Investing in a company that only has one product is always risky, as shareholders in Indivior (LSE: INDV) discovered this morning. The group has announced that dividends will be suspended for the foreseeable future once the final dividend for 2015 has been paid.
Indivior shares were stable following the news, but have fallen by 44% from last summer’s high of 271p. Any hope of a rapid rebound look less likely now that the stock’s attractive 5% yield is gone.
In today’s article I’ll look more closely at Indivior’s 2015 results. Are the shares still a buy, or might you do better to invest in larger peers such as AstraZeneca (LSE: AZN) and Shire (LSE: SHP).
2015 good, 2016 bad?
Indivior was expected to report earnings per share of $0.31 and sales of $951m for 2015. The actual results were slightly better, with the firm generating $1,014m of sales and earnings of $0.32 per share.
An operating profit of $346m gave a healthy margin of 34%. Net debt fell to $174m, from $428m the year before. Given the firm’s post-tax profit of $228m, there doesn’t seem much reason to cancel the dividend.
However, Indivior’s net debt appears low because it has a large cash balance. Total borrowings are $605m, and the firm incurred $44m of interest costs last year. As generic competition increases, Indivior expects profits to fall by around 25% in 2016. Debt levels need to come down to maintain an acceptable ratio of debt to earnings.
Indivior also has a second problem. There are currently six new drug applications in the USA for generic alternatives to Suboxone Film, Indivior’s core product. Current generic competitors can’t use film (which dissolves on the tongue) to deliver the treatment, which is used to treat opioid addiction.
Indivior’s profit guidance for 2016 assumes that no generic film products will enter the market. If a generic film application is successful, then Indivior could see a much sharper fall in sales and profits.
Cutting the dividend makes sense, but it could be a few years before shareholders see the benefits of Indivior’s pipeline of new products. Are the shares a sell until the outlook improves?
Bigger = better?
AstraZeneca has its own problems with generic competition. The firm’s profits are expected to flatline in 2017, but are forecast to be 50% lower than in 2011.
However, AstraZeneca’s much larger portfolio and its pipeline of new products means that shareholders haven’t lost out on the firm’s attractive 4.5% dividend yield. The potential for longer-term growth remains significant, in my view.
Trading on 15 times forecast earnings, AstraZeneca looks more attractive to me than Indivior, whose shares are now cheap for a reason.
I’m less keen on Shire. The firm is in the process of completing the $32bn acquisition of Baxalta. This is a deal that should provide some attractive new products but will also leave Shire with net debt of around $25bn. Although Shire trades on an apparently cheap 2017 forecast P/E of 11, when debt is factored-into the firm’s valuation the shares look fully-priced to me.
I’d also like to see some evidence that Shire can diversify away from a high level of dependence on its flagship Vyvanse ADHD treatment, which accounted for 28% of the firm’s sales last year.
