Orion Group Interim Report 1–9/2019

“The single most important event of the period under review occurred at the end of July as the United States Food and Drug Administration (FDA) granted marketing authorisation under the Priority Review designation to darolutamide for the treatment of non-metastatic prostate cancer resistant to conventional hormone therapy, under the trade name Nubeqa®. This is Orion's first entirely new molecule that has received marketing authorisation since levosimendan (Simdax®). This is an important milestone for Orion, and I wish to thank our employees and our partner Bayer for having attained it. We received a EUR 45 million milestone payment from Bayer for the first commercial sale of the product in the United States and we have included it into our third quarter result.

In July we also completed patient recruitment for the REFALS trial evaluating orally administered levosimendan (ODM-109) in the treatment of symptoms of amyotrophic lateral sclerosis (ALS). The trial involves monitoring the patients for approximately one year, reaching completion in the summer of 2020. We are conducting the trial alone and if the study results are positive, it is possible that Orion will commercialise the product on its own in Europe as well as in key markets outside Europe. We have initiated an assessment on the prospects of launching the product in the United States on our own.

Orion's net sales in January–September 2019 increased by 9% to EUR 776 million and operating profit by 7% to EUR 198 million. Both figures include the EUR 45 million milestone payment received from Bayer.

Among our proprietary drugs, the sales of the Easyhaler® product family and Simdax® continued to develop well. Growth in the Easyhaler® product family was mostly due to the budesonide-formoterol combined formulation, and the overall progress has also been boosted by the sales and marketing efforts that we have reported in the basis for the 2019 outlook. So far there has been no material generic competition for Simdax®, but marketing authorisation applications have been submitted for generic versions of the drug in Europe. Generic competition for Dexdor® has further expanded in the European Union area, and sales of the product have turned to decline, as expected. The sales of the Parkinson's drugs Stalevo® and Comtess®/Comtan® fell seven per cent in January–September. In the third quarter, however, sales were significantly better than in the comparative period, due to an increase in Orion's own sales and the timing of partner deliveries.

Net sales of the Specialty Products business division turned up in January–September. Mostly the growth was due to biosimilars, prescription drugs in Scandinavia and self-care products in Finland. Disruptions in product availability and tougher price competition in generic drugs had a negative effect on the business division's net sales in Finland in particular. In 2019, the decline in prices in Finland appears to have levelled off for the time being.

We continue our ongoing trial with Bayer which evaluates darolutamide in patients with metastatic prostate cancer. The commercial potential of darolutamide will increase significantly if this second Phase III clinical trial (ARASENS) yields positive results in around 2022. As for earlier phase development projects, we are looking for partners to possible next development phases of the ODM-203 and ODM-207 molecules. The ODM-208 and ODM-209 molecule development projects proceeded as expected in the review period.

The ongoing projects supporting growth are expected to burden Orion's profit in 2019 by an estimated
EUR 30 million. This comprises clearly increased depreciation as well as investments in sales and marketing and research. At the same time, operating profit is burdened by intense price competition in the market, availability disruptions and gradually expanding generic competition for Orion's old proprietary drugs.

The outlook remains unchanged. Orion estimates that its net sales in 2019 will be slightly higher than in 2018 and operating profit will be at the same level as in 2018. Both estimated net sales and operating profit include the EUR 45 million milestone payment for the commercialisation of darolutamide. The estimated operating profit also includes significant investments in actions to generate growth. The complete outlook estimate and the basis for it can be found in this report under ‘Outlook for 2019’ and ‘Basis for outlook’.”

Key events in the review period from July to September

15 Jul 2019     Patient recruitment for Orion's REFALS Phase III clinical trial studying the effect of orally administered levosimendan in patients with amyotrophic lateral sclerosis (ALS) was completed.

30 Jul 2019     The United States Food and Drug Administration granted marketing authorisation to darolutamide, a new drug for the treatment of non-metastatic castration-resistant prostate cancer (nmCRPC).

7 Aug 2019      Orion announced the start of darolutamide sales in the United States and that the company will enter the EUR 45 million milestone payment from Bayer for the successful commercialisation of the product in the United States in its third quarter profits.

Events after the period

There have been no significant events after the review period.

News conference and teleconference

A news conference and teleconference on the published results will be held on Wednesday 23 October 2019 at 13:30 EEST at Orion’s head office (address: Orionintie 1A, Espoo). President and CEO Timo Lappalainen will give a brief presentation in English on the financial review.

The event can be followed as a live webcast accessible on Orion’s website at www.orion.fi/en/investors. After the presentation, questions can be asked also via teleconference in Finnish and English.

The conference call ID is 7780776 and the telephone numbers to participate in the teleconference are:
 
Finland: +358 (0)9 7479 0361
Sweden: +46 (0)8 5033 6574
United Kingdom: +44 (0)330 336 9105
United States:  +1 323-794-2093

News conference recordings

A recording of the webcast of the event in English and a recording of the presentation by the President and CEO in Finnish will be available on Orion’s website during Wednesday 23 October 2019.

Financial report material

Financial reports and related presentation material will be available at www.orion.fi/en/investors promptly after publication. The website also has a form for subscribing to Orion’s releases.

Orion calendar 

The Financial Statements and Report by the Board of Directors for 2019 will be published on the Company’s website at the latest in week 10/2020.

For additional information about the report:

Jari Karlson, CFO                                       tel. +358 50 966 2883
Tuukka Hirvonen, Investor Relations             Tel. +358 10 426 2721 or +358 50 966 2721

www.orion.fi/en/investors

Financial review for 1 January–30 September 2019

Net sales

Orion Group's net sales in January–September 2019 totalled EUR 776 (715) million, an increase of 9%. The net sales include the EUR 45 million milestone payment received from Bayer. Exchange rates impacted net sales positively by EUR 4 million. Net sales of Orion’s top ten pharmaceuticals in January–September were EUR 350 (325) million. They accounted for 45% (45%) of the total net sales.

Operating profit

The Orion Group’s operating profit was up by 7% at EUR 198 (184) million. EBITDA was up by 12% at EUR 239 (214) million. Operating profit and EBITDA include the EUR 45 million milestone payment received from Bayer.

Gross profit from product and service sales was EUR 6 million higher than in the comparative period. The positive effect of the increase in net sales calculated in local currencies on gross profit was EUR 13 million, but the change in margins reduced the gross profit by EUR 10 million. Exchange rate changes had a EUR 3 million positive effect on the gross profit.

Milestone payments accounted for EUR 47 (4) million and royalties for EUR 8 (14) million of net sales and operating profit. The decline in other operating income also had a EUR 2 million negative impact on the operating profit.

Operating expenses increased by EUR 28 million. Majority of the growth was due to increase in sales and marketing as well as in research and development costs.

Operating expenses

The Group’s sales and marketing expenses totalled EUR 155 (140) million. The growth was mostly due to depreciation associated with the reacquisition of European rights for Stalevo®, which in January–September were approximately EUR 9 million, as well as investments in the sales of the Easyhaler® product portfolio in particular.

R&D expenses were EUR 86 (76) million. They accounted for 11% (11%) of the Group's net sales. Research projects are reported in more detail under the 'Business Review' part of this report.

Administrative expenses were EUR 34 (32) million.

Other operating income and expenses amounted to EUR 2 (4) million (positive).

Group’s profit

Profit for the period was EUR 155 (144) million.

Basic earnings per share were EUR 1.10 (1.02). Equity per share was EUR 5.07 (5.24).

The return on capital employed before taxes (ROCE) was 32% (50%) and the return on equity after taxes (ROE) 28% (52%). The high figures in the comparative period are explained by the EUR 128 million capital gain recognised for the sale of Orion Diagnostica.

Financial position

The Group’s gearing was -12% (-14%) and the equity ratio 78% (69%).

The Group’s total liabilities at 30 September 2019 were EUR 220 (352) million. At the end of the period, interest-bearing liabilities amounted to EUR 8 (152) million, including EUR 5 (1) million of long-term loans. The change in interest-bearing liabilities was mostly due to the fact that the EUR 150 million bond loan issued by Orion in 2013 matured in June 2019. The company acquired substitutive financing by issuing commercial papers.

After the matured bond loan was paid off, the Group had EUR 94 (255) million of cash and cash equivalents and money market investments at the end of the period. The cash and cash equivalents are invested in short-term money market instruments issued by financially solid financial institutions and corporations.

Orion signed a EUR 100 million loan agreement with the European Investment Bank in January 2019. The loan has not yet been raised.

Cash flow

Cash flow from operating activities was EUR 206 (167) million. Cash flow improved thanks to increased operating profit and decrease in working capital.

The cash flow from investing activities was EUR -26 (129) million. The cash flow from investing activities was positive in the comparative period due to the sale of Orion Diagnostica.

The cash flow from financing activities was EUR -370 (-204) million. The difference to the comparative period is mostly due to the repayment of the bond loan that matured in June. Orion has also bought back its own shares by EUR 7 million.

Capital expenditure

The Group’s capital expenditure totalled EUR 28 (29) million. This comprised EUR 22 (26) million on property, plant and equipment and EUR 6 (4) million on intangible assets.

Key business targets for 2019

Orion regularly monitors the progress of these goals in its financial reports.

Outlook for 2019 (issued on 6 February 2019)

Orion estimates that in 2019 net sales will be slightly higher than in 2018 (net sales in 2018 were EUR 977 million). The estimated net sales include the possible EUR 45 million milestone payment associated with the commercialisation of darolutamide.

The operating profit is estimated to be at the same level as in 2018 (operating profit in 2018 was EUR 253 million). The estimated operating profit includes the possible EUR 45 million milestone payment associated with the commercialisation of darolutamide as well as significant investments in actions to generate growth.

Basis for outlook in more detail

Orion continues persistent actions to generate growth more rapidly than growth of the market in the long term. The ongoing projects supporting growth are expected to burden Orion's profit in 2019 by an estimated EUR 30 million. This comprises clearly increased depreciation as well as investments in sales and marketing and research. At the same time, operating profit is burdened by intense price competition in the market and gradually expanding generic competition for Orion's old proprietary drugs.

Net sales

The sales of the Easyhaler® product family will continue to grow also in 2019 due to combined formulations (budesonide-formoterol and salmeterol-fluticasone) launched in the past few years.

Orion reacquired from Novartis the European sales and distribution rights for the Parkinson's drugs Stalevo and Comtan in December 2018 and April 2019, respectively. Due to the anticipated additional sales of slightly over EUR 20 million following the transactions, the sales of Orion's branded Parkinson's drugs (Comtess®, Comtan® and Stalevo®) are estimated to remain at the same level as in the previous year despite continuously expanding generic competition.

In several European countries, marketing authorisation has been granted for a generic version of Dexdor®. Generic competition commenced in Germany in 2017 and expanded to a few other European countries during 2018. In 2019, generic competition on the product has further expanded in the EU, and its sales have turned to decline. Orion has also been informed that marketing authorisation applications have been filed for a generic version of Simdax® in Europe. It is, however, difficult to estimate the impact of generic competition on the sales of Dexdor and Simdax. The patent for the Simdax molecule expired in September 2015 but this is still not expected to have a material impact on sales of the product in 2019. Orion is continuing actions to defend its rights.

Sales of generic products account for a significant proportion of Orion’s total sales. Competition in Finland, the most important generic market for Orion, remains intense in 2019. However, product launches continue to support Orion’s position as market leader in Finland. At the beginning of 2017, changes were made to the pricing system for substitutable prescription drugs in Finland by narrowing the so-called price band. The change caused an estimated EUR 15 million yearly sales decline both in 2017 and 2018. Thus the cumulative two-year negative impact was around EUR 30 million. For 2019, the estimated impact is EUR 10 million negative. From January to September 2019, the sales of reference priced drugs in the Finnish market declined by 7% and the sales of Orion's reference priced drugs declined by 5%. The volume of these sales grew by 4% and the volume of Orion’s sales by 5% (Source: Pharmarket sales statistics 1-9/2019).

In 2017, the EUR 57 million sales of the biosimilar Remsima® generated a significant portion of the growth in net sales of the Specialty Products business division, but in 2018 Remsima® sales were materially lower due to intensified competition and declined price level. Besides Remsima®, Orion has launched other biosimilars, such as Ritemvia® (rituximab) and Amgevita® (adalimumab). As a whole, the sales of biosimilars are expected to significantly increase from 2018.

Collaboration agreements with other pharmaceutical companies are an important component of Orion’s business model. Agreements often include payments recorded in net sales that vary greatly from year to year. Forecasting the timing and amount of these payments is difficult. In some cases they are conditional on, for instance, the progress or findings of research projects, which are not known until studies have been completed. On the other hand, neither the outcome nor the schedule of contract negotiations is generally known before the final signing of the agreement. The outlook for 2019 includes the EUR 45 million milestone payment for the commercialisation of the prostate cancer drug darolutamide in the United States, which Orion has included in its third quarter result.

Expenditure

The start of production at Fermion's new manufacturing plant in Hanko increases production costs by around EUR 3 million following depreciation. The investment is an important part of Orion's preparation for the future. In the short term, however, increased depreciation has a negative impact on profit since the new plant replaces the one built in the 1970s.

Marketing expenditure will be higher than in the previous year due to additional promotion of sales of the Easyhaler product portfolio in countries where these products have been launched in recent years. In 2019, expenditure will also be increased by a EUR 12 million depreciation related to the acquisition of European sales and distribution rights for the Parkinson's drugs Stalevo® and Comtan®. Orion paid a total of USD 28 million for the transfer of the sales rights in December 2018 and in April 2019, and the investment will be depreciated over two years.

Because the registrations and launches of new products are projects that generally take more than a year, the increases in resources and other inputs required in 2019 were mainly planned during the previous year.

Research and development costs are estimated to be higher than in 2018, in particular due to the Phase III REFALS clinical trial evaluating levosimendan (ODM-109) for the treatment of symptoms of ALS. Of the EUR 60 million total investment in the roughly three-year trial, it is estimated that around EUR 25 million will be spent in 2019. Research and development costs are partly the Company’s internal fixed cost items, such as salaries and maintenance of the operating infrastructure, and partly external variable costs. External costs arise from, among other things, long-term clinical trials, which are typically performed in clinics located in several countries. The most important clinical trials scheduled for 2019 are either continuing from the previous year or at an advanced stage of planning, therefore their cost level can be estimated rather accurately. However, the accrued costs are materially affected by collaboration arrangements and how the costs arising are allocated between Orion and its collaboration partners. For instance, Bayer is paying the majority of the darolutamide research costs.

Investments

The Group’s total capital expenditure in 2019 is expected to be lower than in 2018, when capital expenditure was EUR 65 million.

Near-term risks and uncertainties  

The reacquisition of European sales and distribution rights for Stalevo® and Comtan® will generate additional sales for Orion’s branded Parkinson’s drugs in 2019. On the other hand, sales will decline due to continued generic competition. These effects have been taken into account in the outlook estimate for the current year. However, they still entail uncertainty that may materially affect the accuracy of the estimate made at this stage.

The basic Dexdor® and Simdax® patents have expired and Dexdor's indication patent expired at the end of March 2019. In several European countries, marketing authorisation has been granted for a generic version of Dexdor. Generic competition commenced in Germany in 2017 and expanded to a few other European countries during 2018. In 2019, generic competition on the product has further expanded in the EU, and its sales have turned to decline. Orion has also been informed that marketing authorisation applications have been filed for a generic version of Simdax in Europe. It is, however, difficult to estimate the impact of generic competition on the sales of Dexdor and Simdax. As regards Simdax, the possible generic competition is still not estimated to materially impact its sales in 2019.

Sales of individual products and also Orion’s sales in individual markets may vary, for example depending on the extent to which the ever-tougher price and other competition prevailing in pharmaceuticals markets in recent years will specifically focus on Orion’s products. Deliveries of Parkinson’s drugs to Novartis, the most important collaboration partner, are based on timetables that are jointly agreed in advance. Nevertheless, they can change, for example as a consequence of decisions by Novartis concerning adjustments of stock levels. In addition, changes in market prices and exchange rates affect the value of deliveries to Novartis.

The structural exchange rate risk due to the US dollar has decreased in recent years because the share of Orion’s net sales invoiced in dollars has fallen to below ten per cent and at the same time the value of purchases in dollars has increased. The greatest exchange rate risk at present relates to European currencies such as the Swedish crown and British pound. However, the overall effect of the risk due to currencies of European countries will be abated by the fact that Orion has organisations of its own in most of these countries, which means that in addition to sales income, there are also costs in these currencies. Changes in the Japanese yen exchange rate have become more important as sales of Parkinson’s drugs in Japan have increased. The exchange rate effect related to the Russian rouble has increased due to the strong volatility of the currency. However, Russian sales are not a significant portion of Orion’s entire net sales.

Orion’s broad product range may cause risks to the delivery reliability and make it challenging to maintain the high quality standard required in production. Authorities and key customers in different countries undertake regular and detailed inspections of development and manufacturing of drugs at Orion’s production sites. Any remedial actions that may be required may at least temporarily have effects that decrease delivery reliability and increase costs. Orion's product range also contains products manufactured by other pharmaceutical companies and products that Orion manufactures on its own but for which other companies deliver active pharmaceutical or other ingredients. Possible problems related to the delivery reliability or quality of the products of those manufacturers may cause a risk to Orion’s delivery reliability. The single-channel system used for pharmaceuticals distribution in Finland, in which Orion’s products have been delivered to customers through only one wholesaler, may also cause risks to delivery reliability. To ensure deliveries, in addition to Oriola Finland Oy, there are also other distributors temporarily distributing certain Orion products.

Research projects always entail uncertainty factors that may either increase or decrease estimated costs. The projects may progress more slowly or faster than assumed, or they may be discontinued. Nonetheless, changes that may occur in ongoing clinical studies are reflected in costs relatively slowly, and they are not expected to have a material impact on earnings in the current year. Owing to the nature of the research process, the timetables and costs of new studies that are being started are known well in advance. They therefore typically do not lead to unexpected changes in the estimated cost structure. Orion often undertakes the last, in other words Phase III, clinical trials in collaboration with other pharmaceutical companies. Commencement of these collaboration relationships and their structure also materially affect the schedule and cost level of research projects.

Collaboration arrangements are an important component of Orion’s business model. Possible collaboration and licensing agreements related to these arrangements also often include payments to be recorded in net sales that may materially affect Orion’s financial results. In 2014–2018 the annual payments varied from EUR 5 million to EUR 39 million. The payments may be subject to certain conditions relating to the development of research projects or sales, and whether these conditions are triggered and the timing of triggering always entail uncertainties. The outlook for 2019 includes the EUR 45 million milestone payment for the commercialisation of the prostate cancer drug darolutamide in the United States, which Orion has included in its third quarter result.

Orion’s dividend distribution policy

Orion’s dividend distribution takes into account the distributable funds and the capital expenditure and other financial requirements in the medium and long term to achieve the financial objectives.

Financial objectives

Through the financial objectives Orion aims to develop the Group’s shareholder value and ensure financial stability and profitable growth. Orion’s financial objectives are:

• Growing net sales more rapidly than growth of the pharmaceuticals market. Achievement of this objective requires continuous investment in development of the product portfolio.
• Maintaining profitability at a good level. The aim is operating profit that exceeds 25% of net sales.
• Keeping the equity ratio at least 50%.
• Distributing an annual dividend that in the next few years will be at least EUR 1.30 per share, and increasing the dividend in the long term.

In the short term what actually happens may deviate from the objectives.

R&D projects that have made promising progress will probably somewhat increase the Company’s research expenses in the next few years. However, agreements already made relating to research projects and their good progress, and possible new agreements with partners relating to other projects are expected to generate material milestone payments in coming years. Successful projects will have a positive effect on Orion’s net sales and especially operating profit even before possible approval of new proprietary drugs and before the actual commencement of product sales.

Shares and shareholders 

On 30 September 2019 Orion had a total of 141,257,828 (141,257,828) shares, of which 36,686,579 (37,120,346) were A shares and 104,571,249 (104,137,482) B shares. The Group’s share capital is EUR 92,238,541.46 (92,238,541.46). At the end of June, Orion held 765,399 (562,440) B shares as treasury shares. On 30 September 2019, the aggregate number of votes conferred by the A and B shares was 837,537,430 (845,981,962) excluding treasury shares.

At the end of September 2019, Orion had 69,165 (73,337) registered shareholders.

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