Orexo’s FY18 results demonstrated continuing profitability derived from its lead product, Zubsolv, responsible for 21.7% y-o-y net sales growth driven by US Zubsolv Q418 prescription and revenue growth of 22% and 31.8%, respectively. The weakness in partnered products compared to our targets (although FY18 partnered sales were SEK125.4m) and higher Q4 investment (including litigation) reduced FY18 EPS compared to our estimate by SEK1.8. We have tempered our revenue growth expectations for FY19 until the impact of Suboxone film generics is known.
FY18 total revenues were SEK783m, with SEK227m for Q418 (FY17: SEK644m; Q417: SEK191m). Zubsolv’s Q4 growth countered some of the decline in partnered products. One-off costs including litigation expenses, were higher and lower than we had forecast, respectively. Gross margin was 80% in Q418 and we estimate that this rises to 83% by Q319 following secondary manufacturing improvements. Profit after tax for FY18 rose to SEK138m, with SEK51.6m for Q418, compared to SEK23.2m and SEK26.7m for FY17 and Q417, respectively. Orexo’s cash at the end of FY18 was SEK590m.
Following the intense debate in the US and other countries on the increasing number of opioid use disorder (OUD) patients and the resulting deaths due to opioid overdose, we have explored the convoluted OUD patient journey and its commercial relevance to Orexo. We note that the OUD patient journey resembles more a chronic relapsing condition than an acute treatment and cure. This infers longevity to Orexo’s franchise. In addition, the comorbidities associated with OUD could bring new opportunities for Orexo’s M&A and licensing strategies.
The main changes to our valuation have been to reduce administration spend after Q119 because the litigation expense will decline, but keeping total operational expense of c SEK500m in both FY18 and FY19. We have also tempered US Zubsolv revenue growth until the impact of Suboxone generics is known. Our valuation increases modestly from SEK3.4bn or SEK95.8 per share previously, to SEK3.4bn or SEK97.7 per share. We also include lower near-term sales of its minor products and from regaining the EU Zubsolv rights. We have not yet incorporated gross margin improvements as a result of the primary manufacturing improvements noted in Orexo’s December 2018 capital markets day, but explore the sensitivity of our valuation to further CoGS efficiencies.