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

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.

Investment Opportunity

So how significant is the news of Actavis Inc (NYSE:ACT) receiving generic approval for suboxone, for both it and Reckitt Benckiser Group Plc (LON:RB)? The answer is that it is an absolute game changer! Actavis earned $4.4 billion for its global generic business last year, which was a 32% gain over the previous year. Now, the company is adding a $1.4 billion per year drug that is not even close to tapping its peak sales potential. Therefore, Actavis, with a cheaper drug, will capture most of suboxone’s current sales, plus more.

For the sake of argument, even if Actavis only captured 70% of suboxone’s current sales, it would still be an additional $1 billion on top of Actavis’ current $4.4 billion business, therefore representing a near 25% gain in revenue, minimum, and this does not account for growth within the current business model, which is also expected to grow 30% alone. When it’s all said and done, this one segment could see an additional $2 billion in sales. This is a stock with significant upside potential.

In regards to Reckitt Benckiser, with just one product that makes up 20% of its profit and 15% of its revenue, this is a stock that could be highly affected by generic competition. Suboxone is its money maker, as almost all of its gains have occurred post-suboxone era, therefore it carries a lot weight on the stock. As a result, with the stock trading at 3.0 times sales and with a P/E ratio of 18.66, it is fairly valued. Therefore, expect the stock to lose great value once the market realizes the impact of this new generic competition.

Conclusion

The news of Actavis Inc (NYSE:ACT) receiving rights to suboxone in generic form is huge for the company, yet it has flown under the radar. In the last month Actavis has gained 5.6%, but the return has come as a result of the company receiving generic approval for the $521 million per year Exelon Patch, not the $1.4 billion per year suboxone.

In fact, there’s been hardly any news regarding this catalyst, therefore it is not priced into the stock. Lastly, I must reiterate and take notice of the peak sales potential for a drug such as suboxone that is priced attractively. Currently, with less than 150,000 patients treated annually, and more than 2.6 million people who abuse prescription meds (mostly opiates), there is a massive market for a cheaper suboxone, and Actavis is going to capitalize.

This is a stock that you want to buy now!

The article One of the Best Under-the-Radar Investment Catalysts of the Next Year originally appeared on Fool.com and is written by Brian Nichols.

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