StockRank Movers - May 26th: Focus On Indivior

26th May '15 by Alex Naamani

13 comments 14063 reads

Joel Greenblatt believes that ‘you can make a pile of money investing in spinoffs.’ In his bestselling book, You can be a Stock Market Genius, Greenblatt explains that during the twenty-five years ending 1988, spinoff companies outperformed their industry peers by about 10% per year in the first three years of independence.

A spinoff is of course formed when a corporation takes part of its business and separates it from the parent company, thereby creating a new company. Indivior is a good example of a recent spinoff. It is the former pharmaceutical division of Reckitt Benckiser, and was spun-off as an independent company towards the end of 2014. Indivior is particularly interesting because it is also has a QV Rank of 98/100, suggesting that the company could be a good quality company trading at a cheap price. Let’s take a closer look....

Risk of generic competition

Indivior has a very low PE ratio (7) and an overall ValueRank of 92, making it one of the cheapest stocks in the market. The cheapness of Indivior may reflect risks from generic competition. The company's lead product, Suboxone Film - which is used to treat opioid dependence - represents around 77% of sales. However, the patent for Suboxone expired in 2010. Earnings per share have since fallen from 84 cents (2011) to 60 cents (2014) as Indivior faced increased generic-drug competition. Brokers expect earnings to fall by another 54% in 2015, and then 21% in 2016.

5564865c6fa94INDIVIOR_Share_Price_-_INDV

Strong Product pipeline

The risk of generic competition may already be reflected in the price. However, Indivior’s pipeline could be undervalued by investors. The company plans to launch a series of new products to treat opioid addiction and other illnesses over the next five years.

Opioids are prescribed to treat acute pain (for example, pain following surgery). However, there is currently a worldwide epidemic of opioid overdoses. This is especially apparent in the United States, where prescription opioid overdoses were responsible for more deaths between 1999 and 2008 than heroin and cocaine overdose combined.

Indivior has several products in its pipeline that could treat opioid addiction and overdoses:

Monthly Buprenorphine Injection: This injection would be used to treat opioid addiction. Phase III trials were due to commence in 2015 and the product could be launched in 2017. The product may also…

Unlock with Email

Unlock with Google

Already have an account?
Login here

underscored

26th May '15

Is there any easy way of finding spin offs in the screens?

Rusty2

Thanks, intersting. I was only asking about this company last week as it was ranked 100, but profits are forecast to fall the next few years. It seems many new drugs will not get to the market until at least 2017? For me it seems rather risky, the sp has already gone up but with falling profits is there much more upside? One to watch for now.

Marky

"Indivior has a very low PE ratio (7) and an overall ValueRank of 92, making it one of the cheapest stocks in the market"

"Brokers expect earnings to fall by another 54% in 2015, and then 21% in 2016."

Do you not view the very low historic PE / high ValueRank as red herrings given that brokers estimate such a large reduction in earnings this yr?

matmat17

Am I right in thinking forecast earnings are used to calculate the PE ratio used in the Value rank?Which in Indivior's case is currently 14 per the stock report. Not as cheap as 7 but still pretty cheap for this sector.

I believe Stockopdia uses the current P/E as part of the valuation?

Alex Naamani

Hi guys,

Thanks for the feedback.

herbie4: You mentioned that the "sp has already gone up but with falling profits is there much more upside". Another way to look at it is that the company is already cheap, the bad news may be priced in, so how much more downside risk still exists? A key question is whether Indivior's pipeline will be strong enough to outweigh any bad news (ie. falling profits). The other question is how long will it take for new drugs to drive earnings growth.

Indivior is of course a high risk stock, but many believe that value investors get paid a premium as compensation for the risk of underperformance. Indeed, Ben Graham used to buy the kinds of stocks that you wouldn’t even wish on your mother in law. Individually these looked like bombed out companies, but the idea was that if you diversify across a wide range of stocks, there would be enough recoveries, re-ratings and perhaps buy-outs to offset the losses and generate strong returns.

What do you think?

Marky: Indivior's forward PE is 14.2 - lower than the market and industry averages (16.5 and 21.7 respectively). So the firm is cheap on a historic and a forecast basis (see below).

5564c19f71c5bINDIVIOR_Share_Price_-_INDV

matmat1: We use the historic PE ratio in the ValueRank calculation, see here:

http://help.stockopedia.com/knowledgebase/articles...

I hope this helps?

Best,

Alex

Yes maybe, but with drug companies the risks are the drugs do not get approved, we have all read about new drugs and Im still waiting for them, they never seem to get to market. It looks cheap now because its based on last years earnings, if earnings fall by 50-60% and the new drugs are delayed or not approved then it will look expensive? Anyway its too risky for me, Im going away from risk at the moment. Re strategy I think its high risk, think its been shown that buying quality companies that have a decent dividend is more reliable way to invest. Did I not read that Ben Graham method does not work so well in the UK? By bombed out companies I presume these would have a SR of less than 10, so hardly applies to INDV?

My understanding of INDV, is that revenue is generated by the current opiod replacement drugs, Subutex and Suboxone. Whilst these were protected by market exclusivity INDV held a monopoly, and generated revenue in accordance with being a monopolist.

Market exclusivity has ended for its key products, and it's revenue is being eroded by generic competition. As is often the case with drug companies, apparently compounded by the spin-off factor INDV has been (initially) priced on the worst case scenario for future revenue in the face of generic competition. On top of this it seems that investors have been given a free option on future drugs currently in the pipeline. Therefore to me, it seems like many of the very high ranked stocks, a lot of bad news is "priced" in with the likelihood of surprise falling on the upside not the downside of earnings.

All in my opinion, this is not advice, DYOR

Disclosure long (a lot) on INDV.

Patxi

An example of a spin-off that failed to deliver is Torotrak (LON:TRK) which came out of BTG (LON:BTG) around 15 years ago. At first they did OK but it soon became clear that the management had no idea how to monetise the technology despite it being a decent concept. I held on to the shares far too long (seeing them as freebies) eventually selling out for around 60p. They were worth over 500p not long after they were issued. Currently they are 8.25p each.

I will try not to make the same mistake with INDV should it show signs of weakness.

lightningtiger

Hi Alex,

An interesting article and currently all things look good for this story stock. It is undervalued but I am afraid it does not cut much ice for me. With future profits and dividends estimated to fall over the next couple of years, I have a feeling the share price will not be able to continue in this trend upwards for much longer.Although there are 6 products in the pipeline these can take a long time to come to fruition. There is the possibility that any one could succeed, so I will wait for the story to continue.

I have put it in my watch list since it has a 100 ranking score. However in the same sector comes PVG which has done extremely well last year and last month. How much longer it will continue I have no idea.

EDEN has managed to benefit today having waited a few years for EU product authorisation for their product 3AEY which is used for bunchrot in connection with white wine.UP over 19% today, but will it continue trending that way?

steviej

27th May '15

South32 (LON:S32) spun out of BHP Billiton (LON:BLT) just last week and this is its first week of full trading. Weakish start to life on its own, but trading in London has been heavy, likely due to trackers and other funds offloading.

28th May '15

Another breakthrough today with NSCI with cervical cancer +56.5%. Seems a good sector to keep an eye on. This may carry on increasing tomorrow. Timing is crucial here.

29th May '15

I don't understand the comparison of Indivior (LON:INDV) with Netscientific (LON:NSCI). INDV has actual products and revenue, which are being discounted, and potential for jam tomorrow - which does not seem included in the price! Whereas Netscientific (LON:NSCI) has a compound moving into phase II, right at the start of prooving itself... - and the company has no history of taking drugs to market (not an easy process), this is surely a speculative coinflip vs a classic value play?

StockRank Movers - May 26th: Focus on Indivior

Risk of generic competition

Strong Product pipeline

Unlock the rest of this article with a 14 day trial

About the Author

Alex Naamani

13 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...