Orexo — Highlighting the opioid dependency market size

There are multiple causes of the US opioid epidemic, including changes to the 2012 Federation of State Medical Boards (FSMB) guidelines on Responsible Opioid Prescribing, which were in fact less responsible than previously. The American Pain Society’s 1996 campaign on pain as the fifth vital sign and the promotional practices at certain pharmaceutical companies were also significant contributors. Whatever the causes, the cumulative effects resulted in more than 72,000 drug overdoses in 2017, with the majority, or nearly 49,000, caused by opioids.1 A common perception of an opioid-dependent patient is an intravenous recreational user of illegal heroin. However, many more patients now suffering from opioid dependency were initially patients who were legally prescribed opioids as a result of a surgical procedure or injury. In opioid-dependent patients, whether that initial opioid use is legal or illegal, turns into a chronic and accelerating addiction that usually includes both legal and illegal forms of opioids. Should those opioids include the synthetic opioid fentanyl – which is up to 50 times stronger than heroin – the dependency can be much harder to treat and overdose leading to respiratory failure and death is common. In addition, illegal opioids are much more likely to have a fentanyl component these days as fentanyl can be fully synthesized (within the US) and does not rely on an extraction from poppies, the supply of which is seasonal and its importation into the US can be detected.

Another contributor to the US opioid epidemic was indicated by the recent finding that nearly 6% of the almost 15,000 young people between 16 and 25 years of age who received an initial opioid prescription for wisdom teeth extraction by a dentist were diagnosed with opioid abuse within a year.2 This is the tip of a larger iceberg, with an estimated 20 million cases of substance misuse annually in the US, 12 million involving opioids and about four million patients eligible for treatment. One of the external speakers at Orexo’s CMD, from the Clarion Healthcare consultancy, expects this pressure to result in about six million opioid use disorder patients by 2023, about half of whom will seek treatment.

The US Centres for Disease Control and Prevention (CDC) has estimated that the economic burden of prescription opioid misuse is $78.5bn a year. A 2015 study estimated that between 21% and 29% of patients prescribed opioids for chronic pain misuse them. The addictive properties of the opioids have been illustrated by other studies, which have suggested that between 8% and 12% of patients prescribed opioids develop an opioid disorder. As a result, the rates of suspected opioid overdose deaths, let alone the number of patients with an opioid disorder, show no signs of declining (see Exhibit 1 below).

Orexo’s CMD included presentations from external speakers, which suggested that the growth in the opioid dependency market may be higher than our estimates. We forecast 8.2% market growth in FY18 and FY19, although our forecasts are based on the value of the market rather than the volume of prescriptions. This is partly due to the chronic nature of opioid dependency, as only a small percentage of patients are ever cured of their addiction without either relapse or long-term treatment. Furthermore, another little-considered driver of the future opioid dependency market is the recent legalisation of both medical and recreational marijuana in some US states and Canada. Recreational marijuana has long been considered a gateway drug to stronger recreational opioid use.

The rise in prescription and non-prescription use in the US has resulted in increasing numbers of patients suffering what has been described as opioid use disorders. While not all of these patients will seek treatment, a recent article3 defined opioid use disorders as those that precede medication-assisted treatment (MAT).These included opioid use in increased amounts, or for longer than intended, various behaviours relating to addiction and dependency, the need for increased opioid doses or diminished effect per dose (or both), and various signs and symptoms associated with withdrawal. Opioid-induced hyperalgesia (OIH) was not specifically mentioned as an opioid use disorder, but hypersensitivity to pain resulting from opioids, and requiring increasing opioid dosage, and the pain associated with reduced opioid dosage – the characteristics of OIH –typically tie cancer and chronic pain patients into opioid use disorders, making recovery without effective MAT like Zubsolv almost impossible.

Orexo’s marketed product Zubsolv contains buprenorphine and naloxone. Buprenorphine is a mixed opioid agonist-antagonist, which blocks the drug-liking effects of opioids in the brain, and reduces withdrawal and craving. Naloxone is an opioid antagonist, which blocks the opioid receptors in the brain, preventing other opioids from binding to the receptors. The combination is typically used as a maintenance therapy in patients who want to stop using opioids, while naloxone alone, as in OX124 (or nalmefene in OX125), is frequently used in the emergency overdose setting. The combination of these products, which contain known active ingredients, the use of prescription data-based analytics, and the ability to negotiate and renew volume-based contracts with commercial and non-commercial payers is unique to Orexo. Zubsolv’s US market position could be further enhanced by the withdrawal of the market leader Indivior’s promotional spend. In 2018, Zubsolv was the only branded product to gain market share in this genericised category and becoming the only promoted product should result in further market share gains. In addition, there is increasing US government agency support for MAT.

The US Department of Health and Human Services has proposed five major priorities, the first two of which are relevant to Orexo:

In addition, the US National Institutes of Health met with pharmaceutical companies in 2017 and two of the topics of discussion relevant to Orexo were:

Both these active initiatives demonstrate that Orexo’s marketed product, Zubsolv (buprenorphine/naloxone sublingual tablets),which is indicated for the treatment of opioid dependency, together with its pipeline products OX124 sand OX125 (in development as opioid overdose rescue medications), fits well into this growing market and with the initiatives proposed to address the effects of opioid dependency.

It is difficult not to conclude that the opioid crisis, as it is now termed in the US, will result in an increase in the number of opioid-dependent patients seeking effective MAT like Zubsolv and that Orexo’s products are well-placed to address this growing need.

There have been two recent opposing factors that could affect our valuation of Orexo, which were announced after the Q318 results. We have analysed these and discuss their impact on our SEK3.4bn or SEK95.84 per share valuation of Orexo below.

Partly as a result of the higher volumes of Zubsolv being sold by Orexo in the US alone (and independent of partnered volumes), and partly due to improvements in secondary manufacturing processes, Orexo expects that Zubsolv CoGS will fall by 35% in H219 from the average 2017 level vs its previous estimate of a 25% reduction. We have revised our estimated CoGS reduction from Q219 to align with Orexo’s guidance and our estimates are shown in Exhibit 2.

We have updated our valuation for these revised CoGS and for foreign exchange rates. The reduction in CoGS from H219 compared to our previous model is responsible for a more significant effect on our per-share valuation, assuming no loss in market share to generic Suboxone film (see below) and almost offsets the deferral of Zubsolv EU royalties. Our CoGS improvements have only taken into account secondary manufacturing (formulation, tableting and packaging), although at its CMD Orexo discussed its initiative to reduce the active pharmaceutical ingredient (API) cost. We have not yet incorporated any primary manufacturing cost savings in our model. The change in foreign exchange rates has a minor impact on our valuation but affects our numbers from the top line down in the income statement. In a competitive genericised market, Orexo is unusual in being a branded company that functions like a generics company in terms of manufacturing. This means that it will drive its CoGS down by continuous improvement so that it can compete with generic companies on price and enable sales growth by volume. Ironically, its branded drug delivery technology also allows a lower dose of the active ingredient (the most expensive component of the formulation), which helps this process. The intellectual property underpinning the formulation of Zubsolv has exclusivity until 2032.

A recent two-to-one US Court of Appeals ruling4 reversed the injunction that prevented the progress of Dr Reddy’s launch of a generic version of Indivior’s Suboxone. Prior to the injunction, Dr Reddy’s launched its generic Suboxone film version ‘at risk’ (meaning the risk of losing three times the profits of the launch if the patent litigation was eventually upheld) for two days and was able to push more than a month’s supply into the distribution channel.

This resulted in the market share changes illustrated in Exhibit 3 from Orexo’s Q318 results presentation. This generic supply remained in the distribution channel for more than 11 weeks, taking c 6% market share by volume, mainly from Indivior’s branded Suboxone film, whose market share was 62% at its lowest.

The effect on Zubsolv volumes was relatively minor, with a 0.15% reduction in market share. Our model assumes a market share for Zubsolv of 6.3–7.5% between FY18 and FY19. However, it should be recognised that Dr Reddy’s generic Suboxone film was in the distribution channel for a limited time and was the only generic Suboxone film product available. At some point in the future up to six generic Suboxone products could be launched, including an authorised generic from Indivior although the regulatory approval and launch timings of all but one of those is uncertain.

The sensitivity analysis in Exhibit 4 illustrates the effect of much more drastic, if unlikely, market share reduction impacts on Orexo’s share price from our SEK95.84 per share valuation. A 0.2% market share reduction (more than was seen with c six weeks’ supply of generic Suboxone film in the channel) resulted in a less than 1% decrease in our per-share valuation. We currently view a significant impact on Zubsolv’s market share as unlikely, since the target of a fully substitutable generic Suboxone film is branded Suboxone film, which currently has c 66% of the market by prescriptions. Exhibit 3 illustrates that the impact of generic Suboxone film is likely to have the biggest impact on branded Suboxone film, the market leader, and with c 65% of the buprenorphine/naloxone market in flux, there may even be opportunities for Orexo to acquire market share. We have not included this upside scenario in Exhibit 4, but will review it after Orexo’s FY18 results.

In addition, the commercial effects of generic competition on a large branded product like Suboxone in a market where other branded and generic products like Zubsolv are differentiated could have positive effects on Zubsolv’s market share. This is because:

After its CMD, Orexo announced that due to a portfolio reorganisation at its partner for Zubsolv in the EU, it would be reacquiring the ex-US rights from Mundipharma on 13 April 2019. This change is associated with minimal expenses that do not affect Orexo’s previous financial guidance, and we do not expect any payments to Mundipharma. While the deferral of EU royalties, which we estimate should start again after re-partnering in Q319, is not the best news for Orexo, the EU launch was in its early stages and Orexo will now reacquire a product that has been approved and launched in the EU since it was licensed to Mundipharma. Based on the narrative at Orexo’s Q3 results announcement and CMD, we sensed some disappointment with Zubsolv’s EU launch. Several other partners have already expressed an interest in re-partnering Zubsolv in the EU, so the royalties on EU Zubsolv sales have only been deferred, rather than removed. The deferral has no effect on our FY18 forecast, but from Q119 we have estimated that the deferral of royalties from a delayed EU Zubsolv launch will have a negative c 14% impact on our valuation, but most of this will be offset by the CoGS improvements. We will revisit this after the announcement of the new partners, as Orexo may obtain better terms for a later-stage asset than it agreed to with Mundipharma in 2016.

At its CMD, Orexo reviewed the successful progress on its objectives to 2018 and provided more detail on its objectives from 2019 onwards.

Firstly, Orexo aims to expand from its areas of strength by broadening the commercial platform to leverage and expand scale (M&A, below). Secondly, it aims to further accelerate its US performance and EBIT contribution. We interpret this as the growth of the existing US Zubsolv business using the same commercial tactics as Orexo has since 2012 – continuing to sign volume-based contracts with US commercial and government payers(which has resulted in 400,000 Zubsolv tablets being sold each week), and by managing the commercial operation, specifically the salesforce and promotional spend, to physician-level prescription data and analytics. The third objective is to launch at least one new product from its internal R&D pipeline within four years.

Following the rejection of Actavis’s appeal on the invalidity of Orexo’s patent, which ensures Zubsolv exclusivity until 2032, Orexo finds itself in a strong position and, for the first time, provided more detail on its M&A efforts and targets. The ‘Orexo Perfect Twin’ acquisition or merger partner approach was described as one that would allow c SEK300m in synergies pa, with a product commercialised by its own speciality salesforce in the US and a transaction that would not damage the franchise and profitability of the existing organisation. Orexo discussed the potential synergies in its CMD and while over half come from merging the commercial organisations (one salesforce rather than two), other cost savings would come from HQ savings, clinical and manufacturing costs. Our interpretation of why this transaction has not yet been completed is partly due to Orexo’s comment that complementary franchises are rare, and partly because the prices of those potential targets have not yet fallen to levels that would enable the company to meet its objectives. This caution should be taken as a positive sign since Orexo is not willing to jeopardise its good fortune and efforts to date by making either the wrong acquisition, or overpaying for the right one.

Orexo had previously discussed the initiation of a Phase I study of OX124 as a rescue treatment for opioid overdose containing naloxone in a novel formulation in its Q3 results announcement. At the CMD, it expanded on the profiles of OX124 as a spray formulation, as well as OX125 as a spray formulation of nalmefene, again for opioid overdose. The rationale for the development of these two products was made clear despite the availability of an existing naloxone rescue product (Narcan Nasal Spray). This is due to the increased use (described above) of synthetic opioids such as fentanyl. As well as being at least 50 times more as potent than heroin, fentanyl has up to a fivefold longer half-life. This has led to c 34% of opioid overdose patients requiring more than one dose of Narcan. OX124 and OX125 are formulated to reverse the most powerful opioids and have a longer duration of activity to reduce the need for more than one dose.OX124 and OX125 have different active ingredients (naloxone and nalmefene, respectively) and, while OX124 is more advanced, using an active ingredient that Orexo is used to formulating, the comparative profile and advantages of both products is yet to be determined.

The rise in legal and illegal fentanyl use has had an additional effect on Zubsolv sales since the higher dose (and priced) stock keeping units(SKUs) of Zubsolv were not initially launched in 2014 but were launched subsequently to counter the effects of the availability of, and patient dependence on, the more potent synthetic opioids such as fentanyl. Orexo also described OX338, a non-opioid (ketorolac) sublingual formulation to treat pain which, like OX125, is in preclinical development.

We have only modestly updated our forecasts and valuation from SEK3.4bn or SEK97.06 per share to SEK3.4bn or SEK95.84 per share. The changes to foreign exchange rates resulted in minor changes to our valuation, while aligning the reduction in CoGS with Orexo’s guidance and return of the Zubsolv EU rights has more significant (c14%) but largely opposing effects. We are not incorporating either a positive or negative impact of the launch of Dr Reddy’s generic Suboxone film on Zubsolv’s market share until the FY18 results, by which time the effect on Zubsolv’s market share and its long-term growth trajectory will be more visible.