Orexo AB

STO:ORX

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, and welcome to the Orexo Q2 interim report. Today, I'm pleased to present Nikolaj Sørensen, CEO; and Henrik Juuel, CFO. [Operator Instructions] Speakers, please begin.

[Nikolaj Sørensen, President & CEO]

Thank you very much. Good afternoon to all of you in Europe, and good morning to those of you dialing in from the U.S., and welcome to this Q2 report presentation of Orexo.So the second quarter of 2018 in many ways, I think, is one of the quarters I'm most proud of since my start at Orexo 5 years ago. And the reason for that, apart from a very good financial result, is that we start to see some of the operational improvements that we have worked intensively on the last years is finally giving some effect. Most noteworthy is the COGS improvement, where we have lowered the cost of goods sold per tablet compared to the first quarter with 25%. And we'll come back to that a little later. But also I see that our pipeline progress is moving fast. We've been able to take an idea on to human trials within a year. And we see that our performance in the U.S., even if we exclude some of the exclusive contracts, is actually looking pretty good for some of the more competitive areas of the business in the U.S. And with that, I will start my presentation. I will move on to Page #3, which is the Q2 2018 highlights. So first, on the financials. It's clear that we have had a very strong net revenue growth, partly helped this time by a one-time milestone for Zubsolv approval and launch in Europe. But also we see that even when we adjust for this one, we see strong growth in Zubsolv sales in the U.S. This is leading to a very strong cash position for the company, where we're just a few million short of actually reaching SEK 0.5 billion in cash and with a very strong net cash position.Our EBITDA is one of the best that we have ever reported with a SEK 50.6 million positive result. And what I think, just looking behind this data, even though that includes the EUR 3 million or SEK 30 million milestone, we actually managed to be positive this quarter without any noteworthy payments from any other places and turn the company profitable excluding the milestone. Full year, we are -- as we've said all the time, we expect to be profitable. And we are looking forward to some strong Q3 and Q4 quarters, where we will be helped by royalties from Abstral in Europe.On the commercial progress, we see the momentum that we saw in the first quarter, when we have some exclusive market access agreements and 96% access to the commercial landscape or commercial market in the U.S. We have seen a strong growth of Zubsolv both, of course, year-over-year, where we have the exclusive contracts helping us, but actually also when we compare quarter-over-quarter, where we have an 8.6% growth versus Q1. And what is really encouraging here is that we're seeing growth in some of the large commercial plants, the 2 largest PBMs, pharmacy benefit managers. CVS Caremark and Express Scripts are both showing good growth for Zubsolv.And we are actually, both in Q1 but also in Q2, we're the only branded product in the U.S. which is gaining market share, looking at a quarterly basis. Finally, on our R&D, we are now taking one more project into human trials. It's our OX124 project that is getting ready for the first exploratory human Phase I trial in Q4.Moving to Page #4, which I know is something that takes a lot of focus from a lot of you. We had expected to get a result on our patent litigations by now. We had guided on the first half of this year. And based on history and previous cases from the court in the U.S., there have never been a case that have taken longer than 9 months. We passed that last week. And obviously, we have not received a decision from the U.S. That means that we must be pretty close. But at the same time, there's no way for us to get more firm guidelines on how long a time it can take. But we do know now that our case is one of those who have taken the longest time for the court to publish their final decision. So again, I hope that will happen sooner rather than later, so we can put that into the history books. We do remain positive. And the delay that we have right now is not something that I see as negative. Actually, just as we said before, that have taken longer time indicates that the court is doing something other than just affirm the decision from the district court. And as we are the one who have done the appeal, a reversal of that decision is, of course, what we desire and what we believe we will obtain when the decision is published. We do have another court case running with Actavis, which is the one that is driving some legal spend during this quarter, and that is our infringement case on the '996 patent of Actavis generic versions of Suboxone and Subutex. That one is up in full swing. And we expect to get the first court decision next year.Moving to Page #5. And just a very short highlight on our strategic agenda. It is very clear from Orexo that we are today, I can say as a commercial organization, a one-legged company with one product that is driving our sales and our growth. And that is Zubsolv. At the same time, we have managed to make Zubsolv a very strong profit contributor. We will come back a little later to the profit contribution from the U.S. organization, which indeed is looking very positive. That positive momentum in Zubsolv is what enables us in investing into our pipeline but also working with business development. And here, we are making a lot of progress. And we are in discussions with multiple different companies about different opportunities in different stages. So our ambition is still to add additional commercial products to our pipeline and to our commercial portfolio with the next few years. And the result of this quarter is definitely a good step ahead to accomplish that ambition and aspiration.Moving to Page #6. If you are -- this is more or less the same slide we had last time and I think the most noteworthy thing is that our OX124, as I said before, is now moving into clinical Phase I trial. We have done the formulation at Orexo. And right now, we're actually into all of the more, let's say, administrative processes of moving the technology and moving the formulations over to a clinical research organization, who is going to do the Phase I trial and actually also produce the material for the Phase I trial. So we do expect to have the first subject in -- during Q4 with the results coming next year. I think the biggest challenge for OX124 is probably not to make a product that can be approved. I think the biggest challenge we have is to make a product that is sufficiently commercially differentiated to the leading treatments in the U.S. And this is really what we are focusing our Phase I trial on. Can we differentiate from a commercial perspective in a way that makes it meaningful for the patients and the users, in particular in the U.S.? On our 2 other projects, we are still working on our formulation alternatives. And it's making good progress.Moving to Page #7. This is our pipeline chart, which is more or less a summary of what I just told. I think the one things that are probably small notice is that we have moved -- Zubsolv Europe has moved from registration to being launched. Our OX124 has been moved halfway to clinical Phase I as we are now basically just doing the technical transfer to this clinical research organization and have started manufacturing of the clinical trial materials. So that project will progress into Phase I later this year. I'll also just highlight, we've decided to take OX51 out of the pipeline chart. And that's more a symbolic event as we are not working actively from an R&D perspective on OX51. But we are looking for partners. And we actually have some concrete interest in the product. So it's not a dead product. But when we look at the cost and investment from Orexo, we are not investing into OX51 right now but looking for partners to take the product further. And here, we do have some ongoing discussions. But as those of you who have followed us for a while know that these discussions can take time.So moving to Page #8 and into the U.S. market for Zubsolv, which clearly is continuing to expand. And I think it's very interesting. I read an article in the New England Journal of Medicine from last week, where there's 2 authors of the article. They were both primary care physicians who had a very strong argument why you need to open up prescription of buprenorphine into the primary care physicians in the U.S. and not restrict it to those who have a DATA 2000 certification. And this is really a trend that we are seeing in the U.S. right now, that more and more physicians and politicians are arguing that we need to expand the utilization of buprenorphine, which of course, will benefit certainly Orexo and Zubsolv, should that happen. So even though we are seeing a strong and actually increasing growth rate in the U.S., it's nothing compared to what it actually should be, according to these 2 doctors as they write correctly more than 80% of the patients who should be in treatment don't receive any treatment today. So should that happen, we're moving from DATA 2000 to primary care physicians with -- we are moving basically from 6,000 to 7,000 active physicians to 320,000 physicians. Of course, that is an opportunity for Orexo and for Zubsolv in the market in the U.S.Moving to Page #9, which is more specific on the sales development of Zubsolv. As those of you who have been following us previously have seen that -- it is a little of a -- both a roller coaster and a staircase model, where every time we get some market access agreements or the one time we have lost -- 2 times we have lost agreements, that had a negative impact. When we win, it has a very positive impact. And what we saw in the beginning of this year was a steep climb with the exclusive agreements of Humana and Envision. But what I do find that's very encouraging is this development with CVS Caremark, where we in Q2 increased the number of prescriptions with 19% compared to the first quarter. So when we are in a competitive environment, actually even competing with both generics and the largest branded alternative, we do manage to see good growth. Moving to Page #10. As I said in the previous slide, market access is really the trigger behind these leapfrogs or a jump in growth. And of course, throughout this year, we will see a very good comparison to last year. And what is really the challenge for us is to grow not only compared to last year because that will more or less, by definition, be a strong double-digit growth but moving growth quarter-over-quarter. And here, the 9% growth that we saw compared to the first quarter is very important. And we did that despite the cash market is declining for all branded alternatives. The entire cash market is also flat or slightly declining. But especially the branded products, the cash market, that means patients who have no insurance, is declining because the generic products are available at a much lower price out of pharmacy. What is driving our growth in both Q1 but also in Q2 is the exclusive contracts. As I said before, what is positive for us is when we do face direct competition with the market leader with the generic products in the market, we actually increase our share and increase our growth more than the market with CVS Caremark and ESI/Medco being the 2 largest payers in the U.S., both of them showing very good growth in Q2 over Q2. Our market share on a quarterly basis ended up at 5.6% compared to 5.5% in Q1. Look at the average, we ended the quarter here up to 5.7%, which is more or less where we started the quarter. Also then there was a little dip in the beginning of the quarter, but we're back on the same level as we were before. But our average market share in this quarter is higher than in Q1. Another big focus in the market is the impact of new competitors. And we do have a depot formulation that has been launched into the market, SUBLOCADE. I saw it today that our -- the first company out with a depot formulation, Indivior, with their product SUBLOCADE have come out with a lower guidance than what they had previously. And I think that reflects what we have seen in the market is that the depot formulation are facing a significant challenge in the distribution model, in the payer model. But actually also when we listen to the doctors, there is a challenge with patient resistance, that patients actually, if they are well treated, don't see a need for changing to a depot formulation. And I think there could be other drivers in the market as well which could be a challenge. But so from our perspective, we still see there is a market for the depot formulation, but we don't see that in the broader market, particularly when we have done a deeper research during this quarter into what physician categories are there and which physician categories can be expected to have the capability of both delivering, storing and prescribing a depot formulation. And here, we are down to a quite low number of the overall market today. But maybe there will be a new market growing up with more institutional utilization of the depot formulation. But for Zubsolv, so far, we haven't seen any impact of the depot formulation in our market space.The other area that is definitely within the space that we are, and that is the generic market. And here, during the quarter, we saw 2 generics that have been approved of the market leader. One of them decided -- and here, I must admit that it was very much against my expectation. One of them did decide to launch at risk. A few hours after that was announced, Indivior managed to get a restraining order, which I think [indiscernible] during this week or is at least up for the district court to decide whether that should be a permanent restraining order during this week. But in a few hours after they did put on that restraining order, but obviously, the generics succeeded to ship a lot of products into the market and have taken some market share in the following weeks. For example, it's 4% last week.In normal market dynamics in pharma, one generic product is unlikely to put a lot of price pressure. The big issue is if you have several generic products and they're coming out at the same time fighting for space. But at the moment, we see that the most likely scenario, should the restraining order be lifted, is that we will have one generic in the market. And that generic will primarily impact Indivior and the Suboxone Film product as they also notified about today. For Zubsolv, the impact is likely to be much more limited, if any. And the reason for that is that we're already competing in a market with multiple different generics. So we have a Suboxone tablet market, where we have several generics available at a quite low price. And even in this market that we have seen throughout the first half of this year, we have managed to gain market share. We have managed to grow our business. And knowing the cost of manufacturing, it is very clear that manufacturing a Suboxone tablet generic will be a lower cost than manufacturing a Suboxone Film generic. So that we should see more price pressure because of the film, I think, is unlikely. But at the same time, there can very well be market dynamics around the branded competitors, which would open up some market opportunities for Orexo and for Zubsolv. So it could actually be turned into something positive. There will be some turmoil in this market. So right now, I see none of these 2 market dynamics to have a major impact on Orexo. And we will, of course, monitor the situation closely and put in the appropriate response to whatever we see in the market. But at the moment, I don't think this will have a significant impact as especially generic could also lead to some opportunities for Orexo.With that, I will leave it over to Henrik to go through the financial results in a little more details before I will end up with a little outlook for the year. Henrik, please?

[Henrik Juuel, Executive VP & CFO]

Thank you, Nikolaj. And as usual, we will start with the net revenue breakdown. And this time it is on Slide #11. Total net revenue for the quarter came in at nearly SEK 200 million or more precisely SEK 199.7 million and was clearly driven by strong growth, Zubsolv U.S., 28% growth in Swedish krona. That was helped by a $1.4 million adjustment of rebate accruals relating to prior periods. I'll come back to that in a moment. But I think what we are extremely proud about is the more than 20% growth we saw in demand during quarter 2 compared to the same quarter of last year. The quarter net revenue was also impacted by the milestone income we received from our partner Mundipharma or earns, I should say, from our partner Mundipharma triggered by the launch of Zubsolv in Germany. The product is now launched both in Germany and in Sweden. Abstral came in at nearly SEK 12 million, so above last year's level of SEK 10 million. Edluar, on the other hand, you will see that on the table that we have recognized a net of minus SEK 1.4 million. And that is simply due to an adjustment of prior periods due to wrongly recorded numbers by our partner, Mylan. So total, SEK 200 million, up 25.5% compared to the second quarter of '17. And on a year-to-date basis, that takes us to nearly SEK 340 million, up 18.5% over first half year 2017.Turning to the next page. Our usual growth factor waterfall on Zubsolv U.S. You will recognize to the right the 27.6% growth in Swedish krona that we realized year-over-year for quarter 2. A key driver this quarter was clearly the more than 20% growth in demand. That is the first box to the left. And that was actually achieved in the market that grew 12.3%, meaning that we did gain market share during this period here. And this is clearly the effect from the improved market access situation that we secured effective from 1st of January 2018. And we have during the quarter seen continued volume gain both in our exclusive part of the business but also in the nonexclusive part of the business, particularly driven by the regained access to the CVS Caremark formulary that enables us to compete much more broadly in the U.S. markets.Next, growth factor that is the wholesaler stocking. This quarter, slightly negative or moderate negative impact, as we saw some wholesalers destocking during the second quarter, which is quite natural after the first quarter of '18, where we saw a rapid increase in demand and a rapid increase in wholesaler stocking as a consequence of that. Net price factor, when we compare the 2 years, was positively impacted by the price increase we introduced from 1st of January this year, which was 6%. And here, you will see the impact of the adjustment of rebates from prior periods of USD 1.4 million. And just a few words on that. I think the way the system works is that we are selling to wholesalers. And before the product is sold to the wholesalers, before we know exactly what rebates will pay on these, they have to pass through wholesalers, subregional wholesalers, pharmacists and then the patient will have to pick up the product at a pharmacy. And depending on that patient's insurance or public program coverage, that will eventually determine the rebate. But of course, already when we sell the products to the wholesalers, we have to make assumptions on these rebates. And we do that on a monthly basis so that we only record an expected net revenue.So what we have realized is that when the invoice system comes in finally from the payers that we have accrued $1.4 million too much. And this amount primarily relates to the 2017 periods. So we did nothing wrong in the past. You can say we made the best assumptions we could at the time. But reality turned out slightly better than we had anticipated.Final growth factor, that is we saw a minor negative impact from the foreign currencies, the U.S. dollar, the SEK rate were more or less the same when comparing the second quarter of '17 with the second quarter of '18. So altogether, nearly 28% growth in Zubsolv, and in local currency, nearly 30% growth.Turning to the next page. We will see the full P&L. And if we start from the top, we already talked about the net revenue. So if we go to the gross profit line, SEK 162 million, up 32% compared to last year, of course, driven by the higher revenue level, and in particular, the milestones that flows all the way to the bottom but also this time helped by the improved COGS situation we are facing.As Nikolaj alluded to in his opening, I think this is an area we are very proud about and we are very happy to see the first real signs of all the initiatives we have put behind the manufacturing efficiency program. We used to have an inventory level close to SEK 500 million. This basically meant that we could do nothing to improve the cost of goods sold. This quarter, the inventory value fell below SEK 200 million. And we are now producing to demand, which gives us a lot more flexibility in terms of sourcing, et cetera. So when you look at the cost of goods sold, rather than looking at the market margin, if you look at the specific amount here than what we had managed during the quarter is actually to reduce the average cost per tablet that we sell by 17% compared to the baseline we have established, which is the average cost for 2017. But comparing it to the first quarter, which was somewhat of an expensive COGS quarter, we are actually talking about a 25% reduction in the cost per tablet. And that is the amount Nikolaj mentioned previously in the presentation, so quite a significant reduction in cost of goods sold per tablet. And I'll come back to that in more [indiscernible] in one of the next slides.Now turning to the operating costs. Close to the same level as last year, SEK 117 million in total against SEK 114 million in '17. Selling expenses more or less at the same level. But here again, I think, this is a testimony to what we have been preaching all the time. We have an extremely scalable commercial organization in the U.S. So even with much more doors being opened with the improved market access, we can actually managed to cover that and grow the business with more than 20% on a demand basis with more or less the same costs.Administrative expenses, SEK 34 million, significantly higher than last year and all driven by legal expenses related to the IP litigation case against Actavis we got in the Suboxone and Subutex. And we haven't included much for the ongoing appeal case, where we're just waiting the final decision basically. R&D expenses, close to the same level as last year. And the main project consuming resources this first half year has been our manufacturing efficiency program and our OX124 initiative as well. Other operating expenses, a positive of SEK 2.9 million, created by a revaluation of intercompany U.S. dollar receivables and positively impacted by the appreciation of the U.S. dollar versus Swedish krona.So altogether, this gives us an EBIT for the quarter of SEK 45 million against SEK 9.8 million last year. Net financial items, you will see this time positive. This is where you would normally see the cost of our corporate bond loans coming through. But actually this time, we have a significant amount of U.S. dollar deposits owned by the parent company. And again, the appreciation of the dollar has helped us here. And it actually more than help raise the interest expenses on our bond.The tax line, you will see also positive this time. And that has been driven by an adjustment of the tax assets that the parent company has on the balance sheet. And that was updated to reflect newly announced corporate tax rates in Sweden, effective from '19 and second tranche from 2021. And then it also reflects an updated outlook for 2018 for the parent company. So an EBITDA at the bottom of SEK 50.6 million and on a year-to-date basis, SEK 34 million.Let's turn to the next page, Page 14. We have shown you this before. So I will not walk you through all the detailed texts on this page. But it is again just to highlight the significance and the value of the assets we have with the U.S. commercial organization. What we have seen with the growth in Zubsolv in the U.S., combined with the lowering -- lower COGS levels, we are seeing a significant increase in the contribution from our U.S. organization. And we can say that already first 6 months of '18, we are already at the level we saw for the full year of '17. So our significant assets we have here, and that is, you can say -- even here sitting on untapped synergies, our strategy is to identify commercial-stage products that we can put into this organization here and make it even more profitable.Next slide, #15. That is the same slide as we showed last time again, and it is to give you some more insight into our manufacturing efficiency program, and particularly the impact on the cost of goods sold. So I will direct your attention to the lower left graph. The brown bars is what we presented last time in connection with the Q1 reporting. And the orange bars, that is the update we have just provided here. The only change we have made to the Q1 reporting is that this time, in order to give you some better guidance and direction, we have normalized quarter 1 and quarter 2. At this time here, you will see, if you check your presentation, that Q1 '18 actually came out at index 111 as it was a rather COGS expensive quarter. We have adjusted that and actually taken up to Q2 to an index 88. If you have not done that, we would have been closer to an index 82 for the second quarter. The reason for this is that what we are looking at here, which is supposed to be more directional and for your guidance, we are looking at the bill of material to manufacture Zubsolv and applying the contractual cost that is associated with that bill of material. So if everything goes according to the manufacturing plan, these are the cost per tablet index that should prevail. But of course, in actual numbers, you have more than this. You might have variances during a quarter that could be that manufacturing yield doesn't come out as you expected. You might have to scrap that. You can have indirect production costs that are either underabsorbed, et cetera, et cetera. So we believe that this picture here gives you a better view on the trend going forward.So what you will see from this slide is that we are actually ahead of the plan we shared with you in the second quarter. At that time, it was still a little premature as we have not -- we could not yet talk about our plans to transfer the technology to a new contract manufacturer in the U.S. That we can do today. We have basically been through the process of transferring the technology and just awaiting the final approval from the American authorities, FDA, to start manufacturing the commercial batches.So what we expect is to see on a trend basis a slightly lower level that -- in Q3 that we saw in Q2. But in actual COGS, probably around the same level or slightly higher in Q3 than we have seen in Q2. But in Q4, we will start to sell. That is the plan. Some of the first batches manufactured by our new contract manufacturer, which will take the cost of goods sold even further down, not with a full quarter impact but with an impact expected from December. And then, of course, moving into 2019, that is when you will see full quarter impacts of the first plan. And this time, we are guiding that it will be at least a 25% saving compared to the average cost per tablet we realized in '17. And that is an improvement since the Q1 reporting, where we said approximately 25%. We will give you a further update in connection with the Q3 reporting.Next slide, a picture of our cash flow for the period and our financial position. Q2 came out with a positive cash flow. And all of it is basically generated from operating activities. The positive operating earnings contributed positively while the changes in working capital had a negative impact, primarily due to increased receivables. And here, that is mainly driven by the milestone, the income we have from Mundipharma, which was recognized as revenue. But it was a receivable in the balance sheet. And we are receiving the money here during July. So when you look at the total cash position at the end of the month, very close to SEK 0.5 billion. That does not include the SEK 31 million that we will have received from Mundipharma during July. So a very strong cash position that allows us to continue pursuing our strategy basically.Turning to the next page, which is the outlook for 2018. So in principle, an unchanged outlook but with some more specific guidance on this page here. First of all, the EBITDA performance year-to-date is in line with the guidance we provided previously. We said that Q1 would be negative, but we will be positive for the full year. And we are today already positive on a 6-month basis. And we do expect a positive EBITDA both for the third and the fourth quarter. Remember, this is when the majority of our Abstral royalty kicks in as well.We also guided previously that milestone income for the year would be slightly above the 2017 level that we have shown now, we got the SEK 31 million against the SEK 22.8 million -- SEK 21.8 million last year from the OX-CLI project. There are no more milestone income expected for 2018. We also said previously that for '18, we expect to continue to deliver positive EBITDA, yes. And it was driven by Zubsolv, the U.S. revenue and continued focus on cost control. I do believe we have confirmed here the positive growth from Zubsolv both in terms of the absolute growth following the market but also growing beyond the market and gaining market share. The manufacturing efficiency program, we talked about that. We have seen the first real visible effect. And there is more to come from this program basically.Full year OpEx. We keep our guidance of approximately SEK 500 million for the year. We have spent approximately SEK 230 million towards the half years so that means we are expecting to spend SEK 270 million for the last 6 months of the year here. And one of the reasons here is basically also that now in the new updated guidance here, we are assuming the current exchange rate environment, which is approximately the U.S. dollar has appreciated approximately 9% since we issued the first guidance.So the increase spend on OpEx, I think, is going to be driven by, you can say, selling expenses to some extent but also increased spend in our pipeline. We have the OX124 entering clinical Phase I in the fourth quarter. And then we have seen lately increased legal expenses related to the litigation against Actavis on this Suboxone, Subutex case. And we are right now going through quite expensive phases of that litigation. And finally, I can just reiterate here that we have only included a very limited amount for the Actavis litigation regarding Zubsolv, assuming a positive outcome of that one.And with that, I will turn the word back to Nikolaj.

[Nikolaj Sørensen, President & CEO]

Thank you, Henrik. I will do a fast roundup and then we'll open up for questions. So clearly, I think one of the biggest opportunities for Orexo is that we are in the core of what I believe is the greatest health issue that the U.S. has seen for a very, very long time. And there is no doubt that there is a need for action. And I think more and more people in the U.S. recognize that. And a need for action today and the best treatment available is buprenorphine treatment. And here of course, that would be a major opportunity for Orexo if that should happen. We do have a very strong financial performance. As Henrik has just presented, we have a pipeline of interesting projects that we think could further enhance and improve the treatment of people who are at risk of opiate dependence or actually suffer some opiate dependence. We see market access that continues to drive sales growth in the U.S. We have a European launch during this quarter in Sweden and Germany and looking forward to seeing more countries being added as we turn into the second half of the year.On the business development front, given our strong financial position, we are looking at several concrete opportunities. But as I've said several times before, we, of course, are not afraid of backing out from an opportunity if we don't see that it creates value for our shareholders. And finally, which I think is probably the biggest thing we are waiting for right now is the decision on our patent litigation. We had expected that to come latest last week but have to realize that right now, we have not received the decision and can just hope that that will come as soon as possible.And with that, I will open up for questions and answers. So operator, can you please open the line?

[Operator]

[Operator Instructions] Our first question comes from the line of Frédéric Gomez from Pharmium Securities.

[Frédéric Gomez]

Firstly, I know that you reiterated the same guidance for 2018. But now that we have maybe a better visibility on the numbers with Zubsolv this year, can we imagine that you will be close to the SEK 600 million this year? Is it fair to take this assumption? The second one is on the European launch, you mentioned that for the moment, the drug was available in 2 countries, Germany and Sweden. But how should we think about the coming quarters and then the next countries? Can we imagine easily that, for instance, Denmark and Austria should be the next on the list, knowing that for France and maybe the U.K., it will take more time to get the reimbursement in place? And the final question, because I'm looking closely to the OpEx -- and thanks for the clarification for the second half for this year. But if you look at the selling costs since Q1 '17, it has been always below the SEK 50 million per quarter. So it's remarkable. And I was just curious because you mentioned during the call that you are quite confident to be able to grow the sales in the U.S. without additional selling costs. And I'm just wondering if you can, for instance, achieve the SEK 200 million mark without increasing the selling costs and if we should think about a trend of always below the SEK 50 million mark per quarter.

[Nikolaj Sørensen, President & CEO]

So I didn't get your first question. But Henrik, did you get it?

[Henrik Juuel, Executive VP & CFO]

Yes, I got that one. It was if we could be a little more specific around our guidance for the year and in particular the total sales level. And we have decided to guide the way we have. And unfortunately, we cannot provide more specific details regarding where the year could end or start guessing on that. But I think we can help you in the way that you -- if you look at the Zubsolv growth over the years, you will see that the big jumps always happens in connection with major changes in market access. So when you look at that -- and then in between these big events there, we are -- it's, of course, a matter of the field force doing the hard work in the field and gaining market share. So I would look at that and say, "Okay, where are we today, what have we communicated in terms of additional market access changes?" And make your assumptions on the potential -- the gains in the open market for the rest of the year. Unfortunately, we cannot provide more specific guidance at this point in time.

[Nikolaj Sørensen, President & CEO]

I'll take the last question on OpEx as well?

[Henrik Juuel, Executive VP & CFO]

Yes, let me take the OpEx one as well and selling expenses. I think, yes, we have a very scalable organization at the moment. And we have managed actually to deal with the much-improved market access situation from 1st of January more or less with the same organization. We did make -- or hire reps in a few -- a handful approximately new territories late last year to take advantage of the new market access. And so what I think you should expect is that the current level is probably a little lower than what you should expect going forward. We are prepared to invest whenever we see that there is an opportunity. And we have for the first half year, you can say, we have had a few vacancies in the organization as well and saved some money that way. We are keen to replace those positions, of course, with new people. So you should expect a somewhat higher level. And if you compare to the first quarter of this year, the U.S. dollar has also appreciated nearly 9%. So the second quarter is probably better benchmarked. But expect some higher level in the second half of 2018 than you saw in the first half.

[Nikolaj Sørensen, President & CEO]

I think I can add to that one is that when we invest in field force and when we need more field force, that is connected to market access changes. So when we see improved market access in one region in the U.S. we will add more field force. If we see that we have reduced market access, we will decrease our field force, which is what happened a few years back when we lost CVS Caremark. And now we have reinvested some of that as we gained. So your second question was around the European launch. And here, Germany is the fastest way out. In Sweden, the launch has just started. And in Sweden, those of you who are here know that July is more or less a dead month. So I don't expect anything to happen until after July. Which countries will be next is actually up to Mundipharma to decide and where they see the opportunities. You did mention Austria and Denmark. They would be the natural next countries. Denmark would actually normally have been the first one, together with Germany. But exactly when that will happen, that's up to Mundipharma and their organization to decide when it will happen. We know that they are working on several smaller countries even down in the south of Europe to get the product into the market in a relatively short time frame. But here, unfortunately, I'm a little restrained in what I can say because it's Mundipharma who is doing the launch planning for Europe. So thank you, Frédéric.

[Operator]

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

[Klas Palin, Equity Analyst]

And my first question is also related to the European launch and if it's possible to say anything if you are expecting to earn any royalty from Mundipharma in the second half. And also if you expect to any -- further production income and costs related to Mundipharma in 2018. And also yes, from my understanding about the COGS improvement, is this solely related to the new contract manufacturing in the U.S.? And if we compare it to what was described in the first quarter conference call.

[Nikolaj Sørensen, President & CEO]

Okay. On the first one, Klas, regarding the -- yes, I can say, yes, we do expect royalties from Zubsolv in the second half of 2018. With the launch in Germany, we should gain royalties on that. We have not provided a guidance on the level. And again, here we are depending on Mundipharma for what guidance and what we can communicate. But we are expecting royalties. With regards to manufacturing, we have sold material to them. And really, whether there will be more is depending on the demand. But right now, we simply don't know. So that will be based on the sales pickup in Europe. It could also be based on what markets because Mundipharma is ordering material for specific markets as well. So if they're launching in other markets, it could get some more sales. But we can't give more guidance on that at the moment. And with regards to your second question on COGS, I think I can just continue to take that. The big improvement that you see right now is not related to the change of manufacturing because we have actually not changed the manufacturer. The improvement that you see right now is due to our increased scale in manufacturing of the 5.7-milligram tablet while we're moving from 200,000 batches to 1 million batch sizes as that is the volume product in our pipeline. And that is giving us the effect we're seeing right now. In combination with some of the inventory produced in 2016, when the dollar was even more higher, that has been replenished. And what we are seeing right now is actually we have produced when the dollar rate was lower than where we are right now. And that, of course, gave us some help. Henrik, do you want to...

[Henrik Juuel, Executive VP & CFO]

Yes. No, absolutely right. And if I can just add that the impact from changing to a new contract manufacturer is not visible until -- expected in December, when you will start selling the first batches produced by the new CMO.

[Nikolaj Sørensen, President & CEO]

Any other questions?

[Klas Palin, Equity Analyst]

No.

[Operator]

[Operator Instructions]

[Nikolaj Sørensen, President & CEO]

Okay. Then I can continue while -- if people are adding on, we have received some questions over e-mail. And I will read them. And then Henrik will answer with one exception that I think I will answer.So the first question we received is the manufacturing efficiency program seems to be working. And this is from Andy Smith, the Edison Group. So his question is the manufacturing efficiency program seems to be working well and reduced cost of goods sold to be below our estimates for the quarter. But it also has costs. Can you describe the magnitude of the cost of the program and when those cost starts to diminish? Henrik?

[Henrik Juuel, Executive VP & CFO]

Yes, we can do that. It's not a number that we have disclosed, but I don't mind giving you some hints here. I think, of course, it has a cost changing or moving the technology to a new contract manufacturer. And the impact in 2018 will be approximately SEK 50 million on that project. But I can also say that more than 90% of that has been incurred already and is included in the first half-year number. So we don't expect a lot in the second half year. We are already actually now manufacturing batches. And as soon as we have an approval from the FDA, we can start selling those batches, which we expect to happen in December this year.

[Nikolaj Sørensen, President & CEO]

Okay. And then I have the second question from Andy Smith. Was the Edluar adjustment a one-off event with your partner and it's less likely -- and are they less likely to make the same error again? So it is around the Edluar adjustment if that will -- if we can expect that to be a one-off. Or can we expect to see it again?

[Henrik Juuel, Executive VP & CFO]

Yes, that's, I think, a very good question. I think, unfortunately, we have a history with poor reporting from our partner, Meda and Mylan. And it has not improved since Mylan has acquired Meda. And so we have taken a somewhat conservative approach in the second quarter here, not expecting much. And therefore, you will see that it actually has a net impact of the adjustments and new royalties expected is actually negative. So we hope that we are not going to see more adjustments. But we can't rule that out and we are addressing it, the situation at the moment with our partner Mylan.

[Nikolaj Sørensen, President & CEO]

Okay. And the final question from Andy Smith is with OX124 moving into Phase I in Q4 2018, what sort of increase in R&D spend would you be expecting that would be included in the SEK 500 million OpEx?

[Henrik Juuel, Executive VP & CFO]

Yes. I think the -- we have not guided specifically how much R&D we'll spend. But that is an area where you will see an increase versus the first half year. The OX124 is not a massively expensive project. Remember, it's a Phase I. So the total cost for that for this year, you can say, is a low double-digit -- I would say very low double-digit, so not far from single digits, SEK 1 million, that is expected to finance that during this year. But R&D is definitely an area where we are going to spend more in the second half year. And that will consume some of the SEK 40 million extra spend in the second half compared to the first half, can't be more specific at this point in time.

[Nikolaj Sørensen, President & CEO]

Thank you, Henrik. And then to the final question, we received through e-mail. And that's regarding the Zubsolv European sales as Mundipharma is a company located in Cambridge in the U.K. The question is about the impact of Brexit. And it comes from Peter Östling from Pareto. And here, the question is what will happen? And do we have any impact from the Brexit situation as manufacturing in the U.K. could be a problem for other countries in Europe?And my short answer to this is we actually don't manufacture anything in the U.K. We are manufacturing everything in the U.S. We are looking to set up a manufacturing site in Europe within the European Union, so not in the U.K. And also that -- even though Mundipharma is -- the head office is in the U.K., they have subsidiaries and operations all over Europe. So I'm quite certain that that will not be an issue for Mundipharma. But I think the most important is that we don't see a risk to the supply side as the manufacturing chain right now, the supply chain is set up with U.S. manufacturing and then import into a country within the European Union, more specifically the Netherlands. So at the moment, I think we have that under full control and I don't think that is an issue. There are, of course, probably some practical issues for Mundipharma to solve, should -- or when England and the U.K. are leaving the European Union. That was the final question. If there's nothing more, operator, any more questions received, otherwise, I have to thank all of you for joining this really good second quarter result presentation for Orexo. And I wish all of you a great summer. So thank you for your attention and goodbye.

[Operator]

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