Drug manufacturer Indivior (LSE:INDV) has seen its shares leap to one of the biggest daily gains on the FTSE All Share market after it hiked revenue and income guidance for the year. Is it time now to jump on board and make some money?
The shares pumped higher on the back of remarkable results, with net income almost double expectations at $160m to $190m, while revenues surged $70m higher.
The news looks good on paper. Q3 cash on hand over $1bn? On a market cap of £383m? Either this company is massively, stupidly undervalued and buyers are going to make a fortune, or something is very wrong here.
Indivior was spun out from FTSE 100 consumer giant Reckitt Benckiser. It is listed in London, hence the sterling market cap, but does most of its business in the States, earning in dollars.
Follow the money
More sales, bumper cash flow, cut-price shares, that’s the value we’re always banging on about, right?
We all like to buy in knowing the shares will go higher, and managers revising guidance upwards is usually a strong signal. But with the volatile state of the market right now, we’re seeing portfolios swing wildly from red to black and back again.
A telling statement from CEO Shaun Thaxter said the raised guidance reflected “continued stronger than expected market share performance of Suboxone Film,” but crucially “we cannot be certain how long this benefit will last…“
When I see short-term statements like that from the boss, it’s a giant warning sign that not all is fine and dandy.
Some quick context on Indivior: it was only as recent as April 2019 when the business faced utter eradication. A grand jury in Virginia indicted the company on 28 counts of fraud, alleging it illegally made billions in revenue on the back of Suboxone Film, the opioid addiction treatment drug it sells across the US.
The shares crashed by nearly 75% on news that if found guilty, the London-based manufacturer would have to forfeit $3bn in cash, along with all of its patents, bank accounts and trademarks.
“Indivior promoted [Suboxone Film] with a disregard for the truth about its safety and despite known risks of abuse,” claimed Assistant Attorney General Jody Hunt. Reckitt Benckiser settled the suit for $1.4bn in July.
It’s estimated Indivior made around 80% of its revenue from Suboxone Film. But the US Supreme Court ruled in February 2019 that it no longer had the right of exclusivity on the drug, meaning cheaper generic alternatives could flood the market. Indivior lost an appeal against the decision in July this year.
If nothing in this tale worries you yet, an impossibly low price-to-earnings ratio of 1.68 should give some pause.
Anything under 5 is basically the market saying these shares are too cheap. Way, way too cheap. If there was any realistic chance of the business making the earnings it is projecting, based on these share prices, we’d all have gold Bentleys and live in the Bahamas by now.
Keep your powder dry
Legal risk and a loss of exclusivity on the company’s main money-spinner mean that in my opinion these shares don’t make any sense.
If I were you I’d keep hold of my cash and get ready to invest in the many other opportunities cropping up daily.
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Tom has no position in the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.