Why this 40% slump is a buying opportunity

A month is a long time in the corporate world – and so it's proven for drug-maker Indivior.

Just five weeks ago, executives, shareholders and its long list of City cheerleaders were popping the champagne corks and celebrating stellar half-year results.

First-half operating profit had increased 23% on revenue up 4%, and guidance for full-year was raised. Shares shot up 17.5% to an all-time high at 373p. They closed last night at 416.6p.

That valued the company, spun out of Reckitt Benckiser and listed on the stockmarket shortly before Christmas 2014, at £3 billion, and analysts were tipping the stock up to a fiver.

But all that hard work was undone in one fell swoop Friday. We learned this morning taht The US District Court for the District of Delaware found that a rival drug to Indivior's flagship Suboxone Film does not infringe upon its patent.

The ruling paves the way for generic versions of the treatment for those addicted to prescription painkillers and heroin, like the one from Indian firm Dr Reddy's that led to the case being brought to court. The company will appeal the ruling, we're told.

The Slough-based company said its raised guidance assumed no generic film launch, which seems rather imprudent. Clearly, the risk to that guidance has now increased significantly.

Suboxone has a market share in the US of around 59%, and sales of the drug across the pond represented 80% of Indivior's revenue in 2016.

A material loss of that market share – typically 80%, according to a 2016 industry report – would have a significant adverse impact on revenues, profitability and cash flows, Indivior explained. This "could occur within months of a successful launch of a generic film alternative into the US market".

Chief exec Shaun Thaxter tried to remain upbeat, remaining confident in the firm's long-term outlook and vision. But he could ony watch as over £1 billion was wiped off its market cap this morning. Shares immediately slumped up to 41% and currently pass hands for just 260p, a 14-month low.

There are still plenty of moving parts, though, according to those previously uber-bullish analysts. Results of its application for a new drug, RBP-6000, are still to come – expected 30 November – which broker RBC sees as key to its investment case. Recent comments from president Donald Trump that he would formally declare the US opioid crisis a national emergency suggest there is a big opportunity to capture.

Back in July, Numis described RBP-6000, which will treat US patients with moderate-to-severe opioid use disorder, as "potentially transformational" for Indivior. Should it receive the go-ahead, it could be launched as soon as the first quarter of 2018.

It's why this morning's move is seen by some as an "over-reaction". Paul Cuddon at Numis cut his price target slightly to 470p, but sees the slide as "an excellent entry point".

RBC's Nick Keher agrees, attributing a range of 350p-422p as where the stock should have fallen. The fact that sentiment drove shares lower presents "an opportunity for investors".

Clearly, it's a share for only the very brave and the risk/reward needs to be considered carefully. But the firm still has a strong pipeline and healthy balance sheet, while the appeals process could take up to 18 months.

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.