Orexigen Therapeutics — Update 13 December 2015

Headquartered in La Jolla, California, Orexigen is a biopharmaceutical company focusing on the treatment of obesity. In October 2014 it launched Contrave in the US as an addition to a reduced-calorie diet and increased exercise in overweight (with comorbidity factors) and obese adults. Commercialization rights to Contrave in the US have been licensed to Takeda and to Kwang Dong in South Korea. The company continues to weigh up its partnering options in the rest of the world following the drug’s recent EMEA approval in March under the trade name Mysimba. NASDAQ-listed, Orexigen was founded in 2002 and raised $84m at the time of its IPO in April 2007. An additional $510m in capital has been raised since then. The company currently employs 52 people.

We value Orexigen at $1.09bn or $7.49 per share. Our fair value is based on an NPV analysis of the FCF from Contrave/Mysimba and the company’s ongoing costs for R&D and SG&A, to which we apply a 10% discount rate, appropriate for a biotechnology company with an approved and marketed product. Our analysis is highly sensitive to Takeda/Orexigen’s ability to penetrate the vast obesity market, with a large swing factor in fair value on small changes in penetration. Our sensitivity analysis indicates share price potential ranging from $6.59 to $7.82 assuming Contrave/Mysimba obtains a 0.37-0.77% market share in the US and 0.19-0.39% share in Europe ahead of expected patent expiry in 2025. Orexigen’s share price declined sharply mid-year following the release of second interim data on the terminated LIGHT study by the Cleveland Clinic and the now resolved arbitration proceedings by Takeda related to the deal terms of the planned $210m CVOT study, which Orexigen will now assume. We anticipate the steady renewal of shareholder confidence on the back of an expected continuation of positive scrip trends for Contrave vs its peers. Additionally, the announcement of partnerships for the launch of Mysimba in Europe and ongoing communication regarding a strategy for RoW should support the shares.

Orexigen is subject to the risks associated with a pharmaceutical company in the early phases of a major product launch, including exposure to the commercial decisions of its partner (Takeda) and the potential for side effect issues to emerge post launch. One year into launch, Takeda has achieved a strong sales trajectory for Contrave. Contrave is an extended-release version of two long-marketed drugs that have withstood time in terms of overall safety. Other company-specific risks include IP concerns given Actavis’s recently filed abbreviated new drug application (ANDA) on Contrave’s formulation, although the current expectation is that the key patent will hold until 2024-25. We believe the recent resolution of the dispute with Takeda and renewed commitment by both parties to marketing Contrave in the US removes considerable uncertainty about the shares and our valuation factors in all renegotiated terms with Takeda on future trial costs.

Sales of Contrave were $12.8m in Q315, down from $16.0m in Q215, dipping from the previous quarter despite the increase of 10% in prescriptions sold. With little information from management on these trends (due to confidentiality agreements with Takeda), we believe that a combination of inventory fluctuations and price discounting led to the discrepancy. Orexigen reported revenue of $10.0m on royalties/milestone payments in Q315. We anticipate successful top-line development for the company on Contrave’s successful product launch and expect Orexigen will be profitable in the latter half of 2017 factoring in costs for funding the upcoming $210m CVOT trial (vs the previously negotiated 50/50 split between Orexigen and Takeda). On our forecasts, Orexigen’s current cash holdings of $233m (as at 30 September) should carry the company through to profitability.

Orexigen offers a pure-play investment into the relatively new and rapidly growing market of safe and viable oral weight loss treatments. Contrave is arguably the best placed among a group of three relatively recently launched oral obesity drugs in terms of overall efficacy, safety and sheer market power. Orexigen, through its partner Takeda, has ~900 reps detailing Contrave, more than triple that of competitors Vivus and Arena/Eisai. Following a successful initial launch in October 2014, a targeted marketing program has begun for Contrave, with focus on increasing patient awareness and ultimately including advertising in the form of digital, print and TV. Contrave is also the first anti-obesity treatment approved in Europe in over a decade.

Contrave aims to target the behavioral mechanisms of craving and reward that can lead to overeating. The extended-release (ER) tablets combine bupropion HCI ER and naltrexone HCI ER, regulating appetite and energy expenditure through central nervous system (CNS) activity. The individual compounds works on two separate, complementary areas of the brain: the hypothalamus and the dopamine reward system. The hypothalamus plays an important role in the regulation of the body’s appetite, satiety and metabolism (energy expenditure) receiving various chemical and hormonal stimuli including glucose, insulin, leptin and peptides secreted by the gut processing food. The dopamine reward system regulates control eating behavior and cravings.

First approved in 1985, bupropion has been widely used for treating depression under the brand Wellbutrin (typically at 400mg/day), particularly in overweight people. Although efficacy in depression looks to be comparable to the commonly prescribed SSRIs, the drug has not been associated with their weight gain (or lack of sex drive) and in fact one of the side effects of bupropion reported in clinical trials in depression was modest weight loss. Bupropion was also FDA approved for smoking cessation in 1997 under the brand Zyban. A norepinephrine dopamine reuptake inhibitor (NDRI), the compound has been shown in studies to activate the pro-opiomelanocortin (POMC) area in the hypothalamus, which looks to cause a reduction in appetite and increase in energy expenditure. The firing of POMC neurons (brought on by bupropion) appears to lead to the production of a natural opioid, beta-endorphin that can slow the POMC system equally, moderating potential weight loss. Naltrexone counters this impact by blocking opioid receptors in the brain and limiting the impact of beta-endorphin on the POMC system. Thus, when administered together in a single pill, the increase in activity of the POMC neurons is sustained over an extended period. In a separate mechanism, both bupropion and naltrexone are approved for addiction disorders through the regulation of dopamine and naturally occurring opioids and therefore, when taken together, it is expected they may also impair food craving. Naltrexone is marketed in generic fast-release form as its hydrochloride salt, naltrexone hydrochloride, under the brands ReVia and Depade and Vivitrol (1x monthly ER injectable). In the US, naltrexone was approved for opioid addiction in 1984 and in 1994 for alcoholism. Orexigen’s proprietary ER oral formulation of naltrexone alleviates the common side effect of nausea in its original immediate release form.

Contrave was approved in September 2014 in the US and in March 2015 in the EU on the back of a large Phase III pivotal trial program, COR, evaluating the drug in 4,536 patients in four studies across three doses of naltrexone ER (16mg, 32mg and 48mg) with bupropion ER (360mg). All studies were 56-week, randomized double-blind and placebo controlled, with one focusing on the evaluation of patients with type 2 diabetes (COR-Diabetes) and another on intensive behavior modification (COR-BMOD). Co-primary endpoints for all trials were those typically used in anti-obesity studies: the proportion of patients achieving at least 5% weight loss and percentage change in body weight vs placebo. Endpoints were analyzed using a modified intent-to-treat (ITT), last observation carried forward (LOCF) on treatment. All trials met their endpoints with efficacy broadly in line with the other currently marketed anti-obesity treatments, although data suggest that Vivus’s Qsymia (phentermine/topiramate) has an edge on efficacy.

Overall, the program discontinuation rates of 42-51% for those on Contrave were similar to placebo (41-50%) with 19-29% due to adverse events (mainly moderate and transient nausea, headache, dizziness and vomiting) vs 10-15% on placebo.

The LIGHT study was initiated following Orexigen’s receipt of a complete response letter in January 2011 on its initial NDA requiring a large-scale outcome safety study evaluating Contrave’s cardiovascular safety in high-risk patients over the longer term. Led by the Cleveland Clinic, approximately 8,900 obese and overweight individuals were enrolled in the trial. In November 2013 Orexigen announced a successful interim analysis, meeting the FDA’s pre-specified criteria, with the trial demonstrating an absence of a doubling in CV risk for patients taking the drug, deemed sufficient for approval. The results of the initial interim data, analyzed after ~25% of major adverse cardiovascular events (MACE) occurrences, showed an encouraging hazard ratio (HR) of 0.59 (95% confidence) or 35 MACE events vs 59 for those on placebo, and these data were published by the company in conjunction with the issue of a patent in March 2015. Shortly before approval of Contrave in November 2014, the FDA asked for a new long-term, 9,000-patient outcome study pointing to potential bias in the LIGHT study related to issues of disclosure. This new CVOT trial is due to start in the coming months with targeted completion in 2022 and an estimated cost of $210m. The interim trial result was made public without Takeda’s recommendation. In early May 2015 further data were reported by the study’s leaders at Cleveland Clinic, which were somewhat less promising. A statistically significant benefit of Contrave on CV risk was no longer seen. After ~50% MACE occurrences, the HR increased to 0.88 (102 CV occurrences in placebo vs 90 Contrave) and for the second 25%, 43 events occurred on placebo and 55 in the Contrave group. However, importantly, the data confirmed the original study intent as to Contrave’s safety. The Cleveland Clinic’s steering committee concluded that “these results show neither benefit nor harm for patients taking the drug”. As previously agreed in March, LIGHT was halted on the basis of issues on disclosure. Final, fully analyzed data are to be presented at a scientific forum in due course.

Orexigen’s shares have been hit hard in recent months on arbitration talks with Takeda and additional costs taken on by Orexigen to fund a new study. Investor hopes for a higher market penetration of Contrave due to a CV benefit have proved likely unrealistic, based on the interim LIGHT study findings. However, the study results confirmed safety and efficacy and the data point to no increased risk of MACE events for Contrave, which was the original intent of the LIGHT study.

Orexigen’s renegotiation of its contract with Takeda also created market uncertainty as to the commitment of its US partner. However, a revised agreement ensures continuity of Orexigen’s relationship with Takeda and a solid backing by its US partner in the ongoing commercialization of Contrave in the US. Under the original agreement with Takeda, Orexigen was to pay the first $60m in post-approval development expenses and costs thereafter were to be split 50/50 for safety studies and 75/25 for other trials. Our model incorporates the revised deal with Takeda, for which Orexigen will assume all costs related to the newly required CVOT trial, with a cap on spending of $210m through 2022 (offset by $40m in savings on the early termination of the LIGHT study). Not insignificant is the negotiation of the cost split for any additional trials beyond LIGHT from the previous 50/50, where Takeda will now take on 75% of spending. We also note that other post-marketing requirements by the FDA include several short-term studies such as the QT trial (drug’s effect on the QT interval and ECG morphology) and pharmacokinetic studies in renal and hepatic impairment and drug-drug interaction. Exploratory studies are also being conducted in smoking cessation and depression in overweight patients. Most trials are expected to satisfy regulatory requirements in both the US and EU. An added $105m in milestones payable to Orexigen is also written into the new agreement contingent on any eventual superiority claims on the labelling for Contrave. Moreover, Takeda has given back its marketing rights in Mexico and Canada, providing Orexigen with added flexibility in negotiations with potential international partners (anti-obesity sales were $262m in Mexico in 2014 and $14m in Canada).

Obesity is currently recognized by the larger medical community worldwide as a serious health condition, growing in prevalence globally with decreased life expectancy and related comorbidities including type 2 diabetes, heart disease, obstructive sleep apnoea (OSA), liver and pulmonary disease and certain types of cancer. Additional comorbidities include anxiety, depression, chronic pain and substance abuse. A worldwide epidemic, ~150m people in the US alone (more than one-third of adults and 17% of young people in 2012) are classified as medically obese (body mass index or BMI ≥30)1 and life expectancy in this population is thought to be lowered by up to eight years. Notably, there remain considerable regional differences in the US, with obesity rates forecast to surpass 50% in 39 states by 2030.2 The World Health Organization estimates that there are more than 500 million obese people worldwide. This comes as an enormous cost to healthcare systems, with obesity and related comorbidity expenses in the US estimated at $210bn.3

Due to the sheer size of the potential multi-billion dollar market for obesity, there is capacity for multiple market contenders. Although a large and growing market, the development of anti-obesity agents has been fraught with safety issues historically and even very large pivotal programs have resulted in high-profile failures (Sanofi-Aventis’s withdrawal of rimonabant along with three other CB1 antagonists). Also, even large-scale trials have failed to highlight safety issues that have become evident in a real-world setting (sibutramine withdrawal in 2010 due to safety concerns and Fen-Phen and dexfenfluramine withdrawn in 1996). Additionally, the size of the obesity market has been called into question given high patient dropout rates in pivotal trials and a lack of proven high-volume scrip drivers. Correspondingly, the jaded past of obesity treatments has led to a reluctance on the part of big pharma to enter into large-scale commercialization agreements. Currently, Orexigen’s agreement with Takeda is the biggest of two commercial licensing agreements in the segment, the second being the agreement between Eisai and Arena for Belviq.

Despite numerous disappointments in the segment, the landscape for obesity compounds looks to be changing with the advent of four relatively recently approved obesity treatments by the FDA, one oral and one administered through subcutaneous injection. This newer generation of drugs looks to be relatively safe based on data from their respective large Phase III clinical programs. However, numerous large outcome trials, mainly in cardiovascular areas, are ongoing, often on the back of FDA requirements on approval.

The cause of obesity is considered to be a combination of genetic, behavioral and environmental influences and it is therefore not surprising that multi-faceted weight management programs, which consist of medication, together with diet, exercise and behavior modification, have been shown to work best – not only in weight loss but, importantly, in the ability to keep weight off. The human body uses many chemicals and hormones to protect its stores of fat – a defense mechanism likely useful to our ancestors when food was scarce – and a complete circumvention of this natural protection of stored fat must therefore be multi-faceted and complex. Hence, new solutions in the treatment of obesity rely more and more on combination drugs targeting multiple pathways. As such, current obesity drugs on the market take differing approaches to enhance behavior modification through various mechanisms, some with combination-complementary approaches, and are showing reasonably good success.

The brain acts as a regulator to functions controlling weight including decisions about how much, when and what we eat. In the obese, the brain becomes desensitized to signals to stop eating. However, the brain is sensitive to any losses in weight, at which time metabolism slows and hunger signals are communicated. Weight loss treatments therefore need to target the propensity for the body to crave food and gain weight once pounds are shed. Current and potential anti-obesity drugs may operate through various mechanisms, including appetite suppression (such as phentermine and other amphetamine-based drugs and anti-depressants), the increase of metabolism or the interference in the body’s ability to absorb certain components of food (such as orlistat or OTC fibre supplements like glucomannan and guar gum). It is generally thought that the non-CNS approach, which can initially induce weight loss, is susceptible to a weight loss plateau after several months or a year of therapy, in the absence of treating the underlying behavioral mechanisms in the body.

In 2014 the total US market for obesity products was ~$220m and ~9.5 million prescriptions were written as reported by Oregixen. We take the view that there is significant potential for the newer obesity drugs to dramatically grow the market, particularly those that include a targeted approach to CNS pathways. From a safety standpoint, none of the pivotal Phase III programs for the three prominent obesity drugs or their outcome studies to date has raised serious adverse events signals (although all had a relatively high all-cause dropout rate, which was unsurprisingly highest in placebo groups owing to lack of efficacy). Main obesity treatments currently marketed in order of launch are as follows:

We see little immediate threat to the recent triumvirate of oral obesity drugs currently marketed in the US. There are number of candidates in the pipeline for the treatment of obesity, most of which have yet to start Phase III. The most advanced compound is beloranib (Zafgen), which has shown impressive efficacy vs currently marketed anti-obesity drugs to date. However, the compound is subcutaneous and its lead indication is to treat patients with Prader-Willi Syndrome, a rare disease that causes binge eating due to a non-stop intense craving for food.

Contrave was approved in the US on 9 September and launched in October 2014 as an adjunct to a reduced-calorie diet and increased physical activity in adults with a BMI of 30kg/m2 or greater (obese) or 27kg/m2 or greater (overweight), with one weight-related comorbid condition. As of June 2015, Contrave became the most widely prescribed weight loss treatment in the US. Unlike lorcaserin, Contrave is not DEA scheduled, although packaging does include a black box warning owing to the class-wide risk of anti-depressants increasing risk of suicidal thoughts and behaviors in adolescents, as well as bupropion’s association with serious neuropsychiatric events when used for smoking cessation. In the US the company is partnered with Takeda, retaining the rights to the marketing in subsegments to select specialist physician groups. Takeda provides Orexigen with a large and experienced salesforce, as well as commercial and managed care experience. Orexigen, together with Takeda, is aiming to create a large-scale prescription market for weight loss by detailing high-prescribing primary care physicians and endocrinologists. Takeda is targeting ~75,000 physicians in the US with the first large-scale salesforce detailing obesity comprising 900 sales reps, thereby aiming to increase the appreciation of obesity as a chronic disease. Market coverage is well beyond that of competitors, with Novo Nordisk’s 500-strong salesforce for Victoza the next largest of the currently marketed obesity treatments. Detail has focused on educating targeted physicians on Contrave in the first six months or so after launch, including sampling, with a focus on high prescribers of metabolic and diabetes drugs. We anticipate the pilot testing of a broader marketing program to increase patient awareness in the coming months, including DTC advertising (digital, print and TV).

Orexigen/Takeda remain discreet as to the details of their pricing policy for reasons of confidentiality. However, we believe the pricing strategy for Contrave remains largely competitive with Belviq’s and Qsymia’s. Under one program, patients with insurance coverage pay $55 for the first two months of treatment and $45 each month thereafter and those with no cover pay $70 per month for the first two months and $60 per month thereafter. Sales in Q315 reflect seasonality of the obesity market, but also suggest strong out-of-pocket sales and discounting. Transparency is limited as Orexigen is contractually prohibited in its agreement with Takeda to provide more transparency on sales including inventory build and other one-time events. The cost of the program for all patients includes support with an app called Scale Down, which encourages a daily weigh-in on a wireless scale (provided), giving personalized feedback from the app on the weigh-in, and weekly emails giving advice on healthy lifestyle.

Progress on Contrave since launch is encouraging and the drug is showing the most positive momentum in its category, a trend that could continue given its high level of sales and marketing support. Eight months following commercial launch Contrave was the leading branded weight loss treatment. Chief focus has been on those obese and overweight patients with comorbid conditions, particularly those being treated for diabetes. Takeda reports good success so far, both with doctors who have prescribed obesity medicines in the past (~50% of sales calls) and non-prescribers (~50%). This is borne out by current scrip data showing new and total weekly prescriptions surpassing Belviq and Qsymia despite a relatively latent launch. We note that while sales of anti-obesity treatments tend to flatten in second and third quarters, scrip growth traditionally resumes following Labor Day in early September.

In Europe, the compound was approved in March 2015 under the name Mysimba following a strong majority vote of 31 to two by the CHMP in December. Mysimba is currently positioned for launch as the first significant new obesity treatment in nearly a decade in markets with historically low levels of penetration, but where prescribing and doctor acceptance is starting to take hold.

We currently forecast sales of Contrave to reach $590m worldwide by 2024 (of which $430m is in the US), after which time the key method of use patent expires. While we do not risk-weight our revenue in Europe and South Korea, we have been deliberately conservative in rendering potential upside after signing of partners. We do not include potential RoW sales or potential sales to the overweight (vs obese). Our forecasts do not explicitly include potential sales for additional indications being explored, including depression and smoking cessation in obese patients. We model a 0.57% penetration rate of the obese population in the US and significantly less in Europe at 0.29% penetration where reimbursement lags and uptake of weight loss treatments is traditionally lower. Milestones from Takeda to Orexigen comprise two more $15m anniversary payments in 2016, and 2017 and eligibility for another $880m in sales and regulatory-based milestones. We assume these will be received in full with no risk adjustment. Royalties on sales in the US range from 20-35% on a sliding scale based on increasing levels of revenue. We note incremental changes in penetration rates create huge swings in our forecast sales, as explored in our sensitivity analysis on page 13.

In August Orexigen announced the completion of a distribution agreement with South Korean pharmaceutical company Kwang Dong for the commercialization and related expenses of Contrave in South Korea. Terms of the deal include a recently paid $7m upfront by Kwang Dong, payment of 35-40% royalties on pills supplied, sales-based milestones and other fees. Sales of Contrave are targeted to commence in the second half of 2016 contingent on marketing approval (Contrave was filed on 1 October 2015 with the Ministry of Food and Drug Safety). Kwang Dong has a 500-strong salesforce with which to market Contrave, which is currently detailing pharmaceutical products and health foods. We forecast peak sales of $18m for Contrave in this market, which we believe is conservative given that sales of anti-obesity treatments in Korea reached $61m in 2014 on high obesity rates in the country: 38% in men and 26% in women.

During its Q3 conference call management provided detail as to its plans for marketing Contrave in RoW. Following a comprehensive assessment of ex-US territories, the company intends to take a market-by-market approach with the goal of launching in much of Europe and other major countries in H216. The recent $60m raised via private placement to Baupost is intended to enable leverage in the way of a funding cushion for the retention of increased ownership and more value in certain markets outside the US as it continues discussions with potential partners, where deals will be made with more local players. The company has veered away from market expectations of regional deals, where Orexigen points to the diversity of individual markets, as well as the concentration of decision makers, which gives the company a more hands-on and therefore lucrative part in the sales process. Orexigen established a wholly owned Irish subsidiary to be used as a platform for the sale and marketing of Contrave outside the US. A more comprehensive plan will be forthcoming with additional detail on the ex-US strategy, expected in the early part of 2016 as deals in individual territories begin to unfold.

Orexigen continues to explore opportunities for marketing the approved Mysimba in European countries, which it targets for the second half of 2016. It plans to seek pricing approval in select European countries while developing relationships with prominent specialists, as well as supporting clinical research. The company also plans to file for regulatory approval in other countries. We expect reacquired rights from Takeda for the commercialization of Contrave in Mexico and Canada to provide added leverage in conversations with potential international partners. Other markets earmarked as tier one are Australia, Brazil, China, MENA and Russia.

In late April Actavis filed an ANDA challenging select Contrave patents (as well as those for Vivus’s Qsymia), resulting in Orexigen’s receipt of a Paragraph IV certification. Under the Hatch-Waxman Act the company will receive the procedural 30-month stay following the intended lawsuit filing against Actavis by Orexigen and Takeda. We believe Actavis is positioning itself ahead of the queue for an eventual generic listing and take the stance that Orexigen’s current patent estate is sound, which corresponds with market expectations. We highlight that the efficacy of Contrave is derived from the unique combination of bupropion and naltrexone, whereby naltrexone taken alone does not result in weight loss and bupropion alone results in only around half of the weight loss of the combination. Therefore, the company’s proprietary formulation looks to be a novel discovery. Orexigen holds numerous patents for its proprietary controlled-release combination of bupropion and naltrexone. Key patents are the Weber/Cowley4 composition patent (7,375111) expiring in March 2025 and Weber/Cowley methods patent (7,462,626) expiring in July 2024. The company also holds multiple additional patents covering composition of matter and use for Contrave in obesity in the US (seven Orange Book listings). In Europe the company has exclusive rights to many patent applications including those related to compositions, methods of use and formulations.

Orexigen is subject to the risks typical of a pharmaceutical company in the early stages of a major product launch. This includes the commercial decisions by its partners or potential partners and the level of success of its competitors. The company is also vulnerable to any undesirable effects arising post launch not made evident in its large Phase III clinical program. With a European approval and intended global launch, future sales of Contrave (ex-US) also expose the company to currency fluctuations. We also highlight stock-specific issues.

We value Orexigen at $1.09bn, or $7.49 per share, based on a risk-adjusted net present value (rNPV) analysis. The breakdown of our DCF model, which uses a 10% discount rate, is shown in Exhibit 10. Our valuation includes the company’s estimated net cash holdings of $133m at 30 September. We model cash flow for Contrave through to loss of market exclusivity in 2025 in the US when key patents expire, forecasting a loss of 60% of sales in the first year and tailing off until 2030. We currently model sales in the US, South Korea and European markets only, therefore launches in additional territories including Brazil, Mexico and Canada offer upside to our fair value. We note that our base case rNPV represents considerable upside to Orexigen’s current market capitalization of $329m ($2.62/share), which saw a drop from a market cap of ~$860m (~$6.85 per share) at the time of the termination of the LIGHT study and the announced private placement of Baupost. As stated, we believe the extent of the share price drop was an overreaction and anticipate the renewal of shareholder confidence on the back of an expected continuation of positive scrip trends for Contrave vs its peers. Additionally, the announcement of a partner for the launch of Mysimba (in Europe) and ongoing communication regarding partnerships for Europe and RoW should provide support to the shares.

Given the size of the obesity market and corresponding possible sales volumes (based on relatively marginal penetration rates), we also include an analysis of share price potential based on various market penetration rates in the US and Europe, also indicating the peak sales that correspond to these assumptions (Exhibit 11). We note the relatively wide band of calculated fair value for Orexigen, ranging from $6.59 per share to $7.82 per share, on small changes in penetration rates.

We forecast solid top-line development for Orexigen in the coming quarters and years on the ramp-up of Contrave following the successful debut in its first 12 months on the market to September 2015. We model a steadily growing top line derived from tiered royalties received from Takeda (20-35% on an upward sliding scale), deferred revenue on previous milestone payments (~$100m), potential anniversary milestones ($30m more in two instalments) and sales-based milestones (up to $880m to be received in 2016-24). In Q3 Contrave sales by Takeda of $12.8m ($16.0m in Q215) led to $2.6m in royalties for Orexigen. Sales dipped from the prior quarter despite the increase of 10% in prescriptions sold and, with little information from management on these trends (due to confidentiality agreements with Takeda), we believe a combination of inventory fluctuations and price discounting led to the discrepancy. A net loss in Q315 of $11.1m (Q314 $11.3 profit) was reported. For the full year 2015 we forecast revenue of $32.4for Orexigen growing to $85.6m in 2016 as Contrave continues to make inroads in the US and is launched in Europe and South Korea next year. We model R&D costs at $60.2m and $66.2m in 2015 and 2016 respectively, factoring in the $210m in costs, as incurred, for the new CVOT trial in the coming years. On 10 September, Orexigen announced the private placement of 20m shares and the raising of $60m of common stock and warrants (common shares at $3 and $0.25 per warrant exercisable at $6) to funds owned by the Baupost Group. The additional cash is intended to help support the commercial launch of Mysimba in Europe and regulatory requirements in other targeted markets. As at 30 September 2015, Orexigen carried $87.0 in convertible debt on its balance sheet. In December 2013, it issued $115.0m in aggregate principal amount of 2.75% convertible senior notes due in 2020 in an offering. Orexigen holds the option to settle the 2020 notes with cash, shares or a combination, at the company’s election. The estimated implied interest rate of 8.69% resulted in a fair value calculated as the PV of implied future payments based on the $115m principal. While we do not assume conversion of this debt into shares, if converted the dilution would amount to an additional 14.0m shares. Cash holdings of $233m at 30 September should be sufficient to carry Orexigen into mid-2017, at which time, on our forecasts, the company will become profitable.