Description

Indivior is a fast-growing pharmaceutical company trading at a low-growth valuation with a pristine balance sheet and upcoming catalysts to unlock value.  The company was abandoned by investors and the sell side in 2019 due to the genericization of its main product Suboxone and huge legal fines issued by the DOJ/FTC for bad behavior when it was part of Reckitt Benckiser in 2013.  Indivior now has an extremely bright future with a stabilized Suboxone franchise and its new injectable drug Sublocade is on track to reach blockbuster status. 

Indivior has tremendous upside for the following reasons:

• Sublocade to reach blockbuster status:  Sublocade has the potential and is on track to reach blockbuster status.  Last year, INDV sold $244m of Sublocade and is guiding to 55.7% growth for 2022 to $380m at the midpoint.  The drug is continuing to gain traction despite prescriber, patient, and insurance roadblocks.  Ultimately, we believe that Sublocade can reach the $1bn in peak sales that management projects, a target that requires less than 5% penetration in the buprenorphine market

• Suboxone is stable and, in fact, growing: The few analysts who are covering the stock are projecting INDV’s base business, mostly Suboxone film, to decline over time.  However, Suboxone grew 10% last year and has the potential to continue that growth trajectory as the overall opioid/heroin epidemic has worsened over the last two years.  In contrast to the analyst community, our base case assumes that Suboxone will be a stable franchise.  Any growth above this would deliver significant upside as well

• Perseris value is all upside: INDV’s third primary drug is Perseris, a once-monthly injection to treat schizophrenia.  Management is targeting $200m-$300m of peak sales.  INDV is expanding their salesforce this year to get to that target and expects almost $30m of sales this year.  This has not been a focus for the sell side, but would be extremely additive to earnings if they can reach their targets as these injectables typically have higher than 90% gross margins

• US listing could be a significant catalyst: INDV is listed in London yet reports in dollars and generates most of its revenue in the US.  It is a company that US investors familiar with the US healthcare system are likely to miss when doing screens or getting information from analysts.  During Q4 earnings, management said it is exploring a US listing.  This would bring significant amounts of attention to the company as they increase analyst coverage and gain a US following

• Pristine balance sheet: INDV has $1.1bn of cash on its balance sheet and only $242m of debt.  Including its legal liabilities of $535m (paid over 5 years), the balance sheet is still $325m net cash.  With the company generating over $200m of FCF per year, this gives the company plenty of options for buybacks and inorganic growth

• Highly undervalued: Given the top line growth potential of INDV, we believe they can reach their previous peak operating income margins of 37%.  This would imply ~$500m of EBITDA by 2024 (almost 100% FCF conversion) on a current EV of $2.3bn (inclusive of legal liabilities of $535m)

History and DOJ/FTC Fine Background

INDV was originally spun out from Reckitt Benckiser (LSE:RB) in 2014, most likely because the company was facing genericization of its primary product, Suboxone, a sublingual film for the treatment of opioid use disorder ("OUD").  Suboxone is a form of the drug combination buprenorphine and naloxone.  Buprenorphine is referred to as a "partial opioid agonist" because it binds to the opioid receptors, thereby satisfying the opioid craving.  However, unlike heroin or prescription opioids, buprenorphine has a "ceiling effect" where the opioid effects level off even with higher doses.  Therefore, buprenorphine has less potential for abuse and physical harm, but satisfies an addict's craving and prevents heroin or other opioids from having as much of an effect.  Prior to buprenorphine use, OUD was primarily treated through methadone clinics or rehab programs.  However, buprenorphine allowed doctors to prescribe OUD treatment through a pharmacy and therefore made OUD treatment much more widely available.

When INDV's pill formulation of Suboxone was going generic, they introduced a more easily absorbed film version.  Then they decided to remove Suboxone pills from the market, claiming they were more dangerous for children and were more likely to be diverted to the street.  This allowed the company to maintain its franchise value since the new generics could no longer be automatically substituted for the film.  But it caused major problems later down the line, forcing INDV to settle with the DOJ and FTC for $600m (RB also settled for $1.4bn) over misleading healthcare providers about the safety of Suboxone around children.  INDV will be paying these fines through 2027.

In 2019, INDV's suboxone film went generic. This caused a significant erosion in the company's revenue and profits as volumes and price declined.  The combination of this event and the DOJ fines led to the stock declining over 90%. 

Sublocade to reach blockbuster status

Sublocade is an injectable form of buprenorphine that releases slowly throughout a month long period after injection.  It has several advantages vs. Suboxone:

• Patient adherence: Many patients simply use Suboxone during the week and then use opioids/heroin on the weekend.  They do this to stave off withdrawal effects.  Sublocade prevents people from casually using their Suboxone to maintain their drug habit.  The purpose of these drugs is to keep people off opioids/heroin and Sublocade is more likely to do so

• Diversion resistant: Most patients who come to doctors for a Suboxone prescription have already tried the drug.  That’s because it is often diverted and sold on the street.  It is easier to buy on the street than to go to a doctor and get a prescription.  Rather than prescribe a drug simply to be sold (with profits potentially used to further users’ drug habits), doctors can be sure Sublocade is not being sold on the street

• Ease of weaning off buprenorphine: Doctors we spoke to also pointed out that it is much easier for people to wean off buprenorphine completely using Sublocade because it delivers a constant dose that slowly eases itself out of the body over a long period of time (over a year in some cases).  There are thousands of accounts online of this effect (here is one reddit thread as an example)

Sublocade is not an easy drug to prescribe vs. existing treatments.  For Suboxone film, prescribers simply need to write a prescription and the patient can get the drug at a pharmacy.  For Sublocade, a doctor must have the drug delivered to his/her practice, sign for it, store it in a refrigerator that is DEA compliant, and deal with insurance company prior authorizations and other roadblocks.  Because of this, INDV has pursued a strategy of selling to organized health systems.  This strategy has worked with sales growing significantly even during the COVID period when fewer people wanted to see their providers:

We believe INDV’s $1bn revenue target is achievable based on the following:

• According to company data (revenue divided by dispenses) the average prescription is generating $1,333 of revenue

• Assuming 80% of sales in the US, this means that 600k prescriptions must be written in a year to reach $800m of sales

• With over 14 million buprenorphine-based prescriptions given out every year between Suboxone, its generics, and other non-film versions of the drug, INDV needs less than 5% volume share of the buprenorphine market to achieve its target

• On average patients are on Sublocade for 6 months, according to management. This means they only need to get to 100k patients in the US to reach their projections. The US has an estimated 2 million people diagnosed with OUD and 10 million people who abuse opioids

• Vivitrol, a long-acting non-opioid-based injectable, did 582k prescriptions last year.  Vivitrol is for alcohol or opioid dependence, but about half of prescriptions were for opioid dependence. Vivitrol’s addressable market for opioid dependence is much smaller because it requires the patient with OUD to be off opioids for 7 days so that the drug doesn’t precipitate withdrawal symptoms.  According to our calls, there are not many patients with OUD that meet this criteria, making the addressable market much smaller

There is a large pool of patients that aren’t receiving treatment.  There are an estimated 10 million people abusing opioids yet only 20% have access to treatment.  There are several bills under consideration that would significantly expand availability of these drugs which, if passed, could expand the reach of the drug.

We project $648m of Sublocade sales by 2024:

Of course, there are risks to Sublocade reaching this target as well.  There is one competitor called Brixadi owned by Camurus (CAMX SS) and marketed by Braeburn.  The drug was tentatively approved in 2018 but was not allowed to launch in 2020 due to Sublocade exclusivity.  However, Braeburn received a CRL from the FDA due to issues at its manufacturing facility in both December 2020 and December 2021 (same issue).  There is no update yet as to when these issues could be cleared, but these have been major setbacks for the company, and it could take another year for the drug to be marketed.  Brixadi has several advantages vs. Sublocade:

• Smaller needle

• Fewer CCs injected, making it less painful

• Can be injected in many injection sites instead of just 4 for Sublocade

• Comes in 8 dosage forms for weekly and monthly injections.  Sublocade only has 2 dosage forms for monthly injections

• Does not need to be refrigerated like Sublocade

Given these advantages, we believe Brixadi will be able to take some market share when it is launched.  However, it is unclear when that might happen.  Camurus, which is public, has given no update on expectations for the drug.  Braeburn, Camurus’ marketing partner in the US, has already laid off most of its salesforce for the drug according to CafePharma forums.  In addition, Braeburns’s Chief Medical Officer just started in September 2021 and they are actively hiring for a “Director of Regulatory Affairs” suggesting they don’t know how to solve this issue internally:

Finally, we believe that Sublocade’s 5-year head start on Brixadi represents a significant advantage in a part of the industry that requires a high touch salesforce and years of relationship building to get to scale. Brixadi is not a generic so would have to be actively sold through reps across the country and requires significant financial resources.  Braeburn only has Brixadi in their pipeline and failed to commercialize a previous injectable therapy called Probuphine.

Suboxone is stable and, in fact, growing

Suboxone is a film version of buprenorphine and the most well-known, brand name version of the drug.  Several generics entered the space in 2019, but the market has mostly stabilized with 3 main generic players – Alvogen, Dr. Reddy’s, and Mylan (Novartis was INDV’s authorized generic seller, but appears to have exited the market):

Extracting these numbers in terms of market share, INDV has maintained a 20%+ market share, and this seems to have stabilized:

With no impending entrants into the market until mid-2024 and INDV continuing to increase the price of the drug, we believe that Suboxone can turn into a growing franchise.  However, we model flat growth with international continuing to decline:

While the sell side believes in Sublocade growth, they seem skeptical that the rest of the business can remain stable or grow.  Taking Stifel’s most recent Sublocade projection of $507m for 2023 and backing into their non-Sublocade estimates, it looks like they are assuming the base business will shrink 17% in 2023.  We do not think this is realistic at all given that Suboxone appears to be growing and Perseris will also grow into 2023

Perseris value is all upside

Perseris is a long-acting injectable of risperidone, a common drug used to treat schizophrenia.  It uses the same technology deployed in Sublocade for another legacy drug and has similar adherence and dosing advantages.

Management has consistently maintained that Perseris will be a $200m-$300m in peak sales revenue contributor.  We do not have a special view on this drug, but we do not think sell-side is baking in any upside (see Stifel’s implied revenue declines above).  Other long acting injectables in this space have also been able to reach the $200m-$300m range, so we believe INDV’s estimate is reasonable:

The Risperidone market did 9.5m in prescriptions last year and INDV would only need 100,000 injections to get to the $200m target (i.e., about 1% market share by volume).  INDV expects almost $30m of revenue from Perseris in 2022.  So far, they’ve only had a minor sales force promoting the drug due to focusing on Sublocade and because COVID restrictions made it harder to promote.  In H2 2021, INDV decided to double its salesforce for Perseris and expects to be able to achieve its revenue targets.  We model $100m for Perseris by 2024

INDV is highly undervalued

Using our projections for INDV’s three main revenue drivers, we see INDV increasing revenue to $1.25bn by 2024 and expanding margins significantly due to the operating leverage associated with a stable cost base and 90%+ gross margin drugs like Sublocade and Perseris driving growth:

Given these numbers, INDV trades for as low as 4.5x 2024 operating income.  We believe that the stock has ~100% upside in 2 years (41% IRR) based on 8x 2024 operating income:

Catalyst

• Continued growth of Sublocade
• Suboxone returns to growth
• US listing
• Perseris begins to impact numbers