Orexo — Zubsolv stabilizing enables R&D push

Orexo — Zubsolv stabilizing enables R&D push

Orexo continues to weather the shift in its payer base away from exclusivity to the open market well. It has managed to maintain 4% sequential growth in Zubsolv sales from Q3 to Q419 (SEK190.5m), in the context of a 3% decline in units. Growth in the open market strongly resembles overall market trends (14% AGR for 2019). The company intends to use some of these Zubsolv revenues to advance its pipeline, which will have five products advancing in 2020.

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Orexo

Zubsolv stabilizing enables R&D push

Financial update

Pharma & biotech

6 February 2020

Price

SEK60.1

Market cap

SEK2086m

SEK9.64/US$

Net cash (SEKm) at 31 December 2019

527

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

(4.9)

(9.2)

(21.2)

Rel (local)

(8.2)

(15.8)

(36.5)

52-week high/low

SEK85.70

SEK51.60

Business description

Orexo is a Swedish focused on pharmaceuticals and recently digital therapeutics. Its lead product is Zubsolv, an opioid dependence therapy marketed by Orexo in the US and being out-licensed to partners worldwide. It has three other clinical assets and two digital therapies, of which three are expected to be launched in the US by the end of 2021.

Next events

OX125 first-in-human studies

H120

OX-MPI Phase I results

H120

OX124 pivotal trial

H220

Analyst

Nathaniel Calloway

+1 646 653 7036

Orexo is a research client of Edison Investment Research Limited

Orexo continues to weather the shift in its payer base away from exclusivity to the open market well. It has managed to maintain 4% sequential growth in Zubsolv sales from Q3 to Q419 (SEK190.5m), in the context of a 3% decline in units. Growth in the open market strongly resembles overall market trends (14% AGR for 2019). The company intends to use some of these Zubsolv revenues to advance its pipeline, which will have five products advancing in 2020.

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/18

783.1

92.2

3.99

0.0

15.1

N/A

12/19

844.8

227.9

6.33

0.0

9.5

N/A

12/20e

775.4

200.3

5.62

0.0

10.7

N/A

12/21e

918.6

245.5

6.82

0.0

8.8

N/A

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

Zubsolv stabilizes after move toward open market

In 2019 several exclusivity contracts with payers were terminated allowing for increased generics to enter these markets, but Orexo has largely recouped the lost sales through the higher prices for branded products realized with payers with open formularies. Additionally, there have been positive tailwinds for the company such as the recent discontinuation of the authorized generic of Suboxone. This left Zubsolv as the only branded product on some formularies such as CVS Caremark, which saw sales grow 34% compared to Q319. The trend of declining sales from previously exclusive payers may have stabilized in the case for Humana and United Healthcare according to trends at the end of Q419 reported by the company.

Increased R&D in 2020: Five programs to advance

The progress made with Zubsolv has allowed Orexo to increase its focus on the development of new drugs and digital therapeutics. The primary focus of the company’s pipeline are drugs to reduce the risk and mitigate the damage of opiates and other drugs of abuse. This also includes two digital products that were recently in-licensed from GAIA for the treatment of alcohol and opiate abuse, which the company plans to launch in 2021 and H220, respectively. This is in addition to the company’s already existing three clinical programs that are expected to be ongoing in 2020. Collectively this has increased the company’s guidance for operational expenses to SEK550–600m (from SEK508m for 2019).

Valuation: Decreased to SEK3.65bn

We have decreased our valuation of Orexo to SEK3.65bn or SEK105.27 per share, from SEK4.21bn or SEK121.30 previously. This is driven by decreased revenue estimates and the increased investment in R&D programs, although we consider it too early to effectively evaluate the potential of these programs. We expect to update our valuation when these programs advance, and we see clinical data (in the case of drugs) or initial market traction (for the digital products).

Zubsolv payer mix continues to shift

Orexo reported revenue of SEK238.1m for Q419, of which SEK190.5m was from Zubsolv US sales. This is a 4% growth over Q319 (in constant currency), albeit with a 3% decline in unit sales as the company continues to shift its mix of payers away from exclusive contracts. The so-called ‘open formulary payers’ (those that are not currently or previously subject to such exclusive contracts) provide higher pricing and higher margins, but the company must compete against more alternatives on formulary. Despite this, new prescriptions grew in this open formulary segment by 4% since Q319 and 17% year-on-year.

The sequential quarterly loss in total unit volume is primarily associated with three previously contracted payers: Humana, United Healthcare Group and WellCare. The company reported that volume sales from Humana have turned around and began to increase again by the end of Q419, and sales from United stabilized. A majority of the growth in open formulary business is driven by increased uptake by CVS Caremark, which grew by 34% compared to Q319 (53% year-on-year). This is driven by the recent removal of authorized generic Suboxone from the market, leaving Zubsolv as the sole branded product on formulary.

Among open formularies, Zubsolv growth strongly reflects overall market growth (Exhibit 1), and we expect this to be the overall trend going forward. Market growth for 2019 was 15% overall (in units), roughly in line with trends from previous years (14% in 2018) and showing no signs of abating. We conservatively expect market growth to begin to stabilize in 2020 (10% growth), but we may update this assumption if current trends continue.

Exhibit 1: Buprenorphine/naloxone market growth

Source: Orexo, IMS. Note: *Open formulary business segment includes all payers, excluding current and recently former exclusive payer and the cash business. NTRx=new prescriptions.

The margins for Zubsolv have also been on a significant positive trend. Gross margins improved from 78% in 2018 to 90% in Q419 (87.5% for 2019). This was due to a combination of improved manufacturing as well as higher pricing in the open formularies. Operating margins have more than doubled from 12% in 2018 to 30% for Q419 (27% for 2019). Together these factors have contributed to a remarkably stable and improving business in the context of increased competition.

The reported 2019 revenue (SEK845m) was lower than our estimates (SEK875m), as the loss of formulary status had a faster impact in Q419 than our previous expectation. Following the slower than expected growth for US Zubsolv sales in Q4, we have also adjusted our 2020 estimates, which has reduced our expected revenue to SEK775m from SEK860m. However, the impact of these adjustments on our valuation is mitigated by better than expected margins, as outlined above.

The vast majority of this predicted revenue in 2020 is driven by US sales of Zubsolv (SEK740m for 2020). We include a small revenue stream (SEK8.0m) for ex-US Zubsolv sales, associated with the Mundipharma agreement in Australia and New Zealand. We do not record any US or European revenue for Abstral following the expiration of the company’s IP and partnerships in those regions, although we include a small revenue stream (SEK25.4m) associated with Abstral in the rest of the world. Finally we include SEK2.3m in revenue from Edluar royalties.

Increased focus on pipeline

As Orexo has reached profitability and weathered the uncertainties of shifting its payer revenue base, going forward there will be an increased focus on internal development of new products. The company has five ongoing drug development programs, the majority of which are expected to see clinical progress in 2020.

The company initiated a Phase I clinical study of OX338 in October 2019, which has now been completed. The product is a novel sublingual formulation of ketorolac, which is an NSAID with opiate levels of pain relief, but the use of which has been limited by GI side effects. The goal of the study was to explore new formulations of the drug to improve on its absorption properties and position it as an opiate alternative. The company reported on 29 January 2020 that the study had been completed, and improvements in absorption were seen, but additional formulation work on the product will be needed before further clinical studies.

Orexo also has two drugs in development for rescue treatment of opiate overdose: OX124 (naloxone) and OX125 (nalmefene). Both products are being developed as nasal formulations, similar to the Narcan naloxone nasal spray, but with the intent to improve on the latter’s properties such as increased absorption. The company is currently planning a pivotal trial for OX124 in H220, and first-in-human studies for OX125 are planned for H120.

Progress has also recently been made on OX-MPI, an investigational drug for the treatment of microvascular disease. The company’s partner Gesynta initiated a Phase I study in Q319, which is expected to be complete in H120.

Finally, the company has recently expanded its focus to include digital health products through the licensing of two products from GAIA. OXD-01 is an app-based digital therapy for opiate use disorder, currently in early testing, and OXD-02 (also known as vorvida) is a similar treatment for alcohol use disorder, which has been approved and launched in Germany and Switzerland. Orexo acquired worldwide rights to OXD-01, which it expects to advance to the clinic in 2020 and seek approval for in 2021 (for a potential 2021 launch). The company acquired the US rights to OXD-02 in November 2019, and it is targeting a US launch in H220, although it has stated that it will need to talk to the FDA regarding the most appropriate pathway. The details of these licensing agreements are not disclosed.

We expect increased R&D spending in 2020 due to the progress of these programs: SEK255m from SEK181m for 2019. The company guided to operational expenses of SEK550–600m for 2020 (compared to SEK508m for 2019), largely due to increased R&D expenses, and offset by decreased administrative expenses following the conclusion of litigation (SEK76m forecast in 2020 compared to SEK139m in 2019).

Valuation

We have decreased our valuation of Orexo to SEK3.65bn or SEK105.27 per share, from SEK4.21bn or SEK121.30 per share previously. The decrease is driven by the lower revenue estimates outlined above and the increased R&D expenses expected in 2020 and going forward. We should note that we have not included any value from these development programs in our current model. To evaluate the drugs in development we would need to see clinical data demonstrating their efficacy. For digital health products like OXD-01 and OXD-02, we would like to see initial market traction before including them in our model. We expect to add these programs to our valuation as they progress over the coming year. The company ended the year with SEK527m net cash, which we believe should be sufficient when paired with increasing revenue to support the current development programs.

Exhibit 2: Financial summary

 

 

 

SEKm

2014

2015

2016

2017

2018

2019

2020e

2021e

Year end 31 December

 

 

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

570.3

643.3

705.9

643.7

783.1

844.8

775.4

918.6

Cost of Sales

 

 

 

(107.4)

(136.1)

(149.6)

(164.4)

(171.8)

(105.6)

(74.8)

(82.5)

Gross Profit

 

 

 

462.9

507.3

556.3

479.3

611.3

739.2

700.6

836.1

Reported operating profit

 

 

(25.0)

(169.0)

51.7

57.4

95.8

231.2

164.1

199.3

Joint ventures & associates (post tax)

 

 

 

 

 

 

 

 

Profit before tax (reported)

 

 

(52.6)

(191.1)

35.6

29.7

92.2

227.9

200.3

245.5

Reported tax

 

 

 

(4.0)

(6.9)

(6.5)

(6.5)

45.7

(8.8)

(6.0)

(7.4)

Profit after tax (reported)

 

 

(56.6)

(198.0)

29.0

23.2

137.9

219.1

194.3

238.1

Minority interests

 

 

0.0

0.0

0.0

0.0

7.0

(3.4)

0.0

0.0

 

 

 

 

 

 

 

 

 

 

 

 

Basic average number of shares outstanding ('m)

 

33.0

34.0

35.0

35.0

34.6

34.9

34.6

34.9

EPS - basic reported (SEK)

 

 

(1.73)

(5.74)

0.84

0.67

3.99

6.33

5.62

6.82

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

Fixed assets

 

 

 

289.5

185.9

185.1

176.5

227.1

279.9

294.3

317.5

Intangible assets

 

 

197.0

159.1

138.2

121.0

103.9

113.9

105.6

95.4

Tangible assets

 

 

29.1

24.7

22.1

20.1

20.0

22.0

44.9

78.2

Investments & other

 

 

63.4

2.1

24.8

35.4

103.2

143.9

143.9

143.9

Current assets

 

 

936.4

830.4

833.7

827.4

1,059.5

1,221.2

1,396.5

1,611.4

Stocks

 

 

 

478.1

398.9

344.2

250.2

173.6

131.8

156.1

161.5

Debtors

 

 

 

173.8

233.4

178.5

249.3

296.1

272.6

231.4

271.8

Cash & cash equivalents

 

 

284.5

198.1

282.4

327.9

589.8

816.8

1,009.0

1,178.1

Other

 

 

 

0.0

0.0

28.6

0.0

0.0

0.0

0.0

0.0

Current liabilities

 

 

(268.1)

(251.6)

(309.5)

(349.9)

(483.4)

(461.1)

(461.2)

(461.2)

Creditors

 

 

 

0.0

0.0

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

0.0

0.0

Other

 

 

 

(266.2)

(251.6)

(309.5)

(349.9)

(483.4)

(461.2)

(461.2)

(461.2)

Long-term liabilities

 

 

(502.8)

(498.3)

(399.0)

(324.9)

(327.1)

(333.6)

(333.6)

(333.6)

Long-term borrowings

 

 

(493.8)

(494.4)

(397.8)

(319.1)

(320.6)

(289.6)

(289.6)

(289.6)

Other long-term liabilities

 

 

(9.0)

(3.9)

(1.3)

(5.8)

(6.5)

(44.0)

(44.0)

(44.0)

Minority interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

 

Operating cash flow before WC and Tax

 

(31.1)

(124.7)

60.0

108.1

109.8

240.3

202.2

246.7

Working capital

 

 

(451.8)

17.2

88.7

38.5

114.1

38.4

16.9

(45.9)

Exceptional & other

 

 

(8.5)

(1.6)

0.0

0.0

0.0

0.0

0.0

0.0

Tax

 

 

 

4.0

6.9

7.5

0.0

18.1

12.2

6.0

7.4

Net operating cash flow

 

 

(487.3)

(102.2)

156.2

146.6

242.0

290.9

225.2

208.2

Capex

 

 

 

(71.7)

(4.1)

0.5

(1.6)

(3.6)

(26.4)

(33.0)

(39.1)

Acquisitions/disposals

 

 

0.0

21.8

5.0

0.0

(2.5)

0.0

0.0

0.0

Equity financing

 

 

349.3

3.8

2.2

0.1

0.0

2.0

0.0

0.0

Other

 

 

 

0.0

0.0

0.0

0.0

0.0

(55.8)

0.0

0.0

Net cash flow

 

 

 

(209.7)

(80.7)

163.9

145.1

235.8

210.8

192.2

169.1

Opening Net debt (cash)

 

 

(1.5)

209.3

296.3

115.4

(8.8)

(269.2)

(527.2)

(719.4)

Other

 

 

 

(1.2)

(6.3)

17.0

(20.9)

24.6

47.2

0.0

0.0

Closing Net debt (cash)

 

 

209.3

296.3

115.4

(8.8)

(269.2)

(527.2)

(719.4)

(888.5)

Source: Orexo reports, Edison Investment Research


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United Kingdom

New York +1 646 653 7026

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United States of America

Sydney +61 (0)2 8249 8342

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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

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

Research: Real Estate

GCP Student Living — Strong NAV returns and quarterly DPS increase

GCP Student Living (DIGS) continued to generate strong accounting and share price returns in the three months ended 31 December 2019 (Q220). Portfolio performance continues to benefit from strong supply-demand fundamentals in the markets in which it operates, primarily in and around London (85% of the portfolio value). This is reflected in full occupancy, above inflation rental growth and tightening valuation yields. Dividends are growing and cover building as new assets come on stream and DIGS is well on track for full cover on a fully developed and let basis.

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