Orexo — Update 28 November 2016

Orexo — Update 28 November 2016

Orexo

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Orexo

Worst-case scenario averted

Patent litigation update

Pharma & biotech

28 November 2016

Price

SEK36.7

Market cap

SEK1,273m

SEK8.84/US$

Net debt (SEKm) at end September 2016

219.2

Shares in issue

34.7m

Free float

49%

Code

ORX

Primary exchange

NASDAQ OMX Stockholm

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(21.9)

(25.9)

(48.3)

Rel (local)

(22.5)

(28.3)

(48.8)

52-week high/low

SEK70.0

SEK32.9

Business description

Orexo is a Swedish speciality pharma company, with expertise in drug delivery/reformulation technologies (in particular sublingual formulations) and a US commercial infrastructure for opioid dependence therapy Zubsolv.

Next events

Decision to appeal ’330 ruling

End 2016

FY16 results

26 Jan 2017

Second Actavis IP infringement case

Oct 2017

Zubsolv: possible EMA approval

Q417

Analysts

Lala Gregorek

+44 (0)20 3681 2527

Daniel Wilkinson

+44 (0)20 3077 5734

Maxim Jacobs

+1 646 653 7027

Orexo is a research client of Edison Investment Research Limited

The court ruling upholding the validity of the Orexo ’996 Zubsolv patent precludes Actavis from launching a generic before September 2019. Orexo has 30 days to decide whether to appeal the court decision that a second patent (’330 with 2032 expiry) is invalid. A worst-case scenario allowing imminent launch of Actavis generic(s) has been averted. Zubsolv’s IP portfolio includes two additional patents (’900 and ’421) that extend to 2032, which coupled with the prospect of an appeal on ’330, means that significant hurdles remain ahead of Actavis generic launch.

Year end

Revenue (SEKm)

PBT*
(SEKm)

EPS*
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/14

570.3

(52.6)

(1.6)

0.0

N/A

N/A

12/15

643.2

(191.2)

(5.7)

0.0

N/A

N/A

12/16e

728.1

42.8

1.0

0.0

36.7

N/A

12/17e

898.8

153.7

2.6

0.0

14.1

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Multi-layer IP strategy for Zubsolv

Actavis is the only company to file ANDAs for generic Zubsolv to date. The recent ruling relates to the June 2016 court hearing concerning the first ANDA (filed 2014 covering Zubsolv 1.4mg and 5.7mg); the court decision upheld the validity of the 8,454,996 US patent but found 8,940,330 invalid. Since the first ANDA filing, the FDA has approved four further Zubsolv dose strengths and two new patents have been issued (9,259,421 and 9,439,900). Actavis’s second ANDA was filed in 2015; Orexo responded by initiating two additional infringement suits. The first suit has an October 2017 trial date; the second (related to ’421) is pending a court date.

Actavis generic launch: Not until Q319 at earliest

Orexo has one valid patent to September 2019 (’996), two extending to 2032 (’421 and ’900) and is evaluating its strategy for appealing the ’330 ruling. Overlap of the various ANDA filings and patents challenged by Actavis means the court decision in this first case is likely to affect the process/outcome of the subsequent suits. An appeal outcome, plus rulings on subsequent suits is expected from 2018. The new worst-case scenario is Actavis generic launch in 2019, which gives Orexo at least three years to prepare for a switch to a branded generic marketing strategy.

Financial forecasts and valuation maintained

We maintain our financial forecasts and valuation of SEK4.54bn or SEK131/share as we continue to model Zubsolv genericisation in 2032. Management has guided that legal/admin costs for FY17 and FY18 will be in line with FY15 and FY16. The appeal process is shorter (typically 12 months) and less costly than full litigation. The ruling has no direct impact on sales and marketing costs, or negative impact on sales until at least 2020. Promotion of a branded generic typically requires lower investment. Management also confirmed the solid performance of Zubsolv so far in Q4, with both patient numbers and mgs/Rx increasing in a growing market.

Exhibit 1: Financial summary

SEKm

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

570.3

643.2

728.1

898.8

Cost of Sales

(107.4)

(136.1)

(150.3)

(161.3)

Gross Profit

462.9

507.1

577.8

737.5

EBITDA

 

 

(12.5)

(88.4)

86.3

173.1

Operating Profit (before GW and except.)

 

(25.0)

(169.1)

64.6

166.4

Intangible Amortisation

0.0

0.0

0.0

0.0

Other

16.5

(64.6)

15.9

0.0

Exceptionals

0.0

0.0

0.0

0.0

Operating Profit

(25.0)

(169.1)

64.6

166.4

Net Interest

(27.6)

(22.1)

(21.7)

(12.6)

Other

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

(52.6)

(191.2)

42.8

153.7

Profit Before Tax (IFRS)

 

 

(52.6)

(191.2)

42.8

153.7

Tax

(4.0)

(6.9)

(6.8)

(65.8)

Deferred tax

0.0

0.0

0.0

0.0

Profit After Tax (norm)

(56.6)

(198.1)

36.1

88.0

Profit After Tax (IFRS)

(56.6)

(198.1)

36.1

88.0

Average Number of Shares Outstanding (m)

34.3

34.6

34.5

34.5

EPS - normalised (öre)

 

 

(165)

(573)

105

255

EPS - IFRS (SEK)

 

 

(1.6)

(5.7)

1.0

2.5

Dividend per share (SEK)

0.0

0.0

0.0

0.0

Gross Margin (%)

81.2

78.8

79.4

82.1

EBITDA Margin (%)

(2.2)

(13.7)

11.8

19.3

Operating Margin (before GW and except.) (%)

(4.4)

(26.3)

8.9

18.5

BALANCE SHEET

Fixed Assets

 

 

289.5

185.9

163.8

158.0

Intangible Assets

259.2

159.1

142.4

142.4

Tangible Assets

29.1

24.7

21.4

15.6

Other

1.2

2.1

0.0

0.0

Current Assets

 

 

936.4

830.4

940.2

1,070.7

Stocks

478.1

398.9

308.8

176.7

Debtors

173.8

233.4

179.5

221.6

Cash

284.5

198.1

451.9

672.4

Other

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(268.1)

(251.6)

(304.8)

(341.0)

Creditors

(265.6)

(251.6)

(304.8)

(341.0)

Short term borrowings

(2.5)

0.0

0.0

0.0

Long Term Liabilities

 

 

(502.8)

(498.3)

(498.5)

(498.5)

Long term borrowings

(493.8)

(494.4)

(496.1)

(496.1)

Other long term liabilities

(9.0)

(3.9)

(2.4)

(2.4)

Net Assets

 

 

455.0

266.4

300.7

389.2

CASH FLOW

Operating Cash Flow

 

 

(455.7)

(73.2)

275.8

263.6

Net Interest

(31.6)

(29.0)

(26.9)

(12.6)

Tax

0.0

0.0

0.0

(29.5)

Capex

(71.7)

(4.1)

(1.6)

(1.0)

Acquisitions/disposals

0.0

21.8

11.0

0.0

Financing

341.7

3.8

2.1

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Net Cash Flow

(217.3)

(80.7)

260.4

220.6

Opening net debt/(cash)

 

 

135.4

211.8

296.3

44.2

HP finance leases initiated

0.0

0.0

0.0

0.0

Exchange rate movements

1.5

4.5

6.7

0.0

Other

139.4

(8.3)

(15.0)

0.1

Closing net debt/(cash)

 

 

211.8

296.3

44.2

(176.5)

Source: Edison Investment Research, Orexo accounts

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Orexo and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

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Level 15, 171 Featherston St

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New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Orexo and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

SinnerSchrader — Update 28 November 2016

SinnerSchrader

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