Reckitt Benckiser shares have been on the slide since it announced the proposed demerger of its pharmaceuticals business - henceforth known at Indivior - on Monday.
They lost another 40p to £51.90 ahead of an investor meeting on Friday to explain the outlook for the business (on Monday they were as high as £53.49). There are concerns about growing competition for its Suboxone heroin substitute, with analysts giving mixed signals about the prospects. Indivior will be listed in London in December, with investors receiving one share for every Reckitt share they own.
In a buy note Oriel said:
Clean of Indivior, we believe Reckitt should enjoy brisk growth in its core Health, Hygiene and Home businesses. Consumer health should ensure consistent growth.
At present, we assume the business [Indivior] is worth around £2.3bn in our break-up valuation of Reckitt Benckiser. Given consensus market expectations of Indivior’s market capitalisation post spin appear to be in the region of £2.0bn to £2.5bn, we are comfortable with our static current break-up valuation and its implication for our forward looking valuation of Reckitt Benckiser shares.
We continue to value Reckitt Benckiser on a sum-of-parts basis in order better to reflect its exposure to consumer health and the trade prices being paid for that kind of business. We base our price target on a sum-of-parts calculation with an assumed underlying earnings growth rate of around 10%. Our pre-spin 5800p price target is equivalent to a 2015 calendar PE of 22 times.
Credit Suisse issued an outperform rating but said:
We are reducing our 2015-16 Reckitt earnings per share estimates by 2%-3%. This is driven entirely by lower Reckitt/Indivior estimates as the competitive landscape heats up in the US. We lower our Indivior estimates by 25%-35% for the next two years and our Indivior value to £2.10 (from £3.15).
A second branded competitor for Suboxone and two more generic competitors as well (now four in total) will likely lead to sharp falls in price and market share for Suboxone in 2015 and 2016. The most price sensitive customers (Managed Care and Cash payers) make up 25%-30% of Suboxone revenues. We assume these are mostly lost.
Prior to these changes we valued Reckitt Benkiser Pharmaceutical at £2.3bn or £3.15 per Reckitt share using a discounted cashflow model. Our new numbers would lead to a value around £1.2bn or £1.60 per share. However this doesn’t ascribe any value to the pipeline (new delivery mechanisms, new treatment areas) which could contribute from 2017. ...For now we assume another 50p option value to give £2.10 per share total.
Meanwhile Numis moved its recommendation from add to hold:
The prospectus presents a ‘warts and all’ portrayal of Invidior, and in many regards it makes for decidedly grim reading as regards its near term prospects. One ponders if sales could be sub-$1bn in 2016 versus the $1,112m for 2013.
Overall the FTSE 100 finished 17.70 points lower at 6678.90, hit by weak purchasing managers indices and confidence figures from the eurozone and disappointing manufacturing growth from China.
Given the country’s position as a key consumer of commodities, these latest figures left metal prices weaker and sent mining shares lower. BHP Billiton lost 42.5p to 1582.5p and Rio Tinto fell 77p to £28.65.
A number of companies went ex-dividend, including National Grid, down 24.5p at 936p, and J. Sainsbury, off 4.5p at 258.1p.
But Johnson Matthey rose 189p to £33.41 after its latest update, as did Babcock International, 66p better at £11.84.
Among the mid-caps UDG Healthcare climbed 21.1p to 348p after it unveiled a 9% rise in adjusted full year profits to £70m and made positive comments about the outlook.
But Serco, where chairman Alaister Lyons resigned on Monday, continued to slide, down another 13.5p at 179p.
Lower down the market Tangiers Petroleum jumped 43% to 0.75p after it made a successful bid for a large acreage position in Alaska.
Finally, in the US, there was vague talk - first heard almost a year ago - that online travel agency Priceline could be interested in holiday home business HomeAway at a hefty premium to its current $30 share price.
