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Edited Transcript of ORX.ST earnings conference call or presentation 20-Apr-17 12:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Orexo AB Earnings Call

Uppsala Apr 21, 2017 (Thomson StreetEvents) -- Edited Transcript of Orexo AB earnings conference call or presentation Thursday, April 20, 2017 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Nikolaj Sorensen

Orexo AB - CEO

* Henrik Juuel

Orexo AB - EVP & CFO

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Conference Call Participants

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* Peter Ostling

Pareto Securities - Analyst

* Klas Palin

Redeye - Analyst

* Lala Gregorek

Edison Investment Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Orexo Q1 report 2017. Today, I am pleased to present the CEO, Nikolaj Sorensen and the CFO, Henrik Juuel. (Operator Instructions). Speakers, please begin.

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Nikolaj Sorensen, Orexo AB - CEO [2]

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Thank you very much. Welcome to this first-quarter call for Orexo. I am joined with Henrik Juuel, who will take us through the financial results a little later, but I will start talking about the market and our development progress.

So the first quarter in our market in the US for Zubsolv is normally the most volatile quarter in this business for opioid addiction treatment. It's (inaudible) seasonality in this business, it is the first quarter. That's when the co-pays are reset. That's when larger market access changes normally are implemented.

In this light, I think we are happy to see that our US business continued to show profitability and show the profitability that we saw in the second half of last year continued into this year and that's simply based on the growth that we've seen in Zubsolv compared to the first quarter last year.

Also, the sales (inaudible) on the cash flow and this is now the sixth consecutive quarter where we have a positive cash flow, operational cash flow, which is bringing down our net debt now below SEK100 million.

With that, I would like to start the presentation and jump straight into page number 3, which is called Q1 2017 at a glance. So as I just said, we have had six consecutive quarters with positive cash flow and as expected and guided in the full-year report, the first half of this year will have a more challenging perspective, be more challenging from an EBITDA perspective basically because the Abstral royalty figure will come into the second half.

But with the result we have right now, we will confirm the positive EBITDA target that we had in our full-year report. Basically what we see right now is despite some of the volatility we saw in the market and some larger changes in our two largest accounts, WellCare and UnitedHealth Group, we did see a nearly 16% increase in sales for Zubsolv in the first quarter compared to last year.

Also, as I just said, the US business is more and more targeted towards where we see profitability. We have now been in the market for three years, so we've been better and better at finding out what activities work, what are the geographic differences and where should we put the investment and that's where we have implemented and you've seen that in cost reduction. Across the selling costs, but also on other cost items such as (inaudible) and R&D, we see an improved cost position. However, where we are right now, our full-year cost (inaudible) guidance is maintained. Henrik will talk a little more about what's happening on the cost side.

On the commercial side, we have seen progress in volume compared to Q1 2016 with a little more than 10%. Where we are now looking at the first quarter, we did have some volatility driven solely by two accounts, the UnitedHealth Group and WellCare account where, as we already knew when we did the full-year report, these two have implemented changes that are completely independent of Orexo that have led to volume and share drop in the beginning of the quarter.

If we should exclude these two effects and then we actually see growth during the quarter and we would have seen our marketshare would have increased slightly, especially in the commercial segment, had this not happened.

Overall, we have a slightly accelerating market growth. That is what we are seeing now. It's a little atypical because the first quarter historically has always been weaker than the fourth quarter of the year before, but this year we actually see the first quarter growing and it's growing with a faster pace than what we saw in the end of last year. This is driven by the public segment and it's driven by the access to treatment.

We did increase the price in the beginning of the year, but we are also seeing some rebates just like the entire pharma sector in the US. And there is some pricing pressure, especially on some of the large PBMs and the large insurance companies.

And we were also impacted slightly by this and more or less the price increase we implemented at the beginning of the year was nearer the increase we based on a cost to net perspective basis. Henrik will talk a little more about the effect achieved or in comparison between fourth quarter.

On the R&D and legal side, one thing that we did during the quarter was we are starting a new litigation process against Actavis for the generic versions of Suboxone and Subutex. What we are looking for there is basically we find that they are infringing our patent and if the court agrees with us, we will seek damages for that infringement. The sales of these two products have been quite substantial, especially in the beginning where Suboxone -- it's actually one of the two first generic versions of the Suboxone tablets.

When we look at the R&D, we have new [instructions] around OX51, so we have a patent discussion ongoing and the same for our OX-MPI project that we got back from Boehringer Ingelheim. Both of these are -- it's around taking the next step in the development of the projects. So when we do them, we anticipate them to be more backloaded than had we had a final product, but we are very happy to see that we have discussions for both of these assets, which would enable us to take them into the next phases.

We also have some new development programs in-house, so we have some new formulation technologies. We disclosed that during the quarter. We are doing a lot of testing on that both in terms of animal testing and some in vitro testing and if the data we have received from these tests are supported then we would be ready to start the first -- we could be ready to start the first clinical trials already this year.

On Zubsolv in Europe, the regulatory process continues and we anticipate an approval late this year and for the OX-CLI project, AstraZeneca continues to invest in the project and it progressed according to plan.

On page 4, you can see the overview of our pipeline and we have spent the last couple of years focused a lot on Zubsolv US, but where we are right now, we start to see Zubsolv Europe coming quite close. We start to see movement on OX51, actually the same for OX-CLI and OX-MPI, which both of them are quite unique as this is not reformulation projects, but [NCEs].

Back to our new formulation technologies. We are in an early stage, but again these are reformulations so they can be relatively fast to market and have a different risk profile as compared to NCE projects, which are more traditional biotechnology projects.

Moving onto page 5. This is basically summarizing where we stand in the different projects and again, I think there is a movement in the pipeline that we haven't seen for a while in Orexo and some of these pipeline programs are likely to materialize into concrete news flow during this year.

Then I will jump into our litigation process and as I said in the introduction here, we have started this new infringement process against Actavis and that's based on our 996 patents that were found valid and infringed in the case against Actavis regarding Zubsolv. The decision in that case is, of course, strengthening our claim now in the new case against Actavis, which is based on the same patents that have already been found on infringing with another buprenorphine naloxone tablet.

We will, of course, if we get the support by the court, we will seek damages caused by Actavis for that infringement both in terms of what we would have gained in royalty had they agreed with that, but also damages have done on our overall business.

When we look at Actavis, as you can see on the graph to the right, the red line is Actavis sales and they work together with [M Neal], one of the two companies who got approval already back in March, late February of 2013. Actavis, for a little more than a year, they were a market leader in the Suboxone generic tablet market and the gross sales, if we are looking at both the Suboxone and the Subutex product that was launched later, is now exceeding SEK500 million.

I would need to say that when you are looking at the damages that would normally be based on the net sales and other changes, of course, Orexo can make on that account. I don't have information about the net sales, but I do know that Actavis in the beginning when they were alone in the market together with M Neal, there was less rebates than what we see in the market today when you have several different generic versions in the market.

Then jumping into Zubsolv on page number 7 and one thing that is important for us and I think you'll see that we are moving more and more to what's that in the market definition is to start looking at this market in two, maybe even three different segments. One being the commercial segment with private insurance companies, one being the cash segment, and one being the [public] segment, because from a marketing and commercialization perspective, these three segments behave very differently. They have very different values. They require different commercial efforts and you could easily be in the situation where we could actually gain marketshare in each of these segments, but it is a segment where we have a disproportionate low marketshare such as the public. That has a negative impact on our overall marketshare. You will see later that this is part of what is happening at the moment.

As you can see on page number 7, the public market has really taken off and has shown very strong growth and now in particular in the first quarter, there's no dip compared to the fourth quarter and if you look at the historic data, it's most visible in 2015, but you wouldn't even be able to see that [careful] in 2016, the first quarter. It's not flat, going down, it was actually flattening in 2016 and for the commercial market, the market normally goes down in Q1 and that happened as well for this year.

Overall, the market growth has accelerated from just below 8% in Q4 last year to close to 10% now in the first quarter and this is really atypical for the first quarter, which historically has been flat or actually even negative compared to the fourth quarter of the year before.

And what is really driving the public development we see on page number 8 and now I need to take a little more educating road because the Affordable Care Act I think is something you can spend hours on, but the Affordable Care Act is the driver in the public segment and what has happened in the US is that where you before had traditional Medicaid for very low income people or people without a job or people who had different reasons, could be people who have a disease or something that make them unable to work, we now see that what they call the Medicaid expansion plan and that enables people who even are in employment have some salary, but have low salaries also to get access to a subsidized Medicaid plan and that's the Medicaid expansion plan and basically what happens now and that's why the Affordable Care Act come in is that the states in the US get subsidized with up to 96% from a federal level of the cost of this expansion. And this is really where we see a lot of the growth coming from in our sector.

People -- often young people are opioid-addicted. They are often in temporary employment. It could be hourly employment where you rarely get health insurance by the employer and these are exactly the group where we see the Medicaid expansion coming in.

But then we have the health exchanges. This is where we saw a change in UnitedHealth Group because what happens in the health exchanges is that there's been a rollout where setting up these health exchanges give access to people who have too much income to be able to access Medicaid, but they can then access these health exchanges and find health insurance plans that are affordable and especially for patients who have chronic diseases or expensive diseases as there are strict regulations on how much premium you can have with different groups. You are actually not allowed to increase the premium for patients who have different risk behaviors or different risk factors such as opioid addiction or it could be diabetes. It can be (inaudible) and similar.

But what we have seen in the health exchange business and that's why United come in is it's difficult for insurance companies to get profitability in these private health exchanges simply because there is this adverse selection. Patients with a precondition, meaning they have a higher risk for being more costly for the healthcare system, tend to use health exchanges more than people who are healthy and don't need the insurance system.

So what does this mean for Zubsolv and we are moving into page number 9. So while the Affordable Care Act definitely is a driver of the market growth, it's more uncertain what the value is for Orexo and for Zubsolv. And the reason why I say that is that where we see the growth coming now is in the Medicaid span and this is Medicaid Orexo or Zubsolv has less market access than what we see in commercial and what we are actually seeing is patients who would otherwise have paid for an insurance in the commercial sector, employers who would've offered an insurance have now leveraged the Medicaid plans.

So instead of having a patient on commercial insurance, we actually get a patient on Medicaid and the profitability and value of these plans, the difference is significant. So we would need five patients on Medicaid to be as profitable as one patient in the average commercial plan.

So while it is positive for the patients, the overall market is growing. We also see from a Zubsolv perspective we are probably more likely to have more patients in the commercial sector than having them in the medical sector.

Then what we see as -- one of the things that is helpful and I think is something that have definitely benefited Orexo also for the commercial is that you have for both health exchanges, for the Medicaid, but also for other insurance plans, you have defined these preconditions such as psychiatric disorders, such as opioid addiction where the insurance companies are forced to offer that as part of their insurance package and they are not allowed to charge a premium.

That is important for us, but when we look at the political landscape and the proposals that are coming from the American Healthcare Act, it doesn't seem like that is one of the topics that is up for discussion. So we do believe that even with changes to the Affordable Care Act that important aspect will still remain.

The important part for us in the political landscape in the US is definitely access to treatment and there we haven't seen any tendency by the new administration to slow down or stop the expansion to 275 patients and also we just recently started to see the first nurse practitioners and physician assistants to get waivers and being able to start treatment and that is more important I think than the Affordable Care Act from our perspective.

But moving to page number 10 and what we have seen, as I have been alluding to a couple of times, is we did see changes in UnitedHealth Group. They exited all but three health exchanges. The health exchanges are -- they are on a state level. UnitedHealth Group only stayed in three.

We also saw in WellCare, which is managed Medicaid, that one of the large healthcare providers in Medicaid from December decided to leave called SelfRefind. These two changes are independent of Zubsolv Orexo. It has a lot of implications for us because we have high marketshare with both United and WellCare being north of 75% marketshare of that volume.

So when they decline in volume, that has a disproportionate negative impact on Zubsolv and Orexo. But it's independent of us and just to give an interesting aspect, if you look at the SelfRefind, which is the health provider in Kentucky, they have decided not to take WellCare patients, but they have other insurance plans that cover Zubsolv and if you look at their homepage, the only brand actually mentioned by name is Zubsolv as one of the branded alternatives. So it's nothing to do with Zubsolv; it's to do with the reimbursement they receive from WellCare on the top of the physicians' time with the patients.

And looking at the market, so we did see a drop in the commercial and that is fully explained by UnitedHealth Group. The loss of UnitedHealth Group patients, of course, at 0.6% marketshare loss in the commercial and (inaudible) 0.6% to 7.3%, you are seeing that we would have taken a little share in the commercial segment.

And likewise, in the public segment, in those [less], we also saw that we would have seen a much less of a drop had the WellCare share not dropped.

If we adjust for that and moving into the next page, page 11, we have seen from last year, we have seen an 11.1% growth in volume despite the loss we've seen in UnitedHealth Group and WellCare, but should we have excluded these two events, so at WellCare (inaudible) state with WellCare and had United not exited the health exchanges, we would like to see a positive growth of about 3%.

And if you look at the data, we have seen the volume took a big hit in the beginning of the term, but actually in our IMS data, we have seen on a 4x4 weeks rolling data that we see a slight increase during the quarter.

On a marketshare perspective, here we are actually back to a couple of different effects. One effect we have is, of course, the SelfRefind and WellCare impact, but we also have an effect right now that the commercial sector and the cash sector, they both declined in the first quarter, so you saw a negative development in two segments and you saw the public segment where we then saw a vast increase. And in the public segment, our marketshare overall is much lower than what is in the commercial. It's nearly half. It's 3.9% compared to 7.3%.

So when you see public sector growing, it has a negative impact on the overall marketshare for Orexo. Then you can always say is this the right measure looking at overall marketshare because there is such a big value difference between the different plan types here. So from a profitability and revenue perspective, it actually doesn't make a lot of sense, but also recognize that these numbers are the ones that are publicly available and a lot of you follow on a weekly basis.

So moving into page number 12. We did see a first quarter where we lost compared to last year. We saw a first quarter where the public segment continued to show strong growth. We have less access to the public segment than what we have in commercial, but if you look at previous years, what we have seen there is that the commercial sector normally starts to increase in the second and the third quarter and that would be very important for us to both win net revenue, improve gross to net ratio and become more profitable.

On a total market perspective, we have seen that more and more physicians -- we are now north of 3000 physicians -- have received the waiver to treat 275 patients. We have seen the first nurse practitioners and physician assistants. Just within the last couple of weeks, we have seen 726 nurse practitioners, physician assistants have been waivered to start treatment. The first year, they can only treat 30 patients. The next year, they can treat 100 and then they can move up to 275. Right now, there's more than 700 who have received that waiver.

So there is no reason for us to believe that this market would not continue to grow and I think with other changes in the US, right now, the big focus on more employment, with more people being employed, the commercial sector is likely to grow as well and we do anticipate the commercial sector to continue -- or start growing compared to the slight decline in Q1 compared to Q4.

What we have seen is that market access is the main driver for significant shifts in marketshare in this market. So where we put a lot of effort and a lot of focus is on the market access and at the moment, we are involved in several bidding processes as we are most of the time, but, right now, there are some large bidding processes ongoing in the US and hopefully we can win some of those contracts and get a stronger position and reimbursement for Zubsolv, which would be very important for us in terms of our ability to grow marketshare and grow the sales in the US.

So traditional sales and marketing is important, but I do see that this is becoming more and more a market access-driven market and where we will see our increase in sales and marketing efforts will be driven by improved market access and as I mentioned earlier, we have been pretty good at finding out where to put our investments when we see that and I think there are some good opportunities on market access. I think this market is going to grow. I do think that the commercial market will pick up now in the second and third quarter. At least they have shown that seasonality the last four years. So we think it will continue again this year and there is a lot of logic behind that, which I can, in a longer session, talk more about.

With that, I will leave it to Henrik to take us through the financials and then (inaudible). Henrik, please.

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Henrik Juuel, Orexo AB - EVP & CFO [3]

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Yes. Thank you, Nikolaj and as usual, we will start on the taking you through the development of our net revenues for the period, so you will see that on slide number 13. Net revenue for the quarter ended at SEK127 million and that was again SEK151 million for the same period last year. Last year, you might recall that we earned some milestone payments when we sold the rights to OX-CLI to AstraZeneca that will cost [SEK141] million.

So if we regard this as a one-off nonrecurring milestone payment and adjust for it, then we have actually managed to grow by 15.6% all driven by Zubsolv. If we don't adjust for this and just look at the numbers here, we are looking at a decline, minus 15.7% versus the same period last year.

Zubsolv ended at SEK114.1 million. That is up nearly 16% over last year and fueled by increased demand exceeding the already high market growth for the quarter. And of course, some marketshare gains explains that development.

If you look at Zubsolv revenue versus the previous quarter, that is first quarter 2016, we are looking at a decline, but that is mainly explained by the two isolated events, UnitedHealth Group and WellCare that Nikolaj has talked a lot about already and I will come back to that when we see the breakdown in a moment here. Abstral and (inaudible) developed nicely and grew over last year.

So with that high-level overview, we turn to the next page, which is a waterfall comparing the Q1 2017 with the same period in the previous year. Here we see the nearly 16% growth driven primarily by increased demand with a net sales increase of 11.1% increased demand. The market in this period grew by 9.7%, which is already a very high demand accelerated by the improved access.

So the remaining part is driven by improved marketshare between the two periods, basically. We have seen some slightly negative impact on destocking. That is the wholesaler inventory levels and the inventory levels carried at the pharmacists. They can move a bit up and down depending on how the supply chain adjusts to inventory levels.

The net price component includes several factors. We increased our prices first of January by 6% and that, of course, was the positive factor. We have also seen that we compare these two periods here, a positive impact from a change in the dosage mix, very much driven by the inclusion of the major Maryland account that seems to have a practice of treating with slightly higher dosages.

These two positive impacts more or less offset a negative impact on the gross to net that was driven by, you can say, the continued pricing pressure in this segment here.

Final growth driver was the currency where we saw a stronger US dollar in the first quarter this year compared to the same quarter of last year, but all together comparing the year-over-year growth, a 16% growth, which helps significantly improve the profitability of our US commercial operations and the Company results.

Turning to the next page, this is the usual waterfall that we have shown previously comparing the Zubsolv revenues to the previous quarter. This one shows a decline of minus 11%. The key explanation for this, which can nearly explain all of the decline, are these two market events that Nikolaj has talked about. That is the UnitedHealth Group exit from most of the Affordable Care Act exchange business and it is the SelfRefind clinic's exit from the WellCare insurance.

These are basically events outside of Orexo's control, events that have absolutely nothing to do with Zubsolv as such. You can say they hit us relatively hard because we had a very, very significant marketshare with these two accounts, yes. If we exclude these two events, you will actually see on the next component that is a positive impact, we actually managed to continue to grow in all of our accounts and we can still demonstrate data showing that where we have access and where we are present with our field force, we are actually winning a disproportionate marketshare in particular in the commercial segment.

Destocking impacts when we compare these two quarters was negative this time and that is primarily caused by again losing these two -- parts of these two accounts, the UnitedHealth Group and the WellCare part. Typically what you see, if you see these movements, wholesalers normally adjust to the new demand level and therefore, you will actually see a multiplication effect of those movements. So a negative impact this time.

The net price again comprises of several factors. The price increase has a positive impact here and again, the dosage mix and there lastly you can say offsetting the negative gross to net impacts, but there is a slight net negative impact. So currently, a very minor negative impact here. I think the US dollar, it has weakened a bit when we compare to first quarter to the first quarter last year, but not anything material.

So let's move to the full P&L overview on the next slide. I think here the key message on this one is really that the underlying profitability has significantly improved when we compare the year-over-year numbers.

Let's start with the gross profits. You will see that that is naturally lower than last year, but here again I think the OX-CLI milestone of nearly SEK41 million explains that. In the COGS, you should remember that we have in the first quarter included close to SEK4 million additional COGS associated with our de-blistering and repackaging projects. I can inform here that this project has now been completed and all the costs associated has been included in the year-to-date numbers.

On the operating cost side, in general, you will see across the accounts that we have reduced the spend level significantly. On the selling expenses, this basically reflects a very targeted investment strategy. We have been now more than three years in the market and we have learned where we get the best return from our investments, so you can say right now it's really a matter of investing where we have good enough market access and reimbursement and where we see the growth opportunities as well.

On the administrative expenses, this has been lower compared to previous years and that is based primarily driven by lower spend on the IP litigation cases that are running at the moment. These cases are often (inaudible), of course, because it is hard to predict how much we spend, but right now with the older Actavis case, we are in an appeal phase, which is much cheaper than the real full case that we ran previously.

On the R&D side, spending is pretty low at the moment compared to last year. Last year, we had both the REZOLV study running and we had the PK study for Zubsolv outside of the US or the EU in the European region running and at the moment, you can say our current internal products are running in early stages and not incurring significant expense. So altogether operating costs, that is approximately SEK40 million lower than previous year.

Going all the way to the bottom of the P&L here, we are seeing an EBIT and EBITDA very close to last year's level, but again those include SEK41 million from the OX-CLI payment. So I think if you adjust for these, this is a significant improvement of the underlying profitability of the business. And I think that should be the key takeaway from this one here.

If you look at the operating costs and what we have guided, we have guided a range of SEK500 million to SEK510 million for the full year. One-fourth of that is more than the SEK104 million we have spent in the first quarter. I think what we are hoping -- and I am deliberately using the word hoping here -- is that we will spend more on selling and we will spend more on R&D because that means that we will meet some of those opportunities that we expect. We will invest more on these accounts and on the selling side when market access improves and we see this can justify investing more in the field force resources.

Secondly, on the R&D, as soon as our internal projects are progressing to a level where they require more investments, I think that will be good news and we will be happy to invest the money at that time.

We do expect, in connection with the Q2 report later this year to -- it's tough naturally to revisit this guidance if we feel it's the right time.

So let's turn to the next slide. This is dealing with the financial position and our cash flow. We are very happy that the first quarter of 2017 was now the sixth consecutive quarter with positive cash flow from operating activities. This time with a negative EBITDA, it was mainly driven by improvements in working capital basically across all the working capital accounts, but mainly from reductions in receivables and inventory levels as well.

Financing activities contributed negatively for the quarter and that was the buyback of additional (inaudible) corporate bonds, 59 million, so that means that we today own Orexo corporate bonds with a nominal value of SEK158 million.

Net cash for the reported period was, after the financing activities, negative minus SEK31 million. At the end of the quarter, we now have a cash position of SEK250 million and we are very pleased that we can now say that our net debt has been reduced to an amount below SEK100 million; to be exact, SEK89 million is our net debt at the moment. So with that, I will hand the call back to Nikolaj.

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Nikolaj Sorensen, Orexo AB - CEO [4]

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Thank you, Henrik. So first quarter has been a volatile year, but also -- volatile quarter, but also a quarter where we have mainly been focusing on the commercial sector and looking ahead of us, I think there are a lot of positive activities and news flow that could come during this year. And I am moving to page number 18.

So on the development side, as Henrik alluded to, we do hope that we are ready to both disclose and move our early-stage projects into clinical phase. To do those kind of projects and to receive a patent, you need to take some risks and of course, where we are right now, we are in the high risk phase where we are trying to use new formulation technologies to use some APIs where we think we can make a significant change in the treatment paradigm for patients.

But we hope to see -- have some positive results and we can read through an animal testing and that will enable us to move into a clinical phase later this year.

Also, on the Zubsolv in Europe, we do have a continuous dialogue with the European authorities and we are working to what is the anticipated approval in the fourth quarter of this year.

On the supply side, we did say in the full-year report that we anticipate to see a significant reduction of our cost of goods sold when we are establishing a global supply chain, but a lot of this is also coming from the fact that we are moving up in scale in our manufacturing in our existing supply chain and we will see that our -- we are certain that our cost of goods sold will go down moving forward with the full effect coming in 2018 and 2019 as our existing inventory would be used of finished products.

On the commercial side, we are talking to several different potential additional products and we are looking at different ways for how we can expand our commercial presence in the US. This, of course, takes two to tango. It's a long process for us and keeps up with different companies, but again we are very active on the business development front at the moment.

We are expecting to see an increased marketshare during the year comparing beginning of the year in January with the end of the year and I think there are several drivers of that growth. A disproportional share of the newly stratified physicians and nurses and physician assistants, but also I think there is an important driver that more or less every year we have seen some positive development on the market access side. And this is, of course, an area where we hope and expect to see some positive progress during this year. We are in negotiations with several different insurance companies, but again this is a competitive process.

We do expect to see Zubsolv revenue growth in 2017 compared to 2016 in the US and at least our first quarter is on track to show that. So we still maintain the expectations to see a positive development on our revenue growth on a full-year basis.

And then maybe the most important from a shareholder perspective is around the litigation process against Actavis for our Zubsolv product and here the appeal is ongoing. All of the documents have been sent into the Federal Circuit and we will expect to have the result of the appeal at the end of this year. That is nothing that will come out of the process so far that we find is weakening our positioning. We are still disappointed with the decision regarding that long patent in the first instance, but we find there are some very strong grounds to appeal as we have talked about in our press releases when we started the appeal process in December last year.

With that, I would like to end the presentation and move over to the question-and-answer session. So operator, could you please open up the questions?

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Questions and Answers

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Operator [1]

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Thank you. (Operator Instructions). Peter Ostling, Pareto Securities.

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Peter Ostling, Pareto Securities - Analyst [2]

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Thank you. I have a couple of questions. First, regarding the cost of goods. Even if you adjust for the repackaging program, the gross margin was significantly below what you have showed previously. So there must be something else that is happening within the cost of goods, if you have any major returns or inventory adjustments that have affected the cost of goods in the quarter. If you could elaborate a little bit more on that.

And then also, I don't know, maybe Henrik alluded to this during his part of the presentation, but if you look at the OpEx for Q1 and just multiply that with four, you end up at around SEK420 million and you are guiding on OpEx of around SEK500 million, so where will the additional about SEK100 million be? Will it be significantly higher selling expenses, research expenses or something else in the coming quarters?

And thirdly, was there any change in your contracts on April 1 that affected your marketshare? Did you lose any significant contract at April 1? That's my third question. Thank you.

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Nikolaj Sorensen, Orexo AB - CEO [3]

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I will let Henrik answer the first two questions and I will take the last.

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Henrik Juuel, Orexo AB - EVP & CFO [4]

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First, on the COGS, I think there are many components in this. I think first of all there is the de-blistering costs that we have talked about. That's approximately the SEK4 million. Then COGS itself, if you look at that, you are talking about the margin. The margin is impacted also by the gross to net, which we have seen being reduced during the quarter primarily due to the different payor mix with the commercial not growing as much as the public. So I think the gross to net has a rather significant impact on the gross profit margin for the quarter.

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Peter Ostling, Pareto Securities - Analyst [5]

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But the absolute number of COGS is very, very much higher if you compare to the first quarter last year for instance?

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Henrik Juuel, Orexo AB - EVP & CFO [6]

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Yes, but you can see the absolute amount of COGS is driven by the gross revenue. That's the number of tablets. If you compare it to the -- if you just look at the P&L and compare it to the net revenue, you are missing one component. That is the gross to net. So if that is lower when you compare the two quarters, you will have a net price that is lower.

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Nikolaj Sorensen, Orexo AB - CEO [7]

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But this should not be significant. Peter, I wonder if you are just looking at the P&L, in the revenue section of first quarter last year, you had more than SEK40 million in a one-time payment from AstraZeneca, which, of course, have no COGS associated with --.

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Peter Ostling, Pareto Securities - Analyst [8]

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Yes, no, no, no. I just noticed that your gross margin was significantly below around 70% that you have presented previously.

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Henrik Juuel, Orexo AB - EVP & CFO [9]

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Yes, but I think again I think when you look at gross margin, please remember the question. It is an important driver, so just for the sake of illustration, if you lower your gross to net significantly, that means you have to sell many more tablets incurring much higher COGS to deliver the same net revenue. So that's an important driver of the gross margin.

If you look at the COGS itself, I think it is things like the (inaudible) indirect production costs. We are a company only manufacturing one product, so that means if we don't manufacture anything in a period, we still have the indirect costs that will hit the COGS line. So that will mean that between the quarters, you can see some movement between the quarters. We will have quarters where we manufacture a lot and some where we don't and that can impact some of the variances, but I think the key explanation here is really the gross to net component of this.

And I think what I would like to add to this is, as we have alluded to before, we are running a very interesting COGS improvement initiative looking at identifying new sources of manufacturing, new high scale manufacturing capabilities implementing these. That's actually happening as we speak here at the moment and we are looking at an opportunity to significantly reduce our COGS, but again with the inventories we carry at the moment, we don't expect any significant impact on that until 2018 and 2019 really.

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Peter Ostling, Pareto Securities - Analyst [10]

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And your OpEx?

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Henrik Juuel, Orexo AB - EVP & CFO [11]

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Yes, then the OpEx question. Yes, as I said, basically, if we look across the different OpEx lines, I think we hope again to spend more on selling, but what we are doing right now is that we are basically only investing when we see it makes sense from a geographical perspective. So when we win a market access deal, this will give us higher excess in certain regions and then we are evaluating the investment opportunity to capture that opportunity.

So we hope that will come and we hope to spend more on selling later during the year, but the reason I say hope is that also to illustrate as we have talked about previously we have a very flexible cost base. We can tune it up and down. We have tuned it down now given where we are at the moment and we are only investing if these opportunities are occurring, which we expect they will.

Same goes for the R&D. We hope and expect our current projects to progress to a level where we are prepared to start investing more in trials, etc. in this area here.

On the admin side, here, I will turn it the other way and say I hope we can keep it at this level here, but again I think the litigation, in particular the new one, is a job when it comes to the admin costs because we do not yet have a clear plan from the courts with regards to the new legislation, but we don't expect any significant spend this year. Actually it will, if anything, it will more be into next year. And so --.

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Peter Ostling, Pareto Securities - Analyst [12]

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It sounds like that you will have difficulty actually spending the SEK500 million to SEK510 million on a yearly basis?

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Henrik Juuel, Orexo AB - EVP & CFO [13]

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That could be the case. It's a little too early to conclude on that and it's still three months into the year only. So we have -- our plan is to provide more granularity on this in connection with the second-quarter report.

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Peter Ostling, Pareto Securities - Analyst [14]

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Okay.

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Nikolaj Sorensen, Orexo AB - CEO [15]

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Okay. Then the last question is have there been any significant changes in contracts by April 1. And I think this is an area where we need to look at volumes and the marketshare.

So if you look at the volume the first week of April and compare that to the week before, our volume actually increased if you compare it to four weeks before and we have seen this moving in four-week circles. Our volume is literally flat and especially if you adjust for the different dosage strengths as we have seen over that four-week period that we have and increase in use of the higher dosages compared to the lower dosages.

So there is absolutely no change in volume and this is why I think when you look at the marketshare, you need to look differently on marketshare and on volumes and if we had lost a big contract, you would have seen a loss in volume and there was at least, according to IMS, there was no change in the volume between those 2.5 [no] indications from any other sources, meaning our sales to pharmacies and sales to wholesalers, that was a drop in the first week of January.

What we have seen in the market, and we write about that in the report, is one of the large Medicaid players, CareSource, where we were actually put in a preferred position by January 1, but we had a very low marketshare, of course, because we had been nonpreferred with CareSource prior to that, CareSource moved us to a preferred position and now they have decided to move all patients over to generics.

The big impact of that is on Suboxone who were by far the dominant player in the CareSource account, but I also noticed our marketshare dropped in the first week, but on a volume basis there were no changes. So I think this is more driven by growth probably in some of the Medicaid regions than anything else.

If you look at, from a scripts perspective, one thing we have seen is that the generics are available in some regions of the US with a quite attractive discount to us and that has driven some of the cash markets to go up a little and our cash markets go down slightly.

But from a total volume perspective again, there is no difference when we look at number of tablets, which is the way that we are looking at it. We didn't lose anything by April 1.

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Peter Ostling, Pareto Securities - Analyst [16]

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Okay. Thank you. I will jump back into the queue.

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Operator [17]

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Klas Palin, Redeye.

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Klas Palin, Redeye - Analyst [18]

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Hello and thank you for taking my questions. I would like to continue the question about OpEx, in particular the selling expenses. Is this primarily due to lower headcount and sales reps? And if so, wouldn't it be difficult to find quality sales reps if you once again want to expand the salesforce?

And I also would like to have a question about gross to net. I wonder if you could just give some indication if you expect this to continue to go down, especially as we have seen this increased competition from generics in the beginning of 2017.

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Nikolaj Sorensen, Orexo AB - CEO [19]

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I can start on the OpEx. We actually have the same amount of sales reps in Q1 as we had in Q4. So there has been no changes in sales and the numbers of customer-facing sales reps. Where we do have a change is on the management level where we have reduced our US leadership team with one person and we have reduced our district managers with two persons. So we have gone from eight to six districts in the district manager level.

And that -- these people are a little more expensive that have had a positive impact you can say on the OpEx and the selling expenses, but we have not made an adjustment on the field force. And of course, here, you have a positive effect of the slightly weakening dollar that the costs of the reps also get lower because, of course, we are paying them in dollars, of course.

On the gross to net part, I think the major driver on gross to net moving forward is the mix. We don't anticipate any major changes in the gross to net with the current sales volume we have right now for this year, but what can happen, of course, is if you start to see -- if we get new contracts in Medicaid, for example, that will have a positive gross profit impact, but it will have a negative gross margin impact because they are coming with a higher rebate.

And the same, if we see more growth, for example, and WellCare should start growing more in Maryland, that will have a positive effect on gross profit, but not on gross margin and have a negative effect on gross to net.

If the market evolves as we have seen the last couple of years with more commercial sales moving into the second and third quarter, that will have a positive effect on our gross to net. The big changes in gross to net does come by the first -- by January 1 when some of the larger contracts are renegotiated and come with some increased pressure.

And I would say this is not unique for our sector. It's unique for the entire pharma sector in the US. That some of the large PBMs and large insurance companies are charging especially higher admin fees for the contracts. So I don't know; does that answer your question?

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Klas Palin, Redeye - Analyst [20]

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Yes.

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Nikolaj Sorensen, Orexo AB - CEO [21]

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I think you also asked about wouldn't it be difficult to find new reps quickly when the opportunities occur. I think our experience here is that working with a very professional company like inVentiv, we can actually in a very, very short time -- I'm talking one to two months -- identify qualified people, just have been the field force, so we are not concerned about that. You can actually move really fast on scaling up the field force business if necessary.

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Klas Palin, Redeye - Analyst [22]

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Okay. Thank you very much.

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Operator [23]

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(Operator Instructions). Lala Gregorek, Edison Investment Research.

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Lala Gregorek, Edison Investment Research - Analyst [24]

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Good afternoon, gentlemen. I've got a couple of background questions. In previous quarters, you've commented on the levels of institutional sales. And I was wondering whether there was any insights you could give into the evolution there. And also is part of your strategy to target the high prescribing physicians? So with respect to the 275 physicians, what sort of level is your marketshare with them currently?

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Henrik Juuel, Orexo AB - EVP & CFO [25]

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So the institutional sales, there are no changes to the institutional sales. It was a new event that happened last year that we started to see some institutional sales, was very much driven by some contracts on the Medicaid spaces where some of the institutions automatically switched to Zubsolv as well. We still maintain some sales in institutional sales, but it's not any major or any material differences either up or down.

And with regard to the high prescribing physicians, so our marketshare of the growth is improving and if you look at where we have -- the last research we did into this, we were looking at where we have market access and where we have field reps in place. Our marketshare is north of 10%, especially in the commercial sector, we are up at about 13% and that requires that we have market access and that we have a rep in place.

Then you have regions where we have no rep and where we have no market access and that's, for example, some of the Northeast states and there our marketshare is down into the low single digits and that, of course, has a major impact on where the growth is.

What we have seen now in the first quarter, which makes it a little difficult for us to compare, is some of these large changes in reimbursement, for especially UnitedHealth Group and WellCare has made it a little difficult to do a comparison on our evolution quarter-over-quarter because that is a cloudy picture, but we maintain a very strong marketshare when we have access and when we have a sales rep in place and those two, of course, closely correlated. We won't have a sales rep if we don't have strong market access. And there with some of these high prescribing physicians, good growth, we see we have a good marketshare.

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Lala Gregorek, Edison Investment Research - Analyst [26]

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Okay, great. Thank you very much.

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Operator [27]

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As there are no further questions, I will hand back the conference to the speakers.

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Nikolaj Sorensen, Orexo AB - CEO [28]

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Thank you very much for your questions and as you understand, I think the positive part on this, as you alluded to, several of you, we are very rigid in terms of our cost control. We are investing when we see opportunities and when we don't see opportunities, we are drawing back on some of the investments.

It's been important for me as a CEO to create a company where we have a lot of agility and flexibility on our cost base and I think we have proven last year that we have done that and we are happy to see especially our US business is now a profitable unit. It is contributing profitable in the first quarter like it did in the second half of last year and we, of course, intend to remain that the US business as a positive profit contributor.

Looking ahead, it's very important for us to have this strong financial position because I am certain that there will be opportunities for us both on the current commercial side with Zubsolv, but also on a business development side for adding more commercial products or more pipeline products to Orexo where our strong financial position will become important.

With that, I will thank you for your attention and wish all of you a good day. Thank you.