Taking control of Contrave

Orexigen Therapeutics 12 April 2016 Update

Orexigen Therapeutics

Taking control of Contrave

Company update

Pharma & biotech

12 April 2016

Price

US$0.51

Market cap

US$74m

Net cash ($m) at 31 December 2015

125.9

Shares in issue

145.6m

Free float

92.2%

Code

OREX

Primary exchange

NASDAQ

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(19.3)

(67.4)

(93.7)

Rel (local)

(20.0)

(69.3)

(93.5)

52-week high/low

US$8.00

US$0.51

Business description

Orexigen is a biopharmaceutical company focusing on obesity treatments. The company recently re-acquired the rights to sell its sole product, weight management treatment Contrave, in the US from its prior 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

Weekly Contrave prescription trends

Ongoing

Q1 results

May 2016

Global partnerships

H216

Analysts

Katherine Genis

+1 646 653 7026

Maxim Jacobs

+1 646 653 7027

Orexigen Therapeutics is a research client of Edison Investment Research Limited

On 15 March Orexigen announced the acquisition of US distribution rights to its obesity treatment Contrave from Takeda. The company simultaneously announced a new collaboration with Valeant for the commercialization of Mysimba (Contrave ex-US) in 18 Central and Eastern European countries. We value Orexigen at $213m, significantly reduced from $1.09bn, mainly on reduced expectations for Contrave in the US. However, our fair value of $1.47/share is substantially above the current $0.51 share price.

Year end

Revenue
($m)

PBT*
($m)

EPS*
($)

DPS
($)

P/E
(x)

Yield
(%)

12/14

55.5

(37.5)

(0.32)

0.0

N/A

N/A

12/15

24.5

(67.3)

(0.52)

0.0

N/A

N/A

12/16e

46.4

(59.5)

(0.40)

0.0

N/A

N/A

12/17e

120.9

(32.6)

(0.22)

0.0

N/A

N/A

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

Orexigen (re)acquires US rights to Contrave

Following a longstanding collaboration with Takeda for US commercialization of Contrave, Orexigen is taking back US distribution and building its own salesforce of 160 dedicated representatives with an estimated annual SG&A cost of $80-100m. Takeda launched Contrave in the US in October 2013 with a high-profile marketing campaign and a 900-strong salesforce (detailing multiple products). The transition will occur over the next six months and include payments to Takeda of $60m upfront and $15m in Q117.

Launch in Europe likely in 2016 through Valeant

First sales of Mysimba in Europe are expected in H216 following the recently signed collaboration with Valeant Pharmaceuticals. The deal encompasses 18 countries, 12 of which are in the EU where Mysimba is already approved. The Valeant agreement embodies the company’s refined strategy ex-US detailed earlier this year. European territories will be managed via Orexigen’s 100%-owned subsidiary, Orexigen Ireland, and Mysimba sold through regional, local co-marketing partnerships. Orexigen will maintain a prominent role in marketing and the control of pricing. In the rest of the world, the company is pursuing full partnership agreements similar to its current deal with Kwang Dong in South Korea.

Valuation: Reduced to $213m ($1.47 per share)

We reduce our value to $213m ($1.47/share) from $1.09bn ($7.49/share) as we lower our US peak sales for Contrave from $427m to $194m (on a flattening of prescription growth and a challenging pricing environment) and adjust our model based on the acquisition of US rights to Contrave, including the removal of $895m in milestones due from Takeda on the previous agreement. This is partially offset by the agreement with Valeant and our addition of one RoW deal for Mysimba. Following the recent $165m issue of senior secured notes to Baupost, Orexigen guides a cash runway that will take it into profitability in 2019, consistent with our own forecasts.

Taking over commercialization of Contrave in the US

On 15 March, Orexigen announced the pending re-acquisition of its US rights to anti-obesity medication, Contrave, from licensor Takeda. The partnership was first signed in 2010 for the marketing of Contrave in the US, Mexico and Canada and was subsequently renegotiated earlier this year to encompass the US only. Subject to clearance under the Hart-Scott-Rodino Antitrust Agreement Act, Orexigen has indicated that re-acquiring Contrave rights reflects the company’s desire to take on direct responsibility for the product, which timed well with a strategic realignment of resources by Takeda. The company believe that the deal comes at a favourable point in the product’s life cycle on the back of a fully resourced initial launch period, whereby Takeda has provided Orexigen with the benefit of a large and experienced salesforce to achieve initial brand awareness, as well as commercial and managed care experience. Under the terms of the deal Takeda sales representatives will continue marketing Contrave for up to a six-month transition period, also maintaining significant selling and marketing spend consistent with the recently revised collaboration agreement between the companies in July 2015.

Takeda launched Contrave in October 2014 in the US, targeting ~75,000 physicians with a salesforce of 900 (detailing multiple products) and Contrave enjoyed a solid initial launch. As of June 2015, Contrave became the most widely prescribed branded weight loss treatment in the US, surpassing competitors Qsymia and Belviq (see Exhibit 1). Contrave continues to lead the pack of branded anti-obesity treatments in the US, currently commanding more than 45% of total prescriptions written, well above Qsymia and Belviq, each with ~27-28%. However, sales of obesity products, including Contrave, have somewhat lost momentum in recent months and have not achieved the traditional strong seasonal growth normally seen early on in the year (see Exhibit 2).

Exhibit 1: TRx-branded obesity drugs – market share

Exhibit 2: Sales of TRx-branded obesity drugs

Source: Orexigen (IMS Health)

Source: Bloomberg

Exhibit 1: TRx-branded obesity drugs – market share

Source: Orexigen (IMS Health)

Exhibit 2: Sales of TRx-branded obesity drugs

Source: Bloomberg

Orexigen has communicated its intended targeted and specialized approach to manage the growth of Contrave following its initial 1.5 years on the market, pointing to a relatively high concentration of volume prescribers in the anti-obesity market. To fuel sales, Orexigen has set out a three-year strategic plan to drive Contrave growth post transition with Takeda, through the direct sale of the product via the build-out of a dedicated salesforce of 160 sales representatives and a targeted marketing campaign at a cost that management estimates at $80-100m pa. This implies break-even at an operating profit level in the US at sales of ~$100m, assuming marketing spend at the lower end of projections. Contrave will be the sole product marketed by its own sales representatives, who will target ~18,000 consistent anti-obesity prescribers that have been identified as the most responsive to promotion. The company also aims to support the growth of Contrave by differentiation vs the widely prescribed generic amphetamines, which can lead to side effects such as high blood pressure and dizziness and the potential for abuse. Additionally, Orexigen looks to improve the structure of pricing and discounting targeted through managed care and pharmacy discount strategies, thereby increasing profitability per prescription across patient category (see Exhibit 3).

Exhibit 3: Estimated projected revenue captured across patient segments

Source: Orexigen company presentation, March 2016

The acquisition and US commercialization of Contrave will be funded by the issue of $165m in convertible senior secured notes and related warrants in a private placement to an investor syndicate managed by The Baupost Group. The warrants hold a 10-year term for the purchase of up to 220m shares at a price of $1.50. Under the terms of the acquisition of Contrave from Takeda, which is expected to close in late March, Orexigen will pay Takeda an initial $60m on closing the deal in late March and $15m after a successful transition period in the first quarter of 2017. Orexigen guide towards expectations of profitability for the full year 2019 without the need to raise additional funds, consistent with our own updated forecasts, which now assume Contrave sales of $133m in the US and $96m ex-US in 2019. The company’s profitability target assumes an average growth in the anti-obesity market of 5-10% through 2018, which is down from 15% growth in 2015, although we note a flattening in early 2016, as shown in Exhibit 2. Orexigen also assumes growth of Contrave’s share of the branded obesity market by 3% (to a ~10% share) in 2018 and an improvement in profitability per prescription.

Collaboration with Valeant to kick off launch in Europe

Orexigen is also setting its sights on the ex-US market for the sale of Contrave (known as Mysimba outside the US) as the company strives to take advantage of the lack of effective and safe obesity treatments available in worldwide markets (neither Qsymia nor Belviq are approved ex-US).

On 15 March, Orexigen also announced a new partnership with Valeant Pharmaceuticals for the commercialization of Mysimba in 18 Central and European countries through its wholly owned subsidiary Orexigen Ireland. Valeant’s salesforce will begin selling Contrave in the second half of 2016 in 12 of the 31 EU countries where the treatment is approved for marketing (Greece, Slovenia, Slovakia, Czech Republic, Hungary, Croatia, Lithuania, Estonia, Poland, Latvia, Bulgaria and Romania). Under the terms of the agreement Orexigen will provide Mysimba tablets to Valeant at an agreed transfer price and Valeant will be responsible for obtaining approval in the non-EU countries (Serbia, Bosnia and Herzegovina, Albania, Macedonia, Kosovo and Turkey).

Earlier this year, Orexigen communicated additional detail as to its key priorities for the sale of Mysimba internationally. Rather than signing on a single partner or larger regional partners, the company is looking to monetize its anti-obesity treatment through a series of partnerships, both in Europe and the rest of the world. Management has communicated expectations that US, RoW and Europe will each eventually account for 50%, 25% and 25% respectively of the total value of the obesity treatment. We note Mysimba will likely face little to no competition on launches ex-US vs its competitive home market, as Qsymia and Belviq are not approved in Europe. Consistent with management guidance, we currently model an approximate 50/50 split of Contrave sales between the US and ex-US. However, there is scope for an increase in the international component of our forecast on communication by Orexigen of additional partnerships in Europe and RoW. In the absence of the materialization of large regional marketing deals for Mysimba, Orexigen now points to the diversity of individual markets, as well as the concentration of decision makers as it looks toward product distribution through smaller and specialized players. In some cases it is even possible that Mysimba will be represented by multiple brands through different companies, with separate salesforces in the same geographic area.

European territories will be managed via its 100%-owned subsidiary, the recently established Orexigen Ireland. Here, the company strives to sell the regulatory-approved Mysimba though regional, local co-marketing partnerships, mainly through country-specific launches. Agreements will therefore take the shape of strategic alliances whereby Orexigen will maintain a prominent role in distribution through the control of pricing and much of the marketing effort while the local partner will provide market access through its localized knowledge and salesforce (see Exhibit 4 for potential split of responsibilities).

Exhibit 4: Responsibility of Orexigen and Partners in Europe

Orexigen strategic functions

Partner functions

Brand marketing

Market access

Product supply

Specialist detailing

Pricing/access

GP detailing

Commercial insights

Patient access

Medical affairs

Pharmacovigilance/safety

Regulatory affairs

Supply chain/manufacturing

Clinical development

Distributors

Lifecycle management

Orexigen strategic functions

Brand marketing

Product supply

Pricing/access

Commercial insights

Medical affairs

Regulatory affairs

Clinical development

Lifecycle management

Partner functions

Market access

Specialist detailing

GP detailing

Patient access

Pharmacovigilance/safety

Supply chain/manufacturing

Distributors

Source: Orexigen company presentation

Orexigen points out that its in-house market research reveals key characteristics of the European market that could bode well for the success of Mysimba, which include patient willingness (and ability) to pay out-of-pocket and excess in capacity of existing pharmaceutical salesforces given a lack of product to sell. Obesity drugs have not traditionally enjoyed strong uptake in Europe. However, with little treatment options for the morbidly obese, we expect Mysimba to make moderate inroads in the region, awaiting real sales data to support the company thesis. Despite the estimated 95 million obese patients eligible for anti-obesity medication, less than 1% currently receive anti-obesity medication (vs ~5% in the US).1 Current weight management treatments are limited to GI lipase inhibitors or GLP-1 injectables vs the multiple brand choices in the US.

  Based on UN estimates and World Health Organization obesity estimates.

Outside the US and Europe, the company intends to pursue opportunities modelled on the structure of its current partnership signed with Kwang Dong Pharmaceuticals in South Korea, ie full partnership agreements. Under the terms of its agreement in South Korea, Kwang Dong is responsible for regulatory approval in the country and all commercialization activity and expenses. The company made an upfront payment of $7m to Orexigen and will also pay potential sales-based milestones. Orexigen will supply tablets for ~35-45% of sales. Exhibit 5 below represents those countries targeted by Orexigen for collaborative efforts. The sales potential for Mysimba may be extrapolated from that achieved in peak year sales in various countries, which were reached before a number of obesity treatments were removed from circulation due to safety concerns. The table indicates a real demand for obesity products in these countries.

Exhibit 5: Obesity Drug Sales in Orexigen’s target markets RoW

Country

2014 sales ($m)

Peak year sales ($m)

Mexico

140

213 (2008)

Brazil

120

164 (2008)

Russia

67

84 (2012)

Korea

58

79 (2008)

Australia

56

58 (2012)

MENA

34

40 (2010)

Canada

14

36 (2006)

India

10

15 (2010)

Source: Orexigen presentation, IMS Health Midas 2006-2014, Note: Includes all Rx and OTC.

Valuation

Our valuation moves down considerably to $213m ($1.47 per share) from $1.09bn ($7.49 per share). The main changes to our valuation model are based primarily on a downgrade of our overly optimistic peak sales expectations for Contrave in the US and the acquisition of the US Contrave rights, which includes the removal of $895m in milestones from Takeda. Key components are summarised as follows:

We reduce our peak forecasts for Contrave in the US to $194m from $427m on the back of significantly slower than expected prescription growth trends in the territory and expectations of a continued challenging pricing and reimbursement environment. We now assume an annual price per treatment of $350 vs our prior $420 (2016 estimate inflated at 5% pa over the forecast period). This compares to the price of $327 in 2015e (Edison). We have also revised our penetration expectations from an average of 0.42% in 2016-25 to 0.28%. We note that prescription growth of Contrave, together with other branded obesity treatments, has flattened from early this year vs our expectations of a continued solid growth trajectory in the first quarter, traditionally the most robust selling period of the year.

Due to the reacquisition of Contrave in the US, we remove our forecast royalty rate from Takeda on Contrave now, assuming that Orexigen receives all profits from Contrave in the US, factoring in a 90% gross margin on the treatment. We also add in the requisite marketing and sales costs for US commercialization.

We remove all US milestones in our models from the collaboration with Takeda, which totalled $895m in sales-based and anniversary payments.

We now include $75m in acquisition payments to Takeda, split between an upfront payment of $60m and a contingent amount of $10m payable in Q117. We note our peak sales of $194m in the US fall just below the $200m threshold which, if exceeding this amount, would require an initial $10m and any subsequent milestone payments to Takeda. We have therefore not included any of these payments in our model.

We continue to model a 28% margin in South Korea based on the supply of tablets at 37.5% minus an estimated raw material cost of 10%, and include a second agreement in RoW based on similar assumptions.

We include projections for Contrave sales in 18 Central and Eastern European countries through Orexigen’s deal with Valeant. As guided by Orexigen, our model assumes deal terms to those extended to Kwang Dong.

In Western Europe, we remove milestones on potential collaborative agreements to account for the new targeted structure of agreements to be signed, raising potential royalties from 25% to 30% as Orexigen now looks to assume a bigger role in European distribution.

Exhibit 6: Orexigen valuation

Product

Launch

Peak sales ($m)

Royalty
rate

NPV ($m)

rNPV/share
($)

Previous
rNPV/share ($)

Key assumptions

Contrave US

Oct-14

194

N/A

713

4.90

8.37

Not including sales and marketing costs

Contrave W. Europe

2016

117

30%

129

0.88

1.44

awaiting partnerships

Contrave C. and E. Europe

2016

27

37.5%

26

0.18

n/a

Valeant partnership

Contrave S. Korea

2016

17

37.5%

14

0.10

0.19

Kwang Dong partnership

Contrave RoW

2017

14

37.5%

17

0.12

N/A

PV costs inc taxes

(811)

(5.57)

N/A

Net cash (a/o Dec 31 2015)

126

0.86

N/A

Overall valuation (per share based on 145.6m shares outstanding)

213

1.47

7.49

Source: Edison Investment Research

Financials

On 26 February, Orexigen reported Q415 and FY15 results as follows:

Revenue of $4.9m in Q415 (vs $10.0m in Q315) comprising royalties totalling $2.6m (vs $2.6m in Q315) and other sales including milestones of $2.3m ($7.4m in Q315).

Partner Takeda reported top-line sales of Contrave in the US of $13m in Q415, traditionally the slowest quarter for obesity products (vs our forecast $16m and $13m reported in Q315).

In Q415 Orexigen reported a net loss of $17.8 per share vs a net profit in Q315 of $0.6m.

The company ended FY15 with $214m in cash and cash equivalents.

As noted, following its recently announced acquisition of US rights to Contrave in the US, the company now guides toward profitability in the full year 2019 vs previous guidance of profitability in 2018, which is consistent with our forecasts. Changes to our model in the coming two years are shown in Exhibit 7 below.

Exhibit 7: Changes to Edison short-term forecasts

$m

Old

New

Sales/ royalty/milestones 2016

85.6

46.4

Sales/ royalty/milestones 2017

157.3

120.9

Op profit 2016

(26.2)

(57.1)

Op profit 2017

40.7

(18.7)

Loss per share 2016

(0.23)

(0.40)

Loss per share 2017

0.23

(0.22)

Source: Edison Investment Research

Exhibit 8: Financial summary

$'000s

2013

2014

2015

2016e

2017e

Year end 31 December

US GAAP

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

3,428

55,521

24,457

46,377

120,850

Cost of Sales

0

0

0

(2,345)

(10,789)

Gross Profit

3,428

55,521

24,457

44,032

110,061

Research and development

(56,748)

(57,412)

(40,750)

(41,565)

(42,396)

General & administrative

(23,878)

(28,639)

(43,762)

(59,575)

(86,362)

EBITDA

 

 

(77,292)

(30,669)

(60,278)

(57,493)

(19,132)

Operating Profit (before GW and except.)

 

 

(77,198)

(30,530)

(60,055)

(57,108)

(18,697)

Intangible Amortisation

0

0

0

(3,461)

(5,769)

Exceptionals/Other

0

0

0

0

0

Operating Profit

(77,198)

(30,530)

(60,055)

(60,569)

(24,466)

Net Interest

(473)

(6,995)

(7,219)

(2,388)

(13,864)

Other (includes change in fair value of warrants)

0

0

(39)

0

0

Profit Before Tax (norm)

 

 

(77,671)

(37,525)

(67,274)

(59,495)

(32,561)

Profit Before Tax (FRS 3)

 

 

(77,671)

(37,525)

(67,313)

(62,956)

(38,330)

Tax

0

0

(1,376)

0

0

Deferred tax

0

0

0

0

0

Profit After Tax (norm)

(77,671)

(37,525)

(68,650)

(59,495)

(32,561)

Profit After Tax (FRS 3)

(77,671)

(37,525)

(68,689)

(62,956)

(38,330)

Average Number of Shares Outstanding (m)

96.5

118.2

131.1

148.4

151.4

EPS - normalised fully diluted ($)

 

 

(0.80)

(0.32)

(0.52)

(0.40)

(0.22)

EPS - FRS 3 ($)

 

 

(0.80)

(0.32)

(0.52)

(0.40)

(0.22)

Dividend per share ($)

0.0

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

1,839

1,655

2,694

62,860

72,221

Intangible Assets

0

0

0

60,000

69,231

Tangible Assets

630

857

1,284

1,450

1,580

Other

1,209

798

1,410

1,410

1,410

Current Assets

 

 

178,282

211,326

233,895

278,028

238,729

Stocks

0

1,198

10,802

10,802

10,802

Debtors

0

2,571

6,828

6,828

6,828

Cash

176,996

205,537

214,011

258,144

218,845

Other

1,286

2,020

2,254

2,254

2,254

Current Liabilities

 

 

(22,853)

(29,714)

(32,241)

(32,241)

(32,241)

Creditors

(22,853)

(29,714)

(32,241)

(32,241)

(32,241)

Short term borrowings

0

0

0

0

0

Long Term Liabilities

 

 

(115,406)

(160,923)

(170,970)

(322,701)

(315,259)

Long term borrowings

(80,031)

(83,908)

(88,129)

(248,129)

(248,129)

Other long term liabilities

(35,375)

(77,015)

(82,841)

(74,572)

(67,130)

Net Assets

 

 

41,862

22,344

33,378

(14,054)

(36,549)

CASH FLOW

Operating Cash Flow

 

 

(70,817)

26,828

(54,475)

(55,314)

(23,733)

Net Interest

0

(3,119)

0

0

0

Tax

0

0

0

0

0

Capex

(640)

(246)

(538)

(551)

(565)

Acquisitions/disposals

0

0

0

(60,000)

(15,000)

Financing

1,337

2,734

64,259

0

0

Dividends

0

0

0

0

0

Other

29,682

(1,533)

(3,843)

25

25

Net Cash Flow

(40,438)

24,664

5,403

(115,840)

(39,273)

Opening net debt/(cash)

 

 

(137,403)

(96,965)

(121,629)

(125,882)

(10,015)

HP finance leases initiated

0

0

0

0

0

Exchange rate movements

0

0

29

0

0

Other

0

0

(1,179)

(27)

(25)

Closing net debt/(cash)

 

 

(96,965)

(121,629)

(125,882)

(10,015)

29,284

Source: Company accounts, 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

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

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