Orexo AB

STO:ORX

Earnings Call Transcript 2018-Q1

[Operator]

Welcome to the Orexo Q1 Interim Reports Call. Today, I'm pleased to present CEO Nikolaj Sørensen and CFO Henrik Juuel.[Operator Instructions] Speakers, please begin.

[Nikolaj Sørensen, President & CEO]

Thank you very much. So welcome to this first quarter interim report presentation.So I and my management team are quite pleased to report a result that we find is truly in line with our internal expectations. And I think the highlight of the quarter is definitely the front page of our report, and that is the growth that we have seen of Zubsolv in the U.S. We did guide and we did expect to see a good uplift in the first quarter, but I think the net revenue impact, especially in local currency, has gone beyond what we were hoping for when we started this quarter.We have noticed that the report has been received a little more skeptical by the financial markets, and then we have of course discussed what could be the reasons for this and the difference between our perspective and the external perspective. And we have found that there are 3 areas where we think that we have some information or would need to provide more details, and we have decided to put a little more efforts on that during the call. And one is for our pipeline, what is happening with our new products and also what is happening in Europe. It's around our -- the development of what I would call our core business, the U.S. business. And we will provide more insights into the economics of our U.S. business or what you can say the Zubsolv commercial business as a standalone. And finally, we have talked a lot about our efficiency improvement and how we are going to lower our cost of goods. And we have provided some guidance of how this could have improved our numbers, but we will put significantly more details behind those numbers and enable you to better get -- do the same calculations as we are doing on the profitability for Orexo moving forward.With that, I will start the presentation by moving to the third page, which is the highlights of 2018.So as I said, we have seen a very strong net revenue growth. And the way that the U.S. business is constructed, when you see good growth, we often see a very positive impact on cash flow. And in this particular quarter, our cash flow was positive with SEK 106 million, now putting our cash balance to SEK 437.5 million. And I think this in -- this number in itself is putting us in a very strong position to continually progress our pipeline. I have seen some skepticism whether we have enough finances to progress our pipeline all the way. And I just wonder how that is coming up because there's no doubt that, with the cash position and the expected continued positive cash flow, we are in an extremely strong position from a financial perspective both to pursue our pipeline but also to pursue potential business development opportunities.When we go to the commercial progress. We have seen that we had a strong growth in volume and also decent jump in market share. We actually outgrew the markets for this quarter and we gained 0.6% market share. If we look at the market in total, we're actually the only branded product that have won market share during this quarter. There is no doubt important drivers of that has been the new exclusive agreements, but I'm actually more encouraged to see the growth that we have seen in the competitive segments; for example, in CVS Caremark where we saw an 83% growth in volume during the quarter from January to March.And when we go to our pipeline. We did disclose 2 new projects -- or I would say 2 new pockets because we are not looking at just one formulations. We are actually looking at a couple of different opportunities, but the target is the same. And one is the OX124, which is aimed at developing a new treatment for opioid overdose. There are one brand in the market today, and then there are some old generic injections. And there is a couple -- even in Sweden there are a couple of development programs, but based on our knowledge into the market, we find that we have the potential to develop something that is -- could be differentiated into the market. Also, we have seen that the pendula have probably swung in the U.S. from being a market where no one were talking about NSAIDs and non-opioid pain relievers into a situation today where people are desperately looking at effective pain relievers which on are -- which can treat what we can say as moderate to severe pain; and we'll say, go beyond what you get from an normal paracetamol tablet, for example. So I'm very encouraged by these 2. And we have some good data, especially on OX124, both from in vivo and also some in vitro study.When we get to OX382. We know that this was a -- or this is a very difficult endeavor that we have taken on. And it -- there are several other companies who have tried. We still have the ambition to develop a swallowable buprenorphine tablet. We did receive the first clinical result which is -- and exploratory. It's a very small study. We learned a lot from that study, but we also concluded that, before we feel confident to move it into the next basis, we need to continue some of the development work because we need to have a more consistent result and also somewhat better result than what we saw in the first study. And so that's not the same as we are giving up on the topic. We are still putting resources behind them; and it's simply, I think, a normal way for us to progress the programs. And I think you should expect that. If we are going to tell the market about early-stage projects before we take them into humans, there will be some projects where we need to go back and refine our formulations before we feel confident to make broader clinical studies, and OX382 is one of those examples.We've also decided to limit the resources put behind OX51. And it's been with us for quite a while, and we have done -- we did come -- quite find some negotiations and business development. Although, in the end, we found that this was not a good deal for Orexo, so we terminated the negotiations. We have to simply admit that at the moment in the U.S. the focus on fentanyl products -- and OX51 only is not fentanyl. It's actually called alfentanil, which is an even more powerful opioid. It's not the right time to launch that kind of products in the U.S. And as we have quite long patents on this one, we have [ right ] and have decided to put a lid on the pocket slightly during this year and see how the market evolves. Because there's no need -- there is no doubt that there is a need for a product like OX51. And we have heard that from several companies, but given the political focus on opioids, it's maybe not the right time right now.Moving to Page 4 and looking a little at where are we moving. And I think it's always good sometimes to look back. And when I started in the company in 2013, one of the most frequent questions I got was how we are going to secure the financing moving forward. And I'm pretty proud of the turnaround we've done at the company, now being consistently profitable for 2 years and definitely expecting to show good profit also for this year. The next step for us is to drive the growth of Orexo and becoming even less dependent on Zubsolv. And with that comes and -- broadening and enhancing progress in the pipeline and also continuing to look for additional commercial-stage products. And that's something we are actually investigating all the time and have been in several discussions during the first quarter.And looking what's going to drive us moving forward. There's no doubt that Zubsolv is in a very fast-growing market both in the U.S. but even globally. We have seen that we have -- and Henrik will talk a little more about that, that we can drive additional profitability from our improved manufacturing processes. We are looking to add additional programs both in our own pipeline but also externally. And look -- and bridging to that, into Page #5, what we say the -- what we are fighting for in our R&D and business development teams is, what you can say, provide an answer to patients who are suffering from addiction and really brought a bit on the insights we gained during the years we've been in the market. So what do we think is missing? And what we think we can provide to the market. And it's within treatment of addiction, but it's also treatment of the symptoms of comorbidities. And it's one symptom of addiction that's -- and overdose, and that's where OX124 come in. When we get to avoidance of opioid addiction, what we have learned when we have been in the market is that there are so many people who got addicted when they got their first opioid as a result of an acute situation, acute pain or an emergency situation. You get your first shot of morphine or oxycodone, and then unfortunately, there are some people who get hooked on that. And if we can avoid then and limit the exposure and especially delay the exposure until people get older, I think there is a good opportunity for us to help breaking the curve of opioid addiction.So moving to Page #6, which is a little more details on these projects that we're doing.So the first one, OX382, that's the swallowable formulation of buprenorphine. And as I said, we have finished the first exploratory study in what we can call clinical Phase I. We learned a lot, and we need to go back and look at that. The challenge for OX382 is biologic. It is for us to find a way to make buprenorphine predictable and stable in the uptake of patients who are swallowing a tablet. So before we're testing at humans, it's very difficult to predict exactly how these tablets will behave. And we will now go back. We will test another formulation and see how that will work. And hopefully, we can soon find something that we can progress into the next stage, but I would say, and as I have said all the time, this is not the most easy endeavor or journey we could go into but, at the same time, we find has huge potentials should we succeed.OX124 and, I would even say, OX338 are quite different in the way that we're quite certain that we -- given the expertise we have in Orexo and from our development of Zubsolv and also OX51, Abstral, Edluar, that we can develop formulations which are actually effectively given the substances in OX124 which -- and naloxone and also the different alternatives we have for OX338. So we believe we can do the formulation in a way that works, so the real uncertainty for us and where we'll need answers from tests in humans is will we have enough commercial differentiation for these products to be a good investment, taking all the way to the market. But it is a different risk profile than what we're seeing in OX382, which most likely, if we should succeed, will be a unique product in the market and have a unique position in the treatment spectrum of either pain or opioid addiction, whereas OX124 and OX338 will need to have a differentiated profile compared to the products already available.Moving to Page #7, which is an overview of our pipeline. As I've already talked about some of the new projects, I'll just zoom in one, Zubsolv Europe, where we have Mundipharma as the partner. I've seen there have been some questions. Why didn't I mention it in my CEO comments? Have there been any issues? And I think, on the contrary, I don't mention it because there has simply not been any news compared to what we have said before. The plan is still to launch Zubsolv in Europe during the first half, which we're now in the second quarter. And it's Mundipharma who is holding it fully in control. What we need to respect in the launch of Zubsolv in Europe is that you have different pricing and reimbursement agencies in every market, which is one of the obstacles, for example, in Sweden, that the only thing we are waiting for is reimbursement decision. And then there is also a situation where we are exporting Zubsolv from our manufacturing in the U.S. to ensure we are leveraging our global scale. And that -- with that also comes some complexity in import, export licenses of the products to ensure that we can get distributed into more countries in Europe. So it's right now, we are basically working through the bureaucracy in different markets to ensure that we can launch the product, but that's the only reason that we haven't seen the first sale of Zubsolv in Europe. And we expect that will happen within this quarter, which basically would mean within the next 2 months.And OX51. I did talk about before we have decided to limit our investments this year and monitor how the market evolves in the U.S. with respect to opioids and also in other markets. We will present it, for example, when we are participating in the largest business development conference in June, and it's in Massachusetts or Boston. This will be a part of the pack that we will have discussion with several companies. So it's not like we have camped the project, but we have decided not to invest resources in this year. And I think rather than setting up expectations of a news flow, we have decided to take it away from investor meetings, from our pipeline chart.So moving into Zubsolv in the U.S. and Page #8. I think this probably, for those who knows Orexo or this field, is not any surprise, but I must say it's a remarkable turnaround in attention. And I think the strongest evidence of that is now that the TIME magazine basically devoted a full edition only to the opioid crisis. So there's the attention on all levels in the U.S. If you're like me who's going to the U.S. relatively frequently, I would say try to put on the news channels and count how many minutes it takes before you have a news that is related to the opioid crisis. It won't be a lot because this is real and it's top of everyone's agenda in the U.S.Moving to Page #9. We got some new data, which is, before, we have said [ 64,000 ] deaths in the U.S. That includes also people who are non-opioid, but if we just look at the opioid deaths in the U.S., we are now talking, and I think these are quite confirmed data now, it's 53,200, which is a dramatic increase in a lot of different states in the U.S, as you can see to the right. So there's if it -- there's no indications at all at the moment that this crisis is under control. On the contrary, we actually see an escalation continuously despite more and more patients coming into treatment. And so doesn't the treatment work? I actually think this reflects more that there are so many people who are dependent on opioids who probably are now progressing. They are dependent into a stage where they have risk of overdose. And also, the need for treatment is still significantly larger than the treatment that is offered in the U.S. So there are significant growth opportunity, I would say, unfortunately for Orexo even in years to come.Looking at Page #10. This is the -- how the market has developed. There is not that much change, as you can see, and especially in the public market. It's in as close nearly to a straight line that you can see in terms of growth. And we have seen the total market in the U.S. is moving a little faster than what we recorded in last quarter, which I believe was just below 11%. And this is definitely driven by not only the public market but also the commercial segment, where we start to see some good movement if we're looking on a year-over-year basis.And looking at Page #11, just breaking down the market a little more. So what you would normally see and historically we have seen for several years is that actually Q1 on a market basis is weaker than the Q4. We didn't see that. We see -- saw a market that grew with nearly 3%. And I think the drivers behind this -- there's a couple of them. One of them is clearly that we have seen more and more physicians who are certified to treat more patients. We have seen an inflow of new prescribers, a quite dramatic inflow of new prescriber and physician assistants and nurse practitioners. Just highlight, as you see, this is a high number, but they're actually only allowed to treat 30 patients in their first year, so -- and after 1 year, they can go to 100. And then like physicians, they can go to 275. So you will expect, these 5,500, there would nearly be a catch-up effect if they start to treat up to their maximum amount, which is then, second year, 100, the first ones who were actually certified for exactly 1 year ago.Then we are looking at the public segment. And the public segment, I think, is less seasonal than what you see in the commercial segment. And there we have seen the growth, that in volume it's the same as we've seen before. But as you have a linear growth, and that takes dimension growth, then the percentage is going down a little but it's still very close to 20%. But what we have seen is the commercial growth is picking up. And actually, commercial decline in the first quarter was smaller than what we used to see. What is the normal development in the U.S. is that in the U.S. in the commercial segment you need to pay. And your copay is reset in the beginning of the year, so you need to pay a higher share, if not all of your prescriptions, when you start. And then when you have paid a couple of prescriptions, then we get into the insurance. And that is reset on the calendar year, which is impacting commercial negatively.Looking at Zubsolv. We were, as I said before, the only branded product to grow. And we actually grew in whole segments, to my surprise, actually even in cash, what we also gained a little share compared to the other branded products. Because we definitely didn't get any support from the market access, and that's a purely competitive market. And I think, if you look at it, a lot of the volume is coming from the high -- the exclusive agreements, so especially Humana Medicare Part D, but if we look from a value perspective, the commercial growth is actually worth more, yes. So we have a value growth in commercial, so I'm very happy to see that growth, but I'm also happy to see that with the public sector actually is growing ahead of the market. And this is very important for us moving forward because that's where we see we were a little outside the market last year. So even though we saw a volume that was stable, we lost market share because we were not in the growing segment of the market. We still have more opportunities and we need to get better access in the public market, but at least now we are in the playing field and much better than we were last year.So moving to Page #12. We have a strong rebound in Zubsolv tablets, as I guess many of you have seen before, as you can see to the right, we set consistently, I think, in IMS data. We set the record for 6 consecutive weeks in terms of the volume. It was a little flat the last couple of weeks, but hopefully, we'll see now when the commercial segment normally gets stronger in Q2 and Q3 that we can start to see some new records coming through again. So I'm very pleased with that development. And as I said before, that's very much explained by these new exclusive agreements but also in CVS Caremark where we've seen some good growth.Moving to Page #13. And this number is actually new. It was part of the report also, but that is, we, for the first time are actually quoting our growth in U.S. dollars, so the net revenue growth for our U.S. subsidiary, which was 26% this year. What I think is maybe even more interesting is when we move to Page 14. And that's around our EBIT contribution from our U.S. operations, which is what you can say the core operations for Zubsolv, taking away the investments that we have done in our pipeline, taking away some of the costs that we have in overheads. But basically it says, "So what is the profitability of our core business in the U.S.?" And here actually in the manufacturing we also have costs associated to the Swedish operations, so people working in manufacturing is covered by this picture.And looking at that, it's quite important to me to see that we have an EBIT contribution that have grown with nearly 3.5x from 2016 to 2017. And especially when Henrik in a few minutes will talk about the COGS improvement and how we can improve the gross margins, you don't need to be a master mathematician to understand that we are looking at some pretty good, continuous growth in our profitability in our core business, which is basically our sales of Zubsolv. And so I must say I think this is, hopefully, something you'll appreciate, but I think this is one of the things that give me confidence because I know, just scaling down to where we have our commercial business, we're actually looking at some decent growth in EBIT. And also, looking at the opportunities moving ahead, we have some very good opportunities in our U.S. business to improve that contribution further.So to summarize our Q1. I think this -- as I said before, it -- we were actually quite pleased with the development, especially on the volume side and our net revenues. And that is very much driven by the CVS Caremark but also in other commercial -- the other part of the commercial segment where we are in a competitive situation. We have seen some good growth. There is no doubt that CVS Caremark was the leader of that growth with an 83% growth if we compare December to March in terms of volumes within CVS Caremark. And normally you see the commercial market picking up in the second and third quarter, which for us will be [ we're recording from a ] continued positive development in especially net revenue but of course also in overall volume.When you go to the public segment. Humana, our deal with Humana, has been an important driver. We saw less than what we expected in January, but according to our internal plans we're actually in March came up at -- in line with our expectations. What was a little delay with Humana was the, as I said, how it works in the U.S. with higher authorizations and your ability to get prescribed with your original product and actually stay on that prescription for, depending on where in the U.S., to 1 or 2 months. But we have seen that -- now that Humana is picking up to the levels that we are expecting. The positive part is that there is still a lot of growth in Humana Medicare Part D for us to capture, in particular to get more market share, but this is also very much in line with what I said during the Q4 or full year report because we know that there are different regions of the U.S. where Humana would have a slower implementation. So we still have hopes of good impact from Humana Med D.A little setback for us has been that Ohio fee-for-service Medicaid has publicly announced -- so it's not something that Orexo has said, but they have publicly announced that they are planning to take over control of all pharmaceuticals. Not only opioids but all pharmaceuticals will be taken over by the Ohio fee-for-service Medicaid pharmaceutical benefit board. They now -- just a few weeks back, they announced that they have delayed that implementation and also going to review the decision again in 2019. So when we were expecting, based on what they have announced publicly in press releases and press meetings, that, that would happen by July 1, we now have to wait until 2019. Financially, that's not that important for our plans, but of course it would have been -- could have been a nice volume boost during -- or given a good opportunity for growth during the second half in the public segment. There are some other opportunities that could be opened up for this, but of course in all -- every time there's uncertainty, it gives opportunities but also some threats. And unfortunately here, we have to delay that decision.Market access continue to be the core of our commercial strategy, but I think the important part for me and what I feel is positive for this quarter is that, when we look at competitive situations like the CVS Caremark where we are in head-on competition with the same preferred status as the leading brand in the markets [ of some field ] but also with that the generic actually have an even more preferred status, we are taking market share. And we've managed to grow that business with 83% from December to March.With that, I will leave the word to Henrik to take us through the financial numbers. So please, Henrik.

[Henrik Juuel, Executive VP & CFO]

Thank you very much, Nikolaj.And on Slide #16, we will start with a breakdown of the revenue.For the first quarter of '18, we delivered a total net revenue of SEK 139.7 million. This was entirely driven by a strong growth of Zubsolv in the U.S., 14.9% growth in Swedish krona and totaling up to SEK 131 million. However, in local currency, as Nikolaj already talked about, this was actually a 26.2% growth in revenue.And when we look at Abstral, we delivered SEK 5.8 million of sales. This was lower than same quarter last year. And on Abstral, the way we recognize the quarter's revenues, we have to estimate the numbers as we do not have final sales numbers from our partners. And Q1 of '18 includes a true-up or, you can say, actuals we had I think included a little too much in previous quarters. And we have made an adjustment for that of around SEK 1 million during the first quarter here. On Edluar we are seeing a somewhat similar situation. We're reporting SEK 2.8 million against SEK 4.6 million in same quarter '17. This was actually our partner Mylan that came back and we had an adjustment to numbers they had submitted to us previously, but in absolute values not a significant amount. I think the good story here is really that the strong growth of Zubsolv in the U.S. enabled us to deliver nearly 10% growth on total revenue in quarter 1 '18 over quarter 1 '17.So let's turn to the next slide, #17, and look a little more into the details describing how we managed to deliver the growth for Zubsolv in the U.S., as you will see to the right, a total growth of 14.9%. The light brown bars, they represent the local growth drivers adding up to 26.2%. And here the key, most important factor is really the growth in demand. That is the number of prescriptions sold in [ upland chapters ], if you like. And that was a growth of nearly 12% compared to the first quarter of '17, and it was even higher than the growth that we saw in the market. The market grew 11.5% in the same period of time. This is obviously the impact of the improved market access both within commercial and in Medicare segments. And I think the good story here is really also that this is not only due to the exclusive agreements but we have seen a general good growth in the competitive segments, where of course CVS Caremark being a key growth factor there.When you grow the business as abrupt and significant as we did in the first quarter, wholesalers always have to increase their stocking of the products. And that's happened somewhat as well during the first quarter to an extent higher than what we saw in the first quarter of '17, so that contributed to the growth, local growth, of Zubsolv. We implemented a price increase of an average of 6% from 1st of January this year, and that was sufficient to offset the higher rebates associated with the new exclusive agreements. Remember also that the comparator here, Q1 '17, included a exclusive Maryland business deal. The rebate is even higher than the ones we see in the new exclusive agreements here.So first 3 growth factors adding up to 26.2% in local currency. Then we have the gray bar representing the negative impact from the currency development. We had an average SEK-U.S. dollar exchange rate of SEK 8.9 in the first quarter of '17, and that was reduced to SEK 8.1 first quarter of '18.So with that, let's turn to the next page, which is our full P&L in summary.And here we'll start with the gross profit, which ended at SEK 91.3 million for the quarter, up 12% compared to the prior year, again driven by Zubsolv revenue growth, as we just talked about. On the COGS level, we did have quite an expensive quarter, this quarter, on COGS. We are at the moment selling out batches that were manufactured in 2016, when the dollar exchange rate was above SEK 9. And we expect the last batches of these to be sold out of the system during the second quarter of '18, but there was approximately SEK 5 million additional costs of goods sold included in this format here. I will come back in much more detail about the COGS in a minute or 2.On operating expenses, we ended at SEK 113 million, approximately SEK 9 million above last year's level. And the main contributors to this was an increase on R&D expense level, SEK 45 million compared to approximately SEK 30 million in '17. This was driven by one-off costs related to our manufacturing and efficiency programs, adding up to approximately SEK 9 million; and then also related to the progression of our pipeline, as Nikolaj has already talked about. On the selling expenses you will see that they are well below last year's level, and it's nearly all explained by the lower U.S. dollar exchange rate. We do also have a small saving beyond that. We did start to invest more during the fourth quarter to take advantage of the new market access position, but we still hold a few, you could say, open positions and have made some savings. Our general mode in the market is to be very targeted with our investments. Admin expenses, more or less same level as last year, SEK 27 million. And I can add here that, that SEK 27 million included approximately SEK 8 million of legal costs associated with our IP litigations. So SEK 113 million in total operating costs compared to SEK 104 million first quarter of '17.So adding all this up gives us an EBIT for the quarter of SEK 21.8 million and an EBITDA of SEK 16.6 million, minus, or loss of the -- SEK 16.6 million for the quarter, fully in line both with our internal expectations and the guidance we have provided previously. And I think, before we turn to the next pages, I can add here that, if we adjust it for the one-off expenses approximately SEK 9 million on R&D related to our manufacturing efficiency program, at the same time apply our future expected cost of goods sold level, we would have delivered a positive EBIT for the first quarter. More about that on one of the next slides.So first, let's move to Slide #19, showing you our cash flow breakdown and our current financial position. First quarter showed extremely strong cash flow from operating activities, SEK 106 million positive, driven by improvements in working capital, where the key contributors were provisions increased again due to the quite abrupt and large increase in Zubsolv revenue. The rebates associated with a large portion of that has not been paid yet. The average payment terms are typically 4 to 5 months. Secondly, we continued to reduce inventory levels, and they are now fast approaching a level of SEK 200 million. Remember we peaked around SEK 500 million at some point in time. Finally, we have also managed to decrease our receivables during the period. And in the first quarter, this is typically the payment of the Abstral royalty income for the fourth quarter of last year.So that strong cash flow contribution increases our cash position to a current level of SEK 437.5 million. And this position really enables us to continue to pursue our strategy, first of all, to progress the pipeline, but also to continue business development discussions with the aim to add commercial-stage products to our U.S. operations. Nikolaj showed you in -- on one of the previous slides how profitable we already are, but we do have an extremely scalable organization in the U.S. that can become even more profitable with more products.Let's turn to Slide #20. This is a slide dealing with cost of goods sold, with the questions we have received the last quarters. And we have decided to include a slide here both for some educational purposes but also to shed some more light into our manufacturing efficiency programs and the expected savings that will lead to, so let me try to take you through this slide here.And we'll -- we start here with the upper left, the gross margin's graph. This one basically shows you, first of all, the total COGS for the individual quarters but more importantly the gross margin for Zubsolv in the U.S., which has been historically on this graph here been ranging between 63% to 73%. There are many factors that can influence the gross margin here, and I can just mention some of them: obviously the price that we charge in the U.S.; the exchange rates between U.S. dollar and SEK both when it comes to the manufacturing the product itself but also applying that on the net revenue as well. Our gross-to-net ratios, including rebate levels et cetera, will impact the gross margin, of course the costs per tablet as well. Our manufacturing variances, if we have any of those, albeit for the period-end even the mix after the individual dosage strengths can impact this also. So we have had quite significant swings between 63% and 73%. And one of the factors, I will talk a little about that, on the upper right corner.Here we see a breakdown of the total COGS for our products. This is an illustrative example. I'm taking here the 5.7 milligram, which is our high-volume product; and I'm taking the 2017 manufacturing schedules. Here you will see that we do have -- approximately 12% of the total cost with this specific tablet here is indirect production costs. Indirect production cost represents fixed overheads from our organization in Sweden for those parts dealing directly with the supply of Zubsolv to the U.S. So that is typically our logistics department, parts of our quality department involving releasing batches et cetera. And every year, what we do is that these fixed amounts needs to be allocated across the products manufactured during the year or planned to be manufactured. And if we then during the year have quarters where we do not manufacture much, the non-absorbed indirect production costs will hit our cost of goods sold directly. Reversely, if we have quarters where we manufacture a lot, we could even have, we could have an over-absorption, leading to a positive impact on the cost of goods sold line. So this, you can say, is unfortunately the effect of being a company with one product in our manufacturing setup, so had we had more products, indirect production costs would be allocated across these and we will probably not see these swings between the quarters.Moving to the API column. That is mainly buprenorphine and naloxone, the active pharmaceutical ingredients, included there. Buprenorphine is the most expensive parts. And I think good news is that we have secured a good inventory level of buprenorphine. Even though our total inventory level is now getting close to a SEK 200 million level, we probably have buprenorphine enough to take us into 2020 or maybe even 2021, depending of course on the sales levels. And that is, of course, good for our cash flow going forward as well.And the packaging part constitutes 18% in this example here. And then finally, we have the tableting part of the costs. That is where our suppliers basically manufacture the tablets. We have -- the last year or 2, we have been running a -- what we call a manufacturing efficiency program that is basically addressing all the components of COGS here, but in the near and medium term, I think, where we will see positive impact, that is really on the what we have labeled the tableting side here. We are addressing at 47% of total COGS in this example here, first of all, by moving from low-scale manufacturing, which in this example here used to be 200,000 tablets at a time, to high-scale manufacturing, 1 million tablets at a time. That is a significant efficiency improvement that will lead to quite significant savings. And the same time, we are also looking at different types of sourcings to address this 47% of the total costs.Let's then turn to the lower left graph. That is the expected COGS improvements. I think, first of all, I have to say that the graph you see here is -- should be regarded as directional. There are so many moving parts, so many items that can impact this. And it does assume that all other parameters and what we're looking at here are unchanged. And of course, it does assume that our -- what we call now the MEP project continues going to plan, but basically what we are expecting is that, if we use 2017 average COGS per tablet as an index 100, then we basically expect that we can reduce that by 25%. We are not going to see that immediately right now, but we expect to -- it should be fully transparent in our numbers from the first quarter of '19. And what happens during in the interim period from now and until first quarter of '19 is, first of all, Q1 '18, you have seen the numbers. We are this quarter and the second quarter selling out the expensive batches that were produced in 2016. So it will on total really take us to a level above the index 100, but already in the second quarter we do expect to see some improvements as we have sold already in the first quarter more than half of the expensive batches. In the third quarter, we should have no more of these expensive batches. And we are starting to see the impacts from moving to high-scale manufacturing and even more pronounced in the fourth quarter and in the first quarter of '19. As I said, our current initiatives should be fully reflected in the numbers.We do not stop there. I think we have the MEP initiative. We'll continue and address the other components of COGS. And we do expect that we can actually improve this even further, but that will be beyond the first quarter of '19.So I hope that helps shed some more light into the expected cost savings. As Nikolaj said previously, I think, if you combine this with the growing profit contributions from the U.S., we are looking at a very profitable Zubsolv U.S. business.So with that, let's turn to Slide 21. 21 is our financial outlook for 2018, and this is actually a total copy from what we included in the full year report for 2017. We have not changed our guidance. We are heading towards a positive EBITDA on a full year basis. It will be driven by Zubsolv U.S. contributing good growth both in terms of volume and market shares. We are still guiding -- we talked about the COGS already, and we have now provided you some more input there. On the -- on OpEx we are still guiding to be at a level of approximately SEK 500 million. That does assume that we actually do invest more in the next quarters in both in our U.S. commercial footprint in the U.S. but also to progress the projects even further.So with that, I'll return the presentation back to Nikolaj.

[Nikolaj Sørensen, President & CEO]

Thank you, Henrik.So just I'm moving to Page #22. And I think, just like the outlook, we can say nothing has really happened on our patent litigations, but if I didn't mention it, I guess people would be suspecting something had happened. So I can say that right now we have this desert walk that we have been through in the last 4 years waiting for the outcome of our Zubsolv litigation, and I basically don't have any more information than you have. We are optimistic because -- and very much driven also by the time it has taken. So normally when you wait, it's a positive sign for the ones making the appeal. It's not a guarantee, but it’s definitely something that give us grounds for confidence in our patent situation. So the only thing I can say there is we are simply waiting. We have seen cases that have taken up to 9 months. It's now been 6.5, so -- but hopefully, we'll get it within the next few months and, I would even hope, next week, but I can't guarantee.The other case, which is against Actavis for their infringement of our '996 patents with their generic versions of Suboxone and Subutex, is progressing. And there it will take some years before we expect to have a full resolution on that one, but that is progressing and is actually one that is driving our legal expenses at the moment.Moving to the -- my final slide.I think, as I started, we are quite pleased with the result this quarter, in contrast to some of the investors, but I think this is really driven by we are seeing a market that is probably the biggest health problem that they have in the U.S., I would say, ever. And we are at the core of this. We have seen a market that continues to show very strong growth. We know that there is a significant issue even ahead. And we are in a quite good position from a market access position. And we have been there for a couple of years, so we know a lot about the market now. We are seeing that is translating into a strong financial performance. Even though our EBIT this quarter was negative as expected, we still remain very comfortable that we will have a positive result this year, just like we have with the previous years.Also, from a financing perspective, Henrik talked about our cash flow. We feel quite comfortable that we are continuing to build our cash flow even though, based on rebates and some others, there could be individual quarters, just like we saw in the fourth quarter, that is going negative, but overall in a positive trend. With that, we have money to invest into our pipeline, into our business development. And I think that is something that is going to help us a lot more moving forward. And we are looking at right now in a year where there are a lot of cost triggers, and I'm happy to see one of them confirm being the market access for Zubsolv did translate into good net revenue growth in the first quarter. Launch of Zubsolv in Europe is fully on track for being launched now within the next few months. And also, business development, we have some good dialogues, but in all business development programs it needs to be the 2 parties that agree. And also, we need to find that it's a reasonable pricing. So we continue that fight, but I think we're doing that from a position much stronger than what we have seen before.With that, I will open up for question-and-answers. Operator, could you please open up for question-and-answers, if there are any?

[Operator]

[Operator Instructions] Our first question comes from the line of Andy Smith.

[Andy Smith, Analyst]

Yes. Andy Smith from Edison Investment Research. I did have a couple questions on the cost of goods efficiency program, but you've answered most of those. They were similar to, I guess, what I'd taken from your results announcement this morning, but the -- now the question that now becomes apparent is the cost of goods reduction -- or the cost of goods efficiencies that you're impacting through to the first quarter of 2019 are very impressive, very impressive reductions. And you mentioned that the manufacturing efficiency program continues after that time, but the -- if we were to forecast something out after the -- after Q1 '19, I'm assuming it wouldn't be at the same order of the reductions you're talking about over the next 1.25 years.

[Henrik Juuel, Executive VP & CFO]

Yes, I can take that, Andy. Thanks for the question. No, you're right. I think we are making a big -- you can say, a big impact already in this first round here. So I think the message is just that we will -- we do not stop there. We do continue, but I don't think you should expect that we can repeat that kind of saving once more again.

[Nikolaj Sørensen, President & CEO]

I think one -- maybe one comment is that we are -- some of the bureaucracy we have to fight within the launch in Europe is import and export coming from the U.S. And we are planning to set up supply also in Europe, which would actually give us an opportunity to play in the currency changes. So supply in Europe is, of course, predominantly to support the European sales. And -- but if we see that currencies, as we have seen, have been quite volatile for the last few years, it give us an opportunity to optimize based on where we see we in future quarter have an opportunity to save some money. So just a small one. It's impossible to project, but it gave us at least some basis to optimize on that spectrum...

[Henrik Juuel, Executive VP & CFO]

Maybe I can also just add why is this happening now. I think, really with such a significant impact, why hasn't this happened previously? I think here I think it's important to understand that we are in actually -- our hands has never been tied. We've been sitting on a significant inventory, but now it is down at a level where we are actually manufacturing according to demand, which gives us a lot of flexibility in terms of managing this, the manufacturing and the inventory levels.

[Nikolaj Sørensen, President & CEO]

So I hope we answered your question, Andy. Any other questions?

[Andy Smith, Analyst]

Yes, you did. And I have to add it's quite a shock to see the effects of that program because you normally expect cost of goods or gross profit margin to be correlated with sales. And you're completely breaking that correlation, but that's good for us to model. In terms of the working capital reduction from the inventory you showed in the last quarter: Now volumes are increasing dramatically with Zubsolv. Should we expect that working capital level or reduction to stay stable? Or over time as volumes continue to increase, would we expect that, that management of inventory and wholesaler stocking to start to creep up?

[Henrik Juuel, Executive VP & CFO]

I think now we are at -- we have an inventory level of SEK 206 million. And as I said previously, we still do hold quite a sizable inventory of buprenorphine. So I think it is fair to expect that, we, over the next maybe a year or so could probably level out somewhere between SEK 150 million and SEK 200 million, but we are getting close to the level where it should be. Of course, everything else being equal, it will, end of the day, depend on the demand in the market. The higher the demand, the more inventory we will need, but I think we can -- we believe that we can take it further down but not below SEK 150 million.

[Nikolaj Sørensen, President & CEO]

And so to max out the scale and purchasing of buprenorphine and enough to buy one full batch of buprenorphine, we are talking quite a lot of money. So when we are bringing down the level of buprenorphine, cumulatively they have pretty long shelf lives, it's optimum. So you save money by ordering more than one batch. And then that of course can give you a bump up in working capital for a period of time.

[Andy Smith, Analyst]

Okay. I don't want to monopolize the questions. I have a couple of quick ones which I can either get back in the queue. I'll ask one of them now. In terms of hedging, could you remind me of the old policy? I mean the weakness in the U.S. dollar obviously impact this quarter. Could you remind me of a policy on hedging U.S. sales?

[Henrik Juuel, Executive VP & CFO]

Yes. We are not hedging at the moment. We used to have a natural hedge, but that was simply when we were not profitable in the U.S. I think now we are profitable. I think Nikolaj has showed you the graph. Profitability from the U.S. is increasing, but we are also -- you can say we're a very U.S.-centric business. And a lot of the areas where we would like to invest all the money we generate could be within business development in the U.S. So we are -- actually we are keeping a lot of our cash in U.S. dollars, and we see that as a kind of hedge at some point in time. We hope we will be able to spend that in U.S. dollars as well. But we have -- it's -- of course, constantly it is being discussed in our audit committee. And we have decided that it's not the right time for Orexo to start hedging with the plans we have at the moment and the exposure that we see at the moment.

[Andy Smith, Analyst]

Yes, that's logical. And I agree. In companies -- other companies I've seen, you have to worry about how much of your sales you want to hedge rather than whether you hedge or not and then what's going to happen to interest rates going forward, so I think, yes, complications. But your answer actually leads me on to my last question, if I could fit it in. And it concerns business development. You mentioned your cash is devoted or will be devoted most or partly to the pipeline and business development, and I wonder if you can give us a sense. When you're thinking of business development, obviously you won't -- and you'll have specific transactions, but when you're thinking about business development, do you think of products that would fit the commercial sales force of Zubsolv -- or commercial organization of Zubsolv in the U.S.? Or are you thinking of new molecules that you can use your drug delivery, prolonged-release technology for that are still in clinical studies?

[Nikolaj Sørensen, President & CEO]

I think I can take that one. So we are definitely looking at something that we -- where we can see commercial synergies. Then I think we need to be opportunistic. When we see something that is -- where we could see a synergy with how our field force is structured in the U.S., we would look at it, but predominantly we're looking at opportunities that are with -- that are somewhat touching on the same topic we've been and focused on addiction. But I will say that we are not limited to molecules and pharmaceuticals. It can also be other technologies, so we are looking broader than just pharmaceuticals.

[Operator]

Our next question comes from the line of Klas Palin from Redeye.

[Klas Palin, Equity Analyst]

Henrik and Nikolaj, I have a couple of questions. And I would like to start with your selling expenses that was significantly lower this quarter compared to last quarter and last year and if you just could give some extra color to why we see this reduction now. And also, if -- have you come to any conclusion how you will report your production income of Zubsolv to Mundipharma? And yes, we can start with that.

[Henrik Juuel, Executive VP & CFO]

Okay, yes, let me try to answer these questions. Thanks, Klas. First of all, selling expenses, yes, they are more or less at the same level as first quarter '17, but you're right. They are lower than the level we saw in the fourth quarter of '17 despite the fact that we -- you can say we probably will -- we have more people in the first quarter of this year, but they were hired during the fourth quarter, so there is not a full-quarter impact even in '17. And -- but I think the explanation here, I think, is really that it's not only people-related costs that you see in selling. There are other costs. Like for instance if we do market research and apply consulting for that, it could be marketing campaigns et cetera. And I think these elements actually explains the relatively high level you saw on Q4. I can say that the -- underneath those numbers we do have a slightly larger organization in Q1 compared to Q4.

[Nikolaj Sørensen, President & CEO]

I think and also, Klas, we have actually reduced our home office in the U.S. a little. So we have fewer people in marketing and some other administrative roles, basically a [indiscernible] decisions. So it's a part of optimizing the mix. And when you have people working in marketing, they tend to order a lot of market research, so that can give you a double saving.

[Klas Palin, Equity Analyst]

Okay. And when you described you will increase your commercial investments in 2018, what type of investment would that be? Would that be increased headcounts in for sales reps or in marketing in general?

[Nikolaj Sørensen, President & CEO]

So like I say, one area where we did expect to increase actually quite dramatically would have been in Ohio, but given the changes in Ohio right now we're probably holding back a little on that in the short term. So that one, we will see. I think here we -- our investment in the field force right now, we might add a couple of people, depending on where we see growth, but pass-through in that [ smaller ] field force is really depending on success in market access. So if we see good market access progression, then we will add more people. If we don't see that from where we are, we will stay where we are. And so I think that's -- where we could expect to see some more expenses is when you do business development activities. We often need to do some due diligences and there do market research targeted at companies or products that we're looking at. So again, depending on what we find, that could give some peaks in individual quarters.

[Klas Palin, Equity Analyst]

Great.

[Henrik Juuel, Executive VP & CFO]

Good. And to your other question, Klas, how are we going to treat the, from an accounting perspective, the supplier of Zubsolv, so Mundipharma. And the way that is going to happen is that, when we sell the products, we will sell it to them at costs. And that will be regarded as revenue. And then we will have the COGS associated with it, so that means in principle a loss on the gross margin. It will dilute -- the gross profit, sorry. It will dilute the margin, obviously. And when we -- when this starts to gain some kind of volume, we will provide transparency into our gross profit so that you can see, okay, what is really Zubsolv U.S., what is Zubsolv Mundipharma. And as you know, we -- also we have -- in our supply agreement we have agreed on a base costs for these products that we supply to them. And anything we can do to improve the costs of those products, we will get a fair share of that improvement. So that will end up as the real gross profits in those situations. And you can see the cost reductions that we talked about [ yesterday up in ] [indiscernible]. Those will applicable to this setup here. So we are expecting to earn a positive margin even on the supply of products to Mundipharma. We did not do that first time we shipped to them. We shipped for around, is it, SEK 5 million to SEK 6 million; and the COGS were similar.

[Nikolaj Sørensen, President & CEO]

You can say the base price in Mundipharma is quite close to the index 100 that Henrik showed. And anything we can do below index 100...

[Henrik Juuel, Executive VP & CFO]

Fair share.

[Nikolaj Sørensen, President & CEO]

We will get a fair share of that.

[Klas Palin, Equity Analyst]

Okay. And my final question: SUBLOCADE has launched. And do you have any reflection about the launch, so far?

[Nikolaj Sørensen, President & CEO]

So it's difficult to follow because they are -- because a lot of the volume is expected to go through buy and bill. So the clinic will buy, and then they will bill the patient. So they don't appear in the normal statistics. However, that's the same situation for VIVITROL, which is another product in the market. And I saw one of your colleagues issued a report, I think, earlier this week where he -- I think he said 4,500 scripts for VIVITROL for, I think it's, 5 weeks period. And in the same period, you saw 88 for SUBLOCADE, which indicate that, at least if we expect them to be divided in approximately the same way, it's a relatively low traction. I'm not that surprised about that because what we hear from physicians is that it's quite [ erratic ] to set up the system and to get reimbursed. And for at least smaller clinics, the burden is perceived to be beyond what they feel is reasonable to start the treatment. Then I'm pretty sure that Indivior is doing what they can to make it easier for the physicians to do that, but it's -- there is a limit to how much easy you can do so. At the moment, we actually don't see any impact of SUBLOCADE. It's not something that doctors are talking about. I also -- without having specific details, I heard that there were some delays in the ability to supply it, so even though they are planning to launch early March, I think that was still late somewhat, at least in some regions. So it's probably a little too early to say, but well, I've said all the time I think there is a good market for the [ depots ], but I don't think it's transformative for the segment that we are in. On the contrary, I think it could be opening up new areas of treatment for larger clinics and also more institutional treatments where we don't see that much use of buprenorphine today. But for the people who are prescribing and -- I don't see why they should stop prescribing when a lot of them have long queues of patients wanting to get into the clinic. I think, all these small, we can say, 1 or 2 doctors’ offices, it still gets associated with quite a lot -- and it's -- that's the legislation and regulations are right now associated with a lot of issues to start prescribing. So that's maybe the explanation why they really haven't taken over. And in any sense, you can say they have 88 scripts in 5 weeks and we are shipping nearly 400,000 tablets a week, so it's we are kind of on a different planet in terms of traction, just like they could stay there on a different planet in terms of [ Suboxone field ] shipments [indiscernible].

[Operator]

[Operator Instructions] We appear to have one questions from -- one follow-up question from Andy Smith.

[Andy Smith, Analyst]

And it was Klas's question, second question, that prompted me. In terms of Mundipharma or the Mundipharma agreement, we're not -- there was nothing in the first quarter that we'd expect in terms of the royalties on the sales by Mundipharma in Europe. Is there a delay to the period in which they would recognize revenue and you recognize royalties? 3 months is -- I've heard the 3 months in some relationships. And are there sales milestones that are tripped at some point that we might look out for?

[Henrik Juuel, Executive VP & CFO]

Well, you can say in principle there shouldn't be any delay between them recognizing net sales and us recognizing royalties. Also, there can -- just like we have with Abstral and Edluar, there can be some practical delays if they don't have their final sales figures, but we are of course doing what we can to avoid that. And we have, I think, very close cooperation with Mundipharma, closer than we have with Abstral and Edluar partners as well, so I'm pretty sure that we can -- we will -- there shouldn't be any time lag between them recognizing their revenue and us recognizing the royalties. And your other question, sorry, what was that?

[Andy Smith, Analyst]

At some point when sales reach certain thresholds, are there milestones in the agreement that we should watch out for?

[Henrik Juuel, Executive VP & CFO]

Yes, there are typical milestones depending on sales levels, yes.

[Operator]

[Operator Instructions] We appear to have no further question at this time, so I hand the conference back to you.

[Nikolaj Sørensen, President & CEO]

Okay, well, thank you very much, operator.And thank you for everyone to taking the time to join us during this what I understand is called a super Thursday among analysts and financial journalists. I think there are more than 100 companies reporting today, so I won't take up more of your time. I hope that you got more clarity about our operations and why we probably have a more positive view on our first quarter result than what we saw initially from the market reaction.So thank you a lot, and best wishes for the weekend. And thank you. Bye.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines. Thank you.