Orexigen Therapeutics — Driven by DTC

Orexigen reported Q317 revenues of $18.9m, including $17.8m in US net sales of Contrave, down 14% sequentially. Contrave sales had a setback in Q3 for a number of reasons. First, it is historically considered the off-season for obesity medication (people tend to be more interested in losing weight as part of New Year’s resolutions and in preparation for beach season). Second, the company also moved significantly away from TV spots in favor of digital and print advertising (due to the fact that it was the off-season) and there was also excess inventory in the retail channel, although the company has little visibility on that or how big it is. Finally, there was also some variation with regard to the payer mix (the company will make different levels of revenue per unit depending on whether the patients pay cash, pay cash with a savings card or have Contrave covered by insurance), which reduced net revenue per unit sold to $92 from $96 last quarter. However, this is still an improvement over the $89 in net revenue per unit sold seen in Q117 and is above original 2017 guidance for $85-90 per unit.

The company launched an fall season DTC marketing campaign on 10 September and, based on several metrics such as prescriptions, the number of new physicians writing prescriptions and visits to Contrave.com (which is often the first stop for people looking to find out more before approaching their physician), it appears to be going well (see Exhibits 1 and 2).

Orexigen recently announced that it had signed a distribution deal with Merck KGaA to sell Contrave in almost all of Latin America, including Mexico, Brazil, Argentina, Colombia, Venezuela, Chile, Peru, Ecuador, Bolivia, Paraguay, Uruguay, Panama, Costa Rica, Nicaragua, Honduras, Guatemala, Belize and the Dominican Republic. According to prescription data these countries represent around 25% of the global prescription weight loss opportunity and are where 56% of adults are overweight or obese, according to the Overseas Development Institute. Orexigen will receive undisclosed upfront and potential sales and regulatory milestone payments from Merck KGaA.

Orexigen is now partnered in 67 countries outside the US, which represent around 96% of the global prescription weight loss opportunity. Contrave (branded as Mysimba in certain markets) is currently launched in 17 countries outside the US, with Cyprus being the most recent in Q3. Launches in Germany, Italy and the Nordic countries (Denmark, Finland, Norway and Sweden) are expected in Q417. Outside the United States (OUS) net sales guidance for 2017 is $10-15m with $8m in OUS net sales through Q317.

In April 2015, notice of a Paragraph IV certification regarding an abbreviated new drug application (ANDA) filed by Actavis for approval of a generic version of Contrave 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 2017 and in October the judge ruled in favor of Orexigen upholding the validity of the patents in the case. Importantly, the favorable ruling included patent 8,916,195, which does not expire until February 2030, providing Contrave with more than 12 years of additional protection, a significant length of time. The validation of this patent in a court of law should improve the value of the Contrave asset in the eyes of other pharmaceutical companies.

We are adjusting our valuation from $214m ($13.87/share), to $223m ($13.45/share). The higher absolute valuation is due mainly to rolling forward our NPV and slightly reducing expense estimates. This was mitigated by a reduction in Contrave estimates and a lower cash balance. The per share value declined due to a higher number of shares outstanding. On our forecasts Orexigen’s financing requirement is $90m through to 2020, although this does not include the $230m in convertible debt due in that year or any acceleration of payments on the 0% debt.

Sales of Contrave in the US were $17.8m in Q317, down 14% compared to Q217, although prescriptions are up 26% compared to Q316. Orexigen also booked $1.1m in sales of Contrave to international partners (although part was amortized upfront revenue). Operating expenses were $37.6m in the quarter, down 36% compared to the previous quarter due mainly to lower SG&A as the DTC campaign became less intense over the off-season. These expenses are expected to increase in the final quarter due to the fall season DTC campaign. Following the recent results, we have decreased our revenue estimates in 2017 by $9.7m and in 2018 by $3.7m. We have also reduced our SG&A expense estimates for 2017 and 2018 by $2.8m and $2.6m, respectively, due to far lower than expected spending in Q3. We also decreased our R&D expense estimates by around $4m per year as the run rate has been lower than we expected. The company had $70.6m in cash and marketable securities at the end of Q317 and is guiding for a cash balance of $40-45m at the end of 2017 (previously $40-50m).

Note that while Orexigen listed $172m in long-term convertible debt on its balance sheet as of the end of Q317, it actually owed $236m in principal value on these notes (currently around $230m after the company exchanged 2.1m new shares for $6.46m worth of principal on 30 November), with maturity dates in 2020 (the difference is due to rules relating to the fair value accounting of convertible notes with liability and equity components). Importantly, the 0% convertible senior secured notes that mature on 1 July 2020 contain an indenture, which stipulates that if net product sales for 2017 are less than $100m (the company estimates that they will fall short), the note holders can require Orexigen to repurchase the notes on 30 June 2018. As the principal on the notes is $165m, less than the company’s current cash on hand, Orexigen will need to renegotiate/restructure these notes with the note holders. One possibility would be for an exchange, similar to the one recently in which the company exchanged around $3.5m worth of stock for $6.46m worth of debt principal in the 2.75% convertible senior notes that mature on 1 December 2020. The company has described its negotiations with the note holders as “productive and positive” and will update investors at a later time.

We believe Orexigen has a decent chance in achieving a successful renegotiation/restructure of the debt. The original debt was issued when Contrave was in limbo as Takeda had stopped detailing the product, market share was sinking and it was as yet unclear what Orexigen would be able to do with the product. Since then the company has successfully turned around Contrave prescriptions and shown that it can execute a national sales and marketing campaign.

Orexigen’s financing requirement, not including debt repayments, is an additional $90m through to 2020. The company is exploring various options to provide additional working capital. It currently has a $20m at-the-market (ATM) equity offering agreement in place with Cantor, with approximately $19.6m remaining. It is also looking into an asset-backed line of credit, monetization of its preclinical programs (OREX-1038 for chronic pain and OREX-1019 for opioid addiction), additional upfronts or milestones from international partners, as well as a capital infusion as part of a debt restructuring/refinancing.