|Shares Out. (in M):||734||P/E||30.8x||8.8x|
|Market Cap (in $M):||1,045||P/FCF||nm||23.7x|
|Net Debt (in $M):||-693||EBIT||70||148|
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Indivior PLC (“Indivior” or the “Company”)(1) is a rare investment opportunity where you have an undervalued pharmaceutical company that is on the cusp of spectacular growth yet its share price is depressed due to a baseless litigation claim recently filed by its former parent, Reckitt Benckiser PLC (“Reckitt”). We believe Reckitt has a weak case that will either be dismissed or resolved favorably based on our analysis of U.K. law. We believe the stock is a double near term, with considerable further upside as the Company executes on its growth plans.
· Stock recently tarnished by baseless claim filed by former parent
o Likely dismissal of this claim will be near-term catalyst
· Market’s focus will then turn on how Indivior is revolutionizing the rapidly growing opioid treatment sector
o Next generation treatment drug Sublocade showing blockbuster potential with 20% QoQ sales growth
o Company’s only material competitor plagued by FDA approval issues
· Company recently resolved all DOJ claims on favorable terms
· The stock has traded down significantly despite business fundamentals improving substantially this year
· Great entry point for new investors as a long-term growth story with a near-term catalyst
Indivior is the market leader in opioid addiction treatment medications – both with its industry standard Suboxone and its next generation game-changing Sublocade. Suboxone, often colloquially referred to as “Subs,” has maintained ~40% market share despite generic competition for the past two years. Its high margin revenues have contributed to Indivior’s steady cash flows. With the underlying market growing at a teens percentage, branded Suboxone has maintained $70m+ of quarterly sales and there is no indication that sales are coming down any time soon (branded Suboxone sales were actually up last quarter despite generic competition).
Next-generation Sublocade, a monthly injectable treatment that eliminates opioid cravings in patients for the full month, is on track to become a $1 billion blockbuster, a position confirmed by the CEO on recent earnings calls and presentations. While sales of Sublocade were initially negatively impacted by COVID as many patients avoided going to the doctor, recent trends suggest that growth is accelerating (+20% on a quarter over quarter basis per sell side reports).
Indivior management has guided to $120-$125mm in Sublocade sales for 2020 and based on current prescription information, the Company will comfortably exceed the high end of the guidance. Many doctors and treatment professionals view Sublocade as a potential cure for many sufferers of opioid addiction, a disease that continues to ravage society. The current Covid pandemic and economic despair have made the need for Indivior’s medications greater than ever as opioid abuse and addiction is on the rise.
Despite this potential for Indivior’s tremendous growth, why is the market missing this opportunity?
The answer lies mainly with the Company’s former parent Reckitt Benckiser Group PLC (“Reckitt”). From the time Reckitt spun out Indivior in 2014, it saddled the Company with potential liabilities related to actions taken in developing a film version of Suboxone. Those actions led to a DOJ indictment, which was finally (and favorably!) resolved just last month. However, the very next day, Reckitt swooped in with an unsupported and completely baseless $1.4 billion claim against Indivior. While news of that claim knocked 30% off the stock’s value in one day, we are confident that this claim will fail – and that Reckitt must know this. Either the claim will never be served against Indivior, or Indivior will readily dispose of it in court. This catalyst will finally allow Indivior to be viewed as the tremendous growth story it represents.
Reckitt’s Indemnity Claim is Meritless
Indivior’s stock has dropped over 30% due to a baseless indemnification claim being contemplated by Reckitt against Indivior. Specifically, on November 13, Reckitt filed a claim in the Commercial Court in London against Indivior for £1.07B ($1.4B). Yet, strangely, no one heard of this claim until Indivior became aware of it and released a statement on November 26. Even stranger, the claim was never actually served on Indivior. When first confronted by reporters on the claim, Reckitt responded with the even more cryptic statement:
“As you would expect, we regularly take certain procedural steps to preserve potential claims, especially with a view to any potential statute of limitation issues. We do not consider it appropriate to comment further.”
While the claim has not been publicly disclosed and it is impossible to know Reckitt’s true motivations (and its IR department refuses to even discuss the matter), the amount claimed, according to Indivior’s disclosure, closely matches Reckitt’s own penalty payments to the DOJ. In July 2019, Reckitt agreed to settle potential claims with the DOJ and various states relating to its role in Suboxone marketing issues for a hefty $1.4 billion pursuant to a criminal non-prosecution agreement. Included in that agreement was a forfeiture charge of $647mm to be paid by Reckitt pursuant to U.S.C. 18 1341 (mail fraud), 18 USC 1343 (wire fraud) and 18 USC 1347 (healthcare fraud). While not admitting guilt, Reckitt was clearly motivated to wash its hands of potential charges and any further affiliation with its former subsidiary. When Reckitt spun out Indivior pursuant to a Demerger Agreement, dated November 17, 2014 (the “Demerger Agreement” - https://basic.10jqka.com.cn/ajax/usaph/pubDetail/1abfb6c08e953f38_html), it retained indemnity rights from Indivior for acts related to Indivior’s business. It seems clear that Reckitt’s claim filing seeking indemnification relates to these provisions.
Reckitt Failed to Meet the Conditions Precedent to Indemnification
Based on our analysis of U.K. law, we have concluded that Reckitt’s expected claim would be wholly without merit. For starters, pursuant to the Demerger Agreement, Reckitt failed to follow proscribed procedural conditions to obtaining indemnification. Under the clear terms of the agreement, Reckitt was required to obtain Indivior’s prior written consent before settling its claim with the DOJ if it wanted indemnification from Indivior (Schedule 4, section 6). It is our understanding that Reckitt never contacted Indivior before settling with the DOJ and therefore failed this crucial requirement.(2)
Reckitt is Precluded From Indemnification Due to Acts of Fraud or Dishonesty
Even if Reckitt could somehow overcome these procedural obstacles, Reckitt cannot seek indemnification if it has engaged in any acts of “fraud or dishonesty.” Schedule 4, section 18 of the Demerger Agreements says specifically:
“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.”
In analyzing U.K. law on this issue, including a recent decision of the U.K. Supreme Court, a party does not have to be convicted of fraud or dishonesty to be precluded from indemnification. The standard is what a reasonable person would consider dishonest or fraudulent. See Ivey v Genting Casinos Ltd  UKSC 67 (U.K. Supreme Court). Given that Reckitt’s forfeitures under its non-prosecution agreement with the DOJ were on account of mail, wire, and health-care fraud, Reckitt would have an impossible task of arguing it did not act dishonestly. To give one example from the indictment that was levelled against Indivior, in response to Reckitt’s investor relations director’s email referencing “our plans” to withdraw Suboxone Tablet’s FDA approval in order to delay FDA approval of generic versions of Suboxone Tablet, the General Counsel of Reckitt (which was the 100% owner of Indivior during the time period referenced in the indictment) is quoted by email as saying:
“please do not create any emails or other documents suggesting that we would consider” attempting to delay FDA approval of generic versions of Suboxone Tablet in this way, and “any decision we make will be based on consumer safety.”
Here you have the general counsel of Reckitt telling Reckitt and Indivior executives to stop sending emails relating to acts that can only be characterized as dishonest in any reasonable definition of the word. How Reckitt can avoid this defense to indemnification is a mystery to us and any lawyer we have discussed this issue with.
We think that Reckitt really may have just been seeking to preserve some misunderstood rights it thought it had. Or maybe they were just looking for a tool to counter potential claims from Indivior. Did they file this claim just prior to a perceived six-year anniversary of the Demerger Agreement for statute of limitations purposes, or were they just concerned that Indivior, with its own settlement just approved by the court, could turn around and seek reimbursement of its penalties from Reckitt? We believe that Indivior may actually have legitimate claims for contribution pursuant to tort law provisions against Reckitt. Regardless, we believe Indivior should be able to settle this claim for minimal costs. On the other hand, if Reckitt does in fact serve its claim, Indivior will have strong grounds to seek its dismissal, although the stock will drop termporarily on this news. The bottom line to this is that the market clearly seems to be wrongly assessing the risks to Indivior.
It is also unclear to us whether Reckitt is even permitted to bring a claim for indemnification under the terms of Reckitt’s non-prosecution agreement with the U.S. Department of Justice, a public document (Forfeiture Settlement Agreement (justice.gov)). By seeking $1.4bn from Indivior, and thereby jeopardizing the DOJ’s ability to recover from Indivior, Reckitt could be deemed to at minimum be in violation of the spirit of section 12 of the non-prosecution agreement requiring Reckitt “to cooperate fully and truthfully with the United States’ investigation of individuals and entities not released in this Agreement,” i.e., Indivior. Why Reckitt would put its non-prosecution agreement at risk for a dubious recovery from Indivior is hard to understand.
DOJ Case Fully Resolved
Understanding the story also requires understanding the DOJ claim that has recently been resolved but that has plagued the Company for years. In April 2019, Indivior was indicted in Abington, Virginia for allegedly misrepresenting the safety profile of its Suboxone products to extend its Suboxone patent life (and monopoly). More specifically, Indivior was accused of using improper techniques for switching the market from the tablet to film version of Suboxone. The DOJ claimed $3 billion in damages which clearly represented an existential threat to the Company.
Fortunately, on July 24, the Company resolved these actions. While the headline figure of $600 million may seem significant, the seven-year payout schedule brings the NPV to around $400 million. Also, the settlement allows for continued unfettered access to Medicare and Medicaid. Given the favorable settlement terms, we believe a major cloud has been lifted from Indivior.
Indivior stock traded to the 140p range after the DOJ settlement. Since then, multiple positive events have occurred that should have driven the stock closer to 200p:
- Suboxone sales have remained resilient in the face of generic competition (and even saw modest growth last quarter)
- Sublocade prescription growth has accelerated (currently growing 20% quarter over quarter)
- Sublocade sales should easily exceed management guidance
- Potential competition from Brixadi has been pushed out an indeterminate amount of time as Braeburn, its manufacturer, received a complete response letter from the FDA that was disclosed in a sparsely worded press release
Based on assumed growth in cash flows as Sublocade continues to ramp, it is very easy to see a near term value the Company’s stock of 200p. At 200p, the market capitalization would be ~$2bn with almost a $1bn of cash on the balance sheet and $600mm of revenue that will continue to grow for many years. Looking out a few years, we project that Indivior’s revenue to be above $1.3bn in 2025 and the Company will generate more than $600mm in EBITDA and earn 50p per share. Indeed, the stock was trading at almost 500p per share in 2018 and could go back to the level once the Reckitt litigation overhang is lifted and the Company continues to execute on its growth plans. A 500p stock would equate to 10x these 2025 projections.
Background on Indivior’s Life-Saving Products
Indivior has long been the leader in the U.S. medication-assisted treatment (MAT) market for addiction. Suboxone, its leading product, combines two ingredients, buprenorphine and naloxone, which act to reduce opioid cravings without inciting feelings of euphoria. It has been the industry leading product for almost 20 years. After generic competition was introduced in February 2019, sales initially fell but have since stabilized at over $70mm per quarter for 2020. The Company’s ability to maintain an ~40% share of the U.S. buprenorphine film market is likely due to an overall increase in treatment drug prescriptions and customer loyalty to the Suboxone brand. This high margin business continues to add to the Company’s strong cash flows.
Whereas Suboxone represents steady cash flows, Sublocade represents growth. Sublocade, which gained FDA approval in 2018, is a long-acting version of buprenorphine administered as a monthly injectable in a physician’s office. The efficacy of Sublocade is so significant that it is viewed by many medical professionals as a game-changer. Despite the Covid pandemic keeping patients away from doctor offices, recent quarterly growth of Sublocade has been ~20%. As Indivior expands its marketing into new channels including organized health systems, we expect this growth to accelerate.
In addition, based on its injectable technologies, the Company has been developing several new drugs. One such drug, Perseris, is a monthly injectable version of risperidone, a drug used in the treatment of schizophrenia. Perseris is in the early stages of launch and, as with other injectable in-office medications, is currently being impacted by the Covid pandemic. Yet despite the slow rollout, sales are projected to grow from the current $15 million to a management projected $200 million peak in a few years.
Outside the U.S., the Company also sees the opportunity for significant growth as Suboxone film and Sublocade approach approval. Indivior reported its first sales of Sublocade outside the United States last quarter and expected to launch the product in Europe next year. Rest of world sales are expected to see multiple years of growth with the launch of Sublocade and Suboxone film.
Competition for Sublocade is Weak
Given the central importance of Sublocade to Indivior’s growth story, just how secure is this franchise medication? Fortunately, for Indivior, Sublocade’s position should be well protected. Patent protection for Sublocade is strong, with coverage currently through 2038. So generic competition is clearly not a near-term threat. While other manufacturers could attempt to challenge these patents, our analysis shows, and an independent review by a law firm specializing in the patent law, confirmed that Indivior’s intellectual property for Sublocade is strong and should withstand any such challenges if they were to arise.
While a competing branded drug is on the horizon, that drug, Brixadi, will not come to the US market for some time. The product was expected to come to the US market three years ago and has seen numerous delays. It is not clear when (if ever) the product will actually be launched. Brixadi’s U.S. commercial partner Braeburn Inc. (“Braeburn”) is currently tied up with several major issues. For one, the drug’s Swedish developer Camurus AB (“Camurus”) has sought to terminate the arrangement with Braeburn. However, an arbitration panel just ruled in Braeburn’s favor, leaving this undercapitalized private company as Camurus’ continuing partner. Second, as a branded competitor, Brixadi will need to be introduced through a new marketing and sales force without the deep contacts possessed by Indivior. Finally, Brixadi has not yet even received FDA approval. Rather than receiving the expected final approval this month, Braeburn instead received a Complete Response Letter (“CRL”) from the FDA citing quality related manufacturing issues at Braeburn’s third-party manufacturer. A full FDA review of these issues, especially given its current focus on approving Covid medications, is likely not to happen for at least a year. As a result, we don’t expect that Brixadi will become available before late 2021 or early 2022.
While the Reckitt and DOJ cases have clearly been the central focus of the Company’s litigation claims, several other pending matters remain unresolved. The good news is that the DOJ settlement also included settlements with the states (on similar matters), the Federal Trade Commission (FTC) and several other investigations. However, the Company still faces open multi-district civil antitrust / consumer protection cases brought by a number of state attorneys general, a group of end payor insurers and a group of direct consumers. These cases have been pending for several years and we do not believe they will be resolved in the short term. However, our analysis of these cases suggests that the economic liability for Indivior is modest at best.
Other unresolved litigations include various qui tam complaints relating to the DOJ case (which the Company has reserved for), a securities class action relating to the Company’s ADR’s (we believe won’t be material) and the multi-district opioid manufacturer cases (“MDL cases”). Indivior was named in some of the MDL cases as one of many listed manufacturers of opioid products. The MDL case is related to the use of opiates for the treatment of pain. These cases are currently stayed, and so Indivior cannot challenge its inclusion. However, we believe strongly that Indivior will not be held in the same category as manufacturers of OxyContin and Vicodin. While buprenorphine is a partial opioid and shows up on lists of opiates, Indivior’s medications were never prescribed for pain management. Instead, the sole effective use of buprenorphine is as a treatment for opioid use disorder. We believe the Company will ultimately succeed in having itself removed from these litigations.
Affirmative Claim Against Dr. Reddy/Alvogen
Interestingly, Indivior is in a good position to benefit from another potential litigation. Generic manufacturers Dr. Reddy’s Laboratories (“DRL”) and Alvogen have each begun marketing generic versions of Suboxone film. However, they are each manufacturing this product “at risk” since Indivior has challenged these competitors as having violated its patents. We believe that Indivior has strong grounds and is likely to succeed on these claims. If successful, Indivior could seek damages that we estimate to be as high as $200 million, based on the lost profits attributable to these manufacturers. In addition, Indivior was forced to post a surety bond of $108 million. Even in the case of a settlement that provided only a slight payment to Indivior, it would be able to reclaim this posting back to its balance sheet.
· Negative Covid pandemic
· Additional litigation claims or unexpectedly high settlement of outstanding claims
· Brixadi impact if/when it enters the market
· Increased generic competition for Suboxone
(1) While the Company has two readily tradeable securities, the primary shares listed on the London Stock Exchange (INDV_LN) and U.S.-listed ADR’s (INVVY), we choose to focus on the primary shares. While the ADR’s remain outstanding, the Company no longer supports this program. As a result, extreme movements in the stock have occurred for no explainable reason. We believe this volatility and lack of liquidity makes the ADR’s unnecessarily risky to buy, even though our preference would be to invest through the U.S. exchanges
(2) Reckitt also seems to have failed to follow other procedural requirements, such as providing Indivior timely notice and details of any claim, and consulting with Indivior with respect to the claim (Schedule 4, section 1). These failures could negate, if not severely limit, Reckitt’s entitlement to damages.
This analysis is for informational purposes only and presented “as is” with no warranty of any kind, express or implied. The analysis and the information therein should not be construed as investment advice, or as an offer to sell or the solicitation of an offer to buy any securities or other financial instruments. The opinions and information contained herein are only attributable to the author and not to any other person or entity and are not attributable to any officer, director, employee, agent, or client of the Company. By viewing this analysis, you agree that use of the research presented therein at your own risk. You agree to hold the author harmless for any direct or indirect losses attributable to any information in this analysis. You further agree to do your own research and due diligence before making any investment decision concerning any securities, issuers, or entities referenced in this analysis. You should assume that as of publication date of the analysis the author has taken a position in the securities of issuers referenced in this analysis, including derivatives of such securities, and stands to gain or benefit from market movement in those securities. Such positions may be long and the author may continue to take positions or modify positions in those securities at any time following publication of the analysis and may not report or update any information concerning those positions. The author is not giving you investment advice and the author does not have a fiduciary duty to you. To the best of the author’s belief, all information contained in this analysis is accurate, reliable, and has been obtained from public sources. However, the author makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any information contained in this analysis or concerning results that may be obtained from its use. This analysis contains analysis and opinion. All analysis and expressions of opinion in this analysis are subject to change without notice and the author does not undertake to supplement or update the analysis and opinions therein.
· Resolution of Reckitt claim dispute
· Quarterly financial results
· Prescription data showing an acceleration in Sublocade sales growth
· Perseris growth
· Successful prosecution of claims against DRL/Alvogen which would at a minimum return $108mm of restricted cash to Indivior. Additionally, there is a potential further financial recovery given the ‘at risk launch”
· Company announcement of share buyback program
· Potential takeover candidate by a strategic or PE firm
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