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Drugmaker’s not for the faint-hearted

The Times

Indivior’s shareholders take the good news when they can get it. The drugs group, a specialist in treatments for opioid addiction, paid off $150 million of expensive loans yesterday and that was enough to push the stock 2.5 per cent, 6¾p, higher to 266½p.

In truth, for such a hugely cash-generative business, reducing its borrowings to $333 million is the easy bit. The hard part — getting its drugs to market and seeing off competition from copycats — is still to come. The question for investors is whether they want to join it on what can only be a bumpy ride.

Indivior began life as a listed company at the end of 2014 when it was spun out of Reckitt Benckiser for 120p a share, though it had been operating inside the group for 20 years. The company specialises in treatments for people addicted to illegal drugs such as heroin, but is mainly about patients addicted to prescribed painkillers.

Its main market is the United States and its main drug at the moment is Suboxone, which generated 80 per cent of its $1.09 billion of revenues last year and at the time had a market share of an impressive 57 per cent. Suboxone is a film placed daily under the tongue and, despite being so popular, is far from perfect. Addicts cannot be relied on to take it daily, for example. Indivior’s solution to this, Sublocade, is a monthly injection and was launched in February. It has the potential to be a $1 billion-a-year blockbuster, but has struggled to gain traction, generating only $2 million of sales in the subsequent four months.

Indivior also has drugs in various stages of the testing and approvals process to tackle alcohol dependency and schizophrenia. This is worthy and potentially profitable stuff. Indeed, the prospect of eye-watering future revenues propelled the shares higher in the months after the listing.

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Would that life were that simple. Companies such as Indivior are always going to be susceptible to a low-cost competitor producing a generic version of one of their drugs that blows its market share out of the water. It’s not as if Indivior is not aware of this and it maintains a fighting fund that pays for regular court battles with copycats.

But then along came Dr Reddy’s Laboratories, an American company that won approval for its generic film version of Suboxone a year ago, causing a big drop in Indivior’s share price. The shares more than recovered their losses as investors bet that it could launch its (clearly better) Sublocade alternative in time, even if it lost its legal appeals.

It has been nothing but gloom since June, though, when Dr Reddy’s launched its treatment at a massive discount. Indivior secured an injunction halting sales of the generic, successfully upheld several times since, but not before serious damage had been inflicted on its own revenues and market share. Indivior’s price has been pretty much in freefall ever since.

Things can go one of two ways. Sublocade sales gain momentum, making an irrelevance of Suboxone and Dr Reddy’s version. Indivior also could successfully launch market-leading products to tackle schizophrenia and alcohol dependency and the shares could move ever higher in value.

Alternatively, Sublocade sales fail to take off, Dr Reddy’s finally overturns the injunction, Indivior’s new drugs fail in tests or on the market (or, indeed, encounter swift generic opposition) and more costly court battles follow. The shares continue to fall.

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For investors with an extremely big appetite for risk, Indivior might be very attractive, although the prospects of an annual dividend, at least at the moment, are remote. For anyone else, however, it feels like one to be avoided.

ADVICE Avoid
WHY The potential benefits are substantial, but they do not outweigh the risks

HG Capital Trust
Alongside its half-year results, HG Capital Trust detailed a £15.4 million investment it had just made in Brightpay, a technology company that develops accountancy and payroll software for small and medium-sized businesses in Ireland and the UK.

It is classic HG Capital stuff and is the trust’s tenth investment in a business of its kind, albeit using a new fund that it invested in earlier this year that aims to generate consistent, debt-like returns rather than taking conventional equity stakes in exchange for its money.

HG Capital is a private equity investor that began life in its present form at the end of 2000, when it was spun out of Merrill Lynch. It specialises in investing in companies that produce the kind of technology that makes the crucial day-to-day tasks that businesses have to negotiate easier and more efficient.

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As a listed private equity vehicle, HG Capital Trust gives investors exposure to the potentially lucrative returns on offer from investing in unlisted companies and expanding them away from the spotlight of the public markets. It has consistently done well for its shareholders, increasing in value more than sevenfold in the past 20 years.

It looked pretty impressive in yesterday’s first-half results, too. The private equity markets, and the debt investments they favour, are buoyant and the trust received £104 million in proceeds from exits and refinancings over the six months to the end of June, in turn contributing £79 million to new investments made during the period.

Exits included Intelliflo, which makes software for financial advisers, wealth managers and brokers and was sold to Invesco in a deal that delivered a return of 4.7 times the original investment in 2013. New investments during the six months included the Access Group, which makes business management software used by companies in sectors from finance and recruitment to health and social care.

This trust feels solid, reliable and a good way to take exposure to the far safer end of the technology market. The shares, up 20p at £19.10, are cheaper than those of 3i, the FTSE 100 buyout group, but yield less. They are a good long-term hold.

ADVICE Hold long-term
WHY Consistent performer with substantial room to grow

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