Shares of Indivior (INVVY), (IZQVF) plunged last week due to a court ruling that could open up generic competition Suboxone Film, Indivior’s its top-selling opioid addiction treatment:
Shares in Indivior plunged 40 percent on Friday after it said a U.S. court ruling could lead to a generic rival to its treatment for opioid addiction that generates 80 percent of the London-listed drug maker’s revenues.
Indivior has said it would not be able to rely on patents to prevent Indian firm Dr.Reddy’s from making and marketing a generic alternative to Suboxone Film unless the ruling by the Delaware District Court was reversed on appeal.
The court also ruled that Dr Reddy’s (RDY), an Indian generic drug maker, had not infringed on Indivior’s patents with a copycat version of Suboxone Film. Suboxone Film accounts for over 80% of Indivior’s revenue. According to the company it had a 61% market share in the United States. Dr. Reddy’s would still have to secure FDA approval, but the entrance of a generic rival could destroy the company’s market share and earnings.
The Situation
Indivior specializes in the treatment of addiction and its co-morbidities. Its key treatment – Suboxone – works to eradicate opiates’ influence on the brain, and allows “opiate addicted users to stop taking drugs such as heroin (or pills such as OxyContin or Vicodin) without experiencing painful withdrawal symptoms or struggling with drug cravings.” It markets its products in 42 countries but the lion’s share of sales is derived from the United States. In Q2 2017 the company generated revenue of $288 million, up 5% Y/Y. Revenue was buoyed by continued strong market growth in the U.S. partially offset by generic competition and price sensitive payors like managed care.
America’s Opioid Dependence
America has an opioid crisis. The number of accidental deaths related to opioids and the number of people addicted to them continues to rise. Some believe the statistics are driven by the proliferation of opioid prescriptions. According to The Economist, between 1991 and 2011, opioid prescriptions supplied by retail pharmacies increased from 76 million to 219 million – a 5.4% CAGR. Several state attorneys general believe drug makers have in certain instances fraudulently misrepresented the serious side effects of opioid use.
The U.S. government is seeking to tamp opioid use. In the meantime, opioid addiction and the drugs used to treat them are big business. According to the company the net sales of buprenorphine treatments based in the U.S. exceed $1 billion. The U.S. accounts for about 80% of the total market; there approximately 2.5 million patients, the majority of whom are addicted to prescription pain killers.
Indivior’s market sizeable market share and high profit margins was bound to attract competition. In Q2 the company enjoyed gross margins of 91% and EBITDA margins of 50%. That will likely change dramatically with the entrance of Dr. Reddy’s. There are several other generic companies – including Teva (TEVA) and Mylan (MYL) – seeking to commercialize generic versions of Suboxone Film in the U.S. That said, more generic competition in addition to Dr. Reddy’s could be on the way.
Conclusion
With a $2.6 billion enterprise value Indivior trades at 5.5x run-rate EBITDA. I believe the stock will fall further as a generic Suboxone enters the market. Avoid the stock.
