Orexo AB

STO:ORX

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to Orexo Q1 Report 2024. [Operator Instructions]. Now I will hand the conference over to CEO, Nikolaj Sorensen; and CFO, Fredrik Jarrsten. Please go ahead.

[Nikolaj Sørensen, executive]

Thank you very much. In my clock, we're a little early, so I will take a slow start here. So welcome to the Orexo first quarter results as our headline indicates, we think one of the main items for this quarter is this is the first real quarter, where we can show that our guidance and our monitoring of our underlying profitability is actually correct. And we have some significant nonrecurring expenses during '23 and in the beginning of '23 and in 2022.

And now here in the first quarter, a lot of these expenses have gone away. So we have seen the EBITDA improvement compared to last year with SEK 57 million, which is very much in line with our guidance and actually a little better than I think both we and the market have expected. However, this quarter also had a little mix back because our Zubsolv sales, and I'll come back to that, was not fully meeting our expectations, but I believe there are some good explanations to that. And on top of that, we have an R&D development where some have gone very good and others, we have some small setbacks, but I think they're manageable.

But that taking me to the conference. And I will present today with Fredrik Jarrsten, who will go through the financials of the company, and I will end up with the future drivers of the company. But first, a little highlight of our key achievements for the year or for the first quarter.

So as I said, we had a positive EBITDA with SEK 16 million, and this is a quite good result in particular, internally based on the Zubsolv sales, where we saw Zubsolv had a significant destocking, and I will come back to that shortly. But also in looking at comparator last year, we had a first stocking from Accord. So last year, there was a higher sales in Europe due to our supply to Accord. They are right now using the supply that we have sent to them earlier, and therefore, we didn't see that come back in this quarter. But of course, we expect sales to Accord coming again in future quarters.

So the Zubsolv decline was very much due to a destocking, and we have seen this slight underlying development and demand. But looking at, for example, sales to pharmacies, we actually had a positive trend in the first quarter. So the price increase we had in the beginning of the year is definitely helping us from a sales perspective. But we are not in control of the inventory levels at the wholesalers and in this quarter, we had a quite unusual situation, which lowered the inventory quite significantly. And I will come back to that in more detail.

Our costs are down 31% from our first quarter last year. That puts us quite good ahead of our guidance of [ SEK 530 million ] for depreciations across the company so we are in a good situation on the cost side. We did, during the quarter, refinanced our corporate bond. We did that for the first time under sustainability framework. I was quite pleased to see was -- it was nearly oversubscribed with 100%, and we had a lot of new investors coming in, in particular from internationally, both in the U.S. and Continental Europe.

Our FDA review with OX124 is going well on many accounts. Our review of our supply chain has been completed with the external manufacturer. It appears to have gone well. However, there are some questions that we received recently from FDA around the use of the device and then instructions for use that indicate that we need to go back and complement our applications. And if that is the case, that will drive a delay, but we believe that this can be done within the time frame we have guided about before, which has been 10 to 13 months and a launch late in 2024 and or early-2025. So while it's a little setback, it is something that we have built into our guidance previously.

Our partnership with Sobi, which we today can say was one of the companies we worked with last year on the feasibility study, we have worked on the partnership or collaboration with Sobi and advanced it now into a more formal partnership where we are testing the molecule in AmorphOX on several different dimensions.

We have also started a new collaboration with a vaccine company, where we're testing one more vaccine on AmorphOX. We believe that AmorphOX is quite well suited for vaccines. So this is important for us to generate data on this, and then we have a quite pleased to start up a new collaboration with a vaccine company to test different type of vaccines. We have tested other vaccines in the platform before with good results, but this is a new type of vaccines that we will test.

That takes us to our U.S. commercial update. So there are a little uniqueness during this quarter that have had and, actually starting last year, some of it that have had impact on Zubsolv. The first and most significant for this individual quarter is that we did see a quite significant decline in inventory from the large wholesalers in February and March. And when they're declining the whole inventory, that means that we don't sell to the wholesalers. What is unique is that we haven't seen the same change on demand.

We haven't seen the same change in sales to pharmacies. And we have seen this abnormal decline is actually reported from other companies active in the same areas we are with controlled substance have also seen a decline in the same period of time. So we think this is a little more systemic, probably more focused on controlled substances, but we have seen a quite unusual development in the first quarter, which, of course, has a direct impact on Zubsolv as we report our sales to wholesalers.

Another thing that has happened, which is a real trend break starting last summer, we saw -- have seen the otherwise main driver of growth has been Medicaid for many years. But during last summer, we saw the growth slowing down. And in Q3, we started to see Medicaid decline. And this has accelerated into a quite rapid decline in Medicaid here in the first quarter with nearly 10%.

In parallel, we have seen a growth in the commercial sector. So we've seen this enrollment with Medicaid for the last, say, three quarters where more than 20 million people have left Medicaid. And this, we believe, is very much connected to COVID, where we saw an increase in enrollment in Medicaid and people are now leaving Medicaid.

And also, I believe it's tightly connected to the unemployment situation in U.S. where the unemployment rates are very low, meaning that more people get a job and can then get commercial insurance. This has a lot of impact on the market dynamics as we see the largest segment is declining with nearly 10%. In parallel, we see the commercial increasing with the same number. A lot of the increase in commercial is Medicaid patients moving over to commercial, but we also see right now is the commercial segment and Medicare, where we see some growth.

The third thing that has happened in the quarter is, excellent, February 20 in the middle of that abnormal inventories of the week where we saw the largest decline in inventory, United Health Group had a subsidiary change health, which is managing the claims processes between physicians, patients and pharmacies. They had a ransomware attack, which means that a lot of physicians didn't get paid for the patients. We have seen pharmas is not getting paid for the pharmaceuticals.

And we believe that have had some impact on some physicians. We definitely know some physicians have not taken in the same amount of patients. It's very hard to see exactly where it is, but it does coincide with some of the changes we've seen in the market, for example, on the inventory. And Change Health is managing about 1/3 of the claims in the U.S. as a subsidiary. So it's by far the largest claims processing center that has been impacted by this Cyber attack.

So coming back to Zubsolv and the sales. And here, these are new numbers. We haven't shared those before. But if you look at the graph here, the green line is the stable line, if you have different coloring, that is the sales to pharmacies and we have averaged it out over four weeks. So these are not individual weeks. And you can see the sales to pharmacies is quite stable and actually have quite a little upward trend during the second half of last year coming into the early start of this year.

So sales to pharmacists has gone quite well, and we actually -- this first quarter, we are seeing higher sales to pharmacies than we did first quarter last year. That would normally be followed by a sales to wholesale at the same level because over time, those two numbers, of course, have to be exactly the same. So we need to sell to the wholesalers, what they sell to pharmacies.

But if you look at the dip that we see here in February, March, there's a significant dip in our sales to wholesalers, which has not been followed by so far by an increase in the sales to wholesalers. That's, of course, not something you can't see that continuing down. So it needs to normalize over time. And we're seeing right now here in the second quarter that the sales to pharmacies and to wholesalers is much more aligned than it was under these few weeks in February, where we saw this significant drop in sales to wholesalers.

And just for comparison, you can see last year, we had a much more normal tendency where you can see I included the numbers for December, where you can see there's an increase in December in both in sales to wholesalers and also sales to pharmacies and that is followed by a dip in the early Q1. We see a little the same here, '23, '24, where we see a little increase in December in sales to pharmacies. We see sales to pharmacies dipping a little and then coming back up.

But we have never seen that kind of adjustment that we saw here in the first quarter. And again, this is not unique to Orexo, we have seen that in other companies' quarterly reports also. So a unique situation, but it will normalize. And that gives us confidence to say that we believe that our sales in the next quarters will be better than what we report here in the first quarter.

Zubsolv sales in general, we continue to see a quite good development in Medicaid, where we have outperformed the market this quarter. As I just said in the beginning, Medicaid have actually declined quite dramatically with 9% compared to last year, whereas we are seeing a year-over-year of about 0%. So we don't grow, but we're not losing. And our driver in Medicaid is definitely our new contracts, where we continue to see very good growth in New York, which is actually now passing our first year anniversary, that was from December last year.

Kentucky same thing, also double-digit growth. And Indiana where we actually see an accelerating increase. Last quarter, it's 196%, but now we're actually more than 200% increase in Indiana, where we received reimbursement in July last year. We have increased the prices with 4% from January 1, so that's something that in sales to pharmacies and wholesalers will impact pastime.

Overall, the market continued with a relatively low growth. It's just below 3%, and that is really right now, we see similar decline percentage wise in Medicaid as we see growth in commercial. But since Medicaid is a larger segment that the growth in commercial is not good enough to drive it up, but we also see good numbers in Medicare, which is growing. Medicaid remains the largest segment in the space right now.

Digital Mental Health Program, it is a difficult market. And while I see a significant need for this is a view that is shared by the Center for Medicaid Services, CMS. We have not seen any scalable solution on the reimbursement and distribution. And that is a problem for Orexo, it's also a problem for other partners. We could drive sales. But what we have seen previously is when we did start to see some sales the cost needed to drive sales were not feasible long run. We had to invest many more dollars in for the sales that we got out.

So we have decided to right now approach this in a very cost-conscious way, where we continue working with pilots and we're only pushing expenses when we see that we will have some traction in the market. So in Veteran Affairs, where we have been reimbursed from the first of January, we are now working together with an external vendor to start up some pilot programs. We also -- more on MODIA, but could include some of the other digital therapies, we are collaborating with leading health care providers in several states, where we have made [ share ] grant applications to these opioid abatement funds, which are now more than $50 billion to see if we can start up programs, where we integrate, in particular, our digital health solutions to improve treatment of opioid use disorder.

But we continue to approach this in a very cost conscious way. It's a very small team at Orexo work with that right now. But we are working actively together with Center for Medicaid services to see if we can establish reimbursement model. And if that comes in place, and we can see that there are opportunities, we would be ready to invest more into the market. But before we see that, we are holding back on our expenses in this space.

That takes us to our products under development and starting with AmorphOX and our new collaboration. So we did start a collaboration with Sobi early this year, where we had continue to do the work we did last year with them to optimize the formulation work, to extend the stability studies to see that we can -- with the formulation work we are doing, get more stability data. We're also looking together with Sobi on what is the optimal route of administration, how are we going to use our AmorphOX powder in the best way on their molecule.

So a good collaborative partnership, but we are still in an early stage. But of course, something where we expected this materialize in a good way, it will end up in a more normal licensing and co-development partnership. Then we started up a new collaboration with a vaccine company, where we are testing AmorphOX on a new vaccine to, again, strengthen our documentation and understanding of how AmorphOX could be used on vaccines.

OX124, as I said, we have some good promising results. We never know the outcome before we have received the final decision by FDA. So we have seen an audit of our external suppliers. There are always observations. But right now, we believe that, that was completed with good results. But what we have received and that this is basically within more or less as we speak, we have received some inquiries and questions from FDA regarding the instructions for use, and this is back to what we can call human factor studies. So we need to show that the actual users or actually not the people who get a prescription. But a bystander on the street needs to understand exactly how they're going to use the product.

And here, FDA had some observations and comments to our suggestive instructions for use, and they also asked us to make changes on the device to improve the instructions for a particular by standard. And this is something we are implementing as we speak and where -- but we can see before we get data, this will put the PDUFA date on 15th of July, most likely it wouldn't be in jeopardy. We haven't received any final decision from FDA. But again, being transparent, looking into the questions we've received, we expect this could lead to a delay.

However, we it's not unexpected as we have seen similar situations for basically all other rescue medications. There are none, who recently have been approved in the time frame of 10 months. So this is not completely surprising, and this is something that we have put into the guidance when we have set, we have seen 10 to 13 months. And we still -- based on what we have right now, if everything goes well with these updates, and we still believe that we can be in a position where we could launch late this year or early-2025.

OX640, we have been going to FDA. We said that in our last quarterly report. We have now received the feedback from FDA on our briefing book, where we outlined our clinical development program. This is, of course, something we're now bringing into the partner discussions that we have ongoing and something that has been anticipated in the discussions we have had because this is giving clarity about the development cost that you have to expect for the program.

We presented the results from OX640 at the AAAAI annual meeting. So this is the largest meeting within [ allergy ] in the U.S. And we received a lot of spontaneous positive feedback on the unique properties of OX640, which give us more confidence that we have a product that has some meaningful differentiation in this market.

On OX124, just to remind us, this is still coming, we hope, late this year or early next year from a launch perspective, and it is a high-dose naloxone product. What is unique is the powder base where we have seen before that our bioavailability is very high. But we also believe that the stability of the product makes it important, in particular, in certain regions, for example, being a powder, you are not subject to freeze. So if you're liquid and you get into freezing temperatures, the product will freeze and not be able to use but with OX124 being a powder, we have tested our powder down to minus 18 degrees Celsius, and it still works nicely without any impact on the functionality of the product.

The market that we enter is very dynamic and part of our going to market strategy has been all the time to ensure we have people in place, who understand the market. And I'm very pleased to say here from May 1, we have a commercial lead starting in the U.S. who will lead the commercialization of OX124. She has worked previously with the leading brand in the market. She has been working with this rescue market for several years. She has both been working with product on the market, but also been looking into new product development into the market. So it has been an integral part of this opioid rescue medication market for several years. And like I said, I already know after a few days, we are receiving a lot of positive input from our newest employee in the U.S.

That takes us to the financial and legal overview, and I will let Fredrik take over the presentation.

[Frederik Jarrsten, executive]

Thank you, Nikolaj. So on Page 16, we look at our revenue, I'd start by looking on the top part of the page, you can see our total revenue in Q1 amounted to SEK 139 million. Of that revenue, obviously, Zubsolv within U.S. commercial is the main contributor with SEK 129 million for the quarter, which is down year-over-year with 8%.

Now the main explanation for that decline is the higher wholesale destocking effect, which, as Nikolaj explained earlier, it's a normal seasonal effect in Q1 after an inventory buildup in Q4 the previous year. And that usually normalized the next quarter. But this year, the destocking was quite substantial. This was just partly offset by a favorable payer mix then. And the FX impact from a weaker USD exchange rate was also negative in the quarter.

Now in relation to Zubsolv ex-U.S. revenues in Q1 from supply of tablets to our partner Accord, the reason for the major difference in revenues compared to Q1 last year is the previous inventory buildup at Accord that had a very positive effect on net revenue back then. And this year, on for the lack of revenue is affected by timing of deliveries to respective European markets. So the revenues are royalties from Accord on their product sales which are on a low level, reflecting still an early phase in the rollout on respective European markets.

If you look at Zubsolv specifically in Q1 compared to Q4 last year, you can see in the [indiscernible] graph on the bottom part of the page, higher wholesale inventory destocking of almost SEK 21 million is also from a quarter-over-quarter perspective, the main explanation of our net revenue decreased. The demand for Zubsolv expressed in net revenue terms declined with a total approximately 2% as shown in the first three bars, while the markets of buprenorphine/naloxone grew 1% quarter-over-quarter. There is also a slightly favorable pay mix effect in the quarter. In conclusion, you can see in the graph that in local currencies, Zubsolv net revenue decreased by approximately 12% between the quarters.

Going to the next page, our P&L. Very happy to show such a strong start of the year in relation to our profitability or EBITDA, which in the quarter despite lower net revenues improved by SEK 57 million, as Nikolaj said, to SEK 15.9 million compared to Q1 last year. And when doing the exercise that we usually do of adjusting for non-repeating costs that would imply an even more positive EBITDA of SEK 24 million.

Now to explain this strong result, first of all, when it comes to cost of goods sold, the majority of the SEK 13 million is related to U.S. commercial or to be more specific, that is SEK 12.7 million. And compared to Q1 last year, we were actually able to improve our gross margin in U.S. commercial from 89% to 90%. Now the decrease in the absolute amount of COGS since last year from SEK 29 million to SEK 30 million is though reflecting the lack of sale of Zubsolv ex U.S. tablets to Accord this quarter.

Second of all, when you look at our operating expenses in Q1, we have significantly lower OpEx compared to Q1 last year, following lower expenses for the IP litigation coming down from SEK 37 million to SEK 2.3 million. We had lower expenses in U.S. commercial and more specifically within digital mental health products and its leaner organization and more cost-efficient processes.

And then also within R&D and the MODIA study which was finalized in Q3 last year. And together with lower development costs for OX124, that means a big save in expenses this quarter. The U.S. dollar weakened slightly in the first quarter compared to last year, and the total FX effect on EBIT was a positive SEK 2 million. So in summary, OpEx came in at SEK 131 million this quarter, which is SEK 59 million or 31% lower than Q1 last year.

Now following U.S. Commercial as a segment, the EBITDA contribution from a U.S. business amounted to SEK 43 million for the quarter, which is a margin of 33%, and that is slightly down from 35% last year. And finally, financial items. We have an unrealized FX impact of SEK 2 million on a cash held in U.S. dollars and lower cost for the old corporate bond of SEK 7.7 million compared to last year as a result of the purchase we did of SEK 49 million in nominal value of the old bond.

Moving to next page on cash flow. You can see that liquid funds, which is cash, cash equivalents, that amounted to SEK 198 million end of Q1. That is an increase by SEK 27 million from end of Q4. So where does that come from? Well, following the strong EBITDA development in Q1, cash flow from operating activities before changes in working capital was positive for the quarter with SEK 4.3 million. That's an improvement by SEK 53 million compared to Q1 last year. Otherwise, cash flow for the quarter was heavily affected by the settlement of the first part of the refinancing of the bond that we completed in the quarter.

So just a few words on that. Orexo issued SEK 500 million of a 4-year senior secured bond at a price of three months STIBOR plus 650 basis points which today after the Central Bank's message would be an interest rate of approximately 10.35% per annum. So the first part of the transaction was recognized in Q1, and that had a negative impact on changes in working capital. That's due to the fact that we prepaid for Orexo's own purchase of the new bond loan of SEK 25 million. Now financing activities on the other hand, were positively impacted by the sale of SEK 49 million worth of the old Orexo bond. So in summary, the first part of this transaction added a net of SEK 24 million to our liquidity. The second part of the settlement will be recognized in Q2.

In the cash flow, we also had investment activities, SEK 1.2 million, and that's from investments in equipment to the development organization. And total cash flow for the period ended up at SEK 23.2 million and then adding the FX effect on cash of SEK 3.8 million, that ups to the increase in cash of SEK 27 million that I mentioned before.

With interest-bearing liabilities of SEK 498 approximately million, our net debt end of Q1 was SEK 299.8 million. I just want to mention that in the table of key figures on Page 20 in the report, there is a different number for the net debt, and this will be corrected in the report published on our web page.

On next page, our financial outlook for 2024. We put that up for the first time in the Q4 report. We stated that we expect market growth of 2% to 5%, Zubsolv net sales in line with 2023 in U.S. dollars, OpEx below SEK 520 million and a positive EBITDA. Now with the actuals presented today and the explanations given, especially on the Zubsolv net sales, we can conclude that these metrics are reaffirmed.

And with that, I give back to Nikolaj for the legal update.

[Nikolaj Sørensen, executive]

Thank you very much, Fredrik. And of course, just refer to the financial outlook that we -- in the Zubsolv net sales built in here is that we expect to see a normalization of the inventory levels as we proceed. Right now, they are with some of the wholesalers actually at the record low level of nearly a week less of inventory than we have seen historically.

And when we come to the Q1 legal update, I have not seen anything on the patent disputes. It's surprising to us, to be honest, that we have not received a date for the hearing with the court of appeal. The court of appeal would normally have hearings or they have hearings in the first week of every month. So we are now expecting that the hearing is probably coming in the early autumn, but we haven't received the date yet for when that appeal is.

But we do actually see some cost to development based on some recent decisions made by the Federal Court on some, say, similar questions as have been used in the appeal by some. They have ruled in favor in another case in a ways that we believe is applicable on our case also, which further strengthen our case.

Coming to our U.S. government investigations of Zubsolv, nothing really has happened. We do receive some questions. They are still talking to some of our employees or former employees. We can see that the focus is on certain historic marketing messages and campaigns we've been running. But I will say that all of our marketing messages have been going through medical, legal and regulatory review and the legal review is actually done by an external lawyer.

So it's very, very hard for us to see that we've done anything wrong, and we've not been presented with something that where we can see, okay, this is something we should have done differently. But we're, of course, still collaborating with the authorities when they're asking for information. We're sharing that, but it is now approaching its fourth anniversary and something that I would really like to see that we can put behind us.

So Orexo have reached out to see if there are opportunities to seek a settlement on this matter as we are still paying a decent amount of legal fees to have this case running, we think that would be favorable for the company to put it behind us, even though that would mean that we have to do a settlement.

A little short on our future drivers. I will say that I'm fully aware that our share price and our value creation is not based on our ability to tighten the belt and lower our expenses. I do find it's incredibly important for Orexo to show that we can tighten the belt when needed to ensure stability for the company. We can reach cost to EBITDA numbers, I would say we are very close to say we have our fourth quarter in a row with positive EBITDA. We did have a little dip in the third quarter last year. But if you recall, that was when we had to pay the fee to FDA for the application for weeks 1 to 4. Without that, this would have been our fourth quarter with a positive EBITDA. And we see that improves also even when we adjusting for these nonrecurring items.

But what is important for the company is, of course, our top line. And to drive our top line there's basically ensuring that our foundation Zubsolv is stabilized, and we'll have good -- stable, decent development of Zubsolv moving forward. But where the real growth is supposed to come is from the pipeline, it is from the launch of OX124. So of course, any delay in the launch planned for OX124 is delaying that possible launch.

At the same time, we can say every delay will also delay some of the expenses that we need to take around the launch of OX124. But we are seeing that launch of new products is important to grow our commercial revenues and we, in particular, have high expectations on the launch of new Pharmaceuticals, our digital therapies or digital mental health programs, we still think it's an interesting opportunity. But right now, we see that more like an option than something we're really putting a lot of money behind to drive.

Our AmorphOX technology is something that we believe can drive not only income from our own commercialization, but also from partnership. And here to have partnerships within in particular, biomolecules where we believe that the AmorphOX technology is very well suited to solve some of the issues that have been seen with biomolecules around stability and also around other delivery methods of the product, you can move from an injectable to a nasal spray or you can take away some of the inconvenience or pain that is felt with some of the injections due to some of the services that are put into the product. So AmorphOX is broadening the opportunity for more efficient drug delivery for biomolecules. So partnership like the one we have with Sobi is something that we believe long term could be a very nice driver for growth for the company.

And then we have OX640, which, again, where we have been a little in the vacuum here because of the uncertainty around the development program, but now when we have more clarity, we believe there are strengthened opportunity for us to find a partnership for OX640, it's still an opportunity. In particular, based on the feedback we got from physicians at the conference in the U.S. that gave us even more confidence that we have a product that has a meaningful differentiation in the eyes of the physicians and of the patients.

So summarizing, growing commercial revenues and profit contribution is important, and we see that will happen to capitalizing on our drug delivery technology and of course, improving access to treatment for all of our products. So for us, growth is important. But while we're waiting for this next growth driver, it is incredibly important to secure a strong profitability and balance sheet or strengthening the profitability from where we are right now.

With that, I will leave it over to questions, and thank you for your attention.

[Operator]

[Operator Instructions] The next question comes from Ned Brown from Prairie Capital.

[Unknown Analyst]

Nikolaj, I don't have a question, but I have 2 pieces of news that could be relevant to Zubsolv growth. One is in South Carolina, where I live, the state is using some of their opioid settlement funds to start a mail order, buprenorphine pharmacy, it will greatly help improve distribution and particularly in rural counties in the state. It will be a buprenorphine/naloxone product because that's what the DEA wants. So that should be operational in the fall. As I said, the state has put money behind it.

The second point related to Zubsolv is that the Department of Health and Human Services issued a request for grants last week to 59 states and U.S. territories. So the states specifically have to apply for the money is a fairly staggering USD 1.48 billion over 3 years. And one of the key criteria that they want to see from the states is expanded distribution of buprenorphine to people who are trying to get it.

So whether it's just total numbers of people on buprenorphine or Medicaid coverage or whatever. That said -- as I said at USD 1.46 billion over 3 years. So you might want to partner with your friends in New York, Kentucky and Indiana to make sure the requests have to be in by July 1. So that leaves less than 7 weeks to get the grant request in. So I just wanted to pass that along. I hope it's helpful.

[Nikolaj Sørensen, executive]

Thank you very much, Ned, and thank you for your comment at last quarter. I know you have been in touch with our -- some of my U.S.-based colleagues, and there have been some discussions about how we could leverage some of these opportunities. And I think you're putting the head on the nail here with regards to the grand money and the opioid settlement funds. And I'm pleased to hear that also this kind of movement is made from a national level.

We are working in several states in the U.S. We have [ grants in ] right now, working with health care providers to access some of these funds actually by coming up with programs that could improve access to medications and other solutions. So we are working actually with this, but it's, of course, an area -- we are a small player here. So we need to work with other partners who have direct access to the patients and I appreciate a lot of your comments. So thank you.

[Operator]

The next question comes from Samir Devani from Rx Securities.

[Samir Devani, analyst]

I think I have 3, so maybe just kicking off on OX124 and the additional work that you need to do and complete. I'm just wondering, do you think you'll have that done before the original PDUFA date? I guess that's question one.

And then just still on with the FDA, you mentioned in the report about completing some of the discussions regarding OX640 on the clinical trial. I'm just wondering what else is left to complete? And now having had those discussions, do you feel less or more confident in your ability to partner that product this year?

And then my final question is for Fredrik just on the corporate bond. You mentioned that there will be a further settlement in Q2. And I'm just wondering if you could maybe take us through what the cash flow impact of that settlement will be?

[Nikolaj Sørensen, executive]

Okay. I will take the 2 first and as you said, Fredrik, I will happily leave the last question to him. So the first one with OX124, so we knew that the area that FDA was highlighting was an area where we had expect that, that could be questions from the agency. And we have worked in parallel to see what kind of mitigation strategies do we have, what kind of mitigation activities do we have. So we have advanced the process to find a solution for this.

And then this thing -- so we believe we have a solution in place which could be implemented well ahead of the final PDUFA date. The thing is that we would probably need to test that in a population also. And there, it actually depends a little on the timing of some of the -- we're doing some pretesting right now of these concepts to see what kind of feedback we get. And I would say it's very border line whether we'll have that ready before the PDUFA date, which is one of the reasons why we believe it could be leading to a delay in the approval process.

But we would not have done the right job, if we are not working on a mitigation plan. And of course, you know some of the weaknesses and strengths in your application when you send it in, and this around the human factor is a difficult one. It's something that we've seen in a lot of other rescue medications where you need to iterate and we had some mixed results in the first study that we knew could be an issue for the FDA. And they came back. But in the interim, we have actually worked on the supply chain to see what can we do both on the device to make it more clear, how to operate it, but also in the instructions for you. So we were ready. But of course, we haven't taken the cost to test these new concepts before we knew exactly what to test and that's coming on the questions we received basically within the last few weeks from FDA.

On OX640, I wouldn't say that for the U.S. market, there's of course other stuff you need to get from FDA as we proceed, but this is really the critical path was around the clinical program. And we send in a program, where we build in some of the feedback we saw for the [ AIS ] Pharma products. So we basically adjusted the clinical program. We had planned initially based on the feedback they received and we sent it to FDA. And we got it -- we didn't get it, there was no changes coming back from FDA. So in that way, it was quite positive.

And I think the clinical program can be done in a relatively smooth manner. It's not a very big program. So I think this is strong and it's good for the partnership. I do think that one of the things that we do receive questions from partners is around Europe and what are the requirements for EMA. And that's a little of a timing and tactical question for us is when do we reach out to EMA and then in what way. So I think that's something that some of the partners would appreciate to get more feedback on.

But the biggest market in any calculations for this is the U.S. market. And here, I think we have a quite clear pathway for what we need to do to get it approved in the U.S. and the team continues to work on this. I'll just say that while we were talking with partners, it's not like we're stopping the development program at Orexo. So we continue to work on it. And I think this -- right now, we have basically what we need for these partnering discussions. And I'll leave to Fredrik on the [indiscernible].

[Frederik Jarrsten, executive]

So yes, the bond -- I mean the actual transaction was done in March and that happened to be over the quarter, so quarter ending. So that's why the first part was related to our own transactions on the bond, which is selling the old bond, SEK 49 million and acquiring the new bond of SEK 25 million. So that's why the positive contribution in liquidity.

For the quarter, next quarter, we did acquire additional SEK 5 million of the bond so that is negative. So if you compare the situation for us, we will end up in the new bond with a holding of SEK 30 million compared to SEK 50 million in the old bond. And then we have, obviously, cost for the bond issue, and that will be put on the balance sheet. But obviously, we need to pay it.

[Operator]

The next question comes from Klas Palin from Carnegie.

[Klas Palin, analyst]

Maybe I'm just having a question what you already have answered, but just to clarify, what you got from FDA regarding OX640, the clinical pathway forward that is sort of in line with what you have been discussing with the potential partners with previously?

[Nikolaj Sørensen, executive]

I would say it depends on what partner. So there's one partner where I think this will come as a positive -- positive in completion or but not -- it will come. They are aware. So this is -- I think it's smaller than what they have planned.

The other partner I just spoke have come in here after we have submitted it to the FDA. So I think they're building their case based on what we submitted to the FDA but there was one partner that we worked with last summer and who is still part of the mix right now, and the program we have is definitely leaner than the program that they were planning with.

[Klas Palin, analyst]

And the future strategy you need to do, they sort of are also in line with your time line to get OX640 to a filing?

[Nikolaj Sørensen, executive]

We have to -- we can definitely do the studies within that time line. But we are very interested in having a partner on board before we go into the study. So right now, I will not commit to a time line for how we're going to run it.

[Klas Palin, analyst]

Just a question about this wholesaler destocking, have this had any impact on access of Zubsolv and other controlled substances for patients? I had never heard anything about...

[Nikolaj Sørensen, executive]

As we saw on the graph, which is that I showed, the sales to pharmacies were actually quite stable. So we did see some of the wholesale so part of the effect was maybe that some of the wholesalers during the second half of last year, had built up a little higher inventory than what they usually have. So I think we had 2 effects towards that first they were a little -- when we ended the year, there were on a slightly higher level, not -- normally, we see that increase just before Christmas, but we didn't see that this year. But if you look across the second half of the year, there was a slight buildup starting in the late Q3 and then into Q4 and then it was stable and then they drop down.

But right now, 2 of the wholesalers are at very, very low levels. And -- but sales to pharmacies has been stable and we actually asked our sales force, if there are any complaints about access to the product, and we haven't heard that. So we think this is -- there are many speculative reasons for this. We know there are new -- some of them have a more strict view on how much opioids controlled substance that can have on inventory. So that could be an effect that they're actually reducing the inventory of controlled substance in general.

It's -- we also know that at least one of them referred to in their quarterly report that they had to pay money into the opioid abatement funds as part of the settlement during the first quarter. So it could be a way to free up cash that they actually reduce the inventory on some products. And the natural products to do this on are products where you have a relatively stable supply and stable demand.

So for Orexo has not, at any single time during 10 years, been out of stock. So we have been able to supply them whenever they have sent the order. And I think that is important. If you want to go down in inventory, then you need to be sure that you will get supply from the supplier when needed. And since Orexo have been very stable as a supplier. I think that in one way, penalize us in this process because they're quite certain that even going down to one week less of inventory, they would still be able to supply the market. But right now, we believe that they are on an unusual low level, so we would expect some kind of normalization in the second quarter.

[Klas Palin, analyst]

And then I would like to jump to your own balance sheet and inventory. It was up during the quarter, is this related to this effect? Or is there any other reasons?

[Frederik Jarrsten, executive]

Not any other reasons. I mean, that's a regular operations consequences, I would say.

[Klas Palin, analyst]

Okay. Should we see this as a more of a normal level compared to what we saw in Q4 then?

[Nikolaj Sørensen, executive]

I think in hindsight, Q4 was maybe a little higher than what we usually see, but we didn't see any buildup in Q4 dramatic in a few weeks, which we have done previously, as you also saw the year before, why I included the numbers for December, the year before you saw some jump up in December. We didn't see that this year. But I would be surprised if at least these two of the three large wholesalers in the U.S. are right now at a level which is very low. I would be surprised if they're not jumping up a little.

How much that will impact the overall inventory, I don't know. But they should continue to lower is unlikely, I can't see that we should have this effect coming into Q2 also that you see an even further gap. So either they normalize and we will follow the sales to pharmacies.

But if you look at the curve that was much higher per week than what we reported in sales to wholesalers, so if we can just stay on that level throughout Q2 that will have improved sales numbers if it's a compensation that they actually increased inventory somewhat during the quarter, that will, of course, strengthen sales even further.

[Klas Palin, analyst]

And yes, then my last question about -- you have been quite successful in lowering your OpEx. Are we at the sort of a bottom level now or I mean ex-legal costs? Or do you see further improvements that could be possible?

[Nikolaj Sørensen, executive]

I mean, we can just conclude that doing the math, we are well below the target. But we know that other costs are entering the scene regarding some sort of commercialization efforts in prepare [ production ] OX124. So I think we can't give any more guidance on that.

[Frederik Jarrsten, executive]

But I would say we are constantly looking for how we can lower expenses. And that goes for everything we are reviewing after COVID, we have less people in the office. We are looking at our office space in Uppsala. We are working continuously with our cost of goods. And it's quite simple. If we can lower our expenses or Zubsolv will improve our gross margin with 1%. That translates into about SEK 6 million in profit.

So any percent that we can work on our gross profit is important. So we're also looking at continuous ways that we can improve our cost of goods sold. So I don't think a cost conscious approaches ever ending, you just need to focus. But that is, of course, also to free up money to put money, where we believe we can see growth. And that could be OX124, it could be further investments into OX640 or other development programs that where we want to invest. So overall, I wouldn't expect us to come at a lower level. But if you just take the business as we are right now, I think there will be an additional statements. We hope to free up money that we can invest in other places.

[Nikolaj Sørensen, executive]

We received a question also from the webcast that was around Digital Mental Health Programs and can we expect any revenues from that in the future quarters?

I would say we have a decent amount of short term goals that we believe could lead to income coming from digital mental health. Some of the grant applications we have, I think, could be recognized more under the other income than on revenues, but it will be a positive, you can say, income stream to Orexo. And of course, I would just say these brands that why are you doing that, shouldn't they lead to revenues? The idea is, of course, that we are running projects together with health care providers, which, if successful, could be scaled up to a much bigger solution, which would give you a more ongoing business opportunity.

We have several graphs in several states right now. If they are successful, they would lead to income coming on to digital mental health. We're also working on the VA, where we are now starting up with a new vendor, who have been working successfully to starting up Digital Mental Health Programs in some states in the U.S., and we will see where if they can use that experience to also help us navigating the veteran affairs community. So we have short-term goals, but I must admit that I have been wrong before on digital mental health. So I have to be a little cautious on what kind of guidance. I would say so much, I do believe we will get some income to digital mental health.

Will it be material to Orexo compared to our income from Zubsolv and royalty streams? That I [ doubt ] will happen here in the next few quarters.

With that, we have no further questions. And in Sweden today, it's actually -- I think the stock market has closed now. So it's a half day. So I'm pleased all of you, who dialed in and listened to this call. So thank you so much, and have a pleasant day. Goodbye.