Orexo

While Zubsolv sales and EBIT for Q3 were better than expected, Orexo's future key portfolio, DTx, is still not delivering according to our short-term expectations. As a result of lowering our estimates for DTx sales for the next five years, we lower our valuation range to SEK 44-58 (55-71). Marketing material commissioned by Orexo.

Orexo reported its Q3 numbers this morning with net sales at SEK145.9m, 14.5% ahead of our estimates, down 3% y/y. EBITDA came in at SEK -47m which is less negative than our expectations at SEK -52m. The sales beat vs our expectations is mainly attributable to Zubsolv sales at SEK 136m compared to our estimates at SEK 120.7m. For the first time since 2019, Zubsolv had a positive growth from the previous quarter, keeping us confident that the demand is continuously stable. With the launch of MODIA in Q4, the company is expecting to see both commercial and cost synergies that could fuel continued profit from Zubsolv.

Orexo's DTx segment is still encountering challenges and Zubsolv sales continue to decline. Marketing through social media might speed up sales of DTx ahead, but we still believe it has a long way to go before the segment contributes to significant revenues. We lower our valuation range to SEK 55-71 (66-85). Marketing material commissioned by Orexo.

Orexo reported its Q2 numbers this morning with sales of SEK 142.8, 2.1% ahead of our expectations (SEK139.9) and down 20% from last year (SEK 179.1m). EBITDA was -41.1 (38% more negative than we expected) and the reported opex was SEK -178m (-12% vs our estimates). Sales of Zubsolv came in at SEK 126m, a decline of 30% y/y and 4.5% below our forecast. The spending increase is attributable to improved R&D expenses related to OX124 and digital therapies. The financial outlook is unchanged. Deviation table below.

Orexo experienced a challenging quarter with weaker-than-expected sales for Zubsolv and the DTx offering. The flagship pharma project, OX124, did not receive fast-track approval, delaying its potential launch until late 2023. Consequently, we lower our estimates and cut our DCF-based fair value range to SEK 66-85 (72-91). - Marketing material commissioned by Orexo

Orexo's DTx launch has got off to a slow start, with close to no sales being reported in Q4 2020. We stand by our view that digital therapies in general should face a high underlying need, but we acknowledge that Orexo must soon overcome the current reimbursement challenges and show an uptick in DTx revenue in order for the market to regain confidence in the outlook and the stock. We take down our estimates and lower our DCF-based fair value range to SEK 72-91 (95-119) following the report. Marketing material commissioned by Orexo.

The next major valuation trigger for the Orexo share lies in the company's ability to ramp up sales in its newly launched digital offering, in our view. Even though reimbursement is yet to be established, we expect first sales in Q4 2020. We argue that a successful launch is particularly important because Orexo's main earnings contributor Zubsolv is facing headwinds from increased competition, COVID-19 and legal disputes. We maintain our view that the market conditions for digital therapies are favourable, but we nevertheless lower our DCF-based fair value range to SEK 95-119 (100-126) owing to slightly lower expectations for Zubsolv. Marketing material commissioned by Orexo.

The ongoing pandemic has caused an increase in depression and alcohol and substance abuse. At the same time, social distancing has triggered a need for digital provision of healthcare solutions. This bodes well for Orexo's newly launched digital therapies for depressions and alcohol abuse . While the future sales of the digital offering could be several times Orexo's current revenues, the launch process implies significant short-term investment. We take a more conservative approach to the sales potential of Orexo's digital offering than the company, but nevertheless increase our DCF-based fair value to SEK 100-126 (72-82) per share. Marketing material commissioned by Orexo.

Orexo yet again proved that Zubsolv is resilient against the recent entry of generic competition. We argue, however, that investors should look at the potential from the upcoming launch of the digital therapeutic offering, planned for Q3 2020 at the latest – particularly since the COVID-19 outbreak has increased demand for digital healthcare solutions. Marketing material commissioned by Orexo.

Orexo has recently expanded its research and development efforts in digital therapeutics. In addition to five pharma projects, the company's pipeline portfolio now also includes two digital therapy candidates. In this report, we elaborate on the earnings potential for vorvida and OXD01, Orexo's digital treatments for alcohol misuse disorder and opioid addiction. Both could add significantly to future earnings and the former is planned for launch as early as Q3 2020. Marketing material commissioned by Orexo.