2 FTSE 250 pharma stocks I’d buy today and hold for another five years

Roland Head takes a look at two unusual pharma stocks with long-term growth potential.

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Shares of US pharma group Indivior (LSE: INDV) fell by as much as 20% on Friday morning, after a judge ruled against the firm in a patent case. But the share price bounced back rapidly and was only 7% lower after the first hour of trading.

Today I want to explain why the market still seems confident in Indivior — and why I share this view.

A race against time

Indivior’s main product is Suboxone, a treatment for opioid addiction that’s used widely in the US. Although cheaper generic alternatives are available in tablet form, many doctors prefer to prescribe Suboxone Film, a version that’s placed on the patient’s tongue where it quickly dissolves.

So far there are no generic alternatives to Suboxone Film, meaning that profit margins are high. But last week Indivior lost a court case against would-be generic rival Alvogen. The court ruled that Alvogen’s generic version doesn’t infringe any of the three patents involved in the case.

The US Federal Drug Administration hasn’t approved Alvogen’s product yet, so it can’t go to market straight away. Indivior also plans to appeal and has launched two new patent infringement claims against the company.

However, the likelihood of a generic Film product coming to market seems to be rising. Indivior warned on Friday that if this happens, it could result in “a rapid and material loss of market share for Suboxone Film … within months”.

A big opportunity?

It’s clear that it needs some new products. It plans to launch a new schizophrenia treatment later this year, but one of the firm’s biggest hopes is a new once-monthly addiction treatment called Sublocade. This has only just been launched, but the company believes annual sales could reach $1bn.

Given that the group’s current revenue is $1.1bn, I’d argue that Sublocade looks like a potential replacement for Suboxone Film.

This situation isn’t without risk. But Indivior ended last year with net cash of $376m and has an impressive track record, in my view. I continue to rate this as a buy-and-hold opportunity.

A safer alternative

One company that sits on the other side of the fence to Indivior is generic pharmaceutical specialist Hikma Pharmaceuticals (LSE: HIK).

When I last wrote about it in August I suggested it as a potential turnaround buy. I’m pleased to say that the group’s recent 2017 results confirmed this view. The figures also provided some welcome support for Hikma’s share price, which has risen by 25% since the results were published on 14 March.

The firm now has a new chief executive who is overseeing the consolidation of several manufacturing facilities and distribution centres in order to cut costs. Hikma has also launched 44 new compounds globally, expanding its product portfolio.

The group’s underlying financial performance remains strong. Underlying free cash flow rose from $59m to $235m last year. This enabled the firm to reduce net debt from $697m to $546m, while still providing cover for the group’s dividend.

Hikma shares currently trade on a 2018 forecast P/E of 17 with a prospective yield of 2%. With earnings expected to rise by 15% in 2019, I believe the stock could be a good long-term dividend-growth buy at current levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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