INDV LN - A Joe’s Pros Interview

Please note, this stock effectuated a reverse split on 10/10/2022 at a ratio of 1/5. The presented data has been updated to account for the change, however, the text of the note may refer to data based on the original presented price of $2.26.

Joe

Good morning, it’s Joe DeMatteo on December 7th, 2021, and welcome to the Joe's Pros Interview. And I understand you'd like to talk about Indivior. 

Pro

Yes, Joe, thank you very much. Yes, Indivior is a position that our fund has. We feel very good about the position and really like the story. 

Joe

Why don't you go into a little bit of the background. What got you interested? I know it's been a volatile situation over the last few years and I know that you think it sets up for growth. So, perhaps put a little bit of background on what's happened in the recent past and why it's attractive here. 

Pro

Sure. Indivior, for a little bit of background, is one of the leading, if not the leading company in the opioid addiction treatment market. That is, they make drugs that help people get out of their addiction, whether it's fentanyl, heroin or opioids. They pioneered the first drug for opioid addiction treatment, which was called Suboxone tablets. They were the largest producer and marketer of Suboxone tablets. Later on, the market migrated to Suboxone film, which was also Indivior's main product, also a blockbuster drug. And today they are producing the third most important drug, or at least the next generation of opioid treatment drug called Sublocade, which is just basically Suboxone but in a monthly injectable form. 

But Indivior has had a very troubled past. While it was the leading company in the space, it got involved in marketing activities that led to a DOJ criminal indictment. I know that sounds terrible, but that's unfortunately what happened. And so when the stock was at £500, it got cut in half by first the allegations, or at least the disclosure that the DOJ was investigating the company. The stock got cut in half again when it lost litigation against Dr. Reddy over its Suboxone film that I mentioned. And then when the actual indictment was filed, a lot of times when companies are presented with an indictment, they settle. This didn't settle and led to an actual criminal indictment. The stock went at that point down to £50. And just to be clear, this is a UK listed company but almost all of its sales and marketing and activities are in the US. And so the stock went from £500 to £50 based on these various litigation overhangs, the criminal indictment, the Dr. Reddy litigation over generics, and also there's litigation surrounding their role in the opioid crisis. We think that's the least of the problems that the company had, but those are all various litigation overhangs on the company. 

Joe

Where do those litigations stand now? 

Pro

The litigations are almost all solved. And that's why while it was a broken company, we now think it’s fixed in many ways. They settled with the DOJ in July of 2020. The $3 billion claim that the DOJ wanted was settled for $600 million, paid over time at a 1.5% interest rate. They've already paid out $100 million of it, so we present value that now at around $350 million. 

On the Dr. Reddy litigation, interestingly enough, the generics came in and the thought was that their generic Suboxone film would fall off a cliff. Normally when generics come in, the branded product goes down to 10 percent market share, if not less. What's amazing is Suboxone film, the branded product, has actually started increasing market share. It's remarkable, but the reality is that you're dealing with opioid addicts. You're dealing with people who are in many ways irrational. And in their mind, getting the branded Suboxone film is important to their ability to stay in compliance with their treatment. Doctors are recognizing that, the insurance companies started recognizing that. So whereas before they were taken off the formularies, Suboxone film is back on the formularies. And most importantly, the state of New York just last month decided to reinstate Suboxone film, the branded product, onto their formularies. And so we're seeing while the sales have gone from 100 percent when it was on patent to 33 percent, it's now back to 40 percent plus. So that's remarkable– this is a drug product that the market had sold for dead and said they’re going to lose all their market share, but is now growing market share. It's an 80 percent margin business. Sales were at a low of $70 million a quarter last year in the second quarter. We're now anticipating $90, maybe $95 million a quarter, at least for the next few quarters, which is remarkable because most people considered Suboxone film to be a dead business. 

So, they've solved the big criminal indictment, they're effectively solving the Dr Reddy action– and most interestingly, they actually won the litigation. There was a decision on an appeal with respect to their claim against Dr. Reddy and that went in their favor. So we think in the next year, we may also see a $200, $300, potentially $400 million claim against Dr. Reddy by Indivior. Again, this is a company with a $2 billion market cap. $400 million is not insignificant. Those are the two major litigations that were solved. 

What's left are some of these opioid cases that are out there, but they never produced opioids for pain relief. They were just caught up in the MDL. We think they're going to get dismissed from them once the overall opioid settlement is resolved. They're not a participant in any of the trials and they are not negotiating any kind of settlement because they really have no liability here. But we think that's also an overhang that will get resolved over the next year to two years. Those are the three main litigations. Two of them have been solved, the last one is about to get solved. 

Joe

On the Suboxone film, at first you said that the patients are more comfortable taking something that was not generic. Have there been studies that showed that the branded drug is more efficacious? 

Pro

There's no studies that show that. The reality is that sales are going up and they're maintaining market share. We've done our own internal studies and we've surveyed patients and doctors who prescribe these drugs, and their message is that the hardest decision an opioid addict has to make every morning, because they're in withdrawal in the morning, is, “Do I take my Suboxone film or do I sell it and do heroin?” That's the hard decision they make every morning, and that is what a lot of them fail to do and why you have high relapse rates for addiction. Doctors have found that the patients prefer the brand. It tastes better, it cracks less, they feel it's more efficacious, that it stays with them, they have to take less of those films. These films are like those Listerine mints that you put in for your breath. They dissolve very quickly, but the taste of the branded one, we've been told, is better. It cracks less, it is more efficacious, and so patients prefer that. When you're dealing with an at risk population, when you're dealing with compliance being the biggest issue, anything you can do to keep them on treatment, you're doing. That's why doctors are pushing the brand. That's why insurance companies are acquiescing to the brand. And that's why Medicaid is now, in New York, at least, accepting Suboxone film as a branded product in their formularies. Again, this is such a devastating disease. Just anecdotally, there were 65,000 opioid deaths in 2019. There were 93,000 opioid deaths last year. We're at over 100,000 through October. So, the governments are recognizing we have a crisis and are doing anything we can to help patients. That is what Suboxone film presents to doctors. 

Joe

Thank you for the clarification. It sounded like a risk when you first discussed it, but now I think I understand it better. Why don’t you describe where you think the next couple of years are going for Indivior and why it's attractive here? 

Pro

Sure. We're a firm that focused a little bit on the litigation and once that was resolved, where we normally would sell the stock, we became very big supporters of the company's next generation drug. I mentioned Sublocade. This is really going to be the future for Indivior, but it's really going to be the future for opioid addiction. We're now seeing that Sublocade, which is a monthly injectable, is curing patients of their addiction. There's a little bit of hyperbole in what I say, but there is a lot of truth to that. Sublocade has been shown to address that thing that I mentioned to you, compliance. Every morning, a patient has to make a decision on whether to take their treatment. That goes away with Sublocade. It's a monthly injectable in which buprenorphine, which is the active ingredient, is a partial agonist that takes away the cravings. Suboxone film does this, too, but Sublocade gives you a monthly, steady dose of buprenorphine, which takes away the withdrawal symptoms but doesn't cause euphoria– much less euphoria than even methadone. Methadone actually causes euphoria, but buprenorphine causes very little euphoria. When patients take it, they have a steady stream of buprenorphine in their system. They wake up feeling normal, they can travel again, their lives come back to a sense of normalcy that heroin and fentanyl and opioid addiction took away from them. We've noticed that after 6 - 9 months, once the physical addiction is gone, because they don't wake up feeling the withdrawal symptoms every morning, the psychological addiction goes away, as well. That's what's causing patients now, two years, three years post their last shot of Sublocade to be opioid free. It's remarkable. The studies are remarkable. We interviewed 10 doctors last year. We've interviewed them again. They are all prescribing Sublocade. It's the closest thing to a miracle drug and we're seeing it in the growth. Sublocade is growing 15 to 20 percent quarter over quarter, not year over year, quarter over quarter. We think they’re going to raise guidance in January– they have to. The numbers, the scripts data that we follow, show that it's actually greater than 15 percent. Plus, scripts data from IQVIA and from Bloomberg’s Symphony data doesn't capture the prison systems, and that is really the next chapter for Indivior. They have now penetrated the prison systems. “Penetrated” sounds pejorative– they're actually being welcomed into the prison systems. New York, not only, as I said, re-approved Suboxone film for their formularies, they're now mandating their prisons to use buprenorphine products like Sublocade for their patients. So, we're now seeing penetration in the prison data that's not captured in the scripts data that we're going to start seeing when they report in the fourth quarter. We're going to see that growth. We're going to see 15, maybe even 20 percent, quarter over quarter growth. 

Joe

Is there any competition for Sublocade? 

Pro

Great point. Yes, there is, and that is the one thing we think that's caused the stock to drop over the last month. There's a company called Braeburn which has a branded drug called Brixadi. It's not a generic. It's called Buvidal in Europe and Australia, but it's going to be marketed as Brixadi in the US. They have a PDUFA date of December 15th. They've been denied approval twice already because of problems at the manufacturing facility, but that product will be a competing product. Some people say it's better because the needle is smaller and it doesn't require refrigeration, but there are also studies that show it's less efficacious. It doesn't stay in your body for the full month, and after 25 - 26 days, they need to supplement with Suboxone film. That raises the compliance issue that Indivior doesn’t have because you set your appointments with a doctor every month. You can't go in earlier if you don't have an appointment. So, we think that efficacy is better with the Indivior drug. Cosmetically, maybe a little bit better with Brixadi. In any case, as of today, Sublocade, Indivior’s drug, the only drug on the market, only has 1 percent penetration in the buprenorphine market, and that's getting you to the $230, $250 million of annual sales. Again, this is from $130 million last year, we're at $230, $250 million this year. That's 1 percent penetration. The two competitors could easily have 5 percent. You're looking at $1 billion drug for both companies. 

Having said that, we've actually done a lot of FOIA requests from the manufacturing facility. We think there's probably less than a 50 percent chance that Braeburn gets approved on December 15th. We found out that the manufacturing facility they use, Pharmaceuticals Inc, just was denied another drug last week for another company. They're a third-party manufacturer for Braeburn. They've twice failed their inspection. I'd say it's less than 50/50 that they get it approved on December 15. Even if they did, we think there's room for both drugs. 

The last point I would make is Sublocade offers the ability to discuss fentanyl addiction / overdose in the body of their label, and that's really the biggest problem with opiate addiction. Their competing drug, Brixadi, cannot discuss fentanyl in their label. There is a long section on why Sublocade addresses fentanyl overdose, and this should be a huge competitive advantage. The drug has been in the market for almost four years now, and there is engagement with the insurance companies. Braeburn, which I believe is basically on the verge of bankruptcy right now, has no pharma reps ready yet. They have no approval systems for getting these drugs approved by the insurance company. It's not easy. It took Indivior at least a year and a half to get approved by the insurance companies. So we think it's going to be a headline risk on December 15th, but the reality is that Indivior has been the 800-pound gorilla in the space for 20 years. They've dominated the industry. I don't see much of a competitive threat from Braeburn. But in any case, there's room for both. 

Joe

You say they've got a four-year head start. Has this drug been approved for four years?

Pro

Indivior's drug has been approved. They got approved in 2018. 

Joe

And it's a miracle drug but it only has 1 percent penetration? 

Pro

There were two things that happened. One, they couldn't get the doctors and insurance companies to approve it. This was a little bit of a novelty. This is an injectable. It's a long needle that goes into your abdomen and you had to train the doctors to do this. It's not like an injection for a flu shot. It's actually pretty complicated. You have to hold the fat cells in the abdomen and you have to play with it, and then you have to put the shot in, which, as I said, is painful. So, you needed to train the doctors to do this shot. Then you had to get the insurance companies to approve this. Sublocade is $1,500 a month. Suboxone film branded is $200, Suboxone film generic is like $50 to $75 a month. This was $1,500 a month, but now every state Medicaid office in the country has approved this. Insurance companies have all approved this. It took them a year, year and a half, and then COVID hit. You can only take this drug in a doctor's office. Because of COVID, for almost a year, doctors weren't seeing pharma reps and they weren't seeing patients in person. So, Sublocade slowed down. There was no growth in 2020 because patients couldn't see their doctors. All of that has been resolved. The insurance companies are now all on board. Every state Medicaid is on board. But remember, Braeburn, the competitor is going to have to go through all that. That's why we don't think it's a competitive threat. Yes, it's only 1 percent penetration, but it is now spreading. As we said, the growth is dramatic. It went from $29 million in the third quarter of last year to $36 million to $45 million to $60 million. We're looking at this quarter at potentially $70 million of Sublocade sales, if not more for the quarter. 

Joe

Just a quick thing on the needle. When patients see a large needle coming and it hurts, has that been a problem or do they understand how much better it is? 

Pro

Look, you're dealing with patients. It's hard and it's in their system for a month. That's the other complaint: “Oh, I don't know why this is going to be with me for a whole month.” But you're also talking about people who inject themselves, so they’re not strangers to needles with their heroin and fentanyl addiction. The problem with fentanyl is they're lacing heroin now because fentanyl is cheaper, and that's what's causing all these overdoses. Almost 70 percent of overdoses are fentanyl, so doctors are just so terrified for their patients. I mentioned 100,000 died. There's maybe 5x, 10x that in the hospital for the overdoses. Doctors are recognizing that this needle, as painful as it is, is important. They need it. Patients who had an opioid/heroin addiction all their lives are hearing in their message rooms and chat rooms and amongst their friends who have taken Sublocade that it works. You can't get high. That's what's interesting about buprenorphine. It's a partial agonist. It partially matches up to the opioid receptors to the point where it takes away the euphoria, but because it's partially attached, any heroin or fentanyl that you introduce into your system has nowhere to attach to the opioid receptors. It just gets flushed out of the body, so you can't get high and you can't overdose. That's why doctors are prescribing this. 

Joe

You mentioned fentanyl in the beginning. I'm curious if there was any litigation around fentanyl. Do they manufacture fentanyl? 

Pro

No. They manufacture no fentanyl or opioids. Now, to be clear, buprenorphine is a Level 3 controlled substance. Level 1 is heroin and fentanyl. Level 2 is Oxy and Vicodin. Level 3 is buprenorphine and methadone. They fall into Level 3. It is a controlled substance. That's why they're named in a lot of these opioid suits. We've gone through those complaints where they say Endo has done this and that, and there are pages and pages of what Purdue has done, what Johnson & Johnson has done, what Mallinckrodt has done. The only thing they say about Indivior is that Indivior is a manufacturer of buprenorphine, which is a controlled substance. That's it, because they never prescribed their drugs for pain relief. 

Joe

Ok. Just to tighten it up, what do you see the company earning over the next couple of years? Where do you see the fair value? Do you see this as a growth stock for as far as you can see? How do you frame that up as an investor? Where do you think it goes from here? And any nuances on your numbers versus Street or buy-side numbers would be great. 

Pro

Sure. Just to give you the bigger picture, the company right now is trading at a $2 billion market cap and has over $1 billion in cash. We do a DCF analysis. DCF analysis is one way to do it, and that's our high case, but I think that’s a valid way and the way we're looking at it today. The Street will just use a revenue multiple. That's what a lot of people do with pharmaceutical companies, especially high growth ones. 

We look at Sublocade on a 2025 level. Our base case for revenues is $750 million, and applying a very conservative 2.5x multiple on that gets you to roughly $1.8 billion. They also have rest of the world Sublocade and Suboxone because they sell Sublocade and Suboxone outside of the US. Just based on 2022 estimates, which is very similar to 2021, that is about $245 million. We give a 3x multiple on that. That gets you to $735 million. So, $1.8 billion and $700 million. Then there's US Suboxone, which, again, is growing. We are estimating 2022– we're using 2025 for Sublocade but 2022 for all their other drugs. Suboxone, $283 million. 

Perseris, $79 million. That's their schizophrenia drug. They have a pipeline for cannabis addiction, as well. You wouldn't think that there's a problem with cannabis, but there is. People don't die from cannabis, but they go into psychosis and they have to go to the hospital, so it's a real condition and they're leading the efforts on cannabis addiction. 

Just using the four drugs– Sublocade, Suboxone US, Suboxone/Sublocade rest of the world, and Perseris– our base case, using anywhere from 2x to 3x multiples of those revenues, comes to £343. You then make some adjustments based on cash. They have very little debt. As I mentioned, there's the DOJ and then there's the $250 million revolver. That's the only debt on the company. We subtract the debt from the cash, you get another £80. We come up to almost £435 as our fair value using a revenue methodology, which is what a lot of the Street does. 

Now, most of the broker dealers, Jefferies and Stifel, are very conservative. They're at £300 compared to the £220 price today. We think they're just overly conservative on some of their numbers and they're not using a 2025 Sublocade number. We're using 2025 because we think that's how the market will start looking at it. The whole company is really going to be based on Sublocade. 

That's how we see it. £435 is where we think is fair value at base case against the current £220. Keep in mind, this was £500 just two years ago when Sublocade was still a potential, not the reality that it is today, and when there was the risk that Suboxone film would go off patent. When it was at £500, it hadn't gone off patent but people knew that risk was there. Back then, they still had the DOJ investigation. People knew about the DOJ when it was at £500. Today, the DOJ is solved– it's done– and it is still trading half of where it was just two years ago. That's how we come to £435 as our base case. 

Joe

Got it. Is that conservative given that it was trading at £500 before? 

Pro

It is because we think there’s $200, $300 million that they're going to get from Dr. Reddy. We think they're going to win that litigation. Bloomberg got it completely wrong and said that Dr. Reddy won, and that's categorically false. Your customers who are interested should call the company. Indivior is very excited about the decision, as are we. If you read the decision, you'll see that they won on two claims, which are the most heavily prescribed dosages of Suboxone, and Dr. Reddy is dead to rights on that. I haven't even built in the $200 to $300 million that we expect they're going to get from Dr. Reddy. 

Joe

Very interesting. You've been super generous with your time, so we'll stop there. Thanks very much. 

Pro

My pleasure. All right, bye.