Record quarter reflecting shifting US market

Orexo 31 October 2019 Update
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Orexo

Record quarter reflecting shifting US market

Earnings update

Pharma & biotech

31 October 2019

Price

SEK64.7

Market cap

SEK2245m

SEK9.69/US$

Net cash (SEKm) at end Q319

524

Shares in issue

34.7m

Free float

54.18%

Code

ORX

Primary exchange

NASDAQ QMX Stockholm

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

20.7

(9.6)

5.4

Rel (local)

15.6

(14.9)

(10.0)

52-week high/low

SEK85.70

SEK51.60

Business description

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

Next events

OX338 Phase I complete

Q419

FY19 results

30 January 2020

Analyst

Nathaniel Calloway

+1 646 653 7036

Orexo is a research client of Edison Investment Research Limited

Orexo reported a record performance for Q319 with revenue of SEK231.2m (+6.7% year-on-year). The top line was lifted by a combination of factors including currency and a shift in the reimbursement landscape for Zubsolv in the US toward higher-margin business, translating into a record EBIT of SEK105.9m, over three times that of Q318, and SEK135.7m in operating cash flow. Orexo ended the period with SEK813m in cash (SEK524m net), which we expect the company will reinvest in new assets and its pipeline, including the initiation of a Phase I study of OX338 (complete in Q419).

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/17

643.7

29.7

0.67

0.00

96.6

N/A

12/18

783.1

92.2

3.99

0.00

16.2

N/A

12/19e

874.9

292.0

8.48

0.00

7.6

N/A

12/20e

860.1

271.1

7.59

0.00

8.5

N/A

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

Improved margins driven by lower rebates

The company reported US Zubsolv sales of SEK182.7m for Q319, up 10% year-on-year, 3% in constant currency. Importantly, however, this is on the back of slightly lower volume (-4% year-on-year) as the product transitions out of exclusivity arrangements with a number of payers toward competitive reimbursement markets, which have lower rebates. Combined with other operational efficiencies instituted by the company these factors translated to an EBIT margin of 45.8%, compared to 16.0% for the same period in 2018.

Expanding markets and new geographies

Although unit sales of Zubsolv were down slightly due to these payer dynamics, the US opiate treatment market continues to expand significantly. According to the company’s data, the market expanded 14% on a unit basis from Q318. Additionally, in a step to expand its ex-US footprint, the company signed a licence agreement with Mundipharma to supply Zubsolv in Australia and New Zealand.

OX338 enters the clinic

In October 2019, the company initiated a Phase I clinical study of OX338, a sublingual formulation of ketorolac. Currently ketorolac is labelled for oral use only following an IV or IM induction, and the sublingual formulation would potentially allow patients to skip these initial injections. The Phase I study will examine the pharmacokinetics of the product; it is expected to complete quickly (in Q419) and provide results in 2020.

Valuation: Increased to SEK4.21bn

We have increased our valuation of Orexo to SEK4.21bn or SEK121.30 per share, from SEK3.46bn, or SEK98.79 per share. This increase is driven by improved profitability to reflect the improved margins in the current Q319 report. Our revenue estimates remain roughly the same.

Shift from exclusive agreements pays off

The revenue mix for the company continues to evolve as volume that was previously generated through exclusive agreements with payers shifts into competitive markets. These exclusive agreements are made at the cost of high rebates to payers. Additionally, the company is seeing contraction in the cash-pay market, which is likely due to pricing pressure from reduced cost generics. Although the total volume has declined, revenue has continued to expand as the non-exclusive payer market has fewer rebates attached. These market shifts are reflective of the increased penetration of generics, but the market shifts have also been away from branded Suboxone. CVS Caremark was recently the first pharmacy benefit manager (PBM) to block branded Suboxone. We are very impressed that the company has been able to improve its profitability so substantially in the face of this shifting market, which has led to the record earnings seen in Orexo’s latest earnings report.

Exhibit 1: Volume (in thousands) from formerly exclusive formularies and cash-pay markets

Source: Orexo

Exhibit 2: Volume (in thousands) from competitive markets (ex cash-pay)

Source: Orexo

Market expansion driven by public payers

We believe there will be continued support of pricing and reimbursement as the opiate epidemic continues and public pressure remains. The company stated it believes the recent major settlements with companies involved in the epidemic will increase the amount of public funds available for treatment, which may improve the market landscape. This increased public awareness and support is reflected mostly in the market growth seen from public payers, which expanded 19% over the past 12 months.

Exhibit 3: Buprenorphine/naloxone market growth by payer type

Source: Orexo

OX338: Sublingual ketorolac enters clinic

The company’s latest development project to enter the clinic is OX338, a sublingual formulation of the power NSAID (non-steroidal anti-inflammatory drug) ketorolac. The product entered a Phase I study focused on pharmacokinetics in October 2019. Ketorolac is an NSAID similar to ibuprofen but significantly more potent and capable of providing opiate levels of pain relief. It is typically used in a post-surgical setting as an alternative to opiates to provide a short period of pain relief. However, its potency also translates to higher risks of complications, particularly ulcers, which necessitate a specific dosing schedule. Oral ketorolac is labelled for use to follow-up on IV ketorolac for up to five days. The sublingual formulation could potentially be used as an alternative to the IV induction period. Given that the efficacy of the drug is not in question and the adverse event profile is well understood, we expect the ongoing pharmacokinetic study to be highly informative to whether the product is a viable alternative to IV.

Valuation

We have increased our valuation of Orexo to SEK4.21bn or SEK121.30 per share, from SEK3.46bn, or SEK98.79 per share. This is driven primarily by carrying forward the improved margins seen in Orexo’s Q319 earnings report. We forecast PBT margins of 33% and 32% for 2019 and 2020 respectively (up from 25% and 22% previously). Our revenue expectations remain roughly unchanged. We expect a lag in revenue for 2020 compared to 2019 due to the loss of a significant portion of Abstral royalties, as the European contract with Kyowa Kirin expires at YE19 and US partner Sentynl will withdraw the product from sale in Q419. Additionally, our valuation is increased as a result of increased net cash (SEK524m, from SEK376m at H119).

Exhibit 4: Financial summary

 

 

 

SEKm

2017

2018

2019e

2020e

2021e

Year end 31 December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

 

 

 

 

 

 

 

Revenue

 

 

 

643.7

783.1

874.9

860.1

934.7

Cost of Sales

 

 

 

(164.4)

(171.8)

(120.5)

(112.1)

(116.7)

Gross Profit

 

 

 

479.3

611.3

754.4

748.0

818.0

Reported operating profit

 

 

57.4

95.8

264.6

229.4

253.7

Joint ventures & associates (post tax)

 

 

 

 

 

Profit before tax (reported)

 

 

29.7

92.2

292.0

271.7

312.6

Reported tax

 

 

 

(6.5)

45.7

(2.1)

(8.2)

(9.4)

Profit after tax (reported)

 

 

23.2

137.9

289.9

263.6

303.3

Minority interests

 

 

0.0

7.0

(6.4)

0.0

0.0

 

 

 

 

 

 

 

 

 

Basic average number of shares outstanding ('m)

 

35.0

34.6

35.0

34.7

34.7

EPS - basic reported (SEK)

 

 

0.67

3.99

8.48

7.59

8.74

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

Fixed assets

 

 

 

176.5

227.1

307.3

310.8

315.3

Intangible assets

 

 

121.0

103.9

99.4

89.8

81.1

Tangible assets

 

 

20.1

20.0

22.7

35.8

48.9

Investments & other

 

 

35.4

103.2

185.3

185.3

185.3

Current assets

 

 

827.4

1,059.5

1,347.5

1,607.6

1,906.4

Stocks

 

 

 

250.2

173.6

150.0

159.2

159.2

Debtors

 

 

 

249.3

296.1

332.1

273.6

297.3

Cash & cash equivalents

 

 

327.9

589.8

865.4

1,174.7

1,449.9

Other

 

 

 

0.0

0.0

0.0

0.0

0.0

Current liabilities

 

 

(349.9)

(483.4)

(538.0)

(538.0)

(538.0)

Creditors

 

 

 

0.0

0.0

0.0

0.0

0.0

Short-term borrowings

 

 

0.0

0.0

0.0

0.0

0.0

Other

 

 

 

(349.9)

(483.4)

(538.0)

(538.0)

(538.0)

Long-term liabilities

 

 

(324.9)

(327.1)

(335.7)

(335.7)

(335.7)

Long-term borrowings

 

 

(319.1)

(320.6)

(289.2)

(289.2)

(289.2)

Other long-term liabilities

 

 

(5.8)

(6.5)

(46.5)

(46.5)

(46.5)

Minority interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

Operating cash flow before WC and Tax

 

108.1

70.6

274.5

275.9

316.0

Working capital

 

 

0.0

116.7

(82.2)

49.3

(23.6)

Exceptional & other

 

 

(37.2)

(14.3)

4.2

42.3

59.0

Tax

 

 

 

0.0

(18.1)

(12.5)

(8.2)

(9.4)

Net operating cash flow

 

 

146.6

187.3

192.3

325.2

292.4

Capex

 

 

 

(1.6)

(6.8)

(16.9)

(15.8)

(17.2)

Acquisitions/disposals

 

 

0.0

0.0

0.0

0.0

0.0

Equity financing

 

 

0.1

0.0

0.0

0.0

0.0

Other

 

 

 

0.0

0.4

43.0

0.0

0.0

Net cash flow

 

 

 

145.1

261.9

218.4

309.4

275.2

Opening Net debt (cash)

 

 

115.4

(8.8)

(269.2)

(576.2)

(885.5)

Other

 

 

 

(20.9)

(1.5)

88.6

0.0

0.0

Closing Net debt (cash)

 

 

(8.8)

(269.2)

(576.2)

(885.5)

(1,160.7)

Source: Orexo reports, Edison Investment Research

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

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

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

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

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

Australia

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

New Zealand

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

United Kingdom

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

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

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

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

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

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

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

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

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

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

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

Australia

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

New Zealand

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

United Kingdom

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

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

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

United States

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

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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