Why I think Indivior plc is a growth stock for shrewd investors

On Friday, shares in Indivior (LSE: INDV) crashed by as much as 40% after the company announced that a US court ruling could clear the way for a generic rival to its treatment for opioid addiction that generates 80% of its revenues.

Covering the development on Friday, my Foolish colleague Peter Stephens concluded that investors should avoid the company following the ruling as its future is now “highly uncertain.” However, I believe that shares in Indivior remain attractive after this recent development. 

Building a moat

The District Court of Delaware ruled that a generic competitor to the treatment, Indian-based Dr Reddy’s, does not infringe on Indivior’s patents, clearing the way for a wave of generic competition to take on the company and the US drug market. And while this threat is substantial and very real, Indivior’s existing presence and relationship with its US customers should not be underestimated (as well as providing the pill, it provides patient management as well). 

Management has known about the possible generic threat for some time, and it has taken steps to ensure that the corporation’s business is well defended against any new entrants. Indivior has developed new products, reinforced relationships with distributors and bulked up its marketing team to help maintain market share. 

As well as working on its defences, it will benefit from wider market themes. Specifically, the US is currently in the midst of an opioid epidemic as thousands have become addicted to prescription painkillers. Policy makers are starting to wake up to this epidemic sweeping the country and are looking to take action. Indivior will benefit from any sustained drive by the government to reduce addiction levels. 

Back down to earth 

Shares in the drugmaker crashed on Friday because before the warning, the market was expecting a lot from the firm — the shares were trading at a forward P/E of 14.7. Today, the valuation has returned to a more attractive 9.7 times forward earnings. This depressed multiple reflects the depressed sentiment towards the company but also leaves plenty of room for surprises if the generic hit isn’t as bad as the market expects. 

Shire (LSE: SHP) has also fallen out of favour with investors recently too. Once again, this is another situation where investors have become worried about Shire’s growth potential as generic competitors grab market share. 

Market leader 

As the company has established itself as one of the world’s leading rare disease treatment businesses over the past few years, with numerous new products in the pipeline, I believe the majority of these concerns are unfounded, and over the long term, Shire will continue to churn out returns for investors. 

On this basis, right now the shares look to be severely undervalued compared to the drug-maker’s experience and potential. Shares in Shire trade at a forward P/E of 10.2, falling to 9.2 for 2018. For some comparison, the wider pharma sector trades at a median P/E of 17.4, so it looks as if the shares are undervalued by around 70%. 

City analysts have pencilled in earnings per share growth of 10% for 2018 so even compared to the company’s modest growth rate, shares in Shire look undervalued.