Orexigen’s re-launch of Contrave continues to be successful, with an 18% increase in prescriptions in the United States in Q217 compared to Q117. Importantly, net revenue per unit sold increased 37%, indicating better coverage and less discounting. Outside of the US, progress continues as the product has launched in 17 countries, with another 10-15 expected by Q118, including Germany and Italy. The company has also announced that it has commenced an exploration of strategic transactions as a means to maximize the value creation for shareholders.
Written by
Orexigen Therapeutics |
Contrave outperforming |
Financial update |
Pharma & biotech |
17 August 2017 |
Share price performance
Business description
Next events
Analysts
Orexigen Therapeutics is a research client of Edison Investment Research Limited |
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Orexigen’s re-launch of Contrave continues to be successful, with an 18% increase in prescriptions in the United States in Q217 compared to Q117. Importantly, net revenue per unit sold increased 37%, indicating better coverage and less discounting. Outside of the US, progress continues as the product has launched in 17 countries, with another 10-15 expected by Q118, including Germany and Italy. The company has also announced that it has commenced an exploration of strategic transactions as a means to maximize the value creation for shareholders.
Year |
Revenue ($m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/15 |
24.5 |
(67.3) |
(5.24) |
0.0 |
N/A |
N/A |
12/16 |
33.7 |
(138.1) |
(9.73) |
0.0 |
N/A |
N/A |
12/17e |
94.0 |
(141.4) |
(7.96) |
0.0 |
N/A |
N/A |
12/18e |
160.3 |
(72.7) |
(4.67) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalized, excluding amortization of acquired intangibles, exceptional items and share-based payments.
Continued success in patient-centric campaign
A shift from previous partner Takeda’s healthcare provider-focused marketing to a campaign focused on consumers (but with continued detailing of high prescribing physicians) has yielded a dramatic increase in prescriptions. Prescriptions increased 39% in Q117 compared to the prior quarter and a further 18% in Q217. They now have approximately 50% of the branded obesity market (~8.5% of the total) according to Symphony Health.
10-15 more international launches by Q118
Contrave (Mysimba outside the US) has now launched in 17 countries, including South Korea, the UK, Spain and Poland. Launches in Germany, Italy and the Nordic countries (Denmark, Finland, Norway and Sweden) are expected in Q417. Orexigen is partnered in a total of 48 countries outside of the US.
Strategic review commenced
Orexigen has announced that it has formally engaged with a financial advisor to help explore strategic transactions to unlock value for shareholders. Whether that means acquiring an on-market product that is being divested from somewhere else or selling the company is unclear, though both moves make sense due to the tremendous operating synergies from selling multiple products with one salesforce.
Valuation: $214m or $13.87 per share
We are adjusting our valuation to $214m ($13.87/share), from $194m ($12.76/share). This is mainly due to higher 2017 Contrave estimates and rolling forward our NPV, and was mitigated by a higher net debt level as well as a larger number of shares. Orexigen’s financing requirement is $90m through to 2020, although this does not include the $238m in convertible debt due in that year.
Quarterly update
The re-launch of Contrave with a more patient-centric marketing campaign continues to pay dividends. Quarterly net sales increased 40% over the prior quarter and prescriptions increased 18% over the prior quarter. Importantly, the net revenue per unit sold increased to $96, 37% higher than in Q216. This is also an 8% sequential improvement over the $89 figure last quarter and surpasses the original 2017 guidance of $85-90 in net revenue per unit sold. This indicates improving coverage as well as less discounting.
Based on prescription data from Symphony Health, this strategy has been particularly effective, increasing Contrave’s market share by 10% to close to 50% of the branded obesity market (8.5% of the total market, which includes phentermine) since the consumer campaign started at the beginning of 2017 (see Exhibit 1). There has been a bit of a dip since the beginning of June, which is likely the result of less television advertising. It bears watching but given how much share it has gained, it is not surprising that it would give back a few points.
|
Exhibit 1: Market share in the branded obesity market |
|
|
Source: Symphony Health |
International momentum continues
Contrave, which is known as Mysimba in most international markets, has now launched in 17 countries (see Exhibit 2), including South Korea, the UK, Spain and Poland. Launches in Germany, Italy and the Nordic countries (Denmark, Finland, Norway and Sweden) are expected in Q417. Orexigen’s goal is to launch in a total of 10-15 additional countries by Q118 as well as find partners in an additional 10-15 countries this year (focused on Latin America and Europe). For the first time, the company has recently included OUS net sales guidance of $10-15m into its 2017 guidance (there have been $7m in OUS net sales through Q217).
Exhibit 2: International Contrave launch timelines
Country |
Partner |
Launch date |
Notes |
South Korea |
Kwangdong |
Q216 |
|
Czech Republic |
Valeant |
Q416 |
|
Slovakia |
Valeant |
Q416 |
|
Hungary |
Valeant |
Q416 |
|
Poland |
Valeant |
Q416 |
|
Romania |
Valeant |
Q416 |
|
Spain |
ROVI |
Q117 |
|
Bulgaria |
Valeant |
Q117 |
|
Estonia |
Valeant |
Q117 |
|
Lithuania |
Valeant |
Q117 |
|
Latvia |
Valeant |
Q117 |
|
Croatia |
Valeant |
Q117 |
|
Slovenia |
Valeant |
Q117 |
|
Greece |
Valeant |
Q217 |
|
UK |
Consilient Health |
Q217 |
|
Ireland |
Consilient Health |
Q217 |
|
Cyprus |
Valeant |
Q317e |
|
Italy |
Bruno |
Q417e |
|
Denmark |
Navamedic ASA |
Q417e |
|
Finland |
Navamedic ASA |
Q417e |
|
Norway |
Navamedic ASA |
Q417e |
|
Sweden |
Navamedic ASA |
Q417e |
|
Malta |
Valeant |
Q417e |
|
Austria |
Cheplapharm |
Q417e |
|
Germany |
Cheplapharm |
Q417e |
|
Serbia |
Valeant |
Q118e |
|
Saudi Arabia |
Biologix FZCO |
Q118e |
Regulatory submission Q317 |
Kuwait |
Biologix FZCO |
Q118e |
Regulatory submission Q217 |
Lebanon |
Biologix FZCO |
Q118e |
Regulatory submission Q217 |
UAE |
Biologix FZCO |
Q118e |
Regulatory submission Q217 |
Canada |
Valeant |
2018e |
Regulatory submission Q117 |
Australia |
Valeant |
2018e |
Regulatory submission Q217 |
Turkey |
Valeant |
2018e |
Regulatory submission expected Q317 |
South Africa |
Valeant |
2018e |
Regulatory submission expected Q317 |
Source: Orexigen Therapeutics
Evaluating strategic options
The company has announced that it has formally engaged with a financial advisor to help explore strategic transactions to unlock value for shareholders. Whether that means acquiring an on-market product that is being divested from somewhere else or selling the company is unclear, though both moves make sense due to the tremendous operating synergies from selling multiple products with one salesforce. It will likely be easier for it to acquire a new product rather than sell itself to someone else, as just about every specialty pharma (for example Valeant) and large pharma (for example GSK) appears to be divesting a large numbers of assets.
The value of the Contrave asset will likely improve in the eyes of partners when the Paragraph IV litigation with Actavis over its filing for approval of a generic version of Contrave is successfully concluded. As a reminder, in April 2015, notice of a Paragraph IV certification regarding an abbreviated new drug application (ANDA), the type of application needed to get a generic approved, was received. In June 2016, following a May 2016 claim construction hearing, the court adopted Orexigen’s proposed constructions with regard to the majority of the disputed claim terms in a Markman ruling. The trial was in June of this year and Orexigen believes it went as expected and that it has a strong case. There should be a ruling from the judge in the September/October timeframe.
Valuation
We are adjusting our valuation to $214m ($13.87/share) from $194m ($12.76/share). This is mainly a result of improved 2017 Contrave estimates due to a higher than expected run rate of sales and rolling forward our NPV, and was mitigated by a higher net debt level as well as a larger number of shares. Orexigen’s financing requirement is $90m through to 2020, although this does not include the $238m in convertible debt due in that year.
Exhibit 3: Orexigen valuation table
Product |
Launch |
Peak sales ($m) |
Royalty rate |
NPV ($m) |
rNPV/share ($) |
Contrave US |
Oct-14 |
342 |
100% |
1,708 |
110.71 |
Contrave W. Europe |
2016 |
118 |
30% |
133 |
8.63 |
Contrave C. and E. Europe |
2016 |
27 |
37.5% |
35 |
2.28 |
Contrave S. Korea |
2016 |
15 |
37.5% |
15 |
0.98 |
Contrave ROW |
2017 |
15 |
37.5% |
15 |
0.96 |
PV costs including taxes |
(1,608) |
(104.20) |
|||
Net cash/(debt) (30 June 2017) |
(84.91) |
(5.50) |
|||
Overall valuation (per share based on 15.4m shares outstanding) |
214 |
13.87 |
|||
Source: Edison Investment Research
Financials
Sales of Contrave in the US were $20.7m in Q217, up 69% compared to Q216 and up 40% compared to Q117. Orexigen also booked $2.7m in sales of Contrave to international partners. Operating expenses were $58.5m in the quarter, down 12% compared to the previous quarter due mainly to lower SG&A. These expenses are expected to continue to decline over the course of the year. Following the recent results, we have increased our revenue estimates in 2017 by $5m, increased our SG&A expense estimates for 2017 by $10m due to a higher than expected run rate (although the expense itself is decreasing quarter to quarter), and also decreased our R&D expense estimates by around $2m per year as the run rate has been lower than we expected. The company had $86.6m in cash and marketable securities at the end of Q217 and continues to guide for a cash balance of $40-50m at the end of 2017. Note that while Orexigen currently lists $172m in long-term convertible debt on its balance sheet, it actually owes $238m in principal value on these notes, which will need to be paid in 2020 ($165m by 1 July 2020 and the rest on 1 December). The difference is due to rules related to the fair value accounting of convertible notes with liability and equity components.
Exhibit 4: Financial summary
$000s |
2015 |
2016 |
2017e |
2018e |
||
Year end 31 December |
US GAAP |
US GAAP |
US GAAP |
US GAAP |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
24,459 |
33,709 |
94,025 |
160,251 |
Cost of Sales |
0 |
(7,995) |
(28,111) |
(29,680) |
||
Gross Profit |
24,459 |
25,714 |
65,914 |
130,572 |
||
Research and development |
(40,750) |
(38,023) |
(30,926) |
(34,019) |
||
Selling, general & administrative |
(43,762) |
(118,583) |
(173,126) |
(164,470) |
||
EBITDA |
|
|
(60,276) |
(134,627) |
(138,255) |
(68,092) |
Operating Profit (before amort. and except.) |
|
|
(60,053) |
(130,892) |
(138,138) |
(67,916) |
Intangible Amortization |
0 |
(3,307) |
(7,936) |
(5,769) |
||
Exceptionals/Other |
0 |
77,229 |
(2,100) |
0 |
||
Operating Profit |
(60,053) |
(56,970) |
(148,174) |
(73,685) |
||
Net Interest |
(7,219) |
(7,228) |
(3,264) |
(4,769) |
||
Other (includes change in fair value of warrants) |
(39) |
39,807 |
(1,997) |
0 |
||
Profit Before Tax (norm) |
|
|
(67,272) |
(138,120) |
(141,402) |
(72,685) |
Profit Before Tax (FRS 3) |
|
|
(67,311) |
(24,391) |
(153,435) |
(78,454) |
Tax |
(1,376) |
(133) |
0 |
0 |
||
Deferred tax |
0 |
0 |
0 |
0 |
||
Profit After Tax (norm) |
(68,648) |
(138,253) |
(141,402) |
(72,685) |
||
Profit After Tax (FRS 3) |
(68,687) |
(24,524) |
(153,435) |
(78,454) |
||
Average Number of Shares Outstanding (m) |
13.1 |
14.6 |
15.2 |
15.5 |
||
EPS - normalized ($) |
|
|
(5.24) |
(9.73) |
(7.96) |
(4.67) |
EPS - FRS 3 ($) |
|
|
(5.24) |
(9.73) |
(7.96) |
(4.67) |
Dividend per share (c) |
0.0 |
0.0 |
0.0 |
0.0 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
2,694 |
79,940 |
71,283 |
65,339 |
Intangible Assets |
0 |
76,061 |
68,125 |
62,356 |
||
Tangible Assets |
1,284 |
1,044 |
584 |
409 |
||
Other |
1,410 |
2,835 |
2,574 |
2,574 |
||
Current Assets |
|
|
233,895 |
224,461 |
87,070 |
48,091 |
Stocks |
10,802 |
23,193 |
15,753 |
15,753 |
||
Debtors |
6,828 |
1,102 |
7,636 |
7,636 |
||
Cash |
214,011 |
103,993 |
59,358 |
20,379 |
||
Other |
2,254 |
96,173 |
4,323 |
4,323 |
||
Current Liabilities |
|
|
(32,241) |
(65,360) |
(41,804) |
(41,804) |
Creditors |
(32,241) |
(65,360) |
(41,804) |
(41,804) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(170,970) |
(178,842) |
(206,563) |
(225,950) |
Long term borrowings |
(88,129) |
(166,179) |
(191,529) |
(211,529) |
||
Other long term liabilities |
(82,841) |
(12,663) |
(15,034) |
(14,421) |
||
Net Assets |
|
|
33,378 |
60,199 |
(90,015) |
(154,324) |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(54,473) |
(109,713) |
(137,316) |
(59,137) |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
(538) |
(330) |
0 |
0 |
||
Acquisitions/disposals |
0 |
(63,504) |
(3,414) |
0 |
||
Financing |
64,259 |
188 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
(3,843) |
(15,424) |
76,073 |
188 |
||
Net Cash Flow |
5,405 |
(188,783) |
(64,657) |
(58,949) |
||
Opening net debt/(cash) |
|
|
(121,629) |
(125,882) |
62,186 |
132,171 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Exchange rate movements |
29 |
715 |
0 |
0 |
||
Other |
(1,181) |
0 |
(5,328) |
(30) |
||
Closing net debt/(cash) |
|
|
(125,882) |
62,186 |
132,171 |
191,150 |
Source: Orexigen Therapeutics accounts, Edison Investment Research
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