Orexigen Therapeutics

Contrave market share stabilizing

Q3 earnings

Pharma & biotech

18 November 2016

Price	US$2.53
Market cap	US$37m

Net cash ($m) at 30 September 2016		40

Shares in issue	14.6m
Free float	92.2
Code	OREX

Primary exchange	NASDAQ
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(15.1)	(39.2)	(90.7)
Rel (local)	(16.2)	(38.6)	(91.1)

52-week high/low

US$33.2

US$3.30

Business description

Orexigen Therapeutics is a biopharmaceutical company focusing on obesity treatments. It recently reacquired the rights to sell its sole product, weight management treatment Contrave, in the US from its previous partner, Takeda. Contrave was launched in the US in October 2014 and approved in the EU in March 2015 under the trade name Mysimba.

Next events

Launches in 6 CEE countries

Q416

Analysts

Maxim Jacobs	+1 646 653 7027
Nathaniel Calloway	+1 646 653 7036

healthcare@edisongroup.com

Edison profile page

Orexigen Therapeutics is a research client of Edison Investment Research Limited

The third quarter was one of transition for both Orexigen and the Contrave franchise as Takeda stopped detailing the obesity drug in the United States and Orexigen took up the mantle. Contrave market share fell from 7% to 6% in wake of the announcement, but prescription data indicate it is stabilizing. Outside of the US, progress continues as the product has launched in South Korea and five countries in Central and Eastern Europe (CEE) with launches in another six CEE countries expected in Q416.

Year end	Revenue ($m)	PBT* ($m)	EPS* ($)	DPS ($)	P/E (x)	Yield (%)
12/14	55.5	(37.5)	(3.17)	0.0	N/A	N/A
12/15	24.5	(67.3)	(5.24)	0.0	N/A	N/A
12/16e	32.6	(141.8)	(9.70)	0.0	N/A	N/A
12/17e	87.3	(103.0)	(6.72)	0.0	N/A	N/A

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

Has Contrave reached trough market share?

As Takeda pulled back on its promotion following the announcement in March that Orexigen would be reacquiring all rights to Contrave in the US, market share fell from ~7% to 6.0%. Based on recent prescription data, that share has stabilized and may start to increase as the Orexigen sales team gains traction in coming months.

Improving payer mix

Gross-to-net deductions represented 64% of sales in Q3, down from 67% in Q2, indicating a greater mix of prescriptions paid for by commercial payers, who tend to get lower discounts than those who pay cash and have a savings card. As coverage continues to improve, we expect this discount to approach 40% by 2020.

International launches progress

Contrave, which is known as Mysimba in most international markets, has now launched in South Korea and five countries in CEE. Launches in another six CEE countries are expected in Q416 and a launch in Spain is expected in January. Regulatory filings in Canada, South Africa, New Zealand and Australia (the last two were included in a recently announced deal with Valeant) are all expected in H117.

Valuation

We are increasing our valuation from $70m ($4.80/share) to $106m ($7.25/share), mainly due to rolling forward our forecasts and the fact that some large expenses are behind it. This was mitigated by increased R&D spending assumptions in the longer term as well as lower net cash. Due to the higher spending assumptions, we now expect overall profitability in 2021 instead of 2020, though we still expect operating profitability then. Our estimated financing requirement remains at $70m through 2020.

Contrave ready for a turnaround

According to IMS prescription data provided by the company, Contrave’s share of the total obesity market has fallen from around 7% to 6.0% but appears to have stabilized (see Exhibit 1). Its share in the branded obesity market also seems to have stabilized and continues to be over 40% despite continued inroads from Saxenda (injectable liraglutide, originally developed for diabetes) from Novo Nordisk.

Exhibit 1: Contrave share of total obesity market	Exhibit 2: Contrave share of branded obesity market

Source: Orexigen, IMS	Source: Wolters Kluwer, Bloomberg

Exhibit 1: Contrave share of total obesity market

Source: Orexigen, IMS

Exhibit 2: Contrave share of branded obesity market

Source: Wolters Kluwer, Bloomberg

With Contrave already controlling a large part of the branded obesity market and Belviq XR (a once-a-day formulation of Belviq, which is currently twice a day) recently launched by Eisai/Arena in October, Orexigen recognizes that Contrave’s market share gains will have to come from phentermine, which represents around 80% of the total obesity market, rather than from the other branded products. Phentermine is related chemically and pharmacologically to amphetamines and, while efficacious, also carries with it significant abuse potential and risk for anyone with cardiovascular issues. The main driver of this share growth will be increased physician education on the product, as well as greater payer coverage.

Increased insurance coverage would have a two-pronged positive impact for the company. First, it would reduce the cost of the product for consumers, which would stimulate demand. For participants in the Contrave savings card program, those with a prescription covered by insurance pay no more than a $30 co-pay per month (approximately in line with the cost of phentermine), while those who do not have a covered prescription pay $90 per month.

Second, it would increase the net realized price for Contrave as there is a much steeper discount for those paying cash compared to those paying with insurance. Right now the gross-to-net discount for Contrave as a whole is around 64% (down sequentially from 67% in Q2), which means that for every $1 in the wholesale acquisition cost (WAC), the company only realizes $0.36. Orexigen believes that if insurance covered closer to 30% of prescriptions (currently ~20%), the gross-to-net discount might fall to 40-50%.

International launches in progress

In 2016, Contrave, which is known as Mysimba in most international markets, is in the process of launching or will be launched in about a dozen countries. In June, Contrave was launched in South Korea through partner Kwangdong after just a seven-month approval process, which was faster than expected. According to the company, the Korean anti-obesity market had $71m in sales in 2015, up 21% compared to 2014. Orexigen’s partner Valeant has targeted launching Mysimba in 11 different countries in Central and Eastern Europe, namely Slovenia, Slovakia, the Czech Republic, Hungary, Croatia, Lithuania, Latvia, Estonia, Poland, Bulgaria and Romania, and has already launched in five of them, with the remaining six targeted for launch in Q416. Valeant expects to launch in Greece and Cyprus in Q117. Additionally, the company’s local partner, Laboratorios Farmaceuticos Rovi (ROVI), will be launching Mysimba in Spain in January.

Additionally, regulatory filings in Canada, South Africa, New Zealand and Australia (the last two were included in a recently announced deal with Valeant) are all expected in H117.

Valuation

Exhibit 3: Orexigen valuation

Product	Launch	Peak sales ($m)	Royalty rate	NPV ($m)	rNPV/share ($)
Contrave US	October 2014	277	100%	1,250	85.86
Contrave W. Europe	2016	118	30%	192	13.16
Contrave C. and E. Europe	2016	27	37.5%	46	3.17
Contrave S. Korea	2016	15	37.5%	21	1.45
Contrave ROW	2017	15	37.5%	24	1.67
PV costs including taxes				(1,468)	(100.81)
Net cash (30 September 2016)				40	2.75
Overall valuation (per share based on 14.6m shares outstanding)				106	7.25

Source: Edison Investment Research

Financials

We’ve made minor adjustments for revenues and expenses for 2016 and 2017 following Orexigen’s Q316 quarterly update. The company reported revenue of $7.0m, including $5.3m in US Contrave sales recorded by Orexigen, $866,000 in royalties on $4.3m in net sales by Takeda (which stopped selling Contrave at the end of July) and $895,000 in collaborative income. Note that the $5.3m represents approximately six weeks of sales as Orexigen only sold Contrave for two months and also has changed its revenue recognition policy towards one where it recognizes revenue when its distributors sell the product to the pharmacies (previously Takeda recognized a sale upon sale to the distributors), which cost it approximately two weeks of sales in the total. Total operating expenses were $40.4m and it had a net loss of $30.2m (both numbers exclude a one-time gain on the elimination of deferred revenue associated with the Takeda collaboration). It exited the quarter with $241.0m in cash, restricted cash and marketable securities and $200.9m in debt. The restricted cash is associated with the convertible senior secured notes due in 2020, which require the company to hold $165m in restricted cash until year-end, then $100m until the end of Q117 and $50m until the end of Q217.

Exhibit 4: Financial summary

	$000s	2014	2015	2016e	2017e
Year end 31 December		US GAAP	US GAAP	US GAAP	US GAAP
PROFIT & LOSS
Revenue		55,521	24,459	32,568	87,339
Cost of Sales		0	0	(5,664)	(7,935)
Gross Profit		55,521	24,459	26,904	79,404
Research and development		(57,412)	(40,750)	(46,304)	(47,230)
General & administrative		(28,639)	(43,762)	(115,258)	(119,869)
EBITDA		(30,669)	(60,276)	(138,108)	(88,073)
Operating Profit (before GW and except.)		(30,530)	(60,053)	(134,659)	(87,695)
Intangible Amortization		0	0	(3,139)	(5,769)
Exceptionals/Other		0	0	79,229	0
Operating Profit		(30,530)	(60,053)	(58,569)	(93,464)
Net Interest		(6,995)	(7,219)	(7,122)	(15,310)
Other (includes change in fair value of warrants)		0	(39)	20,484	0
Profit Before Tax (norm)		(37,525)	(67,272)	(141,780)	(103,004)
Profit Before Tax (FRS 3)		(37,525)	(67,311)	(45,206)	(108,773)
Tax		0	(1,376)	0	0
Deferred tax		0	0	0	0
Profit After Tax (norm)		(37,525)	(68,648)	(141,780)	(103,004)
Profit After Tax (FRS 3)		(37,525)	(68,687)	(45,206)	(108,773)

Average Number of Shares Outstanding (m)		11.8	13.1	14.6	15.3
EPS - normalised fully diluted ($)		(3.17)	(5.24)	(9.70)	(6.72)
EPS - FRS 3 ($)		(3.17)	(5.24)	(9.70)	(6.72)
Dividend per share (c)		0.0	0.0	0.0	0.0

BALANCE SHEET
Fixed Assets		1,655	2,694	80,713	89,859
Intangible Assets		0	0	76,301	85,532
Tangible Assets		857	1,284	1,260	1,175
Other		798	1,410	3,152	3,152
Current Assets		211,326	233,895	242,163	139,720
Stocks		1,198	10,802	23,999	23,999
Debtors		2,571	6,828	2,098	2,098
Cash		205,537	214,011	109,986	107,543
Other		2,020	2,254	106,080	6,080
Current Liabilities		(29,714)	(32,241)	(65,473)	(65,473)
Creditors		(29,714)	(32,241)	(65,473)	(65,473)
Short term borrowings		0	0	0	0
Long Term Liabilities		(160,923)	(170,970)	(213,580)	(212,944)
Long term borrowings		(83,908)	(88,129)	(200,919)	(200,919)
Other long term liabilities		(77,015)	(82,841)	(12,661)	(12,025)
Net Assets		22,344	33,378	43,823	(48,838)

CASH FLOW
Operating Cash Flow		26,828	(54,473)	(106,507)	(87,149)
Net Interest		(3,119)	0	0	0
Tax		0	0	0	0
Capex		(246)	(538)	(286)	(293)
Acquisitions/disposals		0	0	(60,435)	(15,000)
Financing		2,734	64,259	139	0
Dividends		0	0	0	0
Other		(1,533)	(3,843)	(55,886)*	100,000
Net Cash Flow		24,664	5,405	(222,975)	(2,443)
Opening net debt/(cash)		(96,965)	(121,629)	(125,882)	90,933
HP finance leases initiated		0	0	0	0
Exchange rate movements		0	29	961	0
Other		0	(1,181)	5,199	0
Closing net debt/(cash)		(121,629)	(125,882)	90,933	93,376

Source: Orexigen Therapeutics accounts, Edison Investment Research. Note: *Other cash flow includes cash that became restricted in 2016 and then unrestricted in 2017.

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