James Faulkner on Indivior – Specialty pharma going cheap

What is it about corporations and unintelligible names? Apparently, Indivior (IND) is a combination of the words ‘individual’ and ‘endeavor’, if you hadn’t guessed it already. However, silly names aside, it’s what’s under the bonnet that counts…

Indivior started life as the pharmaceuticals division of consumer goods conglomerate Reckitt Benckiser (RB.), before being spun-out and listed on the LSE in December 2014. Reckitt justified its decision to hive off thus division by arguing that it would enable it to concentrate on consumer products such as Cillet Bang household cleaners, Strepsils cough drops and Dettol disinfectant. However, investors might be forgiven for wondering “why now?”

Indivior specialises in the treatment of opiod dependence, a field in which it has 20 years’ experience. Its flagship product, Suboxone, lost its patent exclusivity back in 2009, since which time Indivior has had to contend with generic competition. Suboxone film, which was launched in 2010 as a replacement for the tablet form, currently maintains a share of 60% in the US market for buprenorphine-based opioid dependence treatment (based on volume of prescribed milligrams), despite market entry of generic tablets and branded competitors.

In addition to Suboxone, the group also sells two ‘legacy products’ for the treatment of moderate to severe pain, but these comprise less than 4% of group revenues. In addition to extension candidates for its opioid dependence treatments, Indivior has a pipeline of new drug candidates for the treatment of alcohol dependence, cocaine intoxication, schizophrenia and opioid overdose. One candidate, RBP-7000 is currently in a pivotal Phase III study to assess its efficacy, safety and tolerability as a treatment for subjects with acute schizophrenia, and Indivior currently expects US approval in 2017. The rest of the pipeline is either in Stages I or II.

High margins, but falling sales…

Net revenues decreased from $1,339 million in 2012 to $1,216 million in 2013, and from $618 million in H1 2013 to $574 million in H1 2014, with low double-digit market growth being more than offset by loss in US market share and pricing pressure associated with branded and generic competitors. Pre-tax profit fell from $884 million in 2012 to $695 million in 2013, and from $355 million in H1 2013 to $326 million in H1 2014.

Indivior expects this “downward pressure” to continue in the near term as low double-digit growth in the opiod addiction treatment market is offset by the entry of additional generic competitors. “Accordingly, the increased pricing pressure associated with competition is likely to result in downward pressure on the Indivior Group’s net revenue in 2015, potentially continuing into 2016, before the market adjusts to the increased competitive landscape and before it begins to benefit from expected pipeline launches.”

Indivior also has a strong cash flow profile, with free cash flow (calculated as cash flows from operating activities less net cash flows from the purchase and disposal of property, plant and equipment, and intangible assets) of $788 million, $863 million and $690 million, respectively, in 2013, 2012 and 2011. This provides funding for R&D activities and should also enable attractive cash returns to shareholders. Indeed, it is the company’s intention to recommend a dividend for the 2015 financial year equivalent to 40% of net income after tax.

Room for growth…

Indivior already has an impressive track record when it comes to driving growth in the opiod treatment market. By driving increased awareness of the disease space, Indivior has encouraged an expansion in the number of physicians certified to treat opioid dependence from just over 3,600 in 2004 to over 27,000 at the end of 2013. However, there is much more to do if market penetration in the US is to move beyond the estimated 20% of the opioid-dependent population being treated with buprenorphine, in order to reduce the estimated $55 billion social bill for opiod misuse.

There is also significant scope to grow overseas. There are an estimated 10 million opioid-dependent individuals in the countries in which Indivior has a commercial presence, only 30% of whom are currently receiving treatment. Geographic expansion of the Indivior Group’s footprint to countries currently under served by existing therapies and treatment options brings a further 10 million opioid-dependent individuals within firm’s commercial reach; and expansion of Indivior’s business to the treatment of alcohol and psychostimulant (e.g. cocaine) addiction in all markets offers an opportunity to access an estimated total of 136 million potential patients.

What’s it worth?

Clearly, anyone looking to invest will have to be comfortable with the prospect of falling sales for the foreseeable future, but there is a lot of potential for upside for those willing to take a long-term view. The attitude of governments towards drug and alcohol addiction is changing in favour of treatment rather than punishment, as states struggle to get to grips with the related economic and social costs. Indivior is a clear market leader in this field, and therefore stands to gain from this shift in culture.

Although the near-term picture is clouded by uncertainty regarding the rate of decline in Suboxone sales, the fact that the firm intends to pay a significant dividend suggests that it is comfortable with its financial position and prospects for growth. For the current year to 31st December 2015, brokers are forecasting a pre-tax profit of £126 million on revenues of £598 million. At the current share price of 177p, Indivior is rated at just over 10x current year EPS forecasts, falling to 12.7x for FY16. Holders can also expect a sizeable dividend, based on the firm’s plans to pay out 40% of net income. On another metric often cited in the biotech sector, Inidivior is trading at c.2x price-to-sales for FY16.

These are attractive metrics when viewed against other ‘specialty’ pharmaceutical plays on the UK market. Shire (SHP), for example, trades on a P/E of 19x for FY15 and a price-to-sales ratio of c.6.8x.