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Edited Transcript of ORX.ST earnings conference call or presentation 24-Oct-19 12:00pm GMT

Q3 2019 Orexo AB Earnings Call

Uppsala Oct 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Orexo AB earnings conference call or presentation Thursday, October 24, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joseph DeFeo

Orexo AB (publ) - EVP & CFO

* Nikolaj Sørensen

Orexo AB (publ) - President & CEO

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Conference Call Participants

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* Klas Palin

Redeye AB, Research Division - Equity Analyst

* Klas Pyk

Nordea Markets, Research Division - Research Analyst

* Samir Devani

Rx Securities Limited, Research Division - Research Analyst

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Presentation

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Operator [1]

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Hello, ladies and gentlemen, welcome to the Orexo Interim Report for Third Quarter of 2019. (Operator Instructions)

So today, I'm pleased to present Nikolaj Sorensen, Chief Executive Officer; and Joseph DeFeo, Chief Financial Officer. Please begin.

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [2]

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Thank you very much for the introduction and welcome to all the participants to our third quarter results. I will jump straight into the presentation and move into the third page, which is the summary page of the quarter.

We, this time, choose actions to go into literature to find a citation that we find is well showing how we have fared during the last quarter since we had our record-high second quarter results. And that's from Mark Twain saying that rumors of my demise have been greatly exaggerated.

The reason why we choose this is though when we had a fantastic second quarter, clearly that most of you are probably aware of, our share price has not really reacted or reflected that strong result. Also, recognize that some of that can be explained by some clouds that have been on the market and also some misunderstanding about the development for Zubsolv in the U.S.

And I hope we can bring more clarity both in the report we have published, but also during the presentation that we have right now. We will go into quite a lot of details about how the U.S. market is developing and in particular why we think Zubsolv is doing great at the moment.

So taking the financials, this is the best quarter we have ever had. In second quarter, we had to use the same but with one excuse that we also had one quarter with a milestone, which brought us up previously. But this time, we are actually at what is an all-time high performance in terms of profitability and cash flow. And what we've shown in this quarter is that we have a net revenue, which is going up with nearly 7% of that. Zubsolv is, of course, a main part.

Zubsolv is growing with 10.4% in Swedish krona but maybe, more importantly, is that we're also showing growth in Zubsolv in local currency, 3% in U.S. dollars. If you should apply the U.S. dollars, Zubsolv actual growth on the full company that would be about 1.1% growth and the reason why it's not more is Abstral has actually come down a little and we can comment to that when we get to the financials.

What I'm really pleased about is our ability to continue improving our efficiency within the organization, both from a supply side, bringing down our COGS, delivering on our outlooks and forecasts about improving the COGS. But also, the efficiency and how we deploy our field force in a reaction to a market, which in some places are more and more controlled by payers, which mean that the use of the field force is less important. And we have optimized our fee infrastructure as a consequence.

What -- and if you look at the financial results, then you say, so Orexo, you have lost on the top line volume in growth sales. Those of you who follow our prescription data. How come that you have such a positive result on the financials. And one of the reasons that if you look at 2 different market segments, the decline that we have in volume is fully explained by the loss of exclusive contracts.

Those of you who have followed us for a while would know that they are associated with very high rebates. While we're actually seeing a strong double-digit growth year-over-year in the segments that are much less rebated and where we are subject to competition.

So we have good growth in the profitable segments. We're losing volume in the segments that are not as profitable. We also then have our improved efficiency I'll just talk to and then this time, there are some nonrecurring adjustments, a little more positive adjustments than negative adjustment. We also have a nonrecurring negative adjustment related to inventory.

Our cash balance, it's kind of the story of Orexo 2019 is continuing to strengthen and now, we have $813 million in cash. It was a very, very strong quarter and I would expect that it's a little unique for this quarter as we have less rebate payments in this quarter than usual.

When we look into our pipeline and what's next for Orexo, I've seen comments that Orexo is just Zubsolv and nothing could be more wrong. So what we have done in the quarter is that we have closed an agreement with a company called GAIA and I really don't think people recognize is the value of the Digital Therapy and how and that is making impact.

It is the interesting to see companies who have similar products when they are valued alone. In the U.S., several of those companies actually have a valuation or at least an expectation that put them in some valuation much higher than where Orexo is despite our profitable core business.

We also have OX338, which is a non-opioid painkiller. I will talk a little more about that because it's very exciting. Right now, we have the first patient in our clinical trial and we expect to have the results ready either late this year but probably early 2020.

What we have done during the quarter also is that we have strengthened our business development capabilities by hiring a seasoned business development manager in the U.S. who is now running our U.S. business development operations, although reporting globally.

Moving into the pipeline, which is on Page #4. The ones I would highlight are OX338 and our Digital Therapies. I will come back to them a little later but if we look at the rest of the pipeline, we're doing well, OX124, OX125. We're right now working to get commercial scale manufacturing and when that is done, we can start our pivotal study on OX124. But also, we're planning to do a first study on OX125 next year.

When we get to it, we can move actually to Page #5, and that is I think addressing one of the concerns that I have seen from several parties during this quarter is what's happening outside the U.S. with Zubsolv.

First, we did in last quarter results, we announced an agreement with Mundipharma in Australia and that, of course, created a little confusion that first, we canceled the contract with Mundipharma and then we started a new contract. But people who are more familiar with Mundipharma would know that actually all of the -- there's a lot of different companies sharing the same name and also owners. But they are only affiliated. So they're not part of the same company but they have the same name as they share the same owners.

And Mundipharma Australia is actually an independent company who has been affiliated with a company we worked with before. Whereas Mundipharma Australia had decided to take Zubsolv to the agreement we had with Mundipharma Europe. When that European agreement was canceled, Australia decided to continue.

However, as the other agreement was a global contract, it was not possible just to transfer to Australia and that was the reason why it took a little while before we had a new agreement in place with Australia. We're now expecting to launch in 2020 in Australia when supply chain and pricing is in place.

When I get to Europe. We have high expectations of finding partners and we've had a great interest in Zubsolv. What has happened during 2019, in particular during the first half of this year is that we're seeing generic versions of Suboxone tablets being launched in several markets, which has resulted in a lower price. And in the European environment, that, of course, adds complexity into the reimbursement process, what prices Zubsolv should be compared to. And you need to try to motivate the price premium that you would expect for a branded product.

We do work with potential partners to look into the price and reimbursement in several markets in Europe. So we have so advanced discussions that we actually have partners who are working on behalf of Orexo to obtain reimbursement in different markets.

But before we will go out and sign a final agreement, we want to be sure that the business case supports such an agreement. And that means that the price on reimbursement that we would obtain is decisive for whether we can finalize an agreement.

Another thing that I had talked to before is that we need to establish a new supply chain. And whereas we had set up the supply chain today with manufacturing of the tablets and the packaging. We have encountered some unexpected issues around the import license for our packaging partner in Europe who would need a special license because this is a controlled substance, to import the product. And that unfortunately delayed it a little.

And in Europe, many countries would expect smaller pack sizes than what we have in the U.S. So we can't just take our U.S. product and ship it to Europe in the same package. It would need to be European specific. However, that is what I would call an engineering problem and to just solve it. And it's just a delay. It's not a showstopper.

Then moving on to OX338. This would be on a high level and we've shown this same picture before. It's product based on ketorolac and it's basically thought of as a replacement of opioids in use in acute treatment of pain.

We at least believe that ketorolac is the most efficacious and safe product that exists today. You can use it up to 5 days in an acute setting. And as it is an NSAID, we don't see any risk for addiction. What we're doing uniquely in this is to make a sublingual formulation that you should be able to use from the first day. Basically, leave the dentist or whatever procedure you have gone through, and go to the pharmacy and get a very potent pain medication that you can take sublingually.

Today, you do have oral tablets available in the same space, but here you need to be given an IV or IM injection during the first couple of days of treatment. And only the last days you can use these oral tablets. We hope to replace that or we plan to replace that and you can use OX338 from the first day.

There's also a nasal spray that does not require an injection today. So that one you can use from the first day. However, it is perceived very inconvenient and we think that with our sublingual formulation, we should be able to provide something that is much easier to use than nasal spray and the injection products.

If you look on Page 7, we have just a small summary of the some of the data that exists on ketorolac. And as you can see in the graph in the middle of the page, there is some very strong data that basically we can conclude that in that study, there is no difference in efficacy between oral ketorolac and hydrocodone.

And basically, it shows that ketorolac could replace some of the opioids that are in the market. And to our knowledge, we are most advanced in bringing a product to the market that can be conveniently taken sublingually and from day 1.

So to summarize our ketorolac market. Today, the market is in growth stage and that means before rebates, it's more than $100 million. However, when you look at the opioid market where there is a big contraction in the U.S. right now to try to move away from opioids. Many people don't want opioids. We think there is a massive market where our OX338 could play a role.

So we are really looking forward to the results from our clinical study that is ongoing at the moment. And if that is playing out well, we will look forward to share more details about the development plan and timing of OX338.

Then to the Digital Therapy. And people say, so what is this? So most of the Digital Therapy we heard about, that's something you are selling together with the pharmaceutical. And then of course, if we just have -- with Zubsolv, we have just below 5% of the market right now. So how big can that be if you're selling it together with Zubsolv.

However, when you look at some of the products that are brought to market right now, listening to the payers in the U.S., listening to the health care system, Digital Therapy is something that people recognize can provide value independently of the pharmaceuticals. And that's really what we're aiming at is bringing a product to the market, which could in one way be compared to a specialty pharmaceutical, which we could be reimbursed the same way as a specialty pharmaceutical and should be measured on the clinical evidence that we can show for this product. And that way, it doesn't really differ except that it provides much more value than what you have with a standard pill.

So with the system that we have licensed from GAIA, you will basically have an artificial intelligence that will adapt the treatment to the need of the patient. You will have a massive opportunity to collect data that can be used both by the healthcare professional treating the individual patient. But of course, you'll also get a lot of macro data showing how you can optimize and improve treatment for patients. And not to say what data it could provide to the payers to see how they could optimize their systems to get more efficiency into the health care system.

So we believe this is something that I'm personally absolutely convinced that in 10 years from now, there would not be a single interaction with a health care professional in the modern society, which does not have a digital element. Whether that is when you enter the -- contact your doctor or when it's leaving the doctor that they can follow-up. It's one of the things where you really can provide a lot of efficiency improvements and I think this is a very exciting area for Orexo, even though we are addressing it with caution.

So one of the things that we have done, of course as you saw in the press release, we have made an agreement with GAIA, which is not done -- was not easily done. It's based several years of following this market, monitoring different partners. And we found that GAIA are the ones who have the strongest evidence from a scientific basis that they have found a system that works and provide efficacy into the treatment of depression and also into the treatment of alcohol addiction. These 2 are very profound comorbidities for opioid addiction. We saw the same competence as we could apply into opioid addiction.

So we have asked them, based on their knowledge and experience, to actually develop a product for opioid addiction and that work is ongoing right now. And why is Orexo well-positioned for this? Because I'm absolutely certain that the doctors who are going to use this to get the optimal effect out of the Digital Therapy, they need to have an involvement of the decisions. We can't just download an app on the internet and then expect that will give you a treatment.

This will be a tool that the doctors should use, along with other tools. And for there, our infrastructure with field force in place could build a good -- it could provide a lot of value to launch and commercialize, and ensure the uptake of this product. But also, Orexo, based on our years of experience in opioid addiction, we believe we have a lot of insights on how we can develop such a tool to maximize the value and impact when it gets launched.

So I think this is a very exciting partnership and I'm really looking forward to work with GAIA and we have discussions with GAIA on other opportunities that we hopefully could reach in the future.

That said about our pipeline, I will now move over to Zubsolv and the U.S. So first, on Page #12, we found a report in the U.S. that's just been published by the Society of Actuaries in the U.S. estimating the cost of the opioid epidemic, which -- and this is very recent data. It's actually from this year. Estimated now to be $631 million has been the cost for 3 years.

But even more scary is how it explains the decrease in life expectancy in the U.S. And here are some comparisons to World War I and to the Spanish Flu Pandemic, which is the last time where the life expectancy went down for 3 years in a row. But this time it's the opioid epidemic.

And moving to Page #13, that, of course, explains why this market continued to grow and actually outgrow the expectations we had on our Capital Markets Day last year, where we expected 13%. But right now, it's at 14%. Should we just look at the quarter right now, then it's actually north of 14% and it does make it the fastest-growing quarter in actual terms ever in this market.

Looking at the different segments, the growth driver continued to be the public market. But also, the commercial market is now up in double-digit growth for the first time in a long period of time. So there's been 11% growth in the commercial market. The cash market has actually started to grow. That's where we have seen a lot of impact by the generics. But when you look at the Zubsolv data, we don't follow the growth on a corporate level.

So Zubsolv is declining in public. We are growing a little in commercial and we're declining a lot in the cash market, which is where the low priced generic really made an inroad. But if you take away the effect of the exclusive agreements that we have lost and the cash market, then you see that we are growing in the public space with 17% and in the commercial space with 16%. So we actually show good growth in the overall market. And I will come back to the Open Business definition a little later. But what's really costing us on our growth is the loss of these exclusive contracts.

So moving into our -- one of the things that I know have created a lot of confusion this quarter both from analysts and investors has been that when you're looking at the TRx growth, the number is down to single digit and I have seen comments not only for us but also for some competitors that the market growth is now slowing down. It's down to single digit.

And that is correct if you look at TRx, NTRx, that's the prescriptions. However, what's very unique for our space is that the prescriptions by segment, this number of tablets of Suboxone pill per script is very different for the different segment. And what has really happened now is that we've seen a significant growth in tablets and generic film on the cash prescriptions. So the people who are getting cash products are actually getting much more tablets and films per prescription than they did previously.

So when you look at the NTRx, that's the number of units or tablets, that growth is 14% but the number of prescriptions is only 8%. And that's basically because the cash segment, which is growing, has much more tablets and generic film per script than it had previously. So that explains the deviation and that is only something on a market level that's relevant for the generics. It actually does not have any impact on the overall growth of this market, which is now on a record high level.

Moving to Page #15. This is in our development of Zubsolv prescriptions, where as you can see, we have seen a fading volume during 2019. All of that decline is explained by the changes in formulary on 3 specific payers and on the cash market. And I would like to move to the next page where you can see more breakdown of this.

These are the 3 payers, United Group -- United Group Healthcare, it’s WellCare, it’s Humana and the cash market. And then we have the remaining exclusive agreements, which have been renewed and will exist also for next year. And as you can see, we have seen a decline in this market, which is 18% compared to last year. And we've seen a decline, which is going basically quarter-by-quarter.

It was slowing down in the second quarter because that's -- because Humana has remained more stable than WellCare and United. So that didn't have a lot of effect in the second quarter but in the third quarter, we have seen a decline in United also, which is our biggest account. And that has driven that this exclusive segment has gone down.

But if we look at Page #17, which is taking us into the Open Business, and with Open Business that's basically looking at areas where Orexo is reimbursed, where we have access but it's not exclusive agreements. And in that segment, we have grown with 16% from last year. So actually grown faster than the market in this period.

So when we are reimbursed and then there are changes to the market access even with the entry of generic Suboxone film, we actually managed to compete and take market share in this segment. And for me, that is important for the future. Because as you can see on the previous page, we don't have a lot of exclusive deals left that could have a very negative impact on Orexo. Of course, there can still be some loss of share in UnitedHealth Group and WellCare, Humana, even though we are starting to see them flattening out. So the impact is getting less and less for each week.

Then moving to Page 18, this is just a number to pick up for the next slide. But as you can see here, Suboxone film has been very resilient to the generic film. And that is, I think, to our and to Indivior's surprise. It's been a show of strong loyalty that to Suboxone Film. But even show that the generic, when you look at the generic market, the majority of those generics is actually also as generic from Suboxone Film. So the original product but packaged in a Sandoz box.

We know patients and physicians are fully aware of that but now there have been some changes moving into Page #19, which is quite interesting when we look at that's moving ahead of us right now, is just last week, Indivior announced that they are going to discontinue the authorized generic. So that authorized generic, which they account for 50% of the generic market, will disappear.

And then left will be the other generic products, which are not copies but other forms of film that we, at least, based on feedback from patients and physicians are much less preferred than the original Suboxone Film used in the generic -- the authorized generic or in the original branded product.

In combination with that, we also saw the first major PPM, CVS Caremark have, since October 1, locked the brand of Suboxone Film. So they will not continue to have reimbursement of branded Suboxone Film. And this has happened and the first week of data we saw, we saw our market share had a decent jump in CVS Caremark but it's only 1 week of data that is available right now. So it's a little early to say, hey.

But I do think that this movement is what we have anticipated last year when we had our Capital Markets Day, what will happen when you see generic film enter the market. We did flag that there was a risk for our exclusive agreements. That has unfortunately materialized. But we also saw opportunities when the branded Suboxone Film [lose] reimbursement and that's exactly what we've seen happening now with CVS Caremark leading the way.

I would also say on our own reimbursement that we don't see any major changes in our access to reimbursement next year. We actually increased slightly on a commercial basis. We won a big new contract where we're being reimbursed in New Jersey but there are also some smaller ones that have decided to go only with generic.

So in total, we are looking right now by this date, we are expecting to have the same reimbursement next year as we have right now. Then I think there are a lot of opportunities and a few threats also in the future.

Then the final part I'll just say about the market is there have been some focus the last few days on our settlements in the U.S. One has been about the big settlements that opioid pain pharmaceutical companies selling opioid painkillers. What we hear from states and counties is that they expect that a large part of these damages would be channeled into improved treatment of the patients, and of course, some of it also to manage treatment effects on others of the opioid epidemic.

But with more resources, and that's really the intention of most states and counties, that, of course, will help those who are selling products into the market. What just happened 2 days ago is that one company, Teva, reached a settlement with 2 counties in Ohio, and also have a principle agreement with the attorney general from 4 states that they should pay a quite sizable damage payment. But also that they would donate buprenorphine and buprenorphine-naloxone products. And I know (inaudible) had the same discussion that they would donate a generic nasal spray with naloxone, which by the way is not in the market yet.

From that, I would say that there is such a long list of issues that needs to be addressed that it's very, very difficult for us to see what impact that potentially could have. But we do note that the majority of our sales is going to private insurance companies. And I don't think the intention of the settlements of the states is to generate more profitability for these private insurance companies in the U.S., who today are paying for the product Zubsolv.

I think it is -- the settlements are meant to help the states to give access to more treatment for more patients. And with that, that would more drive growth than cannibalizing on the existing market. But of course, there's a lot of uncertainty related to this and a lot of lack of clarity about what it would mean.

So just to finalize on Page 21, we have had a challenging quarter on the top line, with some fading Zubsolv volumes. However, when we're looking at our -- how the market is opening up in several states during the year. We have New Jersey coming next year, potentially even New York will [be moved] to privatization next year. So there's a lot of opportunities for us to broaden and that's where I get confidence is that when we look at the specific segment where we are subject to competition but have access, we're actually doing pretty well with a 16% growth.

When we look at my previous quarterly result, I did say that there was a risk to our exclusive contracts and particular, UnitedHealth Group. That, unfortunately, materialized in the middle of July. We have seen that we are continuing to lose in WellCare and Humana. However, those 2 are today more profitable actually from a net sales perspective or profitability perspective. We're earning more money on WellCare and Humana than we did before.

We continue to perform well in our Open Business and while I see branded Suboxone Film has been much more resilient than we anticipated, the move from CVS Caremark right now, I think probably is the first of many. And with that, I think there's a new opportunity for Orexo to compete with the only branded product in the market for many patients.

With that, I will move over to Joe to take us through the financials. Joe, please.

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Joseph DeFeo, Orexo AB (publ) - EVP & CFO [3]

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Good afternoon. As Nikolaj mentioned, this has been a great quarter for us financially and I'm very proud of the results, and it's really been a company wide effort.

If you move to Slide 23, you can see that Zubsolv, the main driver of our growth, with 10% growth at 3% in local currency. We did have some decline in our Abstral business with lower volumes in Europe and the U.S., but also Edluar has increased. So overall, we have a good strong almost 7% growth in our revenues.

And when you move to Slide 24, this really shows you the efficiency of our U.S. operations. Despite, as you can see in the third bar where it talks about cash segment and formulary changes, despite the decline in our exclusive contracts and in the cash segment, our sales force has been efficient in the Open Business demand of growing 13%. So almost at the same level as the market. So efficiency of our sales force to drive business.

And then when you look at the middle of the slide, you can see we have a onetime reduction in wholesaler inventory levels that has decreased our sales. However, this is a onetime event and part of what you see in the next one is some onetime adjustments. One, showing the efficiency of our managed care organization to take advantage of both opportunities and when we do have challenges to get us the best prices for what we have.

Nikolaj mentioned that WellCare and Humana are actually more positive in net sales despite the volume declines. The other part is with the onetime wholesaler inventory reduction to level set our business, we were able to generate lower returns. And we do expect this to continue in Q4 and well into 2020. So that will be a positive effect going forward despite the onetime reduction in wholesaler inventories. So that shows the efficiency of our trade organization as well.

And then you can see our net price and our payer mix, which we talked a little bit about, specifically WellCare and Humana. We've had favorable growth [to net] and we continue to have favorable currency. So in local currency, 3% growth in the U.S. but over 10% in SEK. So a very strong growth in Zubsolv for the quarter.

And then when you go to Slide 25, you can see our overall P&L and highlight even more efficiencies of our business. We grew, as I mentioned, almost 7% in net revenues. However, our gross profit is up 23% over prior year and this shows the efficiency that comes from our COGS and our supply chain group who has been very effective at reducing the cost of Zubsolv.

And you can see that when you look at – with one item that we've mentioned in the past is our COGS index. We guided that we would have an index versus 2017 of 65% of those 2017 costs. We're actually at 63% this quarter and this year. So we're doing even better than that. And you can see that generates this 23% growth in gross profit.

And along with the efficiencies we've talked about, in the U.S. you can see from a selling expense, we've been more efficient there. We always constantly look at the business and say where can we make an impact and where can't we. And where we can't, we don't waste money in our commercial expenses. And when we do have opportunities, we spend there.

And so in this quarter, we've been able to reduce our expenses in selling expense. In administrative expense, significant reduction and this is due to no longer having the IP litigation, which we had last year, and also into Q1 of this year. So that's gone. That's reduced our administrative expense significantly.

And with all this profitable growth across the board here, we continue to be able to invest in our pipeline. And you can see that we have an increase in R&D. We do expect to do a clinical trial in Q4 for OX338 and we had some expenses for the manufacturing of the tablets for OX338.

So we're able to, with the profitable growth of Zubsolv, invest in our pipeline and still generate what you'll see is record profitability. Our EBIT is more than triple. We're now over - we're over SEK 100 million of EBIT for Q3.

And you can also notice when you look at net financial items, what you'll see is in the next slide -- next 2 slides where we talk about our cash position, we are earning interest by having our money in U.S. dollars, which is where most of our clinical spend comes from, where our U.S. operations are. And predominantly our COGS is generated in U.S. dollars. Also potential business development opportunities we can fund with our U.S. dollar cash, which we'll get to in 2 slides.

When you move to Slide 26, you will see that the U.S. business, as we've shown this slide before, continues to grow. We have the net revenue growth, which still continues. Significant gross profit growth as we've talked with the efficiencies in our cost of sales for Zubsolv. And then, which is very impressive, which is our operating profit. Our operating margins grew to over 45% in the U.S.

So very efficient U.S. organization, very profitable and we expect to continue to have very good profit going forward despite some of the challenge. We'll still be challenged in the cash market and we still will see some potential challenges and risk in those exclusive contracts. Although we do see some slowing of those declines.

And then next, we also show that we have a very strong financial position. We now have over SEK 800 million of cash with the vast majority of that being in U.S. dollars. We drove cash flow from operating activity over 5x more than last year Q3. So SEK 135 million of cash flow from operating activities. And with that, we were also able to do some investment activities in our business development and also paid down 10% of our bond and still generate over [SEK 80,000] of cash flow for the quarter and show that we have liquid funds of cash over SEK 800 million with the vast majority being U.S. dollars earning interest, and a net cash position of over SEK 500 million.

So very strong cash position that enables the company to focus on our future growth in our pipeline and the items in our business development opportunities, and also our interest. So a very strong financial position. And with that, I'll turn it back to Nikolaj. Just to say, once again I'm very proud of these excellent results financially that we've been able to achieve.

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [4]

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Thank you, Joe. These are indeed good numbers. So just to summarize the value drivers that we see for Orexo is that we have a market that is growing very strongly and there are absolutely no dark clouds in the way of continued strong market growth in the U.S.

We are, Orexo today, very strong from a financial and profitability perspective. We have good expectations through our fourth quarter as well. We have a -- when we get to the next story in Orexo, we have a track record and we have experience of developing products, get them approved across the world. And I think that is now coming in handy as our pipeline is getting closer and closer to the last pivotal stages of development. And next in line is, of course, OX338 as I was talking about.

On M&A and business development opportunities, we are continuing to focusing and we have a continuous dialogue with several different companies about opportunities to add to our commercial products. We have increased our reach by adding on a very seasoned business development executive in the U.S. and that is already now starting to pay off with new leads for the company that we would have probably not been able to reach before. We have a pipeline, as I said, that is growing and where we are making good progress at the moment.

So looking at the outlook for '19, we have made some very small adjustments to this. One is that we've been a little bit more specific. We're still expecting, of course, to have a positive EBITDA on a full year basis. I don't think that's a stretch target from where we are right now. We also believe our net sales of Zubsolv in the U.S. will increase despite the competition that we see from generic Suboxone Film. This one before was a mix of a sales and volumes, and now we have specified it to net sales.

Our manufacturing efficiency is on a very good way to deliver the 35% reduction in cost that we're expecting (inaudible) what happened in the fourth quarter is that we will or we are already running our clinical trial on OX338, which of course will increase our R&D spend.

With that, I will open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is over the line of Klas Palin at Redeye.

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Klas Palin, Redeye AB, Research Division - Equity Analyst [2]

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I would start with a question about M&A and business development opportunities. What is holding you back from buying or acquiring some assets? Is it lack of attractive assets for sale or is it competition, or something else perhaps?

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [3]

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So Klas, we have been in several quite advanced discussions during the year and so far this year, we have not lost any processes but we have jumped off processes. And what we're finding is that we, of course, will not do a deal if we don't believe it's a good deal for the shareholders. And we have decided to jump off some relatively late stage opportunities during 2019.

That said, there are still a lot of options that we're looking at, at the moment. And I hope that some of those will materialize shortly. And of course, that's no reason for us to sit and build a bigger and bigger bank of cash. And we don't see any threat to our cash flow. So I think it's very important for us to add more commercial stage products.

And what's holding us back is a little also that we are a relatively small company. And to be very frank, I think we can run 1 to 2 processes in parallel at the time. And if 1 of those processes don't materialize than we have lost X number of months. And unfortunately, what often happens in the process is that you go into a bidding process. You agree on what you can say ahead of terms.

And then the real due diligence starts. That's when you get the lawyers and auditors, and others to look into the data room of the potential acquisition target. And that's often where you find what I would call the devil in the detail that have made us jump off some of the opportunities we have seen this year. And that of course, then you have lost a lot of time because it basically turns out that it's not as attractive as it looked on the surface.

But of course, it is a question mark for us all the time. Are we too risk-averse? That's something that we have a dialogue with the board continuously about where should put our risk level.

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Klas Palin, Redeye AB, Research Division - Equity Analyst [4]

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My second question is about increased competition and within UnitedHealth Group and if you believe we have seen the full impact of this sanction. Also if this will affect the rebates in any way.

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [5]

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So with UnitedHealth Group, we have seen the -- it's a little -- it's a slight fade on volume in UnitedHealth Group. It is an effect because it's a very big account. So every percent we lose there does have a visible impact on the overall decline. So don't take me wrong here. But we still have -- we're by far the market leader within UnitedHealth Group.

What the most dramatic effect of that is that UnitedHealth Group has seen a very strong growth in the overall volume within the account based on patients coming in and now, when they have access to in particular the film and the authorized Generic Film, the original Suboxone product, than we have seen a big increase in United Growth, UnitedHealth Group's total volume.

I do think there's -- so what we have seen not only in United but also previously in Maryland, and partly in WellCare, although in WellCare there's a financial disincentive for patients to stay on product. But even take Humana as an example. We don't see the patients who are in Zubsolv actually switch back to Suboxone film or other products. But what we do see is that whenever there's a patient who stopped treatment, we have a higher competition for the new patient who is coming in.

So you probably see a fade in the market share in United over time but it's not based on patients who are actually say, oh finally, now I can get Suboxone Film. Because we actually don't see that effect. What we predominately see is the new patients tend to choose -- or there is more competition for the new patients. And there, we're back to the traditional market dynamics of them choosing something that they are aware of.

So it's a difficult forecast, UnitedHealth Group, but I do think we should anticipate some fading of United volume even going forward. Then about the pricing and rebates. So UnitedHealth Group is a commercial plan. That means that the rebates for United is much less than what we had to WellCare and Humana.

So the effect that we saw with WellCare and Humana is simply not possible on United, and we don't expect to see any positive impact on our financials like we're seeing with WellCare and Humana. And that's basically -- WellCare and Humana, we were -- you can say we were burning cents on nickel and dimes on those contracts before. And it was most of all a volume contract.

United has been a pretty profitable contract and will continue to be that there. But we don't see the same effect if any.

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Operator [6]

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We're now going to Klas Pyk at Nordea Markets.

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Klas Pyk, Nordea Markets, Research Division - Research Analyst [7]

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Looking into 2020, I wonder how you look at your cost base? You obviously made some operational efficiencies and as you grow into more profitable markets, how in, for instance, selling expenses be impacted as well as if you can give a comment on R&D expenses in 2020.

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [8]

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Joe, do you want to start?

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Joseph DeFeo, Orexo AB (publ) - EVP & CFO [9]

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Sure. So from a sales force expense, I think as I mentioned before, we -- there was a reduction in sales force. However, that was due to some risks that we have and making sure that we're investing in where we can be profitable.

Going into 2020, there are some opportunities that could potentially arise and if they do, then we want to invest in those opportunities. Particularly if New York decides to open up, that would be an opportunity for us to invest more.

IF we haven't seen any -- we don't see any changes in our reimbursement. So we don't expect there to be significant reductions but we will assess it going forward. I don't see a material change but there could be some slight increase or slight decreases in the selling expense.

From the R&D perspective, we are starting to do more trials. So we do expect to see more R&D expense as we go into next year because that's one of our focuses of our pipeline.

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [10]

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I can add to that. So we will also see our new business areas like Digital Therapy, there will be some need for investments during the next year and to the partnership with GAIA. We have a couple of business development opportunities that if they materialize would require a new cost assessment. But that would, of course, come at the moment that we have a new agreement.

So I think there's a lot of stuff that is in the pipeline that could happen this quarter, everything from our internal pipeline if OX338 is successful. Then of course, we will invest a lot of money into the development of that. If our business development efforts that we're running right now materialize, we also have a good opportunity to invest into some very exciting areas that could also impact the cost base for next year.

But if we just look at the business as is right now, like Joe said, I don't think there will be any material changes into our selling setup in the U.S. and our R&D next year. The ones that we know is trials for OX124 and trials for OX125. The 125 being smaller, the OX124 would be the pivotal study. So that would be a little bigger.

However, remember that these are PK studies so it's not a long-term treatment and that means that the costs are significantly less than should you have an additional Phase III study.

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Klas Pyk, Nordea Markets, Research Division - Research Analyst [11]

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Okay. And just 2 other a bit more detailed questions if I may. That's how we should think about Abstral going forward with the U.S. and the European market, the situation there. And also just a reminder on how we should think about IP litigation costs going forward.

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [12]

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Okay, Abstral U.S. and Europe, I think those 2 you should probably expect to disappear. So we have in the report that we were announced by our partner in the U.S. that they will stop supplying to the market and we more during the fourth quarter will have a rundown of inventory. Abstral in the U.S. has unfortunately turned out to be a very small product, with being a Fentanyl market in the middle of the opioid crisis is probably not the best place to be.

Then for Europe, as we have announced previously, the contract for Europe basically ends by the end of December this year and then there will be no more royalties. What will happen -- what we do have from Abstral is royalties from other markets outside the U.S. and Europe. So there will still be income from Abstral but not to the same extent as today.

With regard to IP litigation, that's always a difficult one because we did, you say, appeal or we followed the appeal process that you have in the U.S., which normally would be that you go back to the District Court and then you ask for a rehearing because you find that they have made a mistake. And then you would often get rejected on that request, and then it could move on to the Federal Court.

That's now quite a few months ago that we went back and asked for a rehearing. And really how that will materialize depends on the response on that District Court decision. And if it's going up to the Federal level, I don't expect any significant costs for next year. If, for some reason, that a judge should find out that he has made a major mistake in how he ran the process and do a rehearing, then, of course, there would be some more expenses next year. However, the expenses are not even remotely close to what we have seen previously.

That said, if there are no new IP litigations that we don't know about today, so this is a comment on the existing one we have against Actavis for their infringement with their Suboxone and Subutex tablets.

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Operator [13]

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Okay, before going onto the next question, which is Samir Devani at Rx Securities. (Operator Instructions)

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Samir Devani, Rx Securities Limited, Research Division - Research Analyst [14]

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Congratulations on a strong quarter. I've just got just a couple of questions on the financials really. The cost of goods, you've clearly done alto of efficiency there and I'm just wondering, I think it's an 86% margin excluding royalties in the quarter. How much more scope do you have to improve that?

And then the second question was just on the CapEx. You had SEK 13.7 million spend in the quarter. Can you just remind us what that was for?

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [15]

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Joe, please.

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Joseph DeFeo, Orexo AB (publ) - EVP & CFO [16]

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Okay, for the COGS, we do still see the ability to have some reduction. It won't be obviously as significant but there's still room to improve with some more high efficiency as -- it used to be just our SEK 5.7 million, which is the predominant business. We have seen some of our other, the SEK 8.6 million and SEK 11.4 million, become a large percentage of our business.

So with that shift, you're getting more efficiency in those as well. So there's still room for improvement. I would not say is as significant but we'll see some of that. And from the CapEx side, I mean it's actually more of investing in business development than it is CapEx. It's not CapEx. It's a business development related to Digital.

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Operator [17]

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At this stage, there are no further questions in the queue. So can I please pass it back to you for any closing comments at this stage?

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Nikolaj Sørensen, Orexo AB (publ) - President & CEO [18]

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Thank you very much. I really appreciate those of you who are still with us on this extremely intensive third quarter results publication date. We actually gained attention from some of you today in competition with thousands of other companies. It's impressive and I appreciate a lot that you took your time.

Thank you very much and if any of you have any further questions, don't hesitate to reach out to our IR, Investor Relations at Orexo, and we'll do the best to help you. Thank you so much and have a great day.

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Operator [19]

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This now concludes today's call. So thank you all very much for attending and you can now disconnect your lines.