Why I’ve Bought Reckitt Benckiser Group plc’s Spin-Off, Indivior PLC

Reckitt Benckiser Group Plc’s (LON: RB) spin-off Indivior PLC (LON: INDV) looks to be undervalued.

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At the end of last year, Reckitt Benckiser (LSE: RB) spun off its pharmaceutical division — previously named RB Pharmaceuticals — into a new company called Indivior (LSE: INDV). Reckitt’s management has been trying to refocus the company’s portfolio over the past year or so, and the Indivior spin-off was part of this plan.

Reckitt has been trying to dispose of Indivior for some time. The pharmaceutical company’s sales have been on the slide after US regulators gave the green light to other manufacturers to produce rival generic versions of its heroin substitute drug, Suboxone.

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And Indivior’s declining revenues have impacted Reckitt’s growth. For example, during the third quarter Reckitt’s sales only expended by 2%, although growth would have been 3% excluding Indivior. Reckitt is expecting full-year revenue growth of 4% to 5% now Indivior has been spun off. 

An interesting opportunity 

On its first day of trading, Indivior jumped by 17% as demand for the company’s shares was high. It’s easy to see why. Indivior was spun off in a hurry and Reckitt, it seems, couldn’t be bothered to wait around to get the best price.

Indivior is a global leader in the treatment of opioid dependence, with over two decades of history behind it. The group’s core products, namely the drug Suboxone, are sold in up to 44 countries.

Sales of Suboxone tablets have recently come under attack from generic competitors. However, Indivior has fought back with Suboxone film, the sales of which are holding up relatively well. 

Still, there’s no denying the fact that Indivior is under pressure. Total revenues from the Indivior business are expected to fall by more than 12% this year and profits are likely to fall by 25%, due to lower net revenues but also higher R&D costs.

But here’s the thing, at present levels, Indivior is cheap, really cheap. The company currently trades at an estimated 2014 P/E of 5 and a forward P/E of 9, both of which are significantly below the pharmaceutical sector average P/E of 30. Full-year 2014 earnings per share are expected to be somewhere in the region of 31p per share.

Management has stated that it will payout 40% of earnings as a dividend. So, based on this, at current levels Indivior is set to support a yield of around 7% this year.  

Additionally, the company is highly cash-generative and a gross margin of nearly 80% has been reported for the past five years. 

Room for growth 

Indivior is cheap but the company is cheap for a reason; sales are falling. However, now the company is independent it can focus on growth, and Indivior’s potential market is huge. 

Twelve million people abuse opioids annually in the US and 2.5m of them need treatment for addiction. At present Indivior only treats a quarter of these patients.

What’s more, the company has a pipeline of drugs under development that will hit the market over the next few years. These new treatments include drugs for cocaine overdose and alcohol dependency, as well as treatments for schizophrenia. One new product launch is planned every year from 2016 through to 2020. With over 250 sales reps in the US alone, Indivior already has the infrastructure in place to shift these new products. 

Cheap growth 

So all in all, Indivior is cheap, cash-generative, is set to support a hefty dividend yield and has the foundations in place to grow rapidly from 2016 onwards. I believe the company offers long-term growth and income at an extremely attractive price. 

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