that:

In the opinion of the directors:

• (a) the financial statements and notes of the consolidated entity are in accordance with the Corporations Act 2001 , including:

• (i) giving a true and fair view of the financial position as at 31 December 2016 and the performance for the halfyear ended on that date of the consolidated entity; and

• (ii) complying with Accounting Standard AASB 134 Interim Financial Reporting and Corporations Regulations 2001;

• (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

On behalf of the Board

Scott Richards Director

Melbourne, 24 February 2017

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AUDITOR’S INDEPENDENT REVIEW REPORT

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To the members of Mayne Pharma Group Limited

Report on the Half-Year Financial Report

We have reviewed the accompanying half-year financial report of Mayne Pharma Group Limited, which comprises the consolidated statement of financial position as at 31 December 2016, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the half-year ended on that date, notes comprising a summary of significant accounting policies and other explanatory information, and the directors’ declaration of the consolidated entity comprising the company and the entities it controlled at the halfyear end or from time to time during the half-year.

Directors’ Responsibility for the Half-Year Financial Report

The directors of the company are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal controls as the directors determine are necessary to enable the preparation of the half-year financial report that is free from material misstatement, whether due to fraud or error.

Auditor’s Responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity , in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including: giving a true and fair view of the consolidated entity’s financial position as at 31 December 2016 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 . As the auditor of Mayne Pharma Group Limited and the entities it controlled during the half-year, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001 . We have given to the directors of the company a written Auditor’s Independence Declaration, a copy of which is included in the Directors’ Report.

A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation

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Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Mayne Pharma Group Limited is not in accordance with the Corporations Act 2001, including:

• a) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2016 and of its performance for the half-year ended on that date; and

• b) complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

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Ernst & Young

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Ashley Butler Partner Melbourne 24 February 2017

A member firm of Ernst & Young Global Limited Liability limited by a scheme approved under Professional Standards Legislation

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