Why I'd avoid Indivior plc today after shares crash 35%

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FTSE 100 falling prices

Indivior(LSE: INDV) has seen over £1bn wiped off its market capitalisation today following news concerning potential generic competition. The pharmaceutical company's share price has fallen by 35% as investors have reacted negatively to the outcome of a US court ruling.

Looking ahead, more pain could arise out of the ruling and this may negatively impact the company's financial outlook. As such, it seems to be a stock to avoid at the present time.

Ruling

The ruling by the District Court of Delaware concerns possible generic competition to the company's key product, Suboxone Film. It is used to treat opioid addiction and makes up the majority of the company's revenues. The court has decided that a generic competitor to the treatment, Indian-based Dr Reddy's, does not infringe on Indivior's patents.

As such, pending FDA approval, a competitor to Suboxone could be on the market in the near term. This would be very likely to slash sales of Suboxone Film and would lead to lower sales and profitability for the company in future. This could be as much as an 80% fall in sales according to the company.

Outcome

As well as potentially causing sales of Suboxone Film to fall, the ruling also means that Indivior may find it more difficult to fight future battles regarding its patents. In the past, it has been successful in fighting off other generic competition, but the ruling could set a precedent which makes it easier for generic competitors to launch rival drugs.

Indivior's financial guidance is now likely to change dramatically. Although it states in today's update that it intends to appeal the decision by the court, it had assumed there would be no generic competition to Suboxone when formulating its financial guidance. Therefore, the company's share price could yet fall further if forecasts are even lower than investors currently anticipate.

Certainly, the company may have contingency plans in place should generic competition emerge. The reality though, is that if FDA approval is granted for Dr Reddy's rival drug then the company's sales are very likely to decline significantly.

Risks

Of course, this is not the first time that there has been a surprise announcement regarding patent infringement. In the boom/bust pharmaceutical industry all major companies must face the reality of a loss of patents at some point in their lifetime. However, in the case of Indivior, Suboxone is its major drug by sales. It is therefore heavily reliant on it and lacks the diversity of other major pharmaceutical companies. For other companies, the loss of a patent would be hugely disappointing, but could be offset by other products. For Indivior, that may not be the case.

Therefore, with investor sentiment declining rapidly and the company facing a highly uncertain future, now does not seem to be the right time to buy it. In time, there may be a buying opportunity. But right now, it appears to be a stock to avoid.

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Peter Stephens has no position in any of the companies mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.