Zubsolv gains; US moves to increase treatment

Orexo 9 November 2015 Update

Orexo

Zubsolv gains; US moves to increase treatment

Q315 financial results

Pharma & biotech

9 November 2015

Price

SEK65.0

Market cap

SEK2,249m

SEK8.55/US$

Net debt (SEKm) at end September 2015

293

Shares in issue

34.6m

Free float

N/A

Code

ORX

Primary exchange

NASDAQ OMX
Stockholm

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

(2.6)

20.4

(50.8)

Rel (local)

(8.3)

23.5

(56.9)

52-week high/low

SEK148.00

SEK43.50

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.

Next events

Partnering agreement (either for Zubsolv ex-US or OX51)

2015/16

Q4 and FY15 results

28 January 2016

Updates on US plans to increase access to treatment

2016

Analysts

Dr Philippa Gardner

+44 (0)20 3681 2521

Lala Gregorek

+44 (0)20 3077 5700

Christian Glennie

+44 (0)20 3077 5727

Orexo is a research client of Edison Investment Research Limited

A positive Q315 with Zubsolv sales broadly in line with expectations, coupled with a number of positive and potentially significant developments, continues to support our thesis that Orexo’s share price is overly discounting Zubsolv’s potential. The US government has announced plans to expand access to opioid dependence treatment, which could substantially increase the US market opportunity, reinforcing our current peak sales forecasts. This is in addition to key market share gains, induction label approval and two new PBM agreements. Our valuation is updated to SEK5.8bn, with the decrease owing to Abstral generics and the impact of the CVS loss to 2016 Zubsolv sales.

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/13

429

(110)

(3.6)

0.0

N/A

N/A

12/14

570

(53)

(1.6)

0.0

N/A

N/A

12/15e

600

(191)

(5.7)

0.0

N/A

N/A

12/16e

973

(180)

(4.9)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items.

Zubsolv: Market share gains all round

Zubsolv made market share gains in Q315, growing in the main commercial market and regaining share in the highly profitable cash segment. This helped to boost the gross:net sales ratio, also aided by a one-off revision related to assumed rebate levels. The commercial segment remains the main focus for Orexo and Zubsolv continues to increase its share, which will be key for driving future growth.

First US government moves to increase access

In what could potentially be significant changes to the US opioid dependence market, the US government has announced plans to increase access to medication-assisted treatment (MAT), such as with Zubsolv, with goals to double the number of physicians authorised to prescribe buprenorphine. This is currently limited to 30,000 physicians, with around 6,000 active in treating; all have a 100-patient cap. If realised, these goals could substantially expand the current market.

Intensive discussions for Zubsolv ex-US and OX51

Orexo remains in active discussions for both Zubsolv outside of the US and for pain product OX51. Orexo reiterated its focus to find the right partner committed to maximising each opportunity.

Valuation: SEK5.8bn or SEK169/share on a DCF basis

Our Orexo valuation is largely unchanged at SEK5.8bn (from SEK6.0bn) or SEK169/share. 2016 Zubsolv sales are lowered to reflect the CVS loss, with no changes to our longer-term underlying Zubsolv forecasts, with FX providing a small boost. We have also slowed Abstral sales from mid-2018 following settlement with Actavis allowing for generic US entry from June 2018, earlier than we anticipated. Neither the ex-US Zubsolv opportunity, nor OX51, are included in our valuation.

Zubsolv: Key developments and gains during Q315

There have been a number of key positive developments during Q315, which could all be important for Zubsolv’s future. These include:

induction label approval;

two new pharmacy benefit manager (PBM) agreements in Medicaid (public healthcare); and

initial steps by the US government to increase access to opioid dependence treatment.

During Q315, Orexo also announced unexpected changes to Zubsolv’s formulary position at CVS Caremark. These changes, which are based purely on a financial decision with competitors offering more aggressive rebating, will come into effect from January 2016. Zubsolv will be excluded from restricted plans (a plan that is more highly controlled with less product choice for patients; typically this would be a cheaper insurance programme) and will lose preferred status in other plans. This compares to the current status, where since January 2014 Zubsolv is the only branded product covered by CVS restricted plans and has preferred branded status in other CVS plans. Under these changes Zubsolv will remain available to many, but not all CVS members. Orexo estimates that these changes could affect 10-15% of Zubsolv gross sales.

While disappointing, we believe that in the mid to longer term, any losses resulting from the CVS change should be more than offset by the new PBM agreements (both with undisclosed partners). These will offer Orexo access to a number of insurance plans, including with large insurance companies. Negotiation with these companies will take time and so these agreements will not result in an immediate Zubsolv uptick, but more likely a gradual increase in share.

The induction label should help to facilitate dialogue with physicians, providing a much simpler message; that Zubsolv can be used to initiate and maintain treatment. This is important as rather than trying to switch patients to Zubsolv after induction, de novo patients can now be initiated immediately on Zubsolv; we believe that in the longer term this should have a positive impact on Zubsolv’s positioning and uptake in the market.

US government seeks to increase access to treatment

The most significant update, not just for Zubsolv, but for the whole US opioid dependence market are plans announced by the US Department of Health and Human Services (HHS) to increase access to treatment for opioid dependence. This was then followed by comments from President Obama, where he outlined goals to double the number of physicians from 30,000 to 60,000 who are authorised to prescribe buprenorphine (currently around 6,000 physicians are active in treating opioid dependence, each with a 100-patient cap, severely limiting access to treatment). The first step is for the submission of action plans within 90 days from each of healthcare related agencies to identify current barriers to medical treatment.

If these goals are realised, this could significantly expand the current >$2bn US opioid dependence market. Although this will take time, these White House initiatives serve to reinforce our long-term Zubsolv sales forecasts.

Zubsolv makes key gains in Q315

Zubsolv’s market share has steadily increased, ending Q315 at 6.4% (from 6% at the start) shown in Exhibit 2. Patient demand grew 6.2% compared to Q215, with sales also aided by stocking, currency and an improved gross:net sales ratio. Although the gross:net sales ratio is not explicitly disclosed, Orexo indicated that the improvement contributed around 40% of the 21.6% quarterly revenue growth. A large part of this was owing to a positive one-off adjustment related to assumed rebate provisions (where Orexo makes assumptions regarding the rebate level, which is then adjusted at a later stage to reflect the actual rebate). As this is likely a one-off effect, we expect a return to higher rebating in the near-term.

Exhibit 1: Zubsolv tablet volumes (four-week average)

Exhibit 2: Zubsolv market share (four-week average)

Source: Wolters Kluwer, Bloomberg. Gridlines separate quarters

Source: Wolters Kluwer, Bloomberg. Gridlines separate quarters

Exhibit 1: Zubsolv tablet volumes (four-week average)

Source: Wolters Kluwer, Bloomberg. Gridlines separate quarters

Exhibit 2: Zubsolv market share (four-week average)

Source: Wolters Kluwer, Bloomberg. Gridlines separate quarters

Zubsolv continues to make gains in the commercial segment (market share now 9.3%); this is the largest and one of the more profitable segments, hence traction here is key. A summary of the dynamics in each of the three market sectors are shown in Exhibit 3. Share has remained stable in the public segment (with the highest rebates). Share has been regained in the highly profitable cash segment, with this helping to improve the gross:net sale ratio. Orexo remains most focused on the commercial segment, the largest of the market. Gains continue to be made in the absence of any new agreements, suggesting physician and patient acceptance in this key segment.

Exhibit 3: Overview of the main market segments

Commercial

Public

Cash & Vouchers

Four-week average market share

At end December 2014

7.3%

4.3%

5.3%

At end June 2015

8.6%

3.4%

4.9%

At end September 2015

9.3%

3.5%

5.3%

% of total market volume

42%

39%

18%

% of Zubsolv sales

62%

22%

15%

Rebating

Low-medium

High

Low

Source: Orexo estimates

Valuation

Our Orexo valuation has been updated to SEK5.8bn or SEK169/share (from SEK6.0bn and SEK173/share). We have reduced Zubsolv sales in 2016 owing to the CVS loss reducing gross sales to $190m (from $211m), a 10% decline. We have made no changes to our underlying Zubsolv assumptions beyond 2016, which have been updated for FX (our long-term FX forecasts use the current rate). Our forecasts are now based on the current rate of SEK8.55/US$ (from 8.45 when we last published our forecasts), which results in some very minor c 1% upgrades to our Zubsolv SEK-based forecasts. We have also made some downgrades to our Abstral forecasts from mid-2018, when generics will become available under the terms of the agreement with Actavis. Our valuation has also been rolled forward in time and updated to reflect most recent net debt (which has increased).

Our underlying long-term Zubsolv assumptions are unchanged, maintaining our peak market share of 25% (equivalent to peak Zubsolv gross sales of around $700-750m). We continue to expect rebating will improve over time from current levels (not disclosed), as growth accelerates in the non-exclusive segments to a long-term average of around 35% (implying peak net sales of c $480m). Our Zubsolv forecasts are shown in Exhibit 4. Evidence of a growth step-up, or implementation of government plans to increase access to treatment could lead us to positively revise these forecasts.

Exhibit 4: Zubsolv revenue assumptions to 2021

Assumption

2014

2015e

2016e

2017e

2018e

2019e

2020e

2021e

Zubsolv sales – pre-rebates ($m)

57.3

107

190

352

470

559

648

738

Zubsolv sales – post-rebates ($m)

32.8

52

99

211

306

363

421

480

Total Zubsolv sales – post-rebates (SEKm)

228

439

849

1,808

2,617

3,110

3,604

4,105

Total product sales (SEKm)

569

600

973

1,975

2,691

3,158

3,628

4,105

Source: Edison Investment Research, Orexo. Note: Assumes SEK8.55/$ FX rate, peak market share of 25% and average 35% rebate.

Our explicit DCF-based valuation out to 2030 assumes a WACC of 10%, a long-term tax rate of 30% after 2016 and no terminal value. We estimate a long-term gross margin of 85% on Zubsolv by 2025, with the operating margin gradually trending to 50% in the long term. We include a modest revenue contribution from global Abstral and Edluar royalties until 2020, at which point we assume for simplicity that all revenues relate to Zubsolv. We do not explicitly value the ex-US Zubsolv opportunity, nor OX51, which could both provide upside to our forecasts.

Financials

Zubsolv Q315 net revenues were SEK110.8m, +21.6% compared to Q215 and +62% y-o-y. This is encouraging, particularly given the quarterly decline observed in Q215. Based on the average FX rate during the quarter, we estimate this implies net sales of $13.1m. With Q315 Zubsolv sales broadly in line with our expectations, we have made no changes to our 2015 Zubsolv forecasts. We have reduced 2016 sales, decreasing gross US$ sales by 10% to reflect the impact of the CVS loss. However, in the mid- to longer term, we believe this will be more than offset by the new agreements and the growing underlying share, hence we have made no changes to our underlying Zubsolv forecasts beyond 2016, adjusting only for currency (with FX now SEK8.55/US$ from 8.45).

Total product revenues in Q315 were SEK139.5m, with Abstral and Edluar broadly in line with our FY15 expectations. Orexo recently settled a patent dispute with Actavis regarding Abstral, which will allow Actavis to enter the US market from June 2018 (or earlier under certain undisclosed conditions); this is ahead of the September 2019 patent expiry. As a result of this settlement, we now decline Abstral sales from mid-2018, rather than from 2020.

Q315 R&D expenses were SEK43.3m and 9M15 were SEK116.5m. Although there was a +13.7% q-o-q increase in Q315, we had expected a more marked acceleration. Management continues to expect an uptick in Q415, but now expects R&D expenses of around SEK185m for 2015 (compared to the previous expectation of SEK200m), with which we are in-line.

S&M spend was SEK70.8m, which is 13.3% below Q215. We continue to expect Q4 spend to be similar to Q215 (SEK81.7m) and for FY15 S&M spend of SEK309.8m.

Our financial forecasts are summarised in Exhibit 6 and the main changes to our estimates post Q315 are shown in Exhibit 5.

Exhibit 5: Changes to estimates

Revenue (SEKm)

PBT (SEKm)

EPS (SEK)

Old

New

Change

Old

New

Change

Old

New

Change

2015e

600

600

0.0%

(215)

(191)

11.1%

(6.5)

(5.7)

11.7%

2016e

1,056

973

-7.8%

(104)

(180)

-72.8%

(2.9)

(4.9)

-72.1%

2017e

1,953

1,975

1.2%

409

401

2.0%

8.3

8.1

2.4%

Source: Edison Investment Research. Note: SEK/US$ FX rate updated to 8.55 from 8.45.

Exhibit 6: Financial summary

SEKm

2012

2013

2014

2015e

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

326

429

570

600

973

1,975

Cost of Sales

(28)

(29)

(107)

(145)

(223)

(406)

Gross Profit

298

400

463

455

751

1,570

EBITDA

 

 

(62)

(45)

(13)

(156)

(153)

429

Operating Profit (before GW and except.)

 

(68)

(96)

(25)

(170)

(160)

423

Intangible Amortisation

(1)

0

0

0

0

0

Other

(7)

(6)

17

6

0

0

Exceptionals

(10)

(44)

0

0

0

0

Operating Profit

(79)

(140)

(25)

(170)

(160)

423

Net Interest

(8)

(14)

(28)

(21)

(20)

(22)

Other

0

0

0

0

0

0

Profit Before Tax (norm)

 

 

(77)

(110)

(53)

(191)

(180)

401

Profit Before Tax (IFRS)

 

 

(88)

(153)

(53)

(191)

(180)

401

Tax

2

(2)

(4)

(8)

9

(120)

Deferred tax

0

0

0

0

0

0

Profit After Tax (norm)

(75)

(111)

(57)

(199)

(171)

281

Profit After Tax (IFRS)

(86)

(155)

(57)

(199)

(171)

281

Average Number of Shares Outstanding (m)

29.4

30.8

34.3

34.6

34.6

34.6

EPS - normalised (SEK)

 

 

(2.5)

(3.6)

(1.6)

(5.7)

(4.9)

8.1

EPS - IFRS (SEK)

 

 

(2.9)

(5.0)

(1.6)

(5.7)

(4.9)

8.1

Dividend per share (SEK)

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

91.5

93.2

81.2

75.8

77.1

79.5

EBITDA Margin (%)

(19.0)

(10.5)

(2.2)

(26.0)

(15.7)

21.7

Operating Margin (before GW and except.) (%)

(21.0)

(22.3)

(4.4)

(28.3)

(16.4)

21.4

BALANCE SHEET

Fixed Assets

 

 

189

228

290

252

246

241

Intangible Assets

135

195

259

226

226

226

Tangible Assets

35

33

29

24

17

12

Other

19

0

1

2

2

2

Current Assets

 

 

293

544

936

808

636

1,030

Stocks

28

383

478

400

366

445

Debtors

18

55

174

225

240

487

Cash

228

106

285

183

26

94

Other

19

0

0

0

5

5

Current Liabilities

 

 

(169)

(497)

(268)

(290)

(300)

(407)

Creditors

(169)

(360)

(266)

(290)

(300)

(407)

Short term borrowings

0

(137)

(3)

0

0

0

Long Term Liabilities

 

 

(122)

(114)

(503)

(498)

(498)

(498)

Long term borrowings

(114)

(104)

(494)

(494)

(494)

(494)

Other long term liabilities

(8)

(10)

(9)

(4)

(4)

(4)

Net Assets

 

 

191

161

455

273

85

366

CASH FLOW

Operating Cash Flow

 

 

34

(256)

(456)

(100)

(133)

103

Net Interest

(5)

(6)

(32)

(26)

(20)

(22)

Tax

0

(2)

0

0

(3)

(13)

Capex

(5)

(108)

(72)

(3)

(1)

(1)

Acquisitions/disposals

12

0

0

22

0

0

Financing

(52)

19

342

4

0

0

Dividends

0

0

0

0

0

0

Other

0

(3)

0

0

0

0

Net Cash Flow

(17)

(354)

(217)

(104)

(157)

68

Opening net debt/(cash)

 

 

(132)

(115)

135

212

310

468

HP finance leases initiated

0

0

0

0

0

0

Exchange rate movements

(0)

3

2

(4)

0

0

Other

(1)

102

139

9

0

0

Closing net debt/(cash)

 

 

(115)

135

212

310

468

400

Source: Edison Investment Research, Orexo accounts

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2015 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2015. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Share this with friends and colleagues