Orexo — EU launch milestone achieved

Orexo — EU launch milestone achieved

Yesterday Orexo announced the launch of Zubsolv in the EU by its partner Mundipharma, triggering a €3m (c SEK30.6m) milestone payment. Zubsolv is Orexo’s biggest product, which the company markets itself in the US. The EU launch of Zubsolv by Mundipharma may be underappreciated by investors for reasons we explain below. We have adjusted our model to include net cash including the milestone payment and exchange rate changes which amend our valuation to SEK67.8 per share from SEK63.0 per share.

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Orexo

EU launch milestone achieved

Milestone achieved

Pharma & biotech

19 June 2018

Price

SEK30.30

Market cap

SEK1,048m

$/SEK8.83;€/SEK10.25

Estimated net debt (SEKm) June 2018

149

Shares in issue

34.6m

Free float

37.6%

Code

ORX

Primary exchange

NASDAQ QMX Stockholm

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(17.8)

(22.4)

9.8

Rel (local)

(15.8)

(23.2)

12.8

52-week high/low

SEK52.0

SEK26.4

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 opioid dependence therapy, Zubsolv (also filed in Europe). It also has two clinical assets and three preclinical programmes.

Next events

Q218 results

11 July 2018

Actavis IP appeal

Q218

Q318 results

October 2018

Analysts

Andy Smith

+44 (0)20 3077 5700

Daniel Wilkinson

+44 (0)20 3077 5734

Orexo is a research client of Edison Investment Research Limited

Yesterday Orexo announced the launch of Zubsolv in the EU by its partner Mundipharma, triggering a €3m (c SEK30.6m) milestone payment. Zubsolv is Orexo’s biggest product, which the company markets itself in the US. The EU launch of Zubsolv by Mundipharma may be underappreciated by investors for reasons we explain below. We have adjusted our model to include net cash including the milestone payment and exchange rate changes which amend our valuation to SEK67.8 per share from SEK63.0 per share.

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/16

705.9

35.6

0.8

0.0

37.9

N/A

12/17

643.7

29.7

0.7

0.0

43.3

N/A

12/18e

736.3

108.9

2.9

0.0

10.4

N/A

12/19e

894.4

162.2

4.5

0.0

6.7

N/A

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

Zubsolv comes to the EU (and other markets)

Orexo’s biggest product by sales is Zubsolv (buprenorphine and naloxone sublingual tablet), which accounted for 94% of total Q118 revenues, or SEK131m. It has now been launched in the EU by partner Mundipharma for the treatment of opioid dependence. The launch triggers a €3m (c SEK30.6m) milestone, which we have included in our model, and has a number of additional unappreciated facets. Orexo markets Zubsolv itself in the US but a partner’s launch in the EU has no operational cost to Orexo apart from the cost of goods. In any event, these will be included in a transfer price. The higher manufacturing volumes of Zubsolv produced by Orexo for itself and Mundipharma could further contribute to lowering Orexo’s cost of goods. Mundipharma’s licence is for exclusive ex-US rights, not just for the EU, so the EU launch would ease Mundipharma’s approvals in other international markets. We have forecasted EU Zubsolv royalties starting in H218.

Competitor generic launches may be an opportunity for Orexo

Last week’s FDA approvals of Mylan and Dr Reddy’s generic versions of Indivior’s Suboxone (buprenorphine and naloxone sublingual film) was not good news for Indivior’s shareholders, but we are not expecting any near-term effects on Orexo. This is because the two products are different formulations, any launches are ‘at risk’ (subject to a restraining order) and there have been sublingual generic tablet formulations available for some time against which Orexo competes, although Orexo’s continued marketing has resulted in growing Zubsolv volumes. Furthermore, we believe Orexo has contracts with US insurers with terms of a year or longer.

Valuation: Updated for milestone trigger

We have updated our model for net cash including the milestone payment and exchange rate changes. Our valuation has increased to SEK2.37bn or SEK67.8 per share from SEK2.20bn or SEK63.0 per share previously.

Exhibit 1: Financial summary

 SEKm

2014

2015

2016

2017

2018e

2019e

Year end 31 December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

 

 

 

 

 

 

 

 

Revenue

 

 

 

570.3

643.3

705.9

643.7

736.3

894.4

Cost of Sales

 

 

 

(107.4)

(136.1)

(149.6)

(164.4)

(178.2)

(171.7)

Gross Profit

 

 

 

462.9

507.3

556.3

479.3

558.1

722.8

Reported operating profit

 

 

(25.0)

(169.0)

51.7

57.4

121.8

199.5

Net Interest

 

 

 

(27.6)

(22.1)

(16.1)

(27.7)

(13.0)

(37.3)

Profit before tax (reported)

 

 

(52.6)

(191.1)

35.6

29.7

108.9

162.2

Reported tax

 

 

 

(4.0)

(6.9)

(6.5)

(6.5)

(6.4)

(4.9)

Profit after tax (reported)

 

 

(56.6)

(198.0)

29.0

23.2

102.4

157.3

Minority interests

 

 

0.0

0.0

0.0

0.0

0.0

0.0

Net income (reported)

 

 

(56.6)

(198.0)

29.0

23.2

102.4

157.3

 

 

 

 

 

 

 

 

 

 

Basic average number of shares outstanding

 

33.0

34.0

35.0

35.0

34.9

35.0

EPS - basic reported (SEK)

 

 

(1.73)

(5.74)

0.84

0.67

2.93

4.50

EPS - normalised fully diluted

 

 

(1.73)

(5.74)

0.84

0.67

2.93

4.50

Revenue growth (%)

 

 

32.8

12.8

9.7

(8.8)

14.4

21.5

Gross margin (%)

 

 

81.2

78.8

78.8

74.5

75.8

80.8

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

Fixed assets

 

 

 

289.5

185.9

185.1

176.5

166.5

158.2

Intangible assets

 

 

197.0

159.1

138.2

121.0

109.3

98.8

Tangible assets

 

 

29.1

24.7

22.1

20.1

21.7

24.0

Investments & other

 

 

63.4

2.1

24.8

35.4

35.4

35.4

Current assets

 

 

936.4

830.4

833.7

827.4

992.0

1,157.6

Stocks

 

 

 

478.1

398.9

344.2

250.2

150.0

150.0

Debtors

 

 

 

173.8

233.4

178.5

249.3

301.5

329.9

Cash & cash equivalents

 

 

284.5

198.1

282.4

327.9

540.5

667.6

Other

 

 

 

0.0

0.0

28.6

0.0

0.0

0.0

Current liabilities

 

 

(268.1)

(251.6)

(309.5)

(349.9)

(349.9)

(349.9)

Creditors

 

 

 

0.0

0.0

0.0

0.0

0.0

0.0

Short-term borrowings

 

 

(1.9)

0.0

0.0

0.0

0.0

0.0

Other

 

 

 

(266.2)

(251.6)

(309.5)

(349.9)

(349.9)

(349.9)

Long-term liabilities

 

 

(502.8)

(498.3)

(399.0)

(324.9)

(325.3)

(325.3)

Long-term borrowings

 

 

(493.8)

(494.4)

(397.8)

(319.1)

(319.5)

(319.5)

Other long-term liabilities

 

 

(9.0)

(3.9)

(1.3)

(5.8)

(5.8)

(5.8)

Net assets

 

 

 

455.0

266.5

310.3

329.1

483.2

640.6

Shareholders' equity

 

 

455.0

266.5

310.3

329.1

433.7

591.0

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

Operating cash flow before WC and Tax

 

(35.5)

(119.4)

67.5

108.1

116.1

170.1

Working capital

 

 

(451.8)

17.2

88.7

0.0

65.1

(28.5)

Exceptional & other

 

 

(19.0)

(20.6)

(20.8)

(37.2)

(13.0)

(37.3)

Tax

 

 

 

(4.0)

(6.9)

(7.5)

0.0

(6.4)

(4.9)

Net operating cash flow

 

 

(487.3)

(102.2)

156.2

146.6

181.2

141.6

Capex

 

 

 

(71.7)

(4.1)

0.5

(1.6)

(3.7)

(4.5)

Acquisitions/disposals

 

 

0.0

21.8

5.0

0.0

0.0

0.0

Equity financing

 

 

349.3

3.8

2.2

0.1

0.0

0.0

Other

 

 

 

390.1

(1.2)

(92.8)

(85.5)

0.0

0.0

Net cash flow

 

 

 

180.4

(81.9)

71.1

59.6

212.6

137.2

Opening net debt (cash)

 

 

105.6

284.5

198.1

282.4

327.9

540.5

FX

 

 

 

(1.5)

(4.5)

13.3

(14.1)

0.0

0.0

Closing net debt (cash)

 

 

284.5

198.1

282.4

327.9

540.5

677.6

Source: Orexo, Edison 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Orexo 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.
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 2018. “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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Abzena — FY18 results – clouds lifting

Following a stronger H2 and Abzena’s FY18 results, we have made major changes to our model across both the services business and the Abzena Inside royalty portfolio. The FY18 reported revenues of £22.0m were ahead of our forecast and up c 18% over FY17. This was driven by 60% growth in bio-manufacturing where fortunately, most of the investment in capacity was directed in FY18. Last week’s announcement of a proposed royalty monetisation will help to address the FY19 working capital requirement.

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