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Could Indivior PLC Be A Better Buy Than AstraZeneca plc And Shire PLC?

Reckitt Benckiser’s pharmaceutical spin-off Indivior (LSE: INDV) has been a stunning performer this year, climbing by 76% in seven months since the firm’s shares started trading.

At first glance, this seems strange. The firm only has one product, Suboxone, which is a treatment for opioid addiction, including heroin addiction.

Since 2014, the firm has faced an onslaught of generic competition in its main market, the US. No fewer than four companies have gained approval for cheap generic alternatives to Suboxone.

Indivior’s earnings per share are expected to fall by 54% in 2015 and by 21% in 2016.

Given this, why have investors pushed the shares up so that they are trading on a 2016 P/E of 18.4, while offering a below-average 2.5% yield?

In the remainder of this article, I’ll provide two possible explanations for Indivior’s strong valuation.

I’ll also ask whether investors looking for growth and income might do better with AstraZeneca (LSE: AZN) (NYSE: AZN.US) or Shire (LSE: SHP) (NASDAQ: SHPG.US).

Option 1: Beating expectations

Indivior shares are currently priced on a historic P/E of just 8 times 2014 earnings. It’s quite possible that the firm’s earnings per share will not fall as fast as expected in 2015, which could leave the shares looking cheap.

There are three ways this might happen. Firstly, Suboxone pricing may not fall as fast as expected.

Secondly, prescription volumes are rising, as a result of US Medicaid legislation.

Finally, Suboxone has a technical advantage over its generic competitors. Indivior’s product is available as a film that dissolves on the patient’s tongue. Alternatives are only available as tablets, which can be secreted and traded for drugs by addicts.

Option 2: Pipeline delivers

Indivior does have a small number (four) of new products in development. The most advanced of these is due for patient trials this year.

It’s possible that one of these products will become a blockbuster success, replacing the patent-protected profits formerly generated by Suboxone.

However, relying on such a small pipeline to deliver a major success is risky, in my view.

What about AstraZeneca and Shire?

Patent expiries have caused AstraZeneca’s earnings per share to plunge from $7.24 in 2011 to just $0.98 in 2014.

Despite this, the firm’s shares have outperformed the FTSE 100 over the last five years. They also offer a higher yield, at 4.1%, than the FTSE 100 average of 3.6%.

AstraZeneca’s size and financial firepower has enabled the firm to convince investors that a turnaround is on the horizon. A generous takeover proposal from Pfizer also helped boost sentiment.

AstraZeneca currently trades on a forecast P/E of 16.1. In my view it remains a good long-term income growth buy.

In contrast, Shire’s growth over the last five years has been remarkable. Today, the firm’s shares are 272% higher than they were five years ago.

Like AstraZeneca, Shire’s share price has been boosted by a failed takeover bid, but earnings have risen too. Shire’s earnings per share are expected to be 140% higher in 2015 than in 2011.

However, Shire looks quite fully valued at the moment, with a 2015 forecast P/E of 22 and a yield of just 0.4%. I suspect the best of the firm’s growth has now passed, so now could be a good time to lock in some profits.

Would I buy Indivior? Probably not at today's price, but I wouldn't blame anyone who did. Picking big-cap stocks for long-term portfolios is a complex task with many possible solutions.

However, one set of stock suggestions I really think you should see are the five companies chosen for "5 Shares To Retire On".

These hand-picked income growth plays all offer outstanding long-term prospects. Each of them has a sustainable competitive advantage.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.