Contrave comeback

Orexigen Therapeutics 19 April 2017 Update
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Orexigen Therapeutics

Contrave comeback

Financial update

Pharma & biotech

19 April 2017

Price

US$2.82

Market cap

US$43m

Net cash ($m), including restricted, at 31 December 2016

28

Shares in issue

15.2m

Free float

64.8%

Code

OREX

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(31.2)

(19.0)

(41.1)

Rel (local)

(30.2)

(21.4)

(47.3)

52-week high/low

US$6.4

US$1.7

Business description

Orexigen Therapeutics is a biopharmaceutical company focusing on obesity treatments. It recently reacquired the rights to sell its sole product, weight management treatment Contrave, in the US from its previous partner, Takeda. Contrave was launched in the US in October 2014 and approved in the EU in March 2015 under the trade name Mysimba.

Next events

Launches in 10 additional countries

2017

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

Orexigen Therapeutics is a research client of Edison Investment Research Limited

Orexigen’s decision to shift its US marketing focus from healthcare providers to consumers appears to be paying dividends as there has been a significant rebound in Contrave prescriptions since the launch of the patient-centric campaign. Outside of the US, progress continues as the product has launched in 13 countries, with another 10 expected by the end of the year, including Italy, where Orexigen just signed a local commercial and distribution partner.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/15

24.5

(67.3)

(5.24)

0.0

N/A

N/A

12/16

33.7

(138.1)

(9.73)

0.0

N/A

N/A

12/17e

85.8

(132.0)

(8.55)

0.0

N/A

N/A

12/18e

151.8

(81.1)

(5.14)

0.0

N/A

N/A

Note: *PBT and EPS are normalized, excluding amortization of acquired intangibles, exceptional items and share-based payments.

Consumer campaign drives growth

A shift from Takeda’s healthcare provider-focused marketing to a campaign focused on consumers (although with continued detailing of high prescribing physicians) has yielded a dramatic increase in prescriptions. Orexigen is now guiding for projected total prescription share of Contrave in the US obesity market to be between 7.8-8.5% in 2017, up from 7-8% previously.

Gross-to-net deductions continue to decrease

Gross-to-net deductions represented 58% of sales in Q4, down from 64% in Q3 and 67% in Q2, due to changes in Orexigen’s savings card program and a greater mix of prescriptions paid for by commercial payers. As coverage continues to improve, we expect this discount to approach 50% in 2018/19.

International launches progress

Contrave, which is known as Mysimba in most international markets, has now launched in 13 countries, including South Korea, Spain and Poland. Launches in the UK, Ireland, Cyprus and Greece are expected in Q217. Also, due to a recently signed commercial and distribution agreement with Bruno Farmaceutici, a launch in Italy is expected in Q417 (as well as five additional countries through other partners).

Valuation

We are increasing our valuation from $106m ($7.25/share) to $193m ($12.70/share), mainly due to increasing our US sales estimates, rolling forward our forecasts, slightly lower R&D spending assumptions and the fact that some large expenses are behind it. This was mitigated by increased SG&A spending assumptions in the longer term, lower short-term OUS revenue expectations as well as lower net cash. As our overall operating spending assumptions have increased, our estimate for Orexigen’s financing requirement is now $90m through to 2020 (previously $70m).

Contrave consumer campaign conquers

Since the beginning of its direct-to-consumer (DTC) campaign there has been a significant increase in prescriptions to people new to Contrave (see Exhibit 1) and a discernable rebound in its overall share of the US obesity market (see Exhibit 2) according to IMS prescription data provided by the company.

Exhibit 1: New-to-brand prescriptions (NBRx)

Exhibit 2: Contrave share of total US obesity market

Source: Orexigen, IMS

Source: Orexigen, IMS

Exhibit 1: New-to-brand prescriptions (NBRx)

Source: Orexigen, IMS

Exhibit 2: Contrave share of total US obesity market

Source: Orexigen, IMS

This DTC focus is diametrically opposed to the marketing strategy that Takeda employed while it was in charge with Contrave marketing in the US. Outside the sales expense from the sales representatives, Takeda spent 100% of its marketing budget on marketing to healthcare providers and none on consumers. Unfortunately, when doctors see a patient is overweight they will simply note and mention the patient should lose weight while not discussing therapeutic options, often due to lack of time. The DTC focus increases the chance that this discussion will be had, as patients will bring it up themselves. Other than prescriptions, other metrics, such as find a doctor searches and website visits, demonstrate the success of the shift to consumers (see Exhibit 3).

Exhibit 3: Patient activation metrics

Source: Orexigen, Google Analytics, McKesson

Besides increased Contrave prescriptions, Orexigen is benefiting from increased net revenue per prescription as its gross-to-net deductions are decreasing due to changes in its savings card program and a greater mix of prescriptions paid for by commercial payers. As the gross-to-net discount for Contrave as a whole has improved to 58% (down sequentially from 64% in Q3 and 67% in Q2), for every $1 in the wholesale acquisition cost (WAC), the company realizes $0.42, up 16.7% from Q3 and 27% from Q2. As coverage continues to improve, we expect this discount to approach 50% in 2018/19.

International launches continue

Contrave, which is known as Mysimba in most international markets, has now launched in 13 countries (see Exhibit 4), including South Korea, Spain and Poland. Launches in the UK, Ireland, Cyprus and Greece are expected in Q217. Also, due to a recently signed commercial and distribution agreement with Bruno Farmaceutici, a launch in Italy is expected in Q417 (as well as Serbia by Valeant and certain Middle Eastern countries by Biologix FZCO). Orexigen’s goal is to sign additional deals covering 10-20 countries in H117.

Exhibit 4: Upcoming ex-US launches

Country

Partner

Launch date

Notes

South Korea

Kwangdong

Q216

Czech Republic

Valeant

Q416

Slovakia

Valeant

Q416

Hungary

Valeant

Q416

Poland

Valeant

Q416

Romania

Valeant

Q416

Spain

ROVI

Q117

Bulgaria

Valeant

Q117

Estonia

Valeant

Q117

Lithuania

Valeant

Q117

Latvia

Valeant

Q117

Croatia

Valeant

Q117

Slovenia

Valeant

Q117

Greece

Valeant

Q217e

Cyprus

Valeant

Q217e

UK

Consilient Health

Q217e

Ireland

Consilient Health

Q217e

Italy

Bruno

Q417e

Serbia

Valeant

Q417e

Saudi Arabia

Biologix FZCO

Q417e

Regulatory submission expected Q217

Kuwait

Biologix FZCO

Q417e

Regulatory submission expected Q217

Lebanon

Biologix FZCO

Q417e

Regulatory submission expected Q217

UAE

Biologix FZCO

Q417e

Regulatory submission expected Q217

Canada

Valeant

2018e

Regulatory submission Q117

Australia

Valeant

2018e

Regulatory submission expected Q217

Turkey

Valeant

2018e

Regulatory submission expected Q2/Q3 2017

South Africa

Valeant

2018e

Regulatory submission expected Q317

Source: Orexigen


Valuation

We are increasing our valuation from $106m ($7.25/share) to $193m ($12.70/share), mainly due to increasing our US sales estimates due to a strong rebound in Contrave prescriptions (our peak sales estimates have increased from $277m to $329m), rolling forward our forecasts, slightly lower R&D spending assumptions and the fact that some large expenses are behind it. This was mitigated by increased SG&A spending assumptions in the longer term, lower short-term OUS revenue expectations as well as lower net cash.

Exhibit 5: Orexigen valuation

Product

Launch

Peak sales ($m)

Royalty rate

NPV ($m)

rNPV/share ($)

Contrave US

Oct-14

329

100%

1,525

100.12

Contrave W. Europe

2016

118

30%

184

12.12

Contrave C. and E. Europe

2016

27

37.5%

46

3.03

Contrave S. Korea

2016

15

37.5%

21

1.38

Contrave ROW

2017

15

37.5%

24

1.60

PV costs inc taxes

(1,635)

(107.37)

Net cash, including restricted
(as of 31 December 2016)

28

1.83

Overall valuation (per share based on 15.2m shares outstanding)

193

12.70

Source: Edison Investment Research

Financials

For Q416, Orexigen reported revenue of $13.9m, up from $7.0m in Q316, which was a quarter in which Takeda sold Contrave for one month and Orexigen the other two. Total operating expenses were $48.7m and it had a net loss of $24.6m. It exited the quarter with $194.0m in cash, restricted cash and marketable securities and $166.2m in debt (down from $200.9m in debt in Q316 due to an open-market purchase and retirement of approximately $35m of its debt). The restricted cash is associated with the convertible senior secured notes due in 2020, which require the company to hold $90m in restricted cash until the end of Q117 and $40m until the end of Q217.

We have increased our US revenue assumptions for 2017 and beyond but also reduced our 2017 OUS revenue expectation due to conservative commentary from the company on its quarterly conference call. Our revenue expectations for 2017 have therefore been reduced from $87.3m to $85.8m. We have also reduced our 2017 R&D spending assumption from $47.2m to $38.0m due to lower than expected R&D spending in 2016. Finally, we have increased our SG&A expectations from $119.9m to $157.3m due to the higher than expected run rate in Q416. As our overall operating spending assumptions have increased our financing requirement is now $90m through 2020 (previously $70m) and we continue to expect profitability in 2021. The company has recently announced a $20m at-the-market offering facility through Cantor Fitzgerald and may use that in the near future to raise equity capital.

Exhibit 6: Financial summary

$000s

2012

2013

2014

2015

2016

2017e

2018e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

3,428

3,428

55,521

24,459

33,709

85,768

151,843

Cost of Sales

0

0

0

0

(7,995)

(18,556)

(27,733)

Gross Profit

3,428

3,428

55,521

24,459

25,714

67,212

124,110

Research and development

(73,680)

(56,748)

(57,412)

(40,750)

(38,023)

(38,023)

(41,825)

Selling, general & administrative

(19,987)

(23,878)

(28,639)

(43,762)

(118,583)

(157,268)

(158,840)

EBITDA

 

 

(90,552)

(77,292)

(30,669)

(60,276)

(134,627)

(128,392)

(76,876)

Operating Profit (before GW and except.)

 

 

(90,239)

(77,198)

(30,530)

(60,053)

(130,892)

(128,079)

(76,556)

Intangible Amortisation

0

0

0

0

(3,307)

(5,769)

(5,769)

Exceptionals/Other

0

0

0

0

77,229

0

0

Operating Profit

(90,239)

(77,198)

(30,530)

(60,053)

(56,970)

(133,848)

(82,325)

Net Interest

145

(473)

(6,995)

(7,219)

(7,228)

(3,948)

(4,498)

Other (includes change in fair value of warrants)

0

0

0

(39)

39,807

0

0

Profit Before Tax (norm)

 

 

(90,094)

(77,671)

(37,525)

(67,272)

(138,120)

(132,026)

(81,053)

Profit Before Tax (FRS 3)

 

 

(90,094)

(77,671)

(37,525)

(67,311)

(24,391)

(137,795)

(86,822)

Tax

0

0

0

(1,376)

(133)

0

0

Deferred tax

0

0

0

0

0

0

0

Profit After Tax (norm)

(90,094)

(77,671)

(37,525)

(68,648)

(138,253)

(132,026)

(81,053)

Profit After Tax (FRS 3)

(90,094)

(77,671)

(37,525)

(68,687)

(24,524)

(137,795)

(86,822)

Average Number of Shares Outstanding (m)

70.7

96.5

11.8

13.1

14.6

15.4

15.8

EPS - normalised fully diluted ($)

 

 

(1.27)

(0.80)

(3.17)

(5.24)

(9.73)

(8.55)

(5.14)

EPS - FRS 3 ($)

 

 

(1.27)

(0.80)

(3.17)

(5.24)

(9.73)

(8.55)

(5.14)

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

260

1,839

1,655

2,694

79,940

89,196

83,453

Intangible Assets

0

0

0

0

76,061

85,292

79,523

Tangible Assets

83

630

857

1,284

1,044

1,069

1,095

Other

177

1,209

798

1,410

2,835

2,835

2,835

Current Assets

 

 

138,894

178,282

211,326

233,895

224,461

112,510

66,930

Stocks

0

0

1,198

10,802

23,193

23,193

23,193

Debtors

0

0

2,571

6,828

1,102

1,102

1,102

Cash

137,403

176,996

205,537

214,011

103,993

82,047

36,467

Other

1,491

1,286

2,020

2,254

96,173

6,168

6,168

Current Liabilities

 

 

(25,114)

(22,853)

(29,714)

(32,241)

(65,360)

(65,360)

(65,360)

Creditors

(25,114)

(22,853)

(29,714)

(32,241)

(65,360)

(65,360)

(65,360)

Short term borrowings

0

0

0

0

0

0

0

Long Term Liabilities

 

 

(38,571)

(115,406)

(160,923)

(170,970)

(178,842)

(198,277)

(217,747)

Long term borrowings

0

(80,031)

(83,908)

(88,129)

(166,179)

(186,179)

(206,179)

Other long term liabilities

(38,571)

(35,375)

(77,015)

(82,841)

(12,663)

(12,098)

(11,568)

Net Assets

 

 

75,469

41,862

22,344

33,378

60,199

(61,931)

(132,725)

CASH FLOW

Operating Cash Flow

 

 

(68,342)

(70,817)

26,828

(54,473)

(109,713)

(116,613)

(65,421)

Net Interest

0

0

(3,119)

0

0

0

0

Tax

0

0

0

0

0

0

0

Capex

0

(640)

(246)

(538)

(330)

(338)

(347)

Acquisitions/disposals

0

0

0

0

(63,504)

(15,000)

0

Financing

58,270

1,337

2,734

64,259

188

0

0

Dividends

0

0

0

0

0

0

0

Other

0

29,682

(1,533)

(3,843)

(15,424)

90,005

188

Net Cash Flow

(10,072)

(40,438)

24,664

5,405

(188,783)

(41,946)

(65,580)

Opening net debt/(cash)*

 

 

(147,593)

(137,403)

(96,965)

(121,629)

(125,882)

62,186

104,132

HP finance leases initiated

0

0

0

0

0

0

0

Exchange rate movements

0

0

0

29

715

0

0

Other

(118)

0

0

(1,181)

0

0

(0)

Closing net debt/(cash)*

 

 

(137,403)

(96,965)

(121,629)

(125,882)

62,186

104,132

169,712

Source: Orexigen Therapeutics accounts, Edison Investment Research. Note: *Not including restricted cash, which is shown in ‘other’.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Orexigen Therapeutics and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Orexigen Therapeutics and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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