|Shares Out. (in M):||151||P/E||0||0|
|Market Cap (in $M):||546||P/FCF||0||0|
|Net Debt (in $M):||-479||EBIT||0||0|
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Indivior plc (“INDV.L,” “INVVY”)
Pitch – 8/28/19
Note: While I recommend transacting in the more liquid London primary listing (INDV.L), for the purposes of the write-up I use the US ADR (INVYY) to avoid unnecessary FX translation since Indivior reports in USD and its primary assets / liabilities are largely USD-denominated.
Can I interest you in a small cap UK-listed specialty pharma company whose primary drug faces generic competition as of February and is staring down the barrel at a $3 billion DOJ indictment after its former parent just agreed to pay $1.4 billion to settle the matter?
If you’re still reading, we believe that a long position in Indivior Plc (“INDV.L,” “INVVY” or the “Company”) offers a compelling risk / reward profile with a high probability of a multi-bagger.
With ~$750mm of net cash (~$575mm net of unwinding rebate accruals) and a drug portfolio (all now being commercialized) worth between ~$900 million - $3.8 billion against a market cap of just ~$550 million, Mr. Market is pricing in a high probability of a devastating litigation outcome and a low ceiling for the Company’s recently released drugs. I think this pessimism is overblown, the case against Indivior relatively weak and almost entirely related to the period before Indivior became an independent company for which I do not believe the former parent is necessarily indemnified.
That being said, Indivior is probably not suited for widows and orphans given a non-trivial chance of permanent impairment of all capital and thus a position in the Company must be sized accordingly.
Indivior was spun out of Reckitt Benckiser Group plc (“RB”) via a demerger in December 2014 (the “Demerger”) following the blockbuster success of its Suboxone Tablet and later Suboxone Film drugs coincided with an explosion in demand for treatments for opioid addiction.
Both the Suboxone Tablets and its successor, Suboxone Film, are buprenorphine and naloxone combinations that are prescribed for opioid addiction treatment. At the time of the Demerger, Indivior held a 60% market share of the US market for buprenorphine-based opioid dependence treatment. While methadone can only be dispensed at a certified Opioid Treatment Programs, any licensed medical provider with a DATA 2000 waiver can prescribe buprenorphine. Coupled with an Obamacare aided Medicaid expansion and increased rates of opioid addiction, the market for buprenorphine experienced significant growth over the last decade. According to IMS Health, there were 12.5 million buprenorphine prescriptions in the US in 2016 worth ~$3 billion.
At the time of the Demerger, RB and Indivior claimed that it had stopped selling Suboxone Tablets due to “increasing concerns with pediatric exposure” compared to sublingual film that is individually packaged. In its April indictment of Indivior (the “Indictment”), the Department of Justice (“DOJ” or the “Government”) alleges that this concern for pediatric exposure amounted to fraudulent marketing to increase sales of the patent-protected Suboxone Film in the face of generic competition for Suboxone Tablets. The suit is seeking $3 billion in damages. This caused INVVY to plummet ~70% to $2.00 per ADR.
However, even before the Indictment, INVYY had declined ~80% in the preceding year largely related to the stunted launch of Sublocade, the Company’s newest generation buprenorphine drug in a once-monthly injectable form that was approved by the FDA on 11/30/17. It took patients trying to access Sublocade after is February ’18 launch up to ~60 days to actually get ahold of the medication (the “Patient Journey”). In addition to taking down guidance in the fall, Indivior lost its ANDA case against Dr. Reddy’s Laboratories (“DRL”) that sought an injunction against DRL releasing a generic competitor to Suboxone paving the way for its February ’19 launch.
Why Does the Opportunity Exist?
Indictment Overhang / Investor Transition: With a potential $3bn liability hanging over the head of the Company, the stock has likely transitioned out of the hands of real money, small cap pharma investors into the hands of special situation investors and litigation specialists.
Suboxone Generic Competition: The Indictment could not have come at a worse time as Indivior’s legacy cash cow, Suboxone, became exposed to generic competition in February, which will result in a significant decrease in profitability in 2019 compared to recent years.
Sublocade Stumbles / Wide Range of Outcomes: Sublocade has been touted by management and other industry observers as a $1bn+ peak revenue drug that could readily replace Suboxone’s contribution to the bottom line. However, the transition from Suboxone to Sublocade has proven to be slower than anticipated/communicated to the market due to the aforementioned Patient Journey issues in accessing the drug. While substantial potential remains (and its 2019 revenue guidance of $50-70mm appears somewhat conservative based on its Q2 run rate), Sublocade offers a wide range of outcomes that are probably lower than previous expectations.
Size / Primary UK listing: With a <$600mm market cap, down ~90% from its peak, a primary listing in the UK despite substantially all of its assets and liabilities in the US, Indivior is a bit of a misfit and creates a lack of a natural investor base.
How Strong is the DOJ’s Case?
In its Indictment, the DOJ accuses Indivior (at the time dba Reckitt Benckiser Pharmaceuticals Inc.) of:
1. Defrauding Medicare between 2006 – 2012 by marketing Suboxone Film as safer than Suboxone Tablets when it knew statements to this effect to be false and misleading (the “Misleading Statements Charge”)
2. Causing Suboxone Film to be dispensed in a careless and clinically unsafe manner between 2009 – 2015. In effect, the DOJ says that Indivior looked the other way and in some cases, referred patients to doctors who prescribed high dosages (>24mg) in large numbers (the “Over prescription Charge”)
Reading the Indictment, the Misleading Statements Charge very clearly constitutes the meat of Government’s case (the Over prescription Charge feels more like spaghetti thrown against the wall at the end of the Indictment). The factual basis for the Misleading Statements Charge (pages 5 – 26 of the Indictment) is that Indivior/RB saw the patent cliff for Suboxone Tablets coming and devised a scheme to market single dose packaged film as safer than tablets when executives knew this to be false.
In Federal mail and wire fraud cases (like this one), “fraudulent intent is shown if a representation is made with reckless indifference to its truth or falsity.” Thus, the Government must prove that Indivior acted “with reckless indifference to truth” when marketing Suboxone Film as safer than Suboxone Tablets. I believe this will be a fairly high bar given Indivior can present a reasonable case (backed up by the CDC) that unit does packaged buprenorphine/naloxone is indeed safer than when it is dispensed as bottled tablets:
Indivior funded its own study in the Journal of Pediatric medicine (and thus must be taken with a grain of salt) with similar results. However, in light of significant subsequent evidence in support of Indivior’s safety claim, I believe the Government’s case will be challenging from a factual perspective.
Even if the Government can convict Indivior on the Mail, Wire of Healthcare Fraud charges (which I view as a less than 50/50 proposition), all if not nearly all of this “misconduct” took place prior to the Demerger. While Indivior and RB provide each other with fairly broad mutual indemnities in the Demerger Agreement (see pdf pages 95 – 103), there is one important limitation:
“No liability shall attach to the Indemnifying Party in respect of claims under the RB Indemnities or the Mutual Indemnities (as the case may be) in the case of any fraud or dishonesty on the part of the Indemnified Party.”
As Indivior is charged with Mail, Wire and Healthcare Fraud, that almost exclusively took place prior to the Demerger, and thus under the management and direction of RB (see pages 21-23 of the Indictment), I believe that Indivior would have a very strong case against RB that RB, not Indivior, should be on the hook for any potential DOJ liabilities in an adverse trial outcome. Indivior has alluded to this possibility in the Chairman’s response to the Indictment:
“As you may know, the Department of Justice has taken the unusual step of indicting Indivior for events that date almost exclusively to before the company was formed in 2014”
Taking a step back, it seems crazy and would set a dangerous that RB could be able to spin out an entity saddled with legal responsibility for actions taken by the former parent.
What to Make of RB’s Settlement?
In July, RB settled a separate DOJ action related to its past marketing Suboxone Film practices for $1.4bn (the “RB Settlement”). The RB Settlement does not release Indivor but does contain an interesting provision that acknowledges the potential that Indivior could have recourse against RB should Indivior suffer a civil penalty:
“The following claims of the United States are specifically reserved and are not released...
k. Any liability of Indivior. However, the United States and the Relators shall not seek further recovery from RB Group arising out of a civil judgment against Indivior for the Covered Conduct. This provision shall not affect any rights or claims that may exist between Indivior and RB Group.”
While one might look at the $1.4bn RB Settlement as evidence that Indivior is in the wrong and must be the next domino to fall, I think this interpretation is overly simplistic. One of the first rules of litigation is to go after the guy with the deepest pockets and with a $50bn+ market cap, RB unquestionably has deeper pockets than Indivior. In addition, the HHS/OIG likely threatened RB with Medicare/Medicaid exclusion (as it did with Indivior). While exclusion would certainly hurt Indivior, it could theoretically just sell its Sublocade and Perseris drugs in asset sale(s) to someone who is not excluded. For a company with a multitude of drugs / brands, like RB, this is not really an option and thus even an innocent party might be willing to pay the DOJ to go away in order to prevent a potential outcome that could dramatically affect other aspects of RB’s business. One needs to look no further than the pop in RB’s stock in the immediate aftermath of the Settlement to see the extent of the overhang on the stock, despite a massive settlement payment.
In contrast to RB’s relatively quick settlement, Indivior has indicated a willingness to fight the DOJ through trial to the end. If I were in the DOJ’s shoes, having already recouped one of the 5 largest pharmaceutical settlements, facing off against a spun off entity fighting for solvency with a mediocre case, I would probably take a settlement rather than potentially try to get what I could from Indivior (who had previously reserved $438mm related to the matter) and call it a day versus trying collect in a bankruptcy court several years hence.
Consequently, I estimate Upside, Base and Downside DOJ Liabilities / Probabilities of $200mm (35%), $500mm (40%) and $1.5bn (25%), respectively. I think Indivior winning or being able to collect from RB is more likely than it losing and having to pay out $1.5bn (for a total of $2.9bn between RB and Indivor). That being said, I still think a courthouse steps settlement (ie before the trial next Spring) is the most likely outcome since it would allow the DOJ to walk away with a $1.9bn total settlement from the matter while Indivior could exit the situation solvent and likely worth substantially more than its current market cap (except in a low case asset scenario). Thus, I anticipate a shorter duration in a Base Case / Settle scenario than in fight a win (Upside) or a fight and lose twice (Downside) scenarios.
What are Indivior’s Assets Worth?
Disclosure: coming from more of a legal background I would welcome and appreciate input / comments from those in the VIC community with a pharma background.
(1) Sublocade: A wide range of potential outcome largely driven by uncertainty of peak sales for the product. If the Indivior can hit its stated goal of $1bn in sales (High Case), this stock should be a home run regardless of what happens with the DOJ. I model a more conservative Base Case of $400mm of peak sales based loosely on the on the ~$320mm of LTM sales of Vivitrol, a monthly Naltrexone-based injectable opioid addiction treatment and a Low Case of $200mm. In terms of peak sales multiple, I utilize a range of 1.5 – 2.25x, below the typical 3-5x range due to increased risk of generic competition.
(2) Perseris: While this is still in the early stages of commercialization and generates de minimis revenue, I estimate a peak sales range of $200 - 300mm based on the $200-210mm expected for Aristada this year. I also utilize a slightly higher multiple range (but still probably on the conservative end) of 2.25 – 3x.
(3) Suboxone – US: Represents the tail for branded Suboxone as well as the contribution of Indivior’s authorized generic in the US. Based on the Company’s updated guidance backing out 1H ’19 actual sales, the 2H ’19 Sublocade sales and Rest of World sales, I believe the Company is implicitly forecasting $195 – 212mm of 2H ’19 US Suboxone / generic revenue. While the residual from there might not be enormous, it is high flow through revenue and thus capitalize those sales at 0.75 – 1.25x.
(4) Rest of World: Accounted for $215mm of FY ’18 revenue, though has declined ~19% in 1H ’19. Utilize multiple range centered around 2x given lack of visibility into relative profitability for this revenue stream.
(5) Capitalized G&A: I account for sales & marketing in valuing the individual drugs and account for the G&A cuts that the Company is making this year to estimate annual G&A burn at $150 – 200mm which I then capitalize this at 4x. While some might argue that 4x is too low given that this could be running for longer, if Indivior were to sell any / all of its assets, the $600 – 800mm estimated drag on NAV could also be significantly less.
(6) Cash / TL: Represents 6/30/19 balances
(7) NWC Unwind: As of 6/30/19, Indivior had $396mm of Sales Returns and Rebate payables (down from $510mm as of 12/31/18) against $213mm of receivables. I believe the net balance (~$175mm) will represent a NWC outflow of the next 6-12 months as branded Suboxone sales dwindle.
Adding it all up, I am getting a range of $5.71 - $23.71 of pre-litigation value per INVVY share. While this is a wide range, I think in aggregate its think errs to the conservative side and believe it is not out of the realm of possibility that NAV could exceed the High Case. Consequently, I view the High Case as marginally more likely than my Low Case in my probability scenarios.
Adverse DOJ outcome
Sublocade fails to gain traction or loses Orphan Drug status
Settlement with the DOJ or Trial Verdict (trial scheduled for Spring 2020)
Resolution with RB on Indemnity
Sublocade progress / update on long term guidance
Perseris traction / guidance
Management has been buying shares after the Indictment announcement
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