When it was first spun out of parent Reckitt Beckinser in 2014, opioid addiction specialist Indivior (LSE: INDV) looked like a great investment.
And to begin with, the stock performed exceptionally well, nearly doubling in value over the next 12 months. However, after jumping to a high in June 2015, the stock slumped back below its IPO price at the beginning of 2016. But the stock then charged higher to an all-time high of 490p at the beginning of June this year.
Over the past 40 days, the positive performance of the past few years has been almost entirely erased. At the end of last week, the stock was changing hands for just 300p, 39% below the all-time high. Once again, the stock has clawed back a chunk of these declines today, rising 23% in early deals.
One trick pony?
Indivior’s shares are highly volatile because the business essentially only has one product. The company’s opioid addiction Suboxone Film generates 80% of revenue. While the market for this product is tremendous, Indivior’s fat profit margins have other companies itching to get in on the action.
The latest challenger is India’s Dr.Reddy’s Laboratories. Dr. Reddy’s has received approval from the Food and Drug Administration to launch a generic version of Suboxone Film cutting into Invidior’s revenues. Last week the company warned that its revenue and profit guidance for 2018 was “no longer valid” following Dr. Reddy’s assault on the market, a warning which sent Indivior’s shares plunging.
Today the stock is rising off the back of the news that Dr. Reddy has been blocked from selling its rival product with a court injunction. This is positive news for the company in the near term, but what worries me is that it competitors are clearly massing for an assault on Indivior’s lucrative business.
With the US suffering from an opioid addiction crisis, lawmakers are unlikely to protect the group’s monopoly forever. So, it is no surprise City analysts expect Indivior’s earnings per share to fall by more than 60% over the next two years.
Despite this dour forecast, the shares trade a forward P/E of 17.9. With the long term outlook uncertain, I’m avoiding the company.
Creating investor wealth
In my opinion, Melrose (LSE: MRO), on the other hand, has a much brighter outlook. The company essentially operates as a private equity business. It buys, improves and then sells engineering businesses, rewarding shareholders with large payouts when deals complete.
The company’s record at creating value is flawless. Between 2012 and 2017, Melrose estimates it has created £3.6bn in value for shareholders, an average annual return of 22%, roughly two and a half times the average FTSE 250 annual return over the same period.
The company’s latest target is GKN, which it acquired earlier this year with the goal of transforming the business. City analysts are expecting big things. Earnings growth of 53% is pencilled in for 2018 and growth of 36% is projected for 2019.
Based on these estimates, the stock is trading at a slightly pricey forward earnings multiple of 15.7, but in my opinion, this is a price worth paying for a business growing at 30%+ per annum with a record of creating billions of pounds in profit for investors. In fact, based on its record, I would rate Melrose as one of the cheapest growth stocks in the FTSE 250.
