Driven by DTC

Orexigen Therapeutics 4 December 2017 Update
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Orexigen Therapeutics

Driven by DTC

Financial update

Pharma & biotech

4 December 2017

Price

US$1.57

Market cap

US$29m

Net debt ($m) at 30 September 2017

101

Shares in issue

18.7m

Free float

71%

Code

OREX

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.3)

(31.7)

(13.7)

Rel (local)

(6.5)

(36.0)

(28.5)

52-week high/low

US$5.4

US$1.6

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

10-15 additional international launches

Q417/Q118

Analysts

Maxim Jacobs

+1 646 653 7027

Nathaniel Calloway

+1 646 653 7036

Orexigen Therapeutics is a research client of Edison Investment Research Limited

Contrave sales took a bit of a breather during Q317, which is considered part of the off-season for obesity drugs, with net US Contrave sales falling 14% sequentially. A more unfavorable payer mix, which reduced average net revenue per unit, as well as some excess inventory in the retail channel, added to the weakness. On a year-over-year basis, however, Q317 prescription growth continues to be strong, up 26%. A key overhang that remains is the renegotiation/restructuring of the $165m in 0% convertible senior secured notes, which may need to be repurchased in mid-2018.

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

84.7

(137.7)

(7.13)

0.0

N/A

N/A

12/18e

156.5

(68.9)

(3.54)

0.0

N/A

N/A

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

Fall season DTC campaign commenced

On 10 September, Orexigen commenced its fall season direct-to-consumer (DTC) campaign (digital and print ads were the primary method of reaching consumers since mid-May). This has resulted in a spike in prescriptions, new physicians writing prescriptions and visits to Contrave.com.

Signed deal with Merck KGaA for Latin America

Orexigen recently announced that it had signed a distribution deal with Merck KGaA to sell Contrave in almost all of Latin America, which represents around 25% of the global prescription weight loss opportunity and where 56% of adults are overweight or obese. Orexigen will receive undisclosed upfront and milestone payments.

Debt covenant overhang continues

The 0% convertible senior secured notes that mature on 1 July 2020 contain an indenture, which stipulates that if net product sales for 2017 are less than $100m (the company estimates they will fall short), the note holders can require Orexigen to repurchase the notes on 30 June 2018. As the principal on the notes is $165m and the company does not have the cash to repay, Orexigen will need to renegotiate/restructure these notes with the note holders. The company has described its negotiations with the note holders as “productive and positive”.

Valuation: $223m or $11.92 per share

We are adjusting our valuation from $214m ($13.87/share) to $223m ($11.92/share). The higher absolute valuation is due mainly to rolling forward our NPV and slightly reducing expense estimates. This was mitigated by a reduction in Contrave estimates and a lower cash balance. The per-share value declined due to a higher number of shares outstanding. On our forecasts Orexigen’s financing requirement is $90m through to 2020, although this does not include the $230m in convertible debt due in that year or any acceleration of payments on the 0% debt.

Quarterly update

Orexigen reported Q317 revenues of $18.9m, including $17.8m in US net sales of Contrave, down 14% sequentially. Contrave sales had a setback in Q3 for a number of reasons. First, it is historically considered the off-season for obesity medication (people tend to be more interested in losing weight as part of New Year’s resolutions and in preparation for beach season). Second, the company also moved significantly away from TV spots in favor of digital and print advertising (due to the fact that it was the off-season) and there was also excess inventory in the retail channel, although the company has little visibility on that or how big it is. Finally, there was also some variation with regard to the payer mix (the company will make different levels of revenue per unit depending on whether the patients pay cash, pay cash with a savings card or have Contrave covered by insurance), which reduced net revenue per unit sold to $92 from $96 last quarter. However, this is still an improvement over the $89 in net revenue per unit sold seen in Q117 and is above original 2017 guidance for $85-90 per unit.

The company launched an fall season DTC marketing campaign on 10 September and, based on several metrics such as prescriptions, the number of new physicians writing prescriptions and visits to Contrave.com (which is often the first stop for people looking to find out more before approaching their physician), it appears to be going well (see Exhibits 1 and 2).

Exhibit 1: Branded obesity market prescriptions

Exhibit 2: Contrave.com visits (in thousands)

Source: Orexigen Therapeutics

Source: Orexigen Therapeutics

Exhibit 1: Branded obesity market prescriptions

Source: Orexigen Therapeutics

Exhibit 2: Contrave.com visits (in thousands)

Source: Orexigen Therapeutics

A new major international partnership

Orexigen recently announced that it had signed a distribution deal with Merck KGaA to sell Contrave in almost all of Latin America, including Mexico, Brazil, Argentina, Colombia, Venezuela, Chile, Peru, Ecuador, Bolivia, Paraguay, Uruguay, Panama, Costa Rica, Nicaragua, Honduras, Guatemala, Belize and the Dominican Republic. According to prescription data these countries represent around 25% of the global prescription weight loss opportunity and are where 56% of adults are overweight or obese, according to the Overseas Development Institute. Orexigen will receive undisclosed upfront and potential sales and regulatory milestone payments from Merck KGaA.

Orexigen is now partnered in 67 countries outside the US, which represent around 96% of the global prescription weight loss opportunity. Contrave (branded as Mysimba in certain markets) is currently launched in 17 countries outside the US, with Cyprus being the most recent in Q3. Launches in Germany, Italy and the Nordic countries (Denmark, Finland, Norway and Sweden) are expected in Q417. Outside the United States (OUS) net sales guidance for 2017 is $10-15m with $8m in OUS net sales through Q317.

Exhibit 3: International Contrave launch timelines

Country

Partner

Launch date

Notes

South Korea

Kwang Dong

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

Q217

UK

Consilient Health

Q217

Ireland

Consilient Health

Q217

Cyprus

Valeant

Q317

Italy

Bruno

Q417e

Denmark

Navamedic ASA

Q417e

Finland

Navamedic ASA

Q417e

Norway

Navamedic ASA

Q417e

Sweden

Navamedic ASA

Q417e

Germany

Cheplapharm

Q417e

Serbia

Valeant

Q118e

Saudi Arabia

Biologix FZCO

Q118e

Regulatory submission Q317

Kuwait

Biologix FZCO

Q118e

Regulatory submission Q217

Lebanon

Biologix FZCO

Q118e

Regulatory submission Q217

UAE

Biologix FZCO

Q118e

Regulatory submission Q217

Canada

Valeant

2018e

Regulatory submission Q117

Australia

Valeant

2018e

Regulatory submission Q217

Turkey

Valeant

2018e

Regulatory submission Q317

South Africa

Valeant

2018e

Regulatory submission Q317

Source: Orexigen Therapeutics

Patent protection until 2030

In April 2015, notice of a Paragraph IV certification regarding an abbreviated new drug application (ANDA) filed by Actavis for approval of a generic version of Contrave was received. In June 2016, following a May 2016 claim construction hearing, the court adopted Orexigen’s proposed constructions with regard to the majority of the disputed claim terms in a Markman ruling. The trial was in June 2017 and in October the judge ruled in favor of Orexigen upholding the validity of the patents in the case. Importantly, the favorable ruling included patent 8,916,195, which does not expire until February 2030, providing Contrave with more than 12 years of additional protection, a significant length of time. The validation of this patent in a court of law should improve the value of the Contrave asset in the eyes of other pharmaceutical companies.

Exhibit 4: Contrave Orange Book patents

Patent number

Title

Expiration

7,375,111

Compositions for affecting weight loss

26 March 2025

7,462,626

Compositions for affecting weight loss

20 July 2024

8,088,786

Layered pharmaceutical formulations

3 February 2029

8,318,788

Layered pharmaceutical formulations

8 November 2027

8,722,085

Layered pharmaceutical formulations

8 November 2027

8,815,889

Compositions and methods for increasing insulin sensitivity

20 July 2024

8,916,195

Sustained release formulation of naltrexone

2 February 2030

9,107,837

Sustained release formulation of naltrexone

4 June 2027

9,125,868

Methods for administering weight loss medications

8 November 2027

9,248,123

Methods of providing weight loss therapy in patients with major depression

13 January 2032

Source: FDA

Valuation

We are adjusting our valuation from $214m ($13.87/share), to $223m ($13.45/share). The higher absolute valuation is due mainly to rolling forward our NPV and slightly reducing expense estimates. This was mitigated by a reduction in Contrave estimates and a lower cash balance. The per share value declined due to a higher number of shares outstanding. On our forecasts Orexigen’s financing requirement is $90m through to 2020, although this does not include the $230m in convertible debt due in that year or any acceleration of payments on the 0% debt.

Exhibit 5: Orexigen valuation table

Product

Launch

Peak sales ($m)

Royalty rate

NPV ($m)

rNPV/share ($)

Contrave US

Oct-14

334

100%

1,708

91.14

Contrave W. Europe

2016

118

30%

136

7.28

Contrave C. and E. Europe

2016

27

37.5%

35

1.88

Contrave S. Korea

2016

15

37.5%

16

0.83

Contrave ROW

2017

15

37.5%

15

0.81

PV costs inc taxes

(1,592)

(84.97)

Net cash (as of the end of Q3 but including November 30 debt exchange)

(94.57)

(5.05)

Overall valuation (per share based on 18.7m shares outstanding)

223

11.92

Source: Edison Investment Research

Financials

Sales of Contrave in the US were $17.8m in Q317, down 14% compared to Q217, although prescriptions are up 26% compared to Q316. Orexigen also booked $1.1m in sales of Contrave to international partners (although part was amortized upfront revenue). Operating expenses were $37.6m in the quarter, down 36% compared to the previous quarter due mainly to lower SG&A as the DTC campaign became less intense over the off-season. These expenses are expected to increase in the final quarter due to the fall season DTC campaign. Following the recent results, we have decreased our revenue estimates in 2017 by $9.7m and in 2018 by $3.7m. We have also reduced our SG&A expense estimates for 2017 and 2018 by $2.8m and $2.6m, respectively, due to far lower than expected spending in Q3. We also decreased our R&D expense estimates by around $4m per year as the run rate has been lower than we expected. The company had $70.6m in cash and marketable securities at the end of Q317 and is guiding for a cash balance of $40-45m at the end of 2017 (previously $40-50m).

Note that while Orexigen listed $172m in long-term convertible debt on its balance sheet as of the end of Q317, it actually owed $236m in principal value on these notes (currently around $230m after the company exchanged 2.1m new shares for $6.46m worth of principal on 30 November), with maturity dates in 2020 (the difference is due to rules relating to the fair value accounting of convertible notes with liability and equity components). Importantly, the 0% convertible senior secured notes that mature on 1 July 2020 contain an indenture, which stipulates that if net product sales for 2017 are less than $100m (the company estimates that they will fall short), the note holders can require Orexigen to repurchase the notes on 30 June 2018. As the principal on the notes is $165m, less than the company’s current cash on hand, Orexigen will need to renegotiate/restructure these notes with the note holders. One possibility would be for an exchange, similar to the one recently in which the company exchanged around $3.5m worth of stock for $6.46m worth of debt principal in the 2.75% convertible senior notes that mature on 1 December 2020. The company has described its negotiations with the note holders as “productive and positive” and will update investors at a later time.

We believe Orexigen has a decent chance in achieving a successful renegotiation/restructure of the debt. The original debt was issued when Contrave was in limbo as Takeda had stopped detailing the product, market share was sinking and it was as yet unclear what Orexigen would be able to do with the product. Since then the company has successfully turned around Contrave prescriptions and shown that it can execute a national sales and marketing campaign.

Orexigen’s financing requirement, not including debt repayments, is an additional $90m through to 2020. The company is exploring various options to provide additional working capital. It currently has a $20m at-the-market (ATM) equity offering agreement in place with Cantor, with approximately $19.6m remaining. It is also looking into an asset-backed line of credit, monetization of its preclinical programs (OREX-1038 for chronic pain and OREX-1019 for opioid addiction), additional upfronts or milestones from international partners, as well as a capital infusion as part of a debt restructuring/refinancing.

Exhibit 6: Financial summary

$'000s

2015

2016

2017e

2018e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

24,459

33,709

84,740

156,541

Cost of Sales

0

(7,995)

(21,830)

(28,938)

Gross Profit

24,459

25,714

62,910

127,604

Research and development

(40,750)

(38,023)

(27,292)

(30,021)

Selling, general & administrative

(43,762)

(118,583)

(170,365)

(161,847)

EBITDA

 

 

(60,276)

(134,627)

(134,864)

(64,441)

Operating Profit (before amort. and except.)

 

 

(60,053)

(130,892)

(134,747)

(64,264)

Intangible Amortisation

0

(3,307)

(7,938)

(5,769)

Exceptionals/Other

0

77,229

(1,600)

0

Operating Profit

(60,053)

(56,970)

(144,285)

(70,033)

Net Interest

(7,219)

(7,228)

(3,000)

(4,645)

Other (includes change in fair value of warrants)

(39)

39,807

550

0

Profit Before Tax (norm)

 

 

(67,272)

(138,120)

(137,747)

(68,910)

Profit Before Tax (FRS 3)

 

 

(67,311)

(24,391)

(146,735)

(74,679)

Tax

(1,376)

(133)

0

0

Deferred tax

0

0

0

0

Profit After Tax (norm)

(68,648)

(138,253)

(137,747)

(68,910)

Profit After Tax (FRS 3)

(68,687)

(24,524)

(146,735)

(74,679)

Average Number of Shares Outstanding (m)

13.1

14.6

16.1

19.5

EPS - normalised ($)

 

 

(5.24)

(9.73)

(7.13)

(3.54)

EPS - FRS 3 ($)

 

 

(5.24)

(9.73)

(7.13)

(3.54)

Dividend per share (c)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

2,694

79,940

69,177

63,231

Intangible Assets

0

76,061

68,123

62,354

Tangible Assets

1,284

1,044

590

413

Other

1,410

2,835

464

464

Current Assets

 

 

233,895

224,461

109,122

73,512

Stocks

10,802

23,193

16,105

16,105

Debtors

6,828

1,102

19,103

19,103

Cash

214,011

103,993

67,404

31,794

Other

2,254

96,173

6,510

6,510

Current Liabilities

 

 

(32,241)

(65,360)

(56,232)

(56,232)

Creditors

(32,241)

(65,360)

(56,232)

(56,232)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

(170,970)

(178,842)

(206,382)

(225,745)

Long term borrowings

(88,129)

(166,179)

(191,607)

(211,607)

Other long term liabilities

(82,841)

(12,663)

(14,775)

(14,137)

Net Assets

 

 

33,378

60,199

(84,315)

(145,234)

CASH FLOW

Operating Cash Flow

 

 

(54,473)

(109,713)

(129,500)

(55,663)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(538)

(330)

0

0

Acquisitions/disposals

0

(63,504)

(3,414)

0

Financing

64,259

188

438

0

Dividends

0

0

0

0

Other

(3,843)

(15,424)

75,725

188

Net Cash Flow

5,405

(188,783)

(56,751)

(55,475)

Opening net debt/(cash)

 

 

(121,629)

(125,882)

62,186

124,204

HP finance leases initiated

0

0

0

0

Exchange rate movements

29

715

0

0

Other

(1,181)

0

(5,267)

(135)

Closing net debt/(cash)

 

 

(125,882)

62,186

124,204

179,814

Source: Company accounts, Edison Investment Research

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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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