By leaps and bounds

Orexo 15 July 2019 Update
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Orexo

By leaps and bounds

Q219 results

Pharma & biotech

15 July 2019

Price

SEK71.6

Market cap

SEK2549m

$/SEK; €/SEK

Net cash (SEKm) at end-Q219

375

Shares in issue

35.6m

Free float

54.2%

Code

ORX

Primary exchange

NASDAQ QMX Stockholm

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.6)

(4.5)

89.7

Rel (local)

(6.0)

(6.0)

75.7

52-week high/low

SEK85.7

SEK38.4

Business description

Orexo is a Swedish speciality pharma company, with expertise in drug delivery/reformulation technologies (in particular, sublingual formulations) and a US commercial infrastructure for its opioid dependence therapy, Zubsolv (marketed by Orexo in the US and being out-licensed to partners ex-US). It also has three other clinical assets including OX124, which has reported positive Phase I results.

Next events

Out-licensing of ex-US Zubsolv

Ongoing

In-licensing and M&A

Ongoing

Q319 results

24 October 2019

FY19 results

30 January 2020

Analyst

Andy Smith

+44 (0)20 3077 5700

Orexo is a research client of Edison Investment Research Limited

After a strong Q119, which is seasonally the weakest quarter, Orexo also had a higher bar to beat Q218 due to milestone income making it one of its best ever quarters. Nevertheless, total Q219 revenues rose 0.8% to SEK201.2m. Zubsolv continued to perform well with Q219 sales of SEK184.4m, even against generic film and sublingual tablet competition.

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/17

643.7

29.7

0.67

0.0

106.9

N/A

12/18

783.1

92.2

3.99

0.0

17.9

N/A

12/19e

879.4

220.6

6.12

0.0

11.7

N/A

12/20e

852.3

187.1

4.91

0.0

14.6

N/A

Note: *PBT and EPS are as reported.

Zubsolv sales continue to grow

Orexo’s financial results are driven by US Zubsolv sales, which were SEK184.4m in Q219 (SEK158.4m in Q218). Total Q219 sales rose by 0.8% to SEK201.2m (vs SEK199.7m in Q218 which included c SEK31m in milestone income), while costs were reduced over Q119 (which had included one-off IP litigation costs) and helped Q219 profit after tax increase to SEK54.6m (vs SEK50.1m in Q218). Our estimate of total operating expense in FY19 remains at SEK545m, just above Orexo’s guidance of c SEK500m. Another profitable quarter increased Orexo’s gross cash balance to SEK697m, above our SEK683m estimate. An increasing cash balance remains key to Orexo’s stated aim of in-licensing or M&A to gain new products. Conversely, the re-partnering of ex-US Zubsolv rights may also increase Orexo’s cash balance, although the quality of the partner and terms are more important than the quantum of any upfront payment.

Generic Suboxone film bears watching

The sales volume of Zubsolv in the US continues to increase, while the launch of five generics to Indivior’s Suboxone film seems to have mainly shifted the market between branded and generic sublingual films, and has not materially affected sublingual tablets. Nevertheless, with market share shifts for a product that previously comprised more than half of the total opioid use disorders market, this developing dynamic bears watching.

Valuation: Minor increase for forex and profitability

We have made minor changes to our model to include revenue growth, profitability, the small debt reduction in August and the strength of the US dollar. These changes almost cancel each other out and our valuation is virtually unchanged at SEK3.46bn, or SEK98.79 per share. There is a strategic tension between Orexo’s continued profitability, its investment in the pipeline and the acquisition of new products from outside the company. Since last summer when Orexo won the patent litigation against Actavis, the expansion of its product portfolio has become increasingly important. This will continue over the next year as its minor products lose exclusivity and we trust Orexo’s prudence in this important diversification of revenues.

Recent developments after Q219

Zubsolv licence to Mundipharma in Australia and New Zealand

The financial terms of the recent licensing of Zubsolv to Mundipharma for Australia and New Zealand were not disclosed. This suggests that any upfront payment was not material, but Orexo has previously stated that the quality of the partner is much more important than the upfront payments for any of its products licensed outside the US. The Zubsolv launch is now in Mundipharma’s hands in Australia and New Zealand and is scheduled for early 2020. We have not included any additional ex-US Zubsolv royalties for the foreseeable future until more detail is available. At the very least, with the minor product Abstral losing exclusivity in the EU and US over the next year or so, the start of Zubsolv royalties from this new licence may offset the decline in Abstral EU royalties which were c SEK80m in 2018.

Debt pay-down

More recently, Orexo announced the prepayment of SEK32.5m, about 10%, of its corporate bond. This debt repayment was less than 5% of its cash or less than one quarter of its operating cash flow. The debt pay-down will be in August 2019 with the remainder being due in November 2021 and we have included this debt reduction tranche and corresponding cash balance reduction in Q319 in our model. This is not a surprising move since the interest rate is Stibor (currently 0.005%) plus 4.50%. In the future, we expect that capital allocation will be split between the clinical development of its pipeline, in-licensing and M&A activities (which appear to be at an advanced stage), and now debt retirement as Orexo becomes more comfortable with its long-term cash generation post the Actavis patent infringement win, and available strategic opportunities.

Exhibit 1: Financial summary

 

 

 

SEKm

2017

2018

2019e

2020e

2021e

Year end 31 December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

 

 

 

 

 

 

 

Revenue

 

 

 

643.7

783.1

879.4

852.3

926.2

Cost of Sales

 

 

 

(164.4)

(171.8)

(119.2)

(106.1)

(113.8)

Gross Profit

 

 

 

479.3

611.3

760.2

746.1

812.5

Reported operating profit

 

 

57.4

95.8

215.5

204.9

224.3

Joint ventures & associates (post tax)

 

 

 

 

 

Profit before tax (reported)

 

 

29.7

92.2

220.6

187.1

200.5

Reported tax

 

 

 

(6.5)

45.7

(0.4)

(5.6)

(6.0)

Profit after tax (reported)

 

 

23.2

137.9

220.2

181.5

194.5

Minority interests

 

 

0.0

7.0

(0.5)

0.0

0.0

Basic average number of shares outstanding ('m)

 

35.0

34.6

36.1

37.0

37.0

EPS - basic reported (SEK)

 

 

0.67

3.99

6.12

4.91

5.26

BALANCE SHEET

 

 

 

 

 

 

 

Fixed assets

 

 

 

176.5

227.1

233.0

225.6

219.3

Intangible assets

 

 

121.0

103.9

90.8

82.0

74.1

Tangible assets

 

 

20.1

20.0

21.2

22.6

24.2

Investments & other

 

 

35.4

103.2

186.5

186.5

186.5

Current assets

 

 

827.4

1,059.5

1,292.9

1,481.8

1,682.6

Stocks

 

 

 

250.2

173.6

150.0

159.2

159.2

Debtors

 

 

 

249.3

296.1

377.3

316.7

344.1

Cash & cash equivalents

 

 

327.9

589.8

765.6

1,005.8

1,179.3

Other

 

 

 

0.0

0.0

0.0

0.0

0.0

Current liabilities

 

 

(349.9)

(483.4)

(516.1)

(516.1)

(516.1)

Creditors

 

 

 

0.0

0.0

0.0

0.0

0.0

Short-term borrowings

 

 

0.0

0.0

0.0

0.0

0.0

Other

 

 

 

(349.9)

(483.4)

(516.1)

(516.1)

(516.1)

Long-term liabilities

 

 

(324.9)

(327.1)

(338.6)

(338.6)

(338.6)

Long-term borrowings

 

 

(319.1)

(320.6)

(288.8)

(288.8)

(288.8)

Other long-term liabilities

 

 

(5.8)

(6.5)

(49.8)

(49.8)

(49.8)

Minority interests

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

Operating cash flow before WC and Tax

 

108.1

70.6

243.2

192.4

204.7

Working capital

 

 

0.0

116.7

(128.0)

51.4

(27.4)

Exceptional & other

 

 

(37.2)

(14.3)

(8.1)

(17.8)

(23.8)

Tax

 

 

 

0.0

(18.1)

(13.9)

(5.6)

(6.0)

Net operating cash flow

 

 

146.6

187.3

115.2

243.8

177.4

Capex

 

 

 

(1.6)

(6.8)

(3.7)

(3.6)

(3.9)

Acquisitions/disposals

 

 

0.0

0.0

0.0

0.0

0.0

Equity financing

 

 

0.1

0.0

0.0

0.0

0.0

Other

 

 

 

0.0

0.4

(14.5)

0.0

0.0

Net cash flow

 

 

 

145.1

261.9

150.4

240.3

173.5

Opening net debt (cash)

 

 

115.4

(8.8)

(269.2)

(476.8)

(717.0)

Other

 

 

 

(20.9)

18.9

25.4

0.0

0.0

Closing net debt (cash)

 

 

(8.8)

(269.2)

(476.8)

(717.0)

(890.5)

Source: Orexo, Edison Investment Research


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This report has been commissioned by Orexo and prepared and issued by Edison, in consideration of a fee payable by Orexo. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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New York +1 646 653 7026

1,185 Avenue of the Americas

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United States of America

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Orexo and prepared and issued by Edison, in consideration of a fee payable by Orexo. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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