Contrave market share stabilizing

Orexigen Therapeutics 18 November 2016 Update

Orexigen Therapeutics

Contrave market share stabilizing

Q3 earnings

Pharma & biotech

18 November 2016

Price

US$2.53

Market cap

US$37m

Net cash ($m) at 30 September 2016

40

Shares in issue

14.6m

Free float

92.2

Code

OREX

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(15.1)

(39.2)

(90.7)

Rel (local)

(16.2)

(38.6)

(91.1)

52-week high/low

US$33.2

US$3.30

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 6 CEE countries

Q416

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

Orexigen Therapeutics is a research client of Edison Investment Research Limited

The third quarter was one of transition for both Orexigen and the Contrave franchise as Takeda stopped detailing the obesity drug in the United States and Orexigen took up the mantle. Contrave market share fell from 7% to 6% in wake of the announcement, but prescription data indicate it is stabilizing. Outside of the US, progress continues as the product has launched in South Korea and five countries in Central and Eastern Europe (CEE) with launches in another six CEE countries expected in Q416.

Year
end

Revenue ($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/14

55.5

(37.5)

(3.17)

0.0

N/A

N/A

12/15

24.5

(67.3)

(5.24)

0.0

N/A

N/A

12/16e

32.6

(141.8)

(9.70)

0.0

N/A

N/A

12/17e

87.3

(103.0)

(6.72)

0.0

N/A

N/A

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

Has Contrave reached trough market share?

As Takeda pulled back on its promotion following the announcement in March that Orexigen would be reacquiring all rights to Contrave in the US, market share fell from ~7% to 6.0%. Based on recent prescription data, that share has stabilized and may start to increase as the Orexigen sales team gains traction in coming months.

Improving payer mix

Gross-to-net deductions represented 64% of sales in Q3, down from 67% in Q2, indicating a greater mix of prescriptions paid for by commercial payers, who tend to get lower discounts than those who pay cash and have a savings card. As coverage continues to improve, we expect this discount to approach 40% by 2020.

International launches progress

Contrave, which is known as Mysimba in most international markets, has now launched in South Korea and five countries in CEE. Launches in another six CEE countries are expected in Q416 and a launch in Spain is expected in January. Regulatory filings in Canada, South Africa, New Zealand and Australia (the last two were included in a recently announced deal with Valeant) are all expected in H117.

Valuation

We are increasing our valuation from $70m ($4.80/share) to $106m ($7.25/share), mainly due to rolling forward our forecasts and the fact that some large expenses are behind it. This was mitigated by increased R&D spending assumptions in the longer term as well as lower net cash. Due to the higher spending assumptions, we now expect overall profitability in 2021 instead of 2020, though we still expect operating profitability then. Our estimated financing requirement remains at $70m through 2020.

Contrave ready for a turnaround

According to IMS prescription data provided by the company, Contrave’s share of the total obesity market has fallen from around 7% to 6.0% but appears to have stabilized (see Exhibit 1). Its share in the branded obesity market also seems to have stabilized and continues to be over 40% despite continued inroads from Saxenda (injectable liraglutide, originally developed for diabetes) from Novo Nordisk.

Exhibit 1: Contrave share of total obesity market

Exhibit 2: Contrave share of branded obesity market

Source: Orexigen, IMS

Source: Wolters Kluwer, Bloomberg

Exhibit 1: Contrave share of total obesity market

Source: Orexigen, IMS

Exhibit 2: Contrave share of branded obesity market

Source: Wolters Kluwer, Bloomberg

With Contrave already controlling a large part of the branded obesity market and Belviq XR (a once-a-day formulation of Belviq, which is currently twice a day) recently launched by Eisai/Arena in October, Orexigen recognizes that Contrave’s market share gains will have to come from phentermine, which represents around 80% of the total obesity market, rather than from the other branded products. Phentermine is related chemically and pharmacologically to amphetamines and, while efficacious, also carries with it significant abuse potential and risk for anyone with cardiovascular issues. The main driver of this share growth will be increased physician education on the product, as well as greater payer coverage.

Increased insurance coverage would have a two-pronged positive impact for the company. First, it would reduce the cost of the product for consumers, which would stimulate demand. For participants in the Contrave savings card program, those with a prescription covered by insurance pay no more than a $30 co-pay per month (approximately in line with the cost of phentermine), while those who do not have a covered prescription pay $90 per month.

Second, it would increase the net realized price for Contrave as there is a much steeper discount for those paying cash compared to those paying with insurance. Right now the gross-to-net discount for Contrave as a whole is around 64% (down sequentially from 67% in Q2), which means that for every $1 in the wholesale acquisition cost (WAC), the company only realizes $0.36. Orexigen believes that if insurance covered closer to 30% of prescriptions (currently ~20%), the gross-to-net discount might fall to 40-50%.

International launches in progress

In 2016, Contrave, which is known as Mysimba in most international markets, is in the process of launching or will be launched in about a dozen countries. In June, Contrave was launched in South Korea through partner Kwangdong after just a seven-month approval process, which was faster than expected. According to the company, the Korean anti-obesity market had $71m in sales in 2015, up 21% compared to 2014. Orexigen’s partner Valeant has targeted launching Mysimba in 11 different countries in Central and Eastern Europe, namely Slovenia, Slovakia, the Czech Republic, Hungary, Croatia, Lithuania, Latvia, Estonia, Poland, Bulgaria and Romania, and has already launched in five of them, with the remaining six targeted for launch in Q416. Valeant expects to launch in Greece and Cyprus in Q117. Additionally, the company’s local partner, Laboratorios Farmaceuticos Rovi (ROVI), will be launching Mysimba in Spain in January.

Additionally, regulatory filings in Canada, South Africa, New Zealand and Australia (the last two were included in a recently announced deal with Valeant) are all expected in H117.

Valuation

We are increasing our valuation from $70m ($4.80/share) to $106m ($7.25/share), mainly due to rolling forward our forecasts and the fact that some large expenses are behind it. This was mitigated by increased R&D spending assumptions in the longer term (2018-20) as well as lower net cash.

Exhibit 3: Orexigen valuation

Product

Launch

Peak sales ($m)

Royalty rate

NPV ($m)

rNPV/share ($)

Contrave US

October 2014

277

100%

1,250

85.86

Contrave W. Europe

2016

118

30%

192

13.16

Contrave C. and E. Europe

2016

27

37.5%

46

3.17

Contrave S. Korea

2016

15

37.5%

21

1.45

Contrave ROW

2017

15

37.5%

24

1.67

PV costs including taxes

(1,468)

(100.81)

Net cash (30 September 2016)

40

2.75

Overall valuation (per share based on 14.6m shares outstanding)

106

7.25

Source: Edison Investment Research

Financials

We’ve made minor adjustments for revenues and expenses for 2016 and 2017 following Orexigen’s Q316 quarterly update. The company reported revenue of $7.0m, including $5.3m in US Contrave sales recorded by Orexigen, $866,000 in royalties on $4.3m in net sales by Takeda (which stopped selling Contrave at the end of July) and $895,000 in collaborative income. Note that the $5.3m represents approximately six weeks of sales as Orexigen only sold Contrave for two months and also has changed its revenue recognition policy towards one where it recognizes revenue when its distributors sell the product to the pharmacies (previously Takeda recognized a sale upon sale to the distributors), which cost it approximately two weeks of sales in the total. Total operating expenses were $40.4m and it had a net loss of $30.2m (both numbers exclude a one-time gain on the elimination of deferred revenue associated with the Takeda collaboration). It exited the quarter with $241.0m in cash, restricted cash and marketable securities and $200.9m in debt. The restricted cash is associated with the convertible senior secured notes due in 2020, which require the company to hold $165m in restricted cash until year-end, then $100m until the end of Q117 and $50m until the end of Q217.

Exhibit 4: Financial summary

$000s

2014

2015

2016e

2017e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

55,521

24,459

32,568

87,339

Cost of Sales

0

0

(5,664)

(7,935)

Gross Profit

55,521

24,459

26,904

79,404

Research and development

(57,412)

(40,750)

(46,304)

(47,230)

General & administrative

(28,639)

(43,762)

(115,258)

(119,869)

EBITDA

 

 

(30,669)

(60,276)

(138,108)

(88,073)

Operating Profit (before GW and except.)

 

 

(30,530)

(60,053)

(134,659)

(87,695)

Intangible Amortization

0

0

(3,139)

(5,769)

Exceptionals/Other

0

0

79,229

0

Operating Profit

(30,530)

(60,053)

(58,569)

(93,464)

Net Interest

(6,995)

(7,219)

(7,122)

(15,310)

Other (includes change in fair value of warrants)

0

(39)

20,484

0

Profit Before Tax (norm)

 

 

(37,525)

(67,272)

(141,780)

(103,004)

Profit Before Tax (FRS 3)

 

 

(37,525)

(67,311)

(45,206)

(108,773)

Tax

0

(1,376)

0

0

Deferred tax

0

0

0

0

Profit After Tax (norm)

(37,525)

(68,648)

(141,780)

(103,004)

Profit After Tax (FRS 3)

(37,525)

(68,687)

(45,206)

(108,773)

Average Number of Shares Outstanding (m)

11.8

13.1

14.6

15.3

EPS - normalised fully diluted ($)

 

 

(3.17)

(5.24)

(9.70)

(6.72)

EPS - FRS 3 ($)

 

 

(3.17)

(5.24)

(9.70)

(6.72)

Dividend per share (c)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

1,655

2,694

80,713

89,859

Intangible Assets

0

0

76,301

85,532

Tangible Assets

857

1,284

1,260

1,175

Other

798

1,410

3,152

3,152

Current Assets

 

 

211,326

233,895

242,163

139,720

Stocks

1,198

10,802

23,999

23,999

Debtors

2,571

6,828

2,098

2,098

Cash

205,537

214,011

109,986

107,543

Other

2,020

2,254

106,080

6,080

Current Liabilities

 

 

(29,714)

(32,241)

(65,473)

(65,473)

Creditors

(29,714)

(32,241)

(65,473)

(65,473)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(160,923)

(170,970)

(213,580)

(212,944)

Long term borrowings

(83,908)

(88,129)

(200,919)

(200,919)

Other long term liabilities

(77,015)

(82,841)

(12,661)

(12,025)

Net Assets

 

 

22,344

33,378

43,823

(48,838)

CASH FLOW

Operating Cash Flow

 

 

26,828

(54,473)

(106,507)

(87,149)

Net Interest

(3,119)

0

0

0

Tax

0

0

0

0

Capex

(246)

(538)

(286)

(293)

Acquisitions/disposals

0

0

(60,435)

(15,000)

Financing

2,734

64,259

139

0

Dividends

0

0

0

0

Other

(1,533)

(3,843)

(55,886)*

100,000

Net Cash Flow

24,664

5,405

(222,975)

(2,443)

Opening net debt/(cash)

 

 

(96,965)

(121,629)

(125,882)

90,933

HP finance leases initiated

0

0

0

0

Exchange rate movements

0

29

961

0

Other

0

(1,181)

5,199

0

Closing net debt/(cash)

 

 

(121,629)

(125,882)

90,933

93,376

Source: Orexigen Therapeutics accounts, Edison Investment Research. Note: *Other cash flow includes cash that became restricted in 2016 and then unrestricted in 2017.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “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.

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. 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 2016 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “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.

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Share this with friends and colleagues