Share of the Week: This healthcare small-cap could treble

In the pharmaceutical space, Thursday 27 July 2017 will be remembered for the spectacular fall in AstraZeneca's share price - but a smaller-cap alternative quietly made waves the same day.

Astra, a stalwart holding for many high-profile fund managers, was hammered after negative results from tests on its flagship lung cancer treatment Mystic. Having banked on a better outcome, shares slumped 17% to 4,260p, a six-month low, and fund managers were queuing up to stick the boot in.

Back in February, the Liontrust Macro Equity Income fund slashed its exposure to the firm from 5% to 0.8%, but manager Stephen Bailey said the reasoning behind that decision was not due to any negativity on global healthcare as a theme.

In fact, "we're so positive on the sector's unique macro-thematic backdrop… that it makes up about 15% of the fund". While his fund is concerned with the bigger players in the sector - GlaxoSmithKline is its largest holding - it paints a positive picture for drug manufacturers on the whole.

With that backdrop, our focus today is on FTSE 250-listed Indivior. The Virginia-headquartered firm focuses on the treatment of addiction, with its flagship Suboxone Film treating those addicted to prescription painkillers and heroin.

"Strong" results for the first half of 2017 Thursday saw it up full-year guidance by 4%. Full-year net revenue is now expected to be between $1.09 billion (£833 million) and $1.12 billion, the company said, with a new range for net adjusted income of $265 million to $285 million.

The upgrades reflect strong US market conditions, market share resilience of Suboxone Film and lower legal and R&D expenses. These factors helped Indivior post first-half operating profit of $244 million, up 23% year-on-year.

Boss Shaun Thaxter also described the submission of a new drug application for its RBP-6000 product made during the period as "a major landmark in securing the long-term future of Indivior".

The drug is a "potentially transformational treatment" for US patients with moderate-to-severe opioid use disorder, he explained. Numis Securities analyst Paul Cuddon says RBP-6000 should be launched in Q1 2018.

Shares closed Thursday up a huge 17.5% last night at 372.8p and ticked even higher Friday - just shy of £3.80 - to test a record high before falling back to 362.7p by midday.

Formerly known as Reckitt Benckiser Pharmaceuticals (RBP), Indivior was spun out of Reckitt two and a half years ago. Thaxter was made CEO of RBP in 2009, having joined Reckitt & Colman in 1995, before its merger with Benckiser.

Reckitt listed RBP on the London Stock Exchange as Indivior on 23 December 2014. Its ascent has been a rocky road. Opening up a 120p, shares rose quickly to 271.4p by mid-2015 before a steady decline took it back towards its IPO price last February. But since then, it's rocketed. All told, since flotation, gains currently sit at 202.5%.

But analysts want more - both Numis and Jefferies have price targets of 490p on the stock. Numis even goes as far as to say that target, its base case, is generated on "relatively cautious forecasts". It hopes for 640p, but has a blue-sky target of over £10.

Challenges remain, says Cuddon. These include litigation regarding some of its abbreviated NDAs and an ongoing investigation by the US Department of Justice.

Resolving these "could act as a major catalyst for a re-rating", says Jefferies' James Vane-Tempest. It will then also give Indivior the ability to utilise its substantial net cash reserves, which stand at $295 million.

"Timing [the resolution of] either is unpredictable, so we still advocate buying now in the likely scenario that Indivior overcomes both favourably," Cuddon says. Should there be any patent-related weakness in the share price, Cuddon would see this "as an opportunity to buy more".

With forecast earnings per share (EPS) of 35 US cents for 2017, the equivalent of around 27p, Indivior currently trades on a forward price/earnings (PE) ratio of 13.5 times and an EV/EBITDA of 6 times.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.