Orexo AB

STO:ORX

Earnings Call Transcript 2018-Q3

[Operator]

Ladies and gentlemen, welcome to the Orexo Q3 2018 Conference Call. Today, I'm pleased to present Nikolaj Sørensen, Chief Executive Officer. [Operator Instructions] Nikolaj, please begin.

[Nikolaj Sørensen, President & CEO]

Thank you very much. So welcome to this third quarter result for Orexo. With me today, I have Henrik Juuel, our CFO, until next week. Actually, I also have with me on the call, Joe DeFeo, who will be our new CFO starting on November 1st. And he will introduce himself in the latter part of the presentation. So the Q3 report of Orexo, I think, some days, you have a report that you feel is pretty good. It's a good report. We're proud of the results that we have accomplished in general, and then when I look at the share price, it's clearly that that's not the consensus today, even though it's been a little sour market. In general, I think we have seen a very good development on Zubsolv. We are seeing an even stronger development on our profitability. When you're taking away the cost we have, which is a relatively short-term cost for the IP litigation and I will come back to that, and we are seeing some very strong indications that our profitability can continue to improve us as we proceed, especially based on a lower cost of goods sold. The one area where I am a little disappointed with the results of this quarter is an area that is more out of our control and that's the royalty income from Zubsolv launch in Europe. It's still very early, but the first early launch data is slightly below the expectations we have internally to Zubsolv, but I will come back to that in Europe, in a second.So moving into the presentation. So we are talking about the future and this is truly a very dynamic market and, of course, there are some disclaimers about our ability to look into the crystal ball and talk about what will happen in the future. All that is described in the second page. So the third page and the highlights of this quarter, no doubt that the highlight #1, I think, for Orexo this quarter and the highlight for actually many years was the complaint in patent litigation around Zubsolv for 1 of the 3 patents valid until 2032, which has now been validated in the federal court. I will come back to little more updates on that later. That give us an opportunity now to really focus on the core business. And although we have worked intensively during the time when this court case have been ongoing for more than 4 years, it's, of course, been an overhang not only on our share price, but also in the way that we could work internally, even though we saw, have been very optimistic about the outcome, we have been exposed to those plan for the -- what we felt was unlikely, but it could still happen, that we would have lost this patent litigation. So now we are back on track and I think there are a lot of business opportunities that are opening up with this positive outcome.When we look at the financials, we have seen a very good growth, especially in Swedish krona, we've been helped a little on the dollar side and also the euro side appreciated compares to Swedish krona, where we're seeing the 30.6% growth. This is primarily driven by Zubsolv, which I'm very happy about, because that is now the one where we have patent protection for 14 more years. But even in dollar sales, we saw sales went up to $18.5 million and that's both the growth quarter-over-quarter and also growth compared to last year, actually more than 24%. And if you just look in the Swedish krona, it was nearly 40% growth quarter-over-quarter -- quarter over last year. Our EBITDA is, I think, a strong number. And in particular, if we're excluding the litigation cost, which is basically a cost that is coming the second half of this year, we saw an EBITDA without the litigation cost, which would have been more than SEK 70 million. Henrik will come back to that a little later. Then the numbers are, of course, incredibly important for us and that is our U.S. EBIT number. And for the first time, you might notice, we start to report both on our EBIT margin, but also on our EBIT number in the U.S., which is now SEK 55.6 million and that's actually up with nearly 80% compared to the third quarter last year.And that is basically coming from performance in the market growth of Zubsolv sales and it's coming from a good cost consciousness in the organization, which is, from a finance perspective, has been led by Joe. And then it's coming from our work on the manufacturing efficiency program, which have a dramatic impact on our cost -- on our EBIT margins, we'll come back to that a little later again. On the commercial progress, we saw a very good start of this year and we continue to have that momentum on a quarter-over-quarter basis compared to last year where we saw, again, that sales were growing and prescriptions were nearly 20% compared to last year. It was slightly negative compared to last quarter, but actually, the entire market was slightly negative. We have seen a little unusual tap in the start of this year with a strong growth in Q1, whereas normally a bit negative. I think that explains the little of the slow down during the summer. But it's very good numbers compared to last year. And I think we're now again back on track where we see record weeks nearly every week in terms of sales. What has been positive for us this year is that a good part of the growth we've seen is coming from commercial plans and what is very important is to see that we can compete when we're in a competitive position and that has materialized with actually quite good growth and, for example, CVS Caremark, where we are competing against the market leader and also the generics, and are showing both good strong growth compared to last year. But actually even quarter-over-quarter, we see that we have a growth higher than the market growth within CVS Caremark. Then when we look at market access, which has been the last -- the main driver of sales for Zubsolv for quite a period of time, we're now seeing all of the large market -- all of the large insurance companies have come out with their formularies for '19 and we are confirmed to maintain our position with the large ones, the Express Scripts, CVS Caremark, UnitedHealth Group. Actually, we haven't seen any plan that are taking away Zubsolv from where we are right now in the autumn of 2018 compared to 2019. That said, there are still some smaller plans that needs to confirm the listing for next year. Among others, there are some other Medicaid plans where we actually expect that there are some potential large wins in the Medicaid space that could materialize now during the fourth quarter and will help us next year. As I said, when I introduced, we have launched now Zubsolv in Europe, in Sweden and Germany. Those of you who have been active in Sweden would know that July is a very slow month and the same goes for August in Germany. So actually this quarter has been light in the terms of there's been a lot of vacation days. But despite of that, I would've liked to see a little more momentum, but I know Mundipharma is working hard to get the launch back on track.When we look at our R&D projects, all of them are progressing according to plan. We are starting now in the fourth quarter the OX124 project. It's quite -- it's an exploratory study, but we're actually testing several different formulations of OX124. So expecting that coming in the first half of next year, the results. But we're also doing in vivo testing of our 2 other projects and that's some news compared to what we shared before.So moving to the next page, which is the patent litigation and we now got the results on this, 10th of September, from our appeal of the validity decision on our '330 patent and the Federal Circuit court in a presidential decision found that our patent was valid. The question is now what happens next. So the one thing is that we have appealed a certain question that will save the invalidity. And now as we have been valid, we have to go back to the District Court, get a final decision on the case. However, I have to be transparent here and say there is still an opportunity, even though I would say that is very light, but there is an opportunity for Actavis to try to appeal. And actually during the night, now I heard that they have requested a rehearing with the Federal Circuit. That is extremely rare that this should happen and it was a very well-written decision. So we don't see this as any material risk, but if you follow the normal legal procedure, then there are opportunities for Actavis to appeal either to the Supreme Court or request the rehearing. But as I said, it's something that is happening on very rare occasions. But I think we should look at that as a standard procedure, part of a strategy to seek all avenues that they can find. Then we have another case and that's the one that is taking a lot of investments during this quarter and that's the infringement case we have against Actavis for infringing the '996 patent, the one that was validated by the District Court in Delaware back in 2016, where we started in early 2017, we started a case or infringement of the '996 patent. And with this case, we are now seeing a significant cost during the summer, which has been during the discovery phase and we have been through depositions. And there's also the case where -- actually there is a very different -- it's a very different case than the Zubsolv case. In the Zubsolv case, we were defending a business. In this one, we have seen that they are infringing into our patent and using that to sell other products. So here, the goal for us with this case is actually a damage case. We find that they should have paid royalties to us because they're using our technology to develop their generic versions of Suboxone and Subutex. So this one, we are running purely with an expectations to get a royalty. What that will be, we'll see in the case. It's quite difficult to estimate. But of course, we're running this based on advice from our lawyers that we have a strong case.The sales of Suboxone and Subutex exceeds $0.5 billion, most of that was back in 2013 and '14 when there was light competitive situation. They still sell both of these products; but today, there's much more intense generic competition. So the pricing level is significantly lower today than what it was in 2013, '14. But the damage case is based on gross sales of about north of $0.5 billion. But in the end, the damage will be award based and let's say someone have less visibility into the net sales and rebates paid by Actavis.So based on this outcome, the next question is, "What comes next?" And those of you who have been following us a while would recognize our Page 5 when we are talking about where do we -- where we're headed. And even though we have been working intensively towards this, I think the patent litigation is actually now enabling us to drive towards these [ cohort of the actives ] in a much more focused manner and definitely with more resources. Of course, we now have the source [ and keep our ] Zubsolv for the long term. So a lot of the focus, of course, is to continue to drive the Zubsolv sales, drive our profitability and cash flow of what I would call our core business, so -- or the business that we can control Zubsolv in the U.S. and also maintain a cost-conscious attitude. And what we're doing in Sweden, I think, is something that is becoming very important for us. And that will enable investments into commercial stage asset. So we're looking at, from a business development or an M&A perspective, and then it will enable investments into our pipeline. So basically, our Zubsolv business is the one that should be an enabler for the investments that we see. And with our strong financial position, I think we are excellently positioned to take the opportunities that will occur as we progress. Moving to Page #6, which is a little about where we are headed with our pipeline. So we are aiming and I think addiction is becoming a space that has been ignored for long, where today it's something that is taking the center news. And actually if you looked yesterday, there were some big bills signed by Donald Trump. And I'm actually quite certain that, that would have been the headline news in the U.S. had they not have an issue with the mail bombs that have been sent to several Democrats. So there are a lot of stuff happening in this space and I think we are uniquely positioned as being 1 of the 2 largest companies who are actually working actively in the space. We have a pipeline where we both look -- looking how we can improve the treatment of addiction with our OX382 project, which is swallowable buprenorphine. We're looking how we can improve the treatment of overdose with our OX124. But also, we are looking to see other ways that you could minimize or delay the exposure of when people get their first opioid and that's where OX338 is coming in. Looking at Page #7. We have, in all of these projects, been making good progress. And I think it's very important to understand the way that we're progressing is that we have identified the need in the market, we have identified the target profile. And what we're doing right now is that we're testing the formulations that we can develop that are meeting these expectations. That means that if a formulation does not deliver, we will actually go back and see other ways that we can get to deliver on the same target profile. And here, I think, OX382 is an excellent example of that. We tested it in the first round in a human trial earlier this year. The results didn't give the desired effect. We went back and we looked at what is it that went wrong. And now we have found a different way to do the formulation and we're now getting ready to test it in vivo, which will be an animal test that is planned to take place now in the fourth quarter.For OX124, we -- like we announced in the last quarter, we are right now planning to conduct a clinical trial where I think the first healthy volunteer who will be enrolled into this first trial more or less any day. It will now happen now during the fourth quarter, with the results coming first half next year. And with OX338, which is our newest project, it's a new sublingual formulation of an NSAID product. This one, we are now also ready to move into animal testing and that will happen in the fourth quarter. And here, the target is basically to develop a convenient formulation of a non-opioid treatment and NSAID that should have a comparable effect to morphine. So when you come in with an acute pain situation, be it to the emergency room or in any other situation where you have a strong acute pain, then you should be able to delay the time when you get morphine. Today, we have heard from a lot of the people who are getting addicted to opioids, they actually had their first opioid and started their addiction when they were in an emergency situation. And can you delay that with some years? The risk of growing addicted is probably significantly lighter. As you know, a lot of people in their adolescence are more subject to getting addicted. Moving into the U.S. and Europe. I think we can't say this is enough. I'm completely convinced that this is the biggest health issue that the U.S. is facing at the moment, not because it's the one driving the most number of deaths, but because it's the one driving most suffering and the people who are subjects is -- are people who are needed to drive the company forward. These are often college kids who drop out of college, who then get addicted. What would have happened if we could keep them in college and actually get them graduate and then become productive members of society rather than, to be honest, what they will become is a significant burden if they are growing into a vicious addiction. And the numbers of death, I think, again, solves the number that we're shown and presented several times before. The number is now 2,000. I saw some good news yesterday where I saw that there is a -- looks to be a slight flattening of the number. That's when you look into the early numbers for '18. So hopefully, this curve will not continue to the same escalating growth rate but actually start to flatten a little. And that could be subject to some -- or a result of some of the initiatives made in the U.S. at the moment. When we look behind the numbers and look at what is actually driving the deaths and mortality, it's clear that what was a heroin crisis has become a fentanyl crisis. The reason why we're seeing this jump in death the recent years, and that's not only in the U.S., it's also in Sweden, is actually due to the increase in use of fentanyl. And here, we see now that fentanyl have surpassed, with a good margin, number of deaths from heroin. So when people are actually dying from fentanyl, often I would say it's a combination of the 2. But had the heroin been pure and not mixed with fentanyl, you will probably see significantly less death. What happen is that people are expecting to inject heroin, but then actually get something that has been mixed up with fentanyl and that is driving the death. I listened to a speech by Donald Trump late yesterday evening and he actually referred to a seizure that dawned off in Nebraska from 2 Chinese citizens that had enough fentanyl to kill 26 million people. So these 2 people coming from China trying to sell Fentanyl was stopped by the Nebraska Police and that fentanyl was not to kill 26 million people. So that's kind of 2.5x the Swedish population. And why is Fentanyl such an issue? It is basically because fentanyl is much more powerful than heroin and what is even more scary is that people are starting using carfentanil, which is kind of 1,000x stronger than fentanyl. And here, I know the Canadian police have actually made -- they found carfentanil in the raw form, which was enough to kill everyone in Canada had that been spread out. So maybe fentanyl is much more lethal, but if you look at the way that their profile looks like, they also have a completely different profile, which make the treatment of overdose needs to be in the new way. So heroin has a pretty short half-life. We see a very long half-life of both fentanyl and carfentanil. And then when your people are having an overdose with these synthetic opioids, they're actually at big risk when they get overdose reverse with the naloxone. Then when the naloxone, which has a much shorter half-life, is disappearing from the body, you actually go into a new overdose. So the profile of these synthetic opioids require a new approach to treatment and it's not only overdose, it's actually what we hear from physicians, it's that people who are misusing fentanyl or carfentanil are much more difficult to get into treatment. So there's a need now to see how can we get people into treatment who are actually misusing fentanyl. And that approach is to be differentiated to how we're treating patients who are coming with heroin or patients who are coming with painkillers. Moving to Page #12. It's not like that we are the only one who have seen this. And I said yesterday evening, if I sound a little tired, it's because I ended up in front of the television looking at the speech by Melania and Donald Trump about opioid addiction. And Donald Trump actually yesterday signed a bill that was approved more or less unanimously by the Senate. I think it was 98 to 1 vote in the Senate and I think 324-8 vote in the Congress. So a bipartisan a bill that is made in the U.S. to improve treatment of opioids, they call the opioid package. It has some dollars assigned to it as well, at least Donald Trump cited $6 billion package that they were investing into this. What they are doing now is basically focusing on expanding access to treatment. They also -- they increased the funding of investment into new treatment form. So if you have a new treatment, it's easier to get money from NIDA, for example, in the U.S. During -- they're embedding now substance use disorder into training the whole medical students in the U.S. So if you are a student on the way to become a doctor, it's now -- it will become mandatory to also take the course that's required to get licensed to prescribe treatment of opioid use disorder. And then of course, there a lot of opportunities to minimize the contraband and smuggling of opioids into the U.S. But there is a massive focus, and I said I'm pretty sure this would have been the headline had we not seen the mail bomb sent to the U.S. yesterday. Found in the right corner, you will see Chris Christie. He was actually the front runner appointed by Donald Trump to lead this Opioid Commission back in 2016, '17. He actually made his final report now in early '18, being the Chairman of the Opioid Commission. And especially, there's a work of that Opioid Commission that has now been translated into legalization that has been approved by both Democrats and Republicans and I'm very proud to say that we have attracted Chris Christie to come to Sweden in December when we have our Capital Markets Day and he will present his perspectives on how we can stop this terrible epidemic. Moving into our key markets and sales. We have seen a market that has basically consistently grown for a long period of time. Although this quarter, we saw there was a small dent in the market. And it's followed quite as atypical market, at least for the last 5 years, where we normally have seen the slowdown coming in Q1. And this time, we actually saw, on a market basis, pretty strong growth in the first quarter, which I think is part of the explanation to a little slowdown in the third quarter. We still see a very strong growth year-over-year with the 12.2% growth. And if I'm looking at the most recent data, we'll actually see that our month -- or weekly sales right now are back on track to be -- to record levels. So the market growth consisted -- continues to be very strong and I think we will soon see the curves trending upwards as well.So this strong development in our market in the U.S. is actually one of the drivers than if we're looking at the -- our U.S. subsidiary where I'm digging a little into the economics behind our U.S. subsidiary. This is a new slide that we have not brought before. And what you'll see here is basically last 12-month data. So across this slide, we have last 12 months. And here, we have seen that if you take Zubsolv, go to left side. Page 14, we have the last 12 months sold for nearly $70 million. Of that, we have a cost of goods of $20 million, which take us a gross profit of less than $50 million. Then the OpEx, which is associated by driving our U.S. operations, taking us down to a little short of $20 million. What, however, I think is quite interesting in this is that we have guided about our cost savings and Henrik will go a little more into details about that later. And if you look at the COGS savings guidance that we have and compare to where we are for the last 12 months, we are looking at about 30% decrease in COGS. And if you look at what that would mean on these numbers, it would actually mean that we have an EBIT that will improve from $18.1 million to about $25 million. That's nearly $7 million increase in EBIT. We have EBIT margin in the U.S. improving from 27% to 36%, which I think is purely stellar performance of our U.S. organization. And if you look at the bottom right corner and look at how we are improving both our EBIT margin and our profitability in the U.S., we are at the point when stale economics is really hitting in. So we -- for every dollar, we sell more. We don't need to invest that much money. And that is driving this very, very strong improvement in both EBIT and EBIT margin in the U.S, looking at a rolling 12 months. And of course, the driver behind this has been Zubsolv sales. I'm looking into the slide now on Page 15. We're seeing the development in volume for Zubsolv. We saw very strong growth in the beginning of the year, that's the Humana, Envision where we've got exclusive contract and then we got CVS Caremark, which is more competitive. If we look after the first half, we have seen that CVS Caremark is still a very strong driver. We still see there are some headroom for growth. In the exclusive contracts, especially Humana, you see some good growth during the summer. And we're actually now, in September, we hitted our highest number on a 4-week basis with 393,000 tablets sold on average in a 4-week basis. That was in week 40, 41. So even though it looks a little flattish, we are still in a good growth perspective. And I think Henrik will come back and show that our net sales is actually developing pretty good, which is partly due to the mix of payers that we sell to. One thing that did happen, I'm moving to Page 16, that did happen during the quarter was -- created a little turmoil and that was the launch of a generic film. They only had a few hours in the market. But during those hours, managed to ship a lot of material to the wholesalers. And actually now, that market share peaked in the first weeks of Q3 up at 5.3%. So the natural -- it was actually a pretty good clinical trial, you can say, in terms of how the market would respond. And not that surprisingly, the originator brand of generic copy was the one using most market share with Suboxone losing 5.8 percentage point market share. We saw Zubsolv going down a little, but if we look behind these, these are pure market share data where we have 2 different measurement points before and after the launch of generic -- or during and before, you can say, launch of the generic. If we go in and look behind the data, the Zubsolv data is actually more based on a generic type of growth rather than the Suboxone Film and the space that we lost a little sales was isolated to one city. I think it was Baltimore, where we saw that there was some doctors shifting some of the Zubsolv volume to Suboxone Film. But otherwise, we didn't see any impact of this generic film launch which is giving some confidence in this scenario that the generic film are successful in their appeal of the injunction that they have right now, which is blocking them for selling in the market. So moving to Page 17, which is a little more forward-looking. So what is very positive is that we have understood that market access is a very, very strong driver for sales, not only for Zubsolv, but I'm actually pretty sure about any other pharmaceutical in the U.S. And in this environment, we have seen a good growth this year compared to last year with nearly 24% in net sales. And we have seen that it's been driven by these market access improvements. Of course, for example, within CVS Caremark, we wouldn't have seen the growth that we've seen without having -- without being out fighting in the streets basically with our field force to get more prescriptions and educate the physician about the advantages of Zubsolv.So it is incredibly important looking into our market access position next year. And as I started with, we have now got confirmation by the large market access contract to have in the U.S. all of those accounting for most of volumes. So the CVS Caremark, United Healthcare and so forth. We are also, on the formulary, in same position next year. The space where we're lacking market access in the U.S. has been the fast-growing Medicaid space, which is a struggle on the market share part, as that the market that is really growing in the U.S., we are blocked due to lack of market access. But here, we haven't seen all of the decisions for next year, and we are very optimistic that there will be at least 1 large announcement coming during this quarter, which is likely to improve our access to the Medicaid segment quite significantly compared to where we are right now. Then on the market dynamics, we also -- we saw that -- earlier this year, we saw a launch of new competitor the depot formulation. They have been fighting. It's -- it has been a tough market to enter. There are a lot of regulations, which may impede, I think, the launch. And I'm pretty sure that Indivior have been fighting a lot of bureaucracy around the launch of the depot formulations. Even though a lot of these issues are improving, there's still a lot of issues left. But the legislation yesterday actually reduced some of these obstacles. For example, made some of the distribution through pharmacy, specialty pharmacies, was confirmed or was made permanent. So there are some of the obstacles there gone, but independent of that, I think there are still a lot of challenges for a depot formulation to get traction on the market. We are expecting to see another depot formulation early next year from a company Braeburn which is developed by a Swedish company, Camurus. We saw the generic and I talked about that earlier, where we saw a peak of pipelines, 3% market share with the impact on Zubsolv was actually down to the 10s of scripts during that peak week. So really nonsignificant from our perspective. With that, I will give the word to Henrik who will take us through the financial. Henrik, please?

[Henrik Juuel]

Thank you very much, Nikolaj. And the financial section, we will start by looking at a breakdown of our net revenue for the period. Orexo delivered a net value of SEK 216.6 million during the quarter 3 of 2018, which is up more than 30% compared to the same period last year. And this growth was delivered by very strong growth by Zubsolv in the U.S. Actually 36% growth measured in Swedish krona, ending up at SEK 165 million. In local currency, this was 24.3% and I'll come back to a more detailed breakdown of the Zubsolv growth factors later.Zubsolv rest of world, Nikolaj talked about that, we have launched -- or our partner Mundipharma, they have launched the product in Sweden and Germany relatively late. It's still early days. But as Nikolaj alluded to, we are still a little disappointed with the traction we have seen so far. But Mundipharma is working on that, and we expect them to get back on track naturally.Abstral royalties for the period also showed a nice growth from SEK 39 million to SEK 49 million in the third quarter of '18. This was primarily driven by an appreciation of the euro versus the Swedish krona, but also some continued nice growth in the rest of world region. So that is the markets outside of the U.S., Europe and Japan where we continue to see strong growth with new markets being added and growth in the existing markets as well.Edluar royalties of SEK 2.3 million, that was less than half of what we saw in the same quarter last year and is caused by our partner Mylan facing supply issues with Edluar in the U.S. starting all the way back in the fourth quarter of '17. These issues have been resolved, and we have actually now started to see the business building out again. So hopefully we will see in the next quarters Edluar gaining some more traction again. So all together, SEK 216.6 million for the quarter, a nice 30% growth over last year. And on a 9-month basis, SEK 556 million, up nearly 23% compared to the same period last year.Let's turn to the next slide, which shows us the most important growth factors contributing to the 36.6% Zubsolv U.S. growth. And here, as you will see in the graph, the key growth driver this time has really been the increase in demand of nearly 20% measured in NTRx and that is, of course, fueled by a market that is growing by a healthy 12.2%. But it's also driven by the improved market access that we -- that was in force from 1st of January this year, and this has led to volume gains both in our exclusive part of the business and in the nonexclusive part of the business and particularly getting back on the CVS Caremark formulary, giving us a very broad access across the nation.Between these 2 quarters, we had some wholesaler destocking basically as a consequence of that we, during the quarter, have seen relatively stable volume trends, which allows the wholesalers to optimize the inventory level. So there has been a minor negative impact from stocking in the third quarter here. We have the -- of course, there's some net price impact driven by the 6% price increase that we put in place from 1st of January, and then we also, in the third quarter, we had USD 0.5 million positive rebate adjustment relating to prior periods.And finally, the currency worked for us this time. We had an average exchange rate of SEK 8.9 per U.S. dollar in the third quarter of this year versus SEK 8.1 in the similar quarter of last year. So that is a 10% appreciation of the U.S. dollar versus Swedish krona year-over-year. So let's turn to the next page where we have a full overview of the P&L.Net revenue, we talked about. Gross profit of SEK 174 million for the third quarter, which is up 30% compared to the third quarter of '17, again, driven by the significant Zubsolv U.S. growth, but also by the fact that we have managed to lower the cost of goods sold per tablet as part of our manufacturing efficiency program. And talking about the COGS, I think what we have seen for the third quarter is that we have managed to lower the COGS per tablet by 8% compared to the average level in 2017. The project is on track to deliver on our ambitions that we have actually taken the opportunity in this report is to increase the ambition, but I'll come back to that in a later slide.Operating costs, nearly SEK 140 million against SEK 93 million previous year, a significant increase largely explained by the administrative expenses going up from SEK 21 million to SEK 51 million and that is all explained by an investment of SEK 31 million in the third quarter this year into the IP litigation case regarding Suboxone and Subutex tablets sold by Actavis. Then we have selling expenses increasing as well. Half of the increase you see year-over-year for the quarter is explained by the stronger U.S. dollar and the rest is explained by a small increase in our field force initiated late last year to take advantage of the improved market access from 1st of January.On the R&D expense side, you would also see an increase and that simply reflects the increased activity level within our R&D function and it's this time mainly driven by the OX124 project, our naloxone rescue medication, which is preparing for clinical trials in the fourth quarter, as Nikolaj alluded to earlier.So with that level of operating expense, it leaves us with an EBIT for the quarter of nearly SEK 35 million and an EBITDA of SEK 40 million. However, if we exclude the investments into the IP litigation case, we're talking about an EBITDA of SEK 71 million for the quarter.I have to just make a note on the tax line because you will see there that we actually have a positive number there, up nearly SEK 32 million, which is caused by a reassessment of our tax asset in the parent company. We have increased the value of that asset by SEK 33 million, and that is all driven by the continued increase in profitability in our U.S. subsidiary, Orexo, Inc. (sic) [ Orexo US, Inc. ], that is responsible for our Zubsolv U.S. business. And when that business becomes more and more profitable, it means that less and less financial support is required from the parent company, which enables Orexo to start capitalizing some of the accumulated tax losses we have carried forward. And as it looked right now, that is actually SEK 1.4 billion we have of accumulated tax losses have been carried forward.Looking very quickly at the 9 months data. We are looking at an EBITDA of SEK 73.7 million. Again, if we exclude the IP litigation cost, it is actually an EBITDA of SEK 130 million. So quite a substantial level.So let's turn to the next slide, which is dealing with the Zubsolv cost of goods sold and our manufacturing efficiency program. And that's -- first of all, we can say that, that program is progressing according to plan, and we have now somewhat more visibility. We have somewhat more experience, having another quarter behind us, and that's why we have chosen to actually increase the ambition level for this project. And we are now targeting a 35% saving on the COGS per tablet compared to the average level we saw in 2017, and we are expecting to achieve that level on a monthly basis during the second half of 2019.For the third quarter, we ended up on an index 92. That is slightly better than what we guided in connection with the first quarter report. In the second quarter, however, we guided 85%. So it's slightly higher than that. And remember, we have all the time said that these guidances, they are directional and there will be variations between quarters. There will, from time to time, be manufacturing variances that will make the quarter-by-quarter index vary, but the direction is very, very clear. We are heading towards the 35% saving.And to be specific, on the third quarter of this year, we actually had some additional expenses related to stability testing needed for us to maintain and expand the sales cycle of our products, and these kinds of expenses typically comes in lumps and not equally spread over a year. And so our projects, that is going to deliver a significant impact on the bottom line. I think Nikolaj showed the analytical overview of the U.S. business in his presentation, which basically show that it had -- we acquired the 35% saving on the last 12 months base, it will have given us nearly USD 7 million more on the bottom line. So there's a lot of value behind this project, and we're very happy that it is progressing according to our plans.The next slide is dealing with our cash flow and financial position, and I'm very happy to again show a positive cash flow for the third quarter, SEK 24 million in total, and that has been driven by positive cash flow from operating activities. You will notice, however, that the positive cash flow from operating activities of SEK 24.5 million is significantly lower than the same number the previous year, and that is explained by the fact that during the third quarter of this year, we paid very significant outstanding rebates to the payers in the U.S. And they also typically come in big lumps, whereas last year, we managed -- during that period, we actually increased the liability towards the payers and that explains most of the difference between the 2 years.The other part is explained by we had a positive impact from working capital during the third quarter of this year, but not as positive as we saw for the same period last year. And that is very much due to the fact that we have now reduced the inventory levels down to SEK 180 million. And of course, we can't keep reducing the inventory much further. Right now when it comes to finish products, we are managing the inventory according to demand, the strategy to have a specific number of months on inventory. We can probably reduce the inventory a little on the raw material side, but we still carry a relatively high level of inventory. But of course, we cannot deliver the same prices and contribution to our cash flow as we have seen over the last couple of years from the inventories.This cash flow -- positive cash flow for the quarter takes us to a cash position of nearly SEK 517 million, and it's a very solid position. I think it's the first quarter that we actually break the SEK 0.5 billion mark, and that means that we have now also a significant positive net cash position, which really enable us to pursue our strategy. And with regards to hedging and exposure against exchange rates, I think our strategy at the moment is to keep most of our liquid funds in U.S. dollar-denominated accounts as this is best aligned with our strategy where we are -- one of our key strategic objectives is to identify more commercial stage products for the U.S. business. And eventually, to achieve that, we would have to spend money in U.S. dollars and the same would eventually happen with our pipeline as they progress into clinical stage. So we're very happy with a very extremely strong financial position.Let's turn to the next slide, which is the -- just a quick update on the financial outlook. You can say the easiest and short version is that we have delivered on our guidance, on our own expectations and the outlook is unchanged. However, we have added a little specific details to it here.First of all, we continue to expect that we deliver positive EBITDA in Q4. Remember, in Q4, it has always been our best [ statutory ] quarter. So we still see a very strong result for the fourth quarter, naturally. We have also delivered on the market access situation. And the strong growth that we really guided in the beginning of the year, volume growth in the third quarter was nearly 20% in demand and our market share is up 0.5 percentage points compared to where we ended 2017.Manufacturing efficiency program, we had talked about that and project is on track. We have, during the year, increased the ambition level as we got more and more visibility into the project and the outcome of that. Full year OpEx guidance is unchanged with approximately SEK 500 million, and the increase compared to previous is basically the spend on the legal expenses. We have SEK 31 million in the third quarter, and we do expect to spend approximately SEK 20 million more on the same project during the fourth quarter.And we are, as Nikolaj said, as you can see, all our 3 OX projects are entering clinical stages during the fourth quarter here. So that will, of course, also consume additional expenses. And then finally, what you need to keep in mind as well is that this SEK 500 million, that now assumes the October exchange rates, meaning that the appreciation of the U.S. dollar since we started the year is actually also consuming part of that SEK 500 million. So all in all, we are on track to deliver on the guidance and see ourselves in a very strong position at the moment.

[Nikolaj Sørensen, President & CEO]

Thank you, Henrik. So I will do a fast roundup here and open up for questions in a few -- in a minute or 2.So we are -- I think this quarter for me has been a very strong quarter. We had -- on the macro level, we have our IP secured. We are looking into a market where there was a big package approved yesterday from the President where you can expect to see that leading to additional market growth. We're coming from a very strong financial position. And if you're looking away from the IP litigation cost just in terms it's a very short-term investment into a program where we believe we should have received royalties and what we think is a good case for damages, then we are showing some incredibly strong financial data for Orexo.We have a pipeline that is progressing well and I think are moving -- are now moving into in vivo testing where we have the first results from all of these tests in the first quarter next year. We are looking at launch in Europe where even though it's been slow in the beginning, it is still very early days especially taking into account that the vacation in Europe was now during the third quarter. And on business development, we have some good dialogues ongoing, and I think we have improved our position to win some of these business development auctions significantly after the patent litigation was solved and with the financial position we have at the moment.So moving to Page #25. And this is actually the final quarter we will listen to Henrik present here for Orexo. For those of you who also follow Bavarian Nordic, you have a chance to listen to Henrik present another third quarter results in a few weeks. But I just want to take this opportunity to thank Henrik for your more than 5 years, 5.5 years with Orexo. That's been 21 quarterly reports since you started.When we look at the first report in 2013, we had a negative EBIT of more than SEK 20 million, a cash position of less than SEK 100 million, quite a significant negative cash flow. And if you compare the company that you're leaving today, we have a positive EBIT which would've been north of SEK 70 million had we not have the litigation costs, and we have a cash position which is more than SEK 0.5 billion. So there's no doubt that the company that you're leaving is a much stronger company than the one that you entered in 2013. So Henrik, thanks a lot for your time with Orexo.Then after Henrik, I have the sincere pleasure of promoting a person that I have learned to know very well because -- Joe DeFeo will take over Henrik's position more or less from today, even though officially, it's next Thursday. But Joe has been with us since 2013, and he was I think in [ play ] number 2 probably in the U.S. after Bob DeLuca. Joe has, apart from being Head of Finance, also been leading the operations in the U.S. and basically been the one setting up our U.S. operations from a practical perspective. Joe, of course, has been integral in all of our reporting since he started, and he's very well positioned to take over Henrik's job.And we actually have the pleasure of having Joe with us on the line here from the U.S. So Joe, why don't you just, first, give a short presentation of yourself so everyone have heard your voice before the next quarterly call when you will take Henrik's seat.

[Joseph DeFeo, Chief Financial Officer]

Thank you, Nikolaj. Good afternoon, everyone. It's a pleasure to get this opportunity with Orexo. As Nikolaj mentioned, I've been in the U.S. from the start and helped start the U.S. operations and helped grow it to where it is today and we continue to have a good, positive, strong trajectory of the business. I bring over 30 years of diverse finance experience. Particularly, I've been the head of U.S. commercial operations finance for 2 large pharmaceutical companies that had some of the strongest growth records in the industry. I also have international treasury experience.Since I've been at Orexo, as Nikolaj mentioned, I've been the head of finance and administration. And in the past year, I've been the head of strategic operations for the U.S. So heavily involved in our business overall in the U.S., and now I look forward to work with Orexo on the group level and also look forward to presenting the financial numbers at the Q4 report in January. Nice to speak with you, and thanks, Nikolaj.

[Nikolaj Sørensen, President & CEO]

Thank you, Joe. Looking forward to joining -- to have you join me in January.With that, I go to the final slide, Page 26. And just say thank you and make a short reminder that we have announced the Capital Markets Day in December 6 from 1:00 to 4:30 in Stockholm at the Armémuseet. The keynote speaker for the day will be Governor Chris Christie, who has been leading the opioid commission for President Donald Trump. But apart from Chris Christie, of course, I and my management team will share a lot of insights about our business, our pipeline and be available for question and answers. And we will also have 2 other external speakers who want to give a perspective on the market development in the U.S. more from a commercial perspective, I'm hoping. And we'll also have a professor in medicine who's one of the key opinion leaders within this space in Europe, if not globally, in terms of treatment and scientific data behind opioid addiction. His name is Fred Nyberg, and he's active here in Uppsala.With that, I will open up for questions. Thank you for your attention for this public call, which became a little long, but it was Henrik's last one. Thank you.

[Operator]

[Operator Instructions] The first question comes from the line of Andy Smith from Edison Investment Research.

[Andy Smith, Analyst]

I wanted to pull out a couple of points from the announcement today, and I had recorded them, at least in my model, as one-off events, although I'll leave it to you to advise me whether that's the case. The SEK 1.5 million stability testing cost, as I said, I put that as a one-off event. Should we expect that to happen every year or every 2 years? Because I think there's 2-year stability data that's needed frequently. At any event, it's not material, and that's included in your SEK 500 million operational expense guidance. The main one-off issue though was the tax adjustment of SEK 31.8 million. Do we assume that to be a one-off event? Or do we expect it to recur at some point?

[Henrik Juuel]

Yes, thank you very much for the questions here. First of all, the stability testing, I think it's not a one-off. We need to continuously do stability testing as not all our strengths -- dose strengths, they have the same shelf life today. So this is something we should expect. But you -- I think you normally don't see them as one hit like it has been this time, like SEK 1.5 million. I think you should expect then to see it more even out over the quarters. It was a relatively expensive quarter from that perspective, and -- but I should say, it's not something material and I think it's -- over the years, it's still within the guidance of the 35% savings that we're targeting that includes space for stability testing, naturally. So that was the one. The other one, the tax adjustment. I think hopefully this is not the first time. Remember we have SEK 1.4 billion of accumulated tax losses. I think what we normally do from an accounting or tax perspective is that you make a projection 2 or 3 years ahead. And if you can prove that you -- that we're talking to parent company, that the parent company is profitable, then you can actually capitalize the tax -- expected tax out of the SEK 1.4 billion. So you can say if we continue the current trajectory, I think you will see more of this coming. But of course, it requires that the parent company remains profitable, and we only -- as I've said, we only look 2 to 3 years ahead to be conservative. That is quite customary. Many do this kind of tax assessments. I hope that answered the question.

[Andy Smith, Analyst]

Yes, it does. And one other question from me. The business development opportunities that you've talked about, you're now in a better position. You're now a more attractive partner to anyone that has a product to license in, in the same sort of space as Zubsolv in the U.S. I wonder if you have any thoughts that you could share with us on what metrics -- return metrics you have or anything you will license going forward?

[Nikolaj Sørensen, President & CEO]

So I think this is the easy answer. It needs to be positive, but it needs to be positive with a pretty good margin. So we're talking multiple Xs on our inquiries when we're looking at the investments. Then there is -- it depends on how complementary they are to our existing field force. If it's something that easily goes into the back of the existing field force, I think the return expectations are, on the individual product, are -- we can be a little more conservative. But if it's something that is going out of our existing footprint, then, of course, we would require more. Then my experience of building these NPV calculations is that when you're looking at products with, at least, with a long patent, very easy to get to very, very big numbers. And you don't need to adjust the trajectory that much before you get to multiple different Xs and possibilities, especially because the gross margin on nearly all pharmaceutical are so healthy. So the big question is how much OpEx you need to invest. And that is really the big focus on us is when we're looking at the opportunities, what are the OpEx? How much is fixed investment into the OpEx line in terms of R&D and infrastructure that we need to build out? And the more fixed investment we are looking at, the higher the return is. But we don't have an individual number, and I think the -- as we're working from an opioid addiction space, we don't have the luxury yet to have that many projects to choose from. But if you look at the pipeline there, it's actually with all of the money floating into the space, there is right now a quite significant increase in early-stage projects and companies and also research groups who are looking into ideas into the space. So I expect there to be more. But I'm sorry I can't be more specific on that.

[Andy Smith, Analyst]

That's okay. That gives me enough to go on. And I did have another question, but I don't want to hog the call. So I will forgo it because I just wanted to say thanks to Henrik for his patience. It has helped me when I came to Orexo as a new analyst, and I look forward to working with Joe.

[Henrik Juuel]

You're welcome. It was a pleasure, absolutely.

[Operator]

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

[Klas Palin, Equity Analyst]

My first question is about this latest bill signed by the White House and seemed like -- what's your expectation that this might have on your business and the addiction space? And secondly, what kind of opportunities do you see to expand market share for Zubsolv even if your market access wouldn't improve significant -- significantly in 2019?

[Nikolaj Sørensen, President & CEO]

So on the first one, the -- it's a very long list of initiatives. I got it summarized by our lobbyists and that was, I think, it's 6 pages of bullet points. So it is quite comprehensive program. A lot of it is about information campaign and education campaigns. And here, unfortunately, I think the impact of some of this has not been that significant. The major impact on us is, we say, partly it's taking away a threat because they are now making it permanent that physician assistants and nurses can prescribe and they can expand the number of patients that they can prescribe to, which...[Audio Gap]And of course, the market dynamic between different segments, if the growth is dominating in Medicaid plans where we don't have access, it will be a challenge to keep up the market share. But we can still show -- I think there's still a very good condition to show a good market growth -- to good growth in Zubsolv. But if you just take flat and no market access changes, I think our -- I'm pretty certain that we have a good opportunity to expand our market share within the plans where we have access and even where we are in competition. And I know that some of the exclusive plans are planning initiatives which should enhance our opportunities to get even larger share. Because as I said, there's still some room to grow especially within Humana where quite a few patients still have access to other pharmaceuticals, and there are initiatives coming that would help us grow. So within the plans where we have access, I feel quite comfortable that we have a good opportunity to grow market share. But if the growth is in the part of the market that we're not present, I think that will, of course, make it a little more challenging to keep up with the market growth. And that's what you can see in this quarter. We have very, very slight decrease in the market share, but we did grow and we also grew quarter-over-quarter in terms of net sales. So again, I'm not that worried about the sales development of Orexo and of Zubsolv. But from a market share perspective, we could see a market where we can continue to grow. And for us, would be the [ wrong segments ].

[Operator]

There are no further question, I'll hand back to the speakers.

[Nikolaj Sørensen, President & CEO]

Thank you. I will just round off with where Klas ended. I hope you noted what Klas just said that if you have no improvement in market access, and here, I hope that we, in our next quarterly result, can announce an improved market access. And if it's something that is public at announcement, we will, of course, include it in to our general communication to the market. But there are some very large Medicaid -- particularly one very large Medicaid state where we think we have a good chance to be added to the preferred list where we are not today, and that would increase our access to the growing Medicaid quite substantially when we start next year. So I'll just remind everyone about that.With that, I would just say thank you, everyone. And again Henrik, thank you for these 21 quarterly results and good luck at Bavarian Nordic. Thank you, all.

[Henrik Juuel]

Thank you.

[Nikolaj Sørensen, President & CEO]

Bye.

[Operator]

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