Reckitt Benckiser Group Plc (RB): One of the Best Under-the-Radar Investment Catalysts of the Next Year – Actavis Inc (ACT)

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One under-the-radar drug recently lost its patent protection and the result could have huge ramifications for the company that tried to fight the onslaught of a generic competitor and the company that stands to profit in a huge way.

Reckitt Benckiser Group Plc (LON:RB)

Background Information

Suboxone is Reckitt Benckiser Group Plc (LON:RB)’s only drug and is used to treat opiate addiction. It comes in two forms, film and tablet (dissolved under the tongue). In the 12 months prior to August 2012, suboxone sales for tablets declined 19% to return annual sales of $658.5 million, while the film more than doubled to $764 million. Combined, these two forms of suboxone account for about 15% of the company’s sales and more than 20% of its profit. Therefore, its growth and exclusivity is critical to the company.

Since suboxone received FDA approval in October 2002, shares of Reckitt Benckiser Group Plc (LON:RB) have appreciated by almost 400%, as the company has grown into a $33.5 billion powerhouse! Much of that reason is due to the growth from suboxone and the large profits that it has produced. However, two years ago, this wonder drug came off patent (for the tablet form), and therefore the company began to manufacture it as a film, and consequently increased the price for the tablets.

As the tablet form came off patent, Reckitt Benckiser began submitting research to the FDA showing the tablet was fatal to young children – an odd claim considering the film and tablets have the exact same ingredients (naloxone and buprenorphine). This “research” rings hollow – if the sole difference between the film and the pills is the packaging, then why not simply make the tablet packaging as child-proof as the film’s? This research, the switch to film, and the increase in price for tablets seems like a concerted effort to move patients to film in order for Reckitt Benckiser to preserve its hold on suboxone.

Up until last month, the plan worked. But last month, Actavis Inc (NYSE:ACT) was awarded generic approval for the product, and it is an absolute game changer.

Maximum Upside for Actavis and Huge Pain for Benckiser

The upside for Actavis Inc (NYSE:ACT) is due to the fact that suboxone has barely scratched the surface of its potential in terms of sales. This $1.4 billion drug is sold for an average price of $8 per film (mostly prescribed 3 films per day) and was selling for $11 per tablet. Therefore, with a quantity of 90 per month, users have paid between $720 and $1,000 per month for their prescription. When you consider the fact that this is used to treat opioid addiction, and the two most abused opioids (hydrocodone and oxycodone) sell for about $30 for 90 tablets, it has often been cheaper for a person to remain addicted to the drug. Therefore, a large portion of this potential market has been unable to afford suboxone.

Now, Actavis is well-positioned to steal virtually all of Reckitt Benckiser Group Plc (LON:RB)’s suboxone business while attracting new business from those who couldn’t afford the medication in the past.

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