Mayne Pharma’s weak share price performance has seen it booted from a benchmark of the largest 200 stocks on the ASX alongside aged care operator Estia Health (ASX: EHE) and investment platform HUB 24 (ASX: HUB).

Additions to the ASX include Centuria Industrial REIT (ASX: CIP), Megaport (ASX: MP1), and Mesoblast (ASX: MSB).

Morningstar analyst Nicolette Quinn says she's not surprised by the move, saying there is no evidence that revenue from the company's core US generics business has stabilised, with trade down 30 per cent in the first half of fiscal 2020.

Quinn had originally forecast big losses for Mayne Pharma (ASX: MYX) in fiscal-2020, but was surprised by the extent, which exceeded expectations and caused her to cut her revenue and earnings outlook significantly.

Consequently, Morningstar's fair value estimate was reduced from 61 cents per cent 41 cents per share in February.

"We agree with the strategic shift toward specialty products and this portfolio performed according to our expectations," she says.

"However, revenue is still dominated by generics at 55 per cent contribution and despite the broader US generics market showing evidence of stabilisation, Mayne’s narrow portfolio reported sales down 29 per cent on the previous corresponding period.

"We now expect this performance to persist for the full year."

Quinn anticipates that Mayne Pharma's exclusion from the index will likely place further pressure on its share price as tracking funds exit the name. She notes that analysts could also consider dropping coverage of the stock. 

There are some positives on the horizon as Mayne enters a major licensing and distribution deal in the US and Australia with Mithra Pharmaceutical for a novel oral contraceptive. The two companies signed an exclusive long-term licence and supply agreement in May this year and Quinn expects it to hit the market in fiscal 2022.

"Our outlook for the company hinges on the successful launch of a novel oral contraceptive licensed under a deal with Mithra," Quinn says. 

"In the absence of this product, the company lacks scale and our fair value estimate would fall to approximately 25 cents per share, leading to our high uncertainty rating for the stock."

Mayne's share price has fallen heavily over the past two years due to the intense competition in the generic drugs market.

Index rebalancing adds six, dumps five

Mayne joins six other ASX listed firms who were dropped from the S&P/ASX 200 index following a volatile first half in the Australian market.

Other companies dropped from the coveted list as part of the quarterly rebalancing include lithium miner Pilbara Minerals (ASX: PLS), lottery retailer Jumbo Interactive (ASX: JIN) and fund manager Pinnacle Investment (ASX: PNI).

The S&P/ASX 200 is a free-float adjusted, market capitalisation-weighted index which represents the 200 largest Australian listed companies.

They will be replaced by Centuria Industrial REIT (ASX: CIP), litigation funder Omni Bridgeway (ASX: OBL) and pharmaceuticals firm Mesoblast (ASX: MSB), which has been in the news for its trial of a drug to treat COVID-19.

Software services firm Megaport and gold miner Perseus (ASX: PRU) will also join the list.

A company's inclusion and contribution to the index is measures by its total value – i.e. its share price multiplied by the number of tradeable shares.

The S&P/ASX 200 is one of Australia's best-known market benchmarks and covers about 80 per cent of Australian equity market capitalisation.

The new additions have been among the best performing stocks amid the COVID-inflicted market downturn and have each recovered between 32 per cent and 224 per cent of their value since the market's 23 March bottom.

Stem cell biotech Mesoblast's coronavirus treatment trials and subsequent surge in stock price helped it secure a spot in the index. The company is undertaking phase-3 clinical trials involving 300 patients to test whether remestemcel-L can help those who have severe respiratory distress due to coronavirus.

Additions, removals to the S&P/ASX 200 Index

Effective at the open on 22 June 2020S&P200

Source: Morningstar Direct, S&P Dow Jones Indicies

Share price impact

The S&P/ASX 200 index is relied upon by several index funds and exchange-traded funds including the exchange's second largest ETF - SPDR S&P/ASX 200 ETF (ASX: STW), which holds total assets of $3.7 billion – and the iShares S&P/ASX 200 ETF (ASX: IOZ), with $2.2 billion in assets. IOZ employs a full replication approach, seeking to own every stock in the benchmark.

A stocks inclusion (or exclusion) from an index can have a short-term impact on its price. ETFs who track the index will need to buy shares in companies that are added to their underlying benchmarks. For example, shares in financial services company Perpetual (ASX: PPT) surged 12.3 per cent on 11 March 2019 after it was added as a major holding in the iShares International Select Dividend ETF – a then US$4.4 billion ETF which replicates the Dow Jones EPAC Select Dividend Index.

ASX also said electronic gaming machine designer Aristocrat Leisure (ASX: ALL) would replace global plastics packaging provider Amcor (ASX: AMC) in the ASX 20 index, while A2 Milk Company (ASX: A2M) would replace wealth management giant AMP (ASX: AMP) in the ASX 50 index.

Mall owner Unibail-Rodamco-Westfield (ASX: URW) and miner Whitehaven Coal (ASX: WHC) will drop out of the ASX 100 index from 22 June, to be replaced by data centre operator NextDC (ASX: NXT) and gold miner Saracen Mineral (ASX: SAR).

The new index changes will come into effect at the open on 22 June 2020. The S&P delayed rebalancing of the ASX200 in March amid COVID-19 related market volatility.