Orexigen Therapeutics — Update 12 April 2016

On 15 March, Orexigen announced the pending re-acquisition of its US rights to anti-obesity medication, Contrave, from licensor Takeda. The partnership was first signed in 2010 for the marketing of Contrave in the US, Mexico and Canada and was subsequently renegotiated earlier this year to encompass the US only. Subject to clearance under the Hart-Scott-Rodino Antitrust Agreement Act, Orexigen has indicated that re-acquiring Contrave rights reflects the company’s desire to take on direct responsibility for the product, which timed well with a strategic realignment of resources by Takeda. The company believe that the deal comes at a favourable point in the product’s life cycle on the back of a fully resourced initial launch period, whereby Takeda has provided Orexigen with the benefit of a large and experienced salesforce to achieve initial brand awareness, as well as commercial and managed care experience. Under the terms of the deal Takeda sales representatives will continue marketing Contrave for up to a six-month transition period, also maintaining significant selling and marketing spend consistent with the recently revised collaboration agreement between the companies in July 2015.

Takeda launched Contrave in October 2014 in the US, targeting ~75,000 physicians with a salesforce of 900 (detailing multiple products) and Contrave enjoyed a solid initial launch. As of June 2015, Contrave became the most widely prescribed branded weight loss treatment in the US, surpassing competitors Qsymia and Belviq (see Exhibit 1). Contrave continues to lead the pack of branded anti-obesity treatments in the US, currently commanding more than 45% of total prescriptions written, well above Qsymia and Belviq, each with ~27-28%. However, sales of obesity products, including Contrave, have somewhat lost momentum in recent months and have not achieved the traditional strong seasonal growth normally seen early on in the year (see Exhibit 2).

Orexigen has communicated its intended targeted and specialized approach to manage the growth of Contrave following its initial 1.5 years on the market, pointing to a relatively high concentration of volume prescribers in the anti-obesity market. To fuel sales, Orexigen has set out a three-year strategic plan to drive Contrave growth post transition with Takeda, through the direct sale of the product via the build-out of a dedicated salesforce of 160 sales representatives and a targeted marketing campaign at a cost that management estimates at $80-100m pa. This implies break-even at an operating profit level in the US at sales of ~$100m, assuming marketing spend at the lower end of projections. Contrave will be the sole product marketed by its own sales representatives, who will target ~18,000 consistent anti-obesity prescribers that have been identified as the most responsive to promotion. The company also aims to support the growth of Contrave by differentiation vs the widely prescribed generic amphetamines, which can lead to side effects such as high blood pressure and dizziness and the potential for abuse. Additionally, Orexigen looks to improve the structure of pricing and discounting targeted through managed care and pharmacy discount strategies, thereby increasing profitability per prescription across patient category (see Exhibit 3).

The acquisition and US commercialization of Contrave will be funded by the issue of $165m in convertible senior secured notes and related warrants in a private placement to an investor syndicate managed by The Baupost Group. The warrants hold a 10-year term for the purchase of up to 220m shares at a price of $1.50. Under the terms of the acquisition of Contrave from Takeda, which is expected to close in late March, Orexigen will pay Takeda an initial $60m on closing the deal in late March and $15m after a successful transition period in the first quarter of 2017. Orexigen guide towards expectations of profitability for the full year 2019 without the need to raise additional funds, consistent with our own updated forecasts, which now assume Contrave sales of $133m in the US and $96m ex-US in 2019. The company’s profitability target assumes an average growth in the anti-obesity market of 5-10% through 2018, which is down from 15% growth in 2015, although we note a flattening in early 2016, as shown in Exhibit 2. Orexigen also assumes growth of Contrave’s share of the branded obesity market by 3% (to a ~10% share) in 2018 and an improvement in profitability per prescription.

Orexigen is also setting its sights on the ex-US market for the sale of Contrave (known as Mysimba outside the US) as the company strives to take advantage of the lack of effective and safe obesity treatments available in worldwide markets (neither Qsymia nor Belviq are approved ex-US).

On 15 March, Orexigen also announced a new partnership with Valeant Pharmaceuticals for the commercialization of Mysimba in 18 Central and European countries through its wholly owned subsidiary Orexigen Ireland. Valeant’s salesforce will begin selling Contrave in the second half of 2016 in 12 of the 31 EU countries where the treatment is approved for marketing (Greece, Slovenia, Slovakia, Czech Republic, Hungary, Croatia, Lithuania, Estonia, Poland, Latvia, Bulgaria and Romania). Under the terms of the agreement Orexigen will provide Mysimba tablets to Valeant at an agreed transfer price and Valeant will be responsible for obtaining approval in the non-EU countries (Serbia, Bosnia and Herzegovina, Albania, Macedonia, Kosovo and Turkey).

Earlier this year, Orexigen communicated additional detail as to its key priorities for the sale of Mysimba internationally. Rather than signing on a single partner or larger regional partners, the company is looking to monetize its anti-obesity treatment through a series of partnerships, both in Europe and the rest of the world. Management has communicated expectations that US, RoW and Europe will each eventually account for 50%, 25% and 25% respectively of the total value of the obesity treatment. We note Mysimba will likely face little to no competition on launches ex-US vs its competitive home market, as Qsymia and Belviq are not approved in Europe. Consistent with management guidance, we currently model an approximate 50/50 split of Contrave sales between the US and ex-US. However, there is scope for an increase in the international component of our forecast on communication by Orexigen of additional partnerships in Europe and RoW. In the absence of the materialization of large regional marketing deals for Mysimba, Orexigen now points to the diversity of individual markets, as well as the concentration of decision makers as it looks toward product distribution through smaller and specialized players. In some cases it is even possible that Mysimba will be represented by multiple brands through different companies, with separate salesforces in the same geographic area.

European territories will be managed via its 100%-owned subsidiary, the recently established Orexigen Ireland. Here, the company strives to sell the regulatory-approved Mysimba though regional, local co-marketing partnerships, mainly through country-specific launches. Agreements will therefore take the shape of strategic alliances whereby Orexigen will maintain a prominent role in distribution through the control of pricing and much of the marketing effort while the local partner will provide market access through its localized knowledge and salesforce (see Exhibit 4 for potential split of responsibilities).

Orexigen points out that its in-house market research reveals key characteristics of the European market that could bode well for the success of Mysimba, which include patient willingness (and ability) to pay out-of-pocket and excess in capacity of existing pharmaceutical salesforces given a lack of product to sell. Obesity drugs have not traditionally enjoyed strong uptake in Europe. However, with little treatment options for the morbidly obese, we expect Mysimba to make moderate inroads in the region, awaiting real sales data to support the company thesis. Despite the estimated 95 million obese patients eligible for anti-obesity medication, less than 1% currently receive anti-obesity medication (vs ~5% in the US).1 Current weight management treatments are limited to GI lipase inhibitors or GLP-1 injectables vs the multiple brand choices in the US.

Outside the US and Europe, the company intends to pursue opportunities modelled on the structure of its current partnership signed with Kwang Dong Pharmaceuticals in South Korea, ie full partnership agreements. Under the terms of its agreement in South Korea, Kwang Dong is responsible for regulatory approval in the country and all commercialization activity and expenses. The company made an upfront payment of $7m to Orexigen and will also pay potential sales-based milestones. Orexigen will supply tablets for ~35-45% of sales. Exhibit 5 below represents those countries targeted by Orexigen for collaborative efforts. The sales potential for Mysimba may be extrapolated from that achieved in peak year sales in various countries, which were reached before a number of obesity treatments were removed from circulation due to safety concerns. The table indicates a real demand for obesity products in these countries.

Our valuation moves down considerably to $213m ($1.47 per share) from $1.09bn ($7.49 per share). The main changes to our valuation model are based primarily on a downgrade of our overly optimistic peak sales expectations for Contrave in the US and the acquisition of the US Contrave rights, which includes the removal of $895m in milestones from Takeda. Key components are summarised as follows:

On 26 February, Orexigen reported Q415 and FY15 results as follows:

As noted, following its recently announced acquisition of US rights to Contrave in the US, the company now guides toward profitability in the full year 2019 vs previous guidance of profitability in 2018, which is consistent with our forecasts. Changes to our model in the coming two years are shown in Exhibit 7 below.