Shares in Reckitt Benckiser spin-off, Indivior (LSE: INDV), were as much as 18% weaker today after the pharmaceutical company released a disappointing set of full-year results. The FTSE 250-listed firm, which has a market capitalisation of £2.3bn, reported a lower pre-tax profit than expected as a result of generic competition in the US and price pressure in the EU, which was at least partly caused by continued government austerity in the region.
In addition, the company’s outlook for 2015 is somewhat challenging, as it has stated in today’s update that it is ‘very uncertain as to the timing, extent and impact of tablet price erosion’. As such, its guidance of net income of $130m to $155m for the current year could be subject to significant change as we move through the year, which is clearly a major negative for investors in the company.
And, even though the company’s key drug, Suboxone Film, has proved somewhat resilient in 2014 and still commands a market share of 58% in the US (down from 67% in 2013), it could see further falls in revenue as cheaper, generic alternatives cause even the most loyal of customers to switch to more economically viable products.
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Looking Ahead
Clearly, the present time is highly uncertain for Indivior and the company’s share price is likely to come under further pressure in the short term, until more is known regarding the trading landscape both in the US and in Europe. However, much of this appears to be priced in to the company’s current share price, with it offering a very wide margin of safety at the present time.
For example, assuming a pretax profit of around $143m in 2015 (the midpoint of the company’s guided range of $130m to $155m) means that Indivior trades on a price to earnings (P/E) ratio of 16.4 which, for a major pharmaceutical company, appears to equate to relatively good value for money.
In fact, sector peer, AstraZeneca (LSE: AZN) (NYSE: AZN.US) also trades on a P/E ratio of 16.4 despite still experiencing the effects of a patent cliff, where its top and bottom lines are continuing to experience severe pressure from generic alternatives. As such, AstraZeneca is not expected to begin growing its bottom line until 2017 at the earliest and, as a result, the medium term outlook for the company remains highly uncertain, which is a similar position to that which Indivior currently faces.
Therefore, while today’s results are disappointing and Indivior’s prospects are highly uncertain, now could be a good time to buy a slice of it. Not only does it seem to offer a considerable margin of safety for a major pharmaceutical stock, it also trades on the same rating as AstraZeneca. Certainly, the next couple of years will be somewhat volatile for investors in both companies but, in the long run, they could deliver superb gains and, as such, seem to make a sound combination play.
