Stock Brief - Indivior (LON:INDV)

Indivior is a pioneer in helping patients overcome substance addiction. It is healthily cash generative and profitable on an underlying basis, is buying back stock, and has decades of expertise and a strong market position in its niche.

The group’s two new products, Sublocade and Perseris, have a combined revenue potential of $1.3bn, with additional treatments in the development pipeline. Together, holders will be hoping that this is enough to offset declining revenue in its legacy business, which is under pressure from generic competition.

As a result of its prospects and valuation, Indivior has comfortably outperformed the wider market over the past year.

From the company:

By fully understanding the challenges that patients face, we aim to transform addiction from a global human crisis to a recognized and treated disease around the world, empowering patients to take the first step towards changing their lives.

That sounds very noble, yet there is ethical risk associated with this stock. The following statement from Virginia Attorney General Mark Herring regarding Indivior’s recent $600m out-of-court settlement stands in stark contrast to the drugmaker’s own rhetoric:

The opioid crisis has devastated families and communities across the Commonwealth and drug manufacturers must be held accountable for their role in creating and prolonging this crisis.’

There’s two sides to every story, but this still makes for uncomfortable reading as a prospective shareholder. The group has recently resolved a large case with the US Department of Justice but there are additional legal matters outstanding which are difficult to quantify.

The recent share price performance and improving StockRank appears to indicate value here, but is Indivior a good stock to own? And, as shareholders, is it our job to care?

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Profile

What are the company's principal business activities, how does it generate its revenues?

Indivior creates treatments for addiction, with a core focus on the US opioid epidemic. It develops, manufactures, and markets these products to organised health systems (OHS) and says there is a global opportunity to address addiction as a highly treatable medical condition.

The group has three main products. Two of these are opioid addiction treatments: Sublocade, a ‘potentially game changing treatment of OUD’, and Suboxone, the legacy business still responsible for the majority of group revenue. The third is Perseris, which is indicated for schizophrenia for extended-release injectable suspension.

Suboxone faces competition from generic manufacturers. In FY20 this area of the business brought in $503m of net revenue, down from $707m, to make up the majority of sales. The group anticipates between $499m and $505m of revenue for FY21.

Suboxone has held its market share well but revenue is falling and Sublocade is now the company’s focus. Here, Indivior sees peak net revenue potential of $1bn and describes the treatment as a ‘significant untapped asset’.

Net revenue grew by 81% to $130m in FY20 (20.1% of group total), and the group expects revenue of between $235m-$245m for FY21.

Indivior has a target of $200-$300m peak net revenue for Perseris and is currently investing in a nationwide sales force across the US. The treatment delivered net revenue of $14m in FY20 (2.2% of group total), up from $6m. The group anticipates $17m-$20m of revenue for FY21.

Note - 2021 estimated figures use the lower of the revenue ranges provided by Indivior.

Size, Sector & Exchange

Indivior is a Highly Speculative Mid Cap High Flyer. It operates in the Healthcare sector, as part of the Pharmaceuticals industry group. It is listed on the LSE Main Market.

At the current share price of 247.4p, Indivior is worth around £1.79bn.

Business strategy

Growing sales of Sublocade is the single most significant driving outcome for the Indivior. Revenue here grew by 81% in FY20 and is expected to increase by another 80%-88% in FY21.

The group’s strategic priorities for top line growth are:

• Grow Sublocade to $1bn+ of net revenue,
• Diversify revenue, and
• Build the pipeline for future growth.

Grow Sublocade to $1bn+ NR

There has been a recent strategic shift here to increase penetration of Organized Health Systems (OHS), which looks to be paying off.

Indivior ended 2020 with 38% of Sublocade’s net revenue coming from the OHS channel. By H1 21 this had grown to 50% and the group expects that this channel will be the largest source of Sublocade net revenue by the end of 2021.

Diversify Revenue

As of FY20, $456m of net revenue was generated in the US (70.5%), $182m came from Rest of World (28.1%), and the remaining $9m came from the UK (1.4%).

Product diversification efforts are focused on advancing Perseris. Indivior is currently investing to expand the Perseris sales force to achieve US national coverage in 2022 and has a long-term net revenue goal of $200m to $300m.

Build the Pipeline for Future Growth

The group develops its pipeline with the help of strategic partnerships.

This model is being used in two innovative programs: a selective Orexin-1 (OX1) receptor antagonist (INDV-2000), which is a non-opioid mechanism for the treatment of OUD; and a selective GABAb Positive Allosteric Modulator (INDV-1000) for the treatment of alcohol use disorder.

Indivior’s ATRIGEL® platform is a patented long-acting release technology that delivers rapid onset and consistent formulation release in a subcutaneous injection. It is used in Perseris but could have wider applications.

Longer term, Indivior is open to acquiring assets that can further its leadership in addiction or extend its position in related CNS disease areas.

History & Growth

• 1994 - established as the Buprenorphine division of Reckitt Benckiser,
• 2014 - spun off and listed on the London Stock Exchange as Indivior, with a market cap of around £2.3bn,
• 2019 - indicted over claims that it had made false marketing claims about the safety of its drug, Suboxone, leading to ‘chronic overprescription’.
• 2020 - agreed to pay $600m to resolve liability related to false marketing of Suboxone. Additionally, Indivior Solutions pled guilty to one-count of felony information.

Over the approximate two year period since the beginning of 2020, buprenorphine medication-assisted treatment (BMAT) market growth has averaged in the mid- to high-single digits, which is in-line with the group’s long-term expectations.

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Recent News

Most recent trading update

Third quarter results

Based on the strong commercial execution behind Sublocade® (buprenorphine extended-release) injection and the resilience of our legacy US film business, we have again raised our 2021 net revenue expectations for the overall Group and for Sublocade. Our strategy to focus on the large and growing opportunity in organized health systems (OHS) has seen us deliver five consecutive quarters of double-digit underlying net revenue growth for Sublocade, providing us strong momentum as we look forward to 2022.

FY 2021 upgrades include:

• Full year revenue range: $750m to $770m (previously $705m to $740m), reflecting strong Sublocade performance and continued market share stability for Suboxone Film.
• Sublocade revenue range: $235m to $245m (previously $210m to $230m), based on stronger demand and progress in the US criminal justice system (OHS sub-channel).
• Positive adjusted pre-tax income at a higher level than previous management expectations

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Catalysts

Trends & Events

• Growing Sublocade revenue accelerated by strategic focus on OHS,
• Upcoming Perseris sales drive,
• Developing pipeline of future opportunities,
• Resilient performance in legacy business amid generic competition,
• Share repurchase program of up to $100m, with approximately $31m spent so far.

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Risks

What risks does the business face?

As a reminder of the risks, Indivior’s new chairman begins the most recent annual report with:

There is much in Indivior’s history for all stakeholders to be frustrated by, including unfulfilled potential...

Ethical risk - the group has been accused of prolonging the very epidemics it seeks to treat.

DOJ summary

The company has signed a hefty out-of-court settlement that will see it shell out $600m to federal and state authorities over the next seven years as a result of promoting ‘chronic overprescription’.

In November 2020, the group made a payment of $103m (including interest). Six annual installments of $50m will be due every January 15 from 2022 through 2027. The final installment of $200m will be due in December 2027.

As of FY20, Indivior carried a liability totaling $486m related to the DOJ resolution.

Additional legal matters

The list is notable in length and difficult to quantify, which might rule the company out for some investors despite the promising growth prospects of its new treatments. Outstanding matters include:

• Federal FCA qui tam suits - Many of these civil claims concern the same conduct at issue in the Justice Department case. Discussions are ongoing to resolve the retaliation claims and claims for attorney’s fees and costs.
• Connecticut - ‘The subpoena requests documents related to the group’s marketing and promotion of Suboxone products and its interactions with a non-profit third-party organization’.
• California - Deposition subpoenas served requesting documents relating to Suboxone Film, manufacturing records for the product and its components, ‘and the potential to develop dependency on Suboxone Film’.
• Illinois - Potential violations regarding sales and marketing activity.

For a more comprehensive overview of outstanding litigation issues, Indivior details these in Note 23 of its FY20 Annual Report (pages 157-160).

Customer concentration risk has been moderating.

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Summary

Bull points

Ongoing share buybacks; growing Sublocade revenue; Perseris potential; M&A opportunities; pipeline of new products; high margins and returns on capital; relative strength and broker upgrades; revised FY21 guidance.

Bear points

Declining trends in revenue, net profits, and free cash flows; history of litigation with remaining unresolved cases; generic pressure and declining sales in legacy business.

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If you’d like to read more... Indivior has been a NAPS pick in 2015, 2017, and 2018 due to its often high StockRank. Roland also covered it back in 2016 here, while Sharechap provides the most recent take, back in January 2020.