Indivior has a clear roadmap for achieving $1 billion of revenues from Sublocade and $300 million from Perseris
Thursday 26 May 2022 Author: Martin Gamble

In a rough start to 2022 for markets one stock which has bucked the general trend is pharmaceutical company Indivior (INDV), whose shares are up 30% year-to-date.



In this article we uncover the reasons for recent share price strength and argue that strong earnings momentum can continue to drive the shares higher irrespective of general market weakness.

A ROLLERCOASTER RIDE

Indivior is a global leader in medical assisted treatments for drug addiction and it listed on the UK market in 2014 after being spun-out from consumer goods giant Reckitt Benckiser (RKT).

Drug misuse is a big problem and in the US alone afflicts more than 10 million patients.

Over the last two years the shares have risen six-fold to 303p driven by persistent earnings upgrades and fast sales growth from its opioid drug treatment Sublocade which launched in 2018.

This only tells half the story for Indivior, however. Prior to the recent strong run the shares lost 92% of their value between May 2018 and April 2020.

We will explain why the shares fell so precipitously shortly, but before doing so, it is worth reflecting on the mathematics of a steep fall in a share price.

The steeper the drop the bigger the gain needed to get back to parity. For Indivior shareholders this means a 1,186% gain is needed to recover the 92% prior drop in the shares.

Therefore, despite such a huge gain, the shares remain around 40% below their peak.

WHY THE SHARES FELL

When the company listed its leading opioid product Suboxone had a few years of patent protection left and enjoyed high market share. The product achieved peak US revenues of $1.7 billion.

To extend the protection Indivior moved patients onto a new patented film version of the drug which it claimed was safer.

Ultimately, the patents were invalidated, and new generic versions entered the market in 2018. Several litigation actions followed.

A US Department of Justice (DOJ) probe into the company’s marketing of Soboxone ended after former CEO Shaun Thaxter pleaded guilty to his role in the cover-up.

The company settled with the DOJ in July 2020 after agreeing to pay $600 million in damages over the following seven years.

Former owner Reckitt Benckiser had previously shelled-out $1.4 billion, one of the largest settlements in pharma history to end multiple federal probes, relating to issues arising before the demerger.

Current chief executive Mark Crossley has been with the company since 2012 and took over from Thaxter in 2020.

PHOENIX RISES FROM THE ASHES

In 2018 Indivior launched a new opioid treatment Sublocade for moderate to severe opioid use disorder (OUD).

Sublocade is the only long-acting treatment for OUD which delivers a measured and controlled amount of the drug. This keeps patients on an even keel and prevents the ‘highs’ and ‘lows’ associated with drug abuse. Injections are made monthly and can only be delivered by certified healthcare professionals.

Sublocade generated $12 million of sales when it launched in 2018 and in 2022 it is expected to achieve sales of $385 million according to analysts at Numis. This represents just under 3% market share in the US.

In the first quarter of 2022 Sublocade’s sales doubled year-on-year to $85 million. Management’s medium-term goal is to reach $1 billion of revenues which would still only represent a small market share.

A combination of strong growth from Sublocade and resilient sales of Suboxone (which are not marketed) seems to have caught analysts off-guard.

In April 2021 they were forecasting net profit of $55 million but the actual outturn was almost four times higher at $205 million.

One of the challenges has been estimating declining legacy Suboxone sales which act as a drag on new sales growth from Sublocade. In 2022 sales of Sublocade are expected to overtake the slowing but resilient sales of Suboxone.

Numis is forecasting Suboxone sales to drop from $328 million in 2021 to $176 million in 2023.

INCREASING DIVERSIFICATION

Indivior has developed a treatment for schizophrenia called Perseris which has been shown to reduce symptoms in adults.

Sales efforts are expected to ramp up in 2022 with the deployment of an extended national   sales team.

Perseris generated sales of $5 million in the first quarter, up 67% year-on-year.

Indivior is building a pipeline of drugs to address other stimulants with associated addiction issues such as cannabis and alcohol.

Markets outside the US are also sources of growth opportunity for Indivior. Outside of the US Sublocade is marketed as Subutex and sales doubled in the first quarter to $6 million.

STRONG FINANCIALS

Indivior has a strong balance sheet with net cash of $776 million and it recently announced a $100 million share repurchase program.

The high cash balance more than covers known future liabilities. As part of the DOJ settlement the company must pay $50 million a year until 2027 then a final payment of $200 million, totalling $500 million. The company already paid $103 million in November 2020.

Management have indicated they may complement organic growth with acquisitions. Often shareholders can get carried away with a growth company’s potential which means the shares run ahead of the fundamentals of revenue, earnings and cash flow.

That doesn’t appear to be the case with Indivior because of its legal issues. In fact, the fundamentals of the business have more than kept pace with the rising share price.

In May 2020 the shares traded at 47p and based on forecast earnings at the time the price to earnings (PE) ratio was 25 times.

Today, the shares are 303p and the forward PE is 16.4 times.

We think that looks attractive, as long as you are prepared to live with the lingering litigation risk, given the sales momentum in Sublocade and Perseris, the high margins achieved (gross margins around 80%) and international expansion potential.

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