Orexo AB

STO:ORX

Earnings Call Transcript 2018-Q4

[Operator]

Ladies and gentlemen, welcome to the Orexo Q4 and full year report. Today, I am pleased to present Nikolaj Sørensen, CEO; and Joseph DeFeo, CFO. [Operator Instructions]Speakers, please begin your meeting.

[Nikolaj Sørensen, President & CEO]

Thank you very much and good afternoon to all of you who have taken time to join us on this very busy day, that we're sharing with a lot of other companies, I understand, who will be reporting today also. So I'm very proud to present the 2018 full year report for Orexo. It has truly been a pivotal year for Orexo, and if someone, a few years back, would have told me that we would reach more than SEK 100 million in EBITDA, I, of course, would have believed that, but I still would have thought that that's a way to go. But now we are there and we are seeing a significant improvement in, what I would say, the most important part of our business, our U.S. business, who actually made nearly to SEK 200 million in the EBIT contribution for the year, which is -- I think, is a very good number.So I will start the presentation and move from page -- the front page to second page. So we will provide some new outlooks and forward-looking statements in this report which, of course, is always subject to both external and internal changes during the year. But we will do our best to provide some good guidance for this year.Moving to Page #3, which is an overview of 2018 and some of the main highlights that we feel that we've seen and why we're there to call this a pivotal year for Orexo. So in the financial side, I already talked about the EBITDA, which is a very good number, and in particular, if you look at the growth rates, which is 50% compared to 2017. Looking at what is driving that, giving me even more confidence that -- because that is really driven by sales development, cost improvement, both on the COGS, our ability to maintain our selling cost in the U.S., which is making our U.S. business a significant contributor to the business despite intensified competition that we've seen.On the R&D, we have worked for a couple of years with different projects, but now we finally get to projects that are passing the Proof-of-Concept stage in the year, particular, I want to highlight OX124, where we've received some very positive data, first clinical trial, in the beginning of January.Without going too much into details, the way that it works for these naloxone products is that you need to exceed and have them improved by availability compared to the products in the market and the data we have shown right now are so strong that we feel pretty high confidence that we can get a product that is significantly better than the market-leading products today, then we recognize there are other products in pipeline, but so far, I actually think our product is put -- is placed in the elite of the different pipeline products in terms of bioavailability, speed of onset, duration of the products. We, of course, need to show that in a more broader clinical trials data.On the operational side, as most of you've seen, we continue to see our manufacturing efficiency program materializing reached 21% reduction in Q4, which is aligned with our guidance. But on a full year basis, that's a 9% reduction in the COGS per tablet if we compare to 2017. We're still very confident that we can see further reductions throughout the year, leading to a 35% reduction in the second half compared to 2017.We've also started a project in Uppsala where we're upgrading the facilities here to GMP standard, which mean that we can do clinical trial material, which would speed up the development further in our R&D.Finally, on the people side, we have internalized our Field force in the U.S., very successful. There were no one who were turning down the offer. And I'm very happy to see that we are, in our annual engagement surveys, both on the U.S. and Sweden are putting ourselves in the top tier of not only comparable companies but actually all companies using the same supplier of engagement surveys.Then finally, the one thing that really made this pivotal is, of course, we have been fighting and we have been investing to win our case against Actavis for Zubsolv exclusivity. Now we can put that behind us, as we have prevailed and have a positive outcome, so now we have patent secured for 2032 for Zubsolv.Moving to the next page, which is more focused on Q4. Building up to the full year, of course, is a good result in Q4. And, in particular, I'd like to highlight the numbers when we're excluding the litigation cost because the litigation cost in this quarter was higher than we anticipated, but that is a nonrecurring investment that will be there in Q1 as well, but after that we expect that to decline significantly. And we got to nearly SEK 70 million on EBITDA in the quarter. Also, the U.S. continues to improve the quarter with nearly 11.5% up from last quarter, but even more interesting if you compare to the quarter in 2004 -- in 2017, then we saw a 213% increase in our EBIT contribution from our U.S. business. It's truly a good number.Then during the day, I have noticed the comments about Orexo missing the consensus. I think the -- I know that the main driver of that is we have slightly higher expenses than anticipated. Joe DeFeo will talk to that when we get to the financial numbers, but I think there is some good explanation behind that and I can call in the market to say that basically all of this overinvestments are due to nonrecurring investments.If we look at Zubsolv in the U.S., we continue to see -- on a full year basis, we saw a really good -- both market growth and also Zubsolv growth, where Zubsolv is growing faster than the market. In the fourth quarter, we also saw best numbers ever. For Zubsolv, we did grow a little in demand compared to Q3. And -- but we lost a little in the market share as we saw the market was accelerating in total.Market access, good news is that we have improved our market access even further in the commercial segment, but also in the Medicaid segment, we see that we are taking good leap forward in terms of market access in the U.S., which should start to pay off during this year.Then we gained our rights to Zubsolv outside the U.S., and actually, right now, we have discussions ongoing with several interested parties. So I feel quite confident that we can find new home for Zubsolv, but also expect that Orexo will take a more prominent role in Zubsolv's distribution moving forward outside the U.S.And finally, in R&D, I already talked to the OX124 trial, which is positive, but we also have some good in vivo data on OX338, which is our pain product with Ketorolac and now we are preparing that product to go further into human studies late in this year.Taking us to the next page, Page 5. I already mentioned it. We have won the patent litigation in the U.S., but as you have probably noticed, we have significant legal expenses this quarter and expect also to see significant investments in our IP litigations in Q1 this year, for them to see decline significantly in the quarters following. The case that we are running right now is the case against Actavis for infringement of the 996 patent and that is with the Suboxone and Subutex generic products that they launched in 2013.We, of course, through this with a lot of confidence that we do have a strong case, but it is a trial, and we are expecting the trial -- the trial has been scheduled to March 25 to 29. It is a jury trial, and that also mean that when you have a jury trial, you will receive the decision very shortly after the trial period. So it's not like we have to wait for a long period of time. So in the end of this quarter, we should have an outcome in District Court from this process, and then, of course, both parties may consider if they are -- our path to appeal this case. But as we also saw in the Zubsolv case, when you get into the appeal process, although it's not achieved, it is on a significantly lower expense level than what you have in the District Court, should that happen.Moving to Page #6. We had Capital Markets Day in December, where our Chairman laid out the directions for Orexo moving forward. And the main area, I think, right now, is that we have reached a very solid commercial -- performance in our commercial infrastructure in the U.S., but we see significant opportunities to leverage scale better and improve the performance of our U.S. company by adding more products in the commercial stage. So finding new business development opportunities, M&A is on the top of our objectives and agenda for this year. So we're working on that and have ongoing discussions with different companies at the moment.On -- our second target is, of course, to continue accelerate our Orexo U.S. performance. It's a very dynamic market. So far, we have shown that agility, determination, commitment, has led us to continue to improve our EBIT contribution in the U.S., and we foresee that will continue even this year.And our third objective is to have, at least, one of our internal pipeline projects that makes it to the market in 4 years. And I think the good dates are on OX124. We're pretty well positioned to reach this target as we expect that one could be filed already in 2021.With that, I'll move over to the next page, which is an overview of our R&D projects, and as I talked to OX124, which is in the middle, we did have positive outcome showing substantial higher plasma concentration of naloxone than the leading competitor in the U.S. Our projects that we have had for the longest is OX382. It's an oral formulation of buprenorphine. There we actually, right now, doing the last preparations on the in-vivo tests and we expect to see the results later in this quarter.Finally, we have on OX338. We did perform in-vivo testing in the end of last year and just received the data, which looks good. So if now the data supports then we would have advanced this project into clinical studies. So we are now preparing this project to go into clinical testing with a Phase I trial later this year.Taking the next page, Page #8. Moving into our key market, the U.S. markets, and the sales. We have seen a market that have taken an accelerated growth pattern. It was 12.3% in Q3 over Q3 the last year, but in this quarter, we actually saw the market grew with 14.1% compared to 2018, the full market, very much driven by the public market, that's Medicaid market, where the market grew with nearly 20%. But maybe worth mentioning is that Zubsolv in the fourth quarter over fourth quarter perspective, actually grew with 36.5%. And likewise, in the commercial market, we also saw Zubsolv growing much faster than the market. This market segment where we do lose is in the cash segment, and we've seen that for a while, and that's where the generic tablets that are in the market right now have beat the price level for that -- for the individual person who is paying cash, I think the price difference is now so big for that person. So you can -- using different vouchers for the generics, you can get down to price that is critical for us to compete with.Moving to Page #9, which is little more details on Zubsolv development and comparing to the market growth. Also saw in the previous page, Zubsolv has outpaced the market looking in the full year basis with an 18% growth, whereas the market grew with 12.7%. And looking at the curve for Zubsolv on the right side of this slide, we saw that -- we see a big jump in the beginning of year driven by Caremark and Humana, where both of commercial and Humana Medicare Part D, which is a big driver in that ambition. There is another one where we're added to. All of these have added to this quite significant jumps on the beginning of the year. But we actually saw a continuous costs of development during the year with an all-time high, just before Christmas, both on the full week rolling, but also on a weekly basis. Then, of course -- but you would see the little dip that we have here in the graph is the Christmas weeks, where we -- as anticipated, you always see that market go down during Christmas.Moving to Page #10. We are in the market where we see -- what we anticipate more dynamic in the market and one thing that happened last year was the launch of Indivior's Sublocade. Braeburn wasn't expecting to get that CAM2038 to get approved, and they got approved in Christmas. But there was, obviously, some exclusivity issues, which stopped them from launching their monthly depot until 2021, but they have announced and talk about that they would launch a weekly depot later this year. However, we don't expect the depots to have so much impact on Zubsolv, but the big change in the market is probably to come from the generic launch of Suboxone Film, where Dr. Reddy has definitely indicated their ambitions of launching, and now even Alvogen has been received an approved product. So we could probably also anticipate Alvogen if they prevail in the ongoing legal battle to launch into this market. However, we haven't heard anything from the Dr. Reddy's case for a while, so -- but we do expect some position to come within -- actually, probably within the next couple of weeks.That said, moving to the next page, Page 11. We think that this market dynamic is both offering its fair share of challenges, but there are also significant opportunities. For the depot formulations, we have seen that Sublocade has not met the market expectations, and we don't really see any indications in the beginning of this year to -- for that trend to make a major jump upwards. It is still a niche product, and we anticipate that the depot formulations, both due to the cumbersome prescription journey, but also due to the pricing, will continue to be a niche product in the market where the majority of the patients will, for a foreseeable future, at least, continues to stay on the much, much cheaper sublingual products where Zubsolv has won.For the generics, it's a slightly different story. So getting in the generic film, we have different scenarios. And I think it -- how that will impact the market really depends on how many generics will enter the market and in what time frame. If we see many generics on a very short time frame, there is a higher risk of price competition compared to should we only see 1 or maybe 2 generics enter the market, normally you would see that the price is staying on a relatively large -- high level. With 1 or 2 generics, I think there is plenty of opportunities for Orexo to work with the payers to improve the access for Zubsolv as we would be very price-competitive compared to the generics Suboxone Film. Suboxone today still maintain exclusivity on several plans, in particular, in the public space, where we are not covered, and this could be a way to open up for that market for Orexo.Then if there are many generics, it will be more turmoil. The price competitions are likely to be higher. We are happy to see that we have confirmed all of our contracts in the commercial space, and we have improved our market access in the public space, despite a repayer being aware of the generics are likely to launch into the market. However, even in that scenario, we would be the only branded sublingual product in the market with an active promotion and I think that opens up a lot of opportunities, both in terms of working with physicians, offering patient support, and also for many payers, it is still important to have a branded alternative for the patients, and there we would be uniquely positioned in this market. And looking at where the market shares are, we have a little more than 5% and 65% sitting in that generic space. I'm actually convinced that, that will also open up much more opportunities and challenges for Orexo. But it will be some turmoil if we see a lot of generics coming in, in a very short time period.Moving to Page #12, I did talk about our market access has improved. And in the commercial, we thought we could never get more than 95%, 96%, but now we are 97%, and that's based on the new agreement with Blue Cross in North Carolina. However, more importantly, in the fast-growing public market space, such that Zubsolv grew nearly 20% on a year-over-year basis. We have been suffering to see and our market share has been -- had a difficult to keep track with the market, when we don't have very large deals in the same quarter because a large part of the growth has been in the market, where we have not enjoyed the same coverage as we have in the growing, but somewhat slower growing commercial market. So to see now that we will take a jump of 32% in the end of last year to 38%, was very important for Orexo, and we do anticipate that markets like Ohio, which is the largest people service Medicaid state in the U.S., that we have an opportunity now to compete, while we have been blocked before. I know, you say, in Ohio, we have even been blocked indirectly from working in commercial segment because such a big part of the patients have been in the public space. And if we don't have more -- have enough market access, it doesn't make sense for us to have a sales representative meeting the physicians. But now we basically in Ohio grow from poor market access to have one of the best market access across the state, which have also led us to invest into -- going up to 4 or 5 sales reps in the state.Apart from Ohio, we also got Alabama, which is much smaller. From January 1, we will see -- actually, last week, Texas was adding us into the formulary. We expect both Florida and Washington DC to add us into the formulary during the first quarter. On the negative side, WellCare, which was provided a decent amount of volume, it was an exclusive contract for Zubsolv, decided to open up the formulary for generics, which mean that the generics come in with a lower co-pay, and also the patients should start on the generics, so this is what is called a step edit. Here we -- say, financially, this can -- is -- could very well turn out to be positive. Of course, some of the volume drop that you have seen earlier this year in market share and also a little in December can be explained by the WellCare drop. But from the financial perspective, we don't need to keep any significant share of WellCare volumes before this change is actually financially better for Orexo. And to give a parallel, as some of you might recall, we lost -- we have exclusive contract in Maryland. Maryland decided to open up. And for quite a period of time, Maryland actually helped us to improve, both the pricing and the profitability, as we -- by just using a slight part of that market, it actually had a much cost -- much stronger EBIT contribution than the exclusive contract, and WellCare is in the same space.Moving to Page #13, and that's our U.S. business. I already talked about that. It's always nice to see the curves pointing in the right direction. And here we see -- on an annual basis, we see a continued good growth in our sales in the U.S., very much driven by a very strong first half, where we got the new agreements, but we have seen a continuous growth in the market -- in the U.S. throughout the year in volume. I'll talk a little to the financial development between the quarters, later Joe will comment on that, but we do see a positive demand development in U.S. Looking at the operating profit, then, of course, I would like to check one quarter, but now we reported on a last 12 months basis, and there we reached a little higher than 30% in the last 12 months in EBIT margin in the U.S., with more than $20 million in the EBIT contribution. If you just look at the individual quarter, we'll actually be outside the curve as we reached 37% in Q4. And we think that just looking at the U.S. business right now, we know that we will improve our cost of goods, but we also reached the point that when we'll grow, we don't need to add more people. We have decided to invest into Ohio, so that will increase the selling expenses on a very slightly, but it will -- as in the other constant market growth and growth in, for example, CVS Caremark and other plans will not result in any additional operating expenses. So a lot of the top line growth will basically go straight down to the EBIT, which will also help us to improve the margin and, of course, the EBIT result. So just to round off our U.S. business, we do have a very strong Zubsolv business in the U.S. It's a strong growth despite a relatively modest market share. We've seen a very strong sales growth. We've seen strong EBIT contribution growing at 2.5x compared to 2017. Margin has more than doubled, if we look at the full year basis. And looking a little ahead, we see the market access, we have, despite everyone being aware, that, that would -- it's likely to be generics film. We have improved our market access in both the commercial and in the public segment. Sales and marketing. We find that we have a well-balanced size on the organization, and we will only add resources when we have some very material changes, for example, Ohio opening up for -- for Ohio Medicaid opening up for Zubsolv. On our supply chain, Joe will come back to it later, but we have -- we do anticipate to see continued improvement in cost of goods. And finally, I think it's interesting to follow how our pipeline -- and it's -- in particular, our report of the new dates of OX124, already now open up for a dialogue with decision-makers in the U.S., both on the political and also on the health issues that we have not really had before. So that our pipeline is developing and addressing concrete needs in the market. And to take OX124 as an example, what's really needed in the U.S. is a product that is addressing fentanyl overdose. And to do that, you need to have something that has high bioavailability, has a higher and longer duration, higher Cmax, sort of higher total exposure of naloxone. And that's exactly where OX124 is coming in. And when we present that for key opinion leaders in the U.S., we have a very positive reaction which, of course, is good for Orexo, that we also see that we are developing new products and not just work with Zubsolv.With that, I will open up for Joe to have his first quarter presentation for Orexo. So, Joe, please, on Page #15.

[Joseph DeFeo, EVP & CFO]

Okay. Good afternoon. So if you look at net revenues, Nikolaj alluded to how well the U.S. business did. Overall, our net revenues grew almost 19% -- 18.9%, and this was driven by higher Zubsolv U.S. revenue and partly offset by some lower revenues from our partners.The U.S. revenue was the strong growth driver with 31.8% growth in Q4 over previous year, and that's SEK 166.7 million. We did have the final shipment of Zubsolv delivered to Mundipharma for our ex U.S. business. And as we mentioned before, Mundipharma has decided to, for strategic reasons, to exit the partnership as of April this year coming up. We did have a slight decline in Abstral, and this is predominantly due to less demand in some individual European markets. We did see recovery of Edluar sales after we had some manufacturing problems in the first half of this year of 2018, but that -- now it's recovering. So overall, we had a strong 18.9% growth in that revenues.Next, Slide 16. We'll get a little more into the U.S. As I mentioned, the U.S. Zubsolv sales grew 31.8%. This was due to 22% growth in demand. We did have some destocking in the fourth quarter. But we also, in January of 2018, we had a 6% price increase, and we also had a positive impact from foreign exchange. So in local currency, the growth was 21.3%. Just to mention that in January of 2019, we've taken a 4% price increase, so there will be a positive price -- gross price increase in 2019.Moving to the next slide, which is Slide 17, is our overall P&L, which we've had a very good strong profitable quarter. Our gross profit was 31% higher than the prior year for Q4, and this was driven, both by Zubsolv U.S. growth we mentioned and the lower COGS per tablet. Operating costs were significantly higher above prior year. The biggest driver of this, as mentioned before, has been our IP litigation, that amounted to SEK 26.4 million of the administrative costs in Q4. We also had some higher R&D costs. This is due to higher activity levels in OX124, as Nikolaj has mentioned before, it's our positive result. We also had the manufacturing efficiency program and the restructure of European supply due to Mundipharma situation.If you look, we did have -- we did come in about 3% higher than our previous guidance on overall operating costs for the year. And that was due once again mostly due to the higher litigation costs, but also due to additional spending because of our positive results on OX124 and also related to -- since we won the patent case, we spent a little more on Investor Relations, and as you know, we had our Capital Markets Day. And then also because of the announcement of the generic film, we spent a little more on market research to get a better idea of the situation in the market.And finally, very positively on the tax situation, due to our higher profits, we had a positive impact from revaluation of our deferred tax asset. So that was a big benefit to our bottom line having that as well.If we move to Slide 18, talk a little bit more about our COGS. Nikolaj mentioned that we've reduced our COGS from the index at 2017 of 100%. In Q4, we got down to 79%, which is where we guided to. And for the full year, with the 9% reduction to 91%. So we're well on our way to getting what we mentioned our 35% reduction in 2019 from 2017. We expect improvements to continue in the first quarter, in second quarter, and then also in the second half of the year. So the COGS has been a significant -- it's also -- as Nikolaj mentioned, it helps our competitiveness. I mean, especially with the generic film potentially launching, having a lower cost of goods gives us a better opportunity to compete for additional business in this market that has generics.Next slide, Slide 19. You could see we have a very solid financial position from a cash standpoint. We had another strong cash flow quarter -- cash flow from operating activities, almost SEK 72 million growth. And now, we've reached almost $600 million in cash at the end of Q4. So very -- I mean, SEK 600 million in Q4. So we have very strong liquid funds available for the opportunities that we're pursuing. Moving on to Slide 20. Overall, our guidance, we expect to continue to improve our EBITDA on the full year basis and on the quarterly basis. And -- but we also assume that we'll see the same patterns as previous years. As you may know, in Q1, it's usually our lower quarter than Q4. This is predominantly in the market. It's -- you see this -- you see high deductibles start to happen and kick in for commercial business. So you do see the volume tend to go down from Q4. But year-over-year, Q1 is off to a strong start versus Q1 of '18.We do expect overall volume of Zubsolv sales in the U.S. in 2019 will increase, that's despite increased competition from the potential launch of Suboxone Film generics. Nikolaj mentioned several managed-care wins that we have, so we have a lot of opportunities for growth from that standpoint. We do think with the potential launch of generics, we will see some market risk and some uncertainty, but we -- it also provides us opportunities for Zubsolv in the U.S.I mentioned the manufacturing efficiency program. We do anticipate to reach our set 35% reduction in the second half of 2019 compared to 2017. We do believe our full year OpEx will be around the same level as 2018 around that SEK 500 million. We do have the final outcome. It is dependent on the cost of the IP litigation, which will be mostly in the first quarter of this year. We will take opportunity for investments in our development programs, when they reach clinical stage faster than anticipated. So there will be times where we'll spend more on our R&D when we have those opportunities. And yes, our first new partnerships for Zubsolv outside the U.S. is expected to be initiated this year. And we do see that exchange -- the current exchange rates, we do anticipate those to be -- what we'll see for the rest of the year, but we'll see on that standpoint.So I'll turn it back over to Nikolaj.

[Nikolaj Sørensen, President & CEO]

Thank you, Joe. So just a very short summary of our presentation. So I think it's -- when we look forward into 2019, we are doing that, at least, internally with our heads kept very high, with a high confidence. We know that we have the IP for Zubsolv secured until 2032. Even though other generic companies might be tempted to try to infringe into the patent with a federal court decision on the validity of our 330 patent, we have a much stronger situation today than we even had before the Actavis trial started back in 2014.Our financial performance have continued to improve. And, in particular, what we focused a lot on is to improve our U.S. performance, and I think, we're in a very good position to see that improving. When we look at the R&D, it's a little nick. You can say, it's a double-edged swords here. If we succeed in our R&D efforts, and we see that some of our projects are meeting the endpoints in both in vivo testing and when we get into clinical trial, that will, of course, lead to more investments needed to take the product forward. So that could also impact the guidance. We have expected to have one more clinical trial, but should we have more projects moving into clinical trial, we might have to address the guidance a little. But purely based on the positive news in R&D, so that's what I mean with the double-edged swords here. Market access. When we thought it couldn't be better, we have continued to improve our best-in-class commercial access in the U.S. But more importantly, we have seen a good lead forward in the public market. And that's where I do anticipate there will be opportunities should we see a launch of generics film into the market for Orexo to replace, maybe some of the Suboxone exclusive position today.Outside the U.S., we have regained the full rights to Zubsolv where we had one partner in Mundipharma. We probably anticipate to see several different partnerships with strong regional players moving forward. We did have more bidders to Zubsolv last time. And, of course, we have restarted the discussions with some of these companies. And I feel quite comfortable to say that we will have companies who will take Zubsolv forward and probably in a stronger position than before. Even though it will require more efforts for Orexo as we would need to manage multiple different partners, but I feel with the supply chain we have in place in the U.S., we are actually in much stronger position that have we relied on Mundipharma to do this moving forward, at least, based on what we saw the last year.Business development, right now, actually to date, we have discussions with the company on something that could be interesting. And we continue to look for interesting opportunities. But also to -- but not to the degree that we are not -- we are not afraid, I can say to say no. So if we find something -- if we find it's too expensive, then we will, of course, not continue the discussions -- or any business development opportunity needs to be able to rely on its positive energy from where we started.With that, I will open up for question-and-answers. Please, operator.

[Operator]

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

[Andy Smith, Analyst]

I've got a couple of questions. The first one is on OX124, possibly OX125. I know Joe hinted that potentially the clinical program might progress. And I'm thinking, Orexo is a past master, taking known actives like naloxone and a known delivery system. And in that respect, the time lines you have for 2021, I think, is for launch of OX124. If you needed: one, fewer clinical studies or you could do it in one clinical study rather than 2? Is there potential for that product with the right performance to get to the market quicker than you've currently forecasted?

[Nikolaj Sørensen, President & CEO]

So we'll start with that before we take your other questions. I can start answering this one and then you can take your follow-up questions. On -- if it was purely based on the formulation work and the clinical development, we would have a strong opportunity to take this faster to the market. But our technology is new, it is unique. And that means that the critical time line, right now, is actually not development of the product, it is more to set up commercial manufacturing of the products and that's what you need to get an approval of that product is that you -- in the last test, you're actually using commercial product in a commercial manufacturing process. And that -- the product, I'd say, the results were -- I can't say, so we -- they were -- if we should have had a dream scenario, we reached the dream scenario. I think we have some very strong results. And that mean that we have advanced our formulation much faster than we could probably have anticipated before. And that would also mean that we -- if we just had the manufacturing ready right now, we could have done the pivotal studies relatively fast. But we now have to work on our manufacturing processes, as we are -- as I said, we are part of the product is a unique system. So that's what the critical time line is right now. So I think there are quickly opportunities to do it faster, but then we need to solve the manufacturing process first. And right now that is what we're working hard on us. We don't have a solution at the moment. I think we stay with the current guidance and time lines.

[Andy Smith, Analyst]

Okay. That was clear. Nikolaj, I'll stick with your guidance. And the other initial question I have was, I seem to remember the contracts with commercial payers in the U.S. So up to a year long, but I have no idea as you're making such inroads into regional Medicaid payers in the U.S. Are they single-year contracts you enter into or multiyear contracts? Or do you -- are the details kept confidential?

[Joseph DeFeo, EVP & CFO]

Most of the contracts are usually 1 year. Some commercial contracts are longer than 1 year. But on the -- from the public side, predominantly, on when you talk state Medicaid, there is usually 1-year contracts.

[Nikolaj Sørensen, President & CEO]

We'll take a contract...

[Joseph DeFeo, EVP & CFO]

Commercial contracts whether that's Medicare Part D or your commercial contracts, they can be longer than 1 year.

[Nikolaj Sørensen, President & CEO]

So United, for example, is the longer contracts. Even though there are -- in all of these contracts, there is the -- when the buying power is on their sites, but it is a longer contract on single-CVS Caremark, so also a longer contract.

[Operator]

[Operator Instructions] And we have a question from the line of Dan Johansson from Nordea.

[Dan A. Johansson, Analyst]

I also have a few questions. First one related to Abstral. Sales came in a bit lower than last year due to slower sales in some parts of Europe. Could you share something about your expectations for '19? Do you expect it to be maintained at the current level? Or do you see any major shifts going into this year?

[Nikolaj Sørensen, President & CEO]

So on Abstral, the rights with Abstral for Europe is sitting with Kyowa Hakko Kirin and the European subsidiary. I think they are still using the brand name ProStrakan, but Kyowa Hakko Kirin basically have the rights in all other markets and U.S. I know that they are coming out with their own guidance. And for that I need to be very careful of providing any details on where they are. I think -- and just in a general comment on that market, what we're seeing is actually some markets is growing -- continues to grow and show nice data. And other markets, there has been a decline. And part of that, I think, is that in some of the competing products that have common generics into the market and some of the competitors. So I'd -- but I would refrain from giving any guidance because I know that Kyowa Hakko Kirin, which is the company of Japan, giving their own guidance, so I will need to refer that for more details, if that's okay. But as you might -- just on that -- the final comment on Abstral, as you might know, in Europe, the patent is ending this year which, of course, for us mean that we would anticipate a much lower sales decline -- a much lower royalty for Abstral next year. Then on the positive side, we do see that the market for Abstral outside the U.S. and Europe, where we are less dependent on the patents has continued to grow. So there are opportunities for Abstral even in 2020. So that's where we are. Other questions?

[Dan A. Johansson, Analyst]

Yes. In terms of cash flows, I mean, very strong development in 2018, no doubt. Do you see further potential to optimize the working capital from this level where it is today?

[Joseph DeFeo, EVP & CFO]

Sorry, could you repeat the question?

[Nikolaj Sørensen, President & CEO]

Is there further opportunities to improve the working capital from where we are right now in the cash flow side?

[Joseph DeFeo, EVP & CFO]

I think there is opportunities from that standpoint. I mean, the more we grow our sales, the more you have a bit of a timing and -- in your cash flow of -- when you collect the gross sales versus when you pay the rebates, so that's a part of improvement. On the inventory side, we did have a good reduction of the inventory levels. So I don't think -- I think that's an area where we might see an increase in inventory levels. We did, as you know, get to a point where we're in a good position where we don't have a risk of write-offs but we have seen the inventory levels come down, so I don't anticipate further reduction in inventories, especially for growing sales. So from that standpoint, I wouldn't say there is an opportunity. But there always is an opportunity, the more you sell, you have a better position of collecting your receipts of gross sales before you pay out your rebates.

[Dan A. Johansson, Analyst]

Okay. Final question. You mentioned in the report that the record high number of physicians that came newly waivered to accept their first opioid dependence patients in the Q4. Could you share something about your thinking for 2019 in terms of treatment expansion? Do you expect this phase to continue? How will that support your business?

[Nikolaj Sørensen, President & CEO]

So I think if you just look in -- look for what actions and the interesting way that works in U.S. So the newly waivered both physicians and physician assistants and nurse practitioners, what you see with them in the first year, they're only allowed to prescribe to 30 patients, and then they can go up to 100, and then to 275. So actually you will see a little of a catch up effect as they -- if they continue to be active after the first year, which a lot of them will do. So I think that will drive growth in itself. On the number of physicians, actually one of the -- some of the initiatives announced during the autumn by the White House was to expand to even new groups of physicians who could also -- health care -- not physicians, health care professionals, who could be -- who would be allowed to prescribe these products and use, so there was an initiative to make it mandatory for everyone who is becoming a doctor in the U.S. as a part of their curriculum, they have to get certified to prescribe these doctors. So as more doctors are getting educated and get out and get -- actually you would see a long-term growth in number of treating physicians. And then, finally, I know there is a discussion and there are more and more advocates who want to open up the markets. So you see this treatment being accessible like any other treatment that would mean that all GPs basically and family practitioners and physicians from the U.S. could prescribe these products. And then you would have to refer patients with more severe problems to a specialist. There we haven't seen any concrete legal proposals, but where it was something that was not discussed at all a few years back, you see people on a pretty high position in the society in the U.S. is now starting to advocate for that change. So I think there are a lot of drivers why we would see an increased access to treatment.

[Operator]

Next question is a follow-up from Andy Smith from Edison Investment Research.

[Andy Smith, Analyst]

I wanted to follow up on the point that was made and we briefly talked about in your Capital Markets Day last year. And Joe has talked about the -- the more continuing improvement in cost of goods. And my thought on that or my interpretation on that is that continuing improvements in secondary manufacturing, as the volumes increase. But you also mentioned at the Capital Markets Day that there is potential improvements there in primary manufacturing. And I wonder if you'd like to, not give any numbers or guidance on that, but -- the feeling is, improvements in primary manufacturing could be more substantial than the secondary manufacturing because the active pharmaceutical ingredient is the most expensive part of the formulation. Can you give us some of your thoughts on when and -- of the primary manufacturing improvements, how they will contribute to COGS in the future?

[Nikolaj Sørensen, President & CEO]

So the API that we're using in the products, the most expensive one is clearly buprenorphine. Buprenorphine, we've purchased a lot of several years ago or actually when we started. So there we're still having some inventory of the API. Then, of course, where we are today, we have a pretty high volume. And looking at the entire market, whereas the global demand for buprenorphine has increased quite substantially, we would expect that there are some opportunities to negotiate a good price with the suppliers of the APIs, as we are not manufacturing that, we're clearly in the hands of those who are producing that API. We haven't started that negotiation at the moment. You are right that today is the substantial part of the manufacturing cost, whereas the secondary manufacturing that we are doing to convert it into tablets was larger part in the previous cost of goods, but today, it's a big part of that. But then I don't think you can anticipate the same kind of improvement in our API prices as we have seen in our manufacturing of Zubsolv. What we do see as we're moving forward is that, today -- so we have 2 sources of improvement in the price. One is that we're moving to a larger scale, and the other is that we have an other equipment. So we have 2 suppliers in the U.S., and the -- if you take the large scale so far, everything is based on moving to large scale with the 5.7 milligrams tablet. Should we, with increased volume, be able to move some of the other strings to the same large-scale manufacturing, that will also have a positive impact on the cost of goods on the -- over time. So I do think there are opportunities beyond what we have guided right now. And as I used to say internally, if you're selling 400,000 tablets every week, if you can save $0.01 or $0.02 per tablet, that is quite a lot of money in the end of the year. So we are looking at every single cent that we can save in our manufacturing. And I think you need to do that when you're working with known APIs. You need to think like a generic company how can we improve our cost of goods while we're maintaining the quality. And there, of course, we have much higher-quality requirements on Zubsolv as a branded product than the generics which, I think, is positive. It is important in the market place, also in the U.S. moving forward. It's that branded products generally has a better quality or has a higher quality demand, they might have to qualify on because of the generics. But there is a higher demand on branded products in terms of quality than what is on the generics. And we, of course, live up to that. Joe, do you have to add?

[Joseph DeFeo, EVP & CFO]

And the other point, I would say, is around the mix of the strength, our high -- our fastest-growing strengths are our higher strengths, which have better margins. And Nikolaj mentioned, potentially bring other strengths to the higher production and the 8.6 would be the next one. So that mix helps us from that standpoint as well.

[Nikolaj Sørensen, President & CEO]

Any other questions, Andy?

[Andy Smith, Analyst]

No, no, that's fine. That's actually useful. And I think actually as of the end of December, it's more than 400,000 tablets a week, isn't it Nikolaj?

[Nikolaj Sørensen, President & CEO]

That were weeks where we had exceeded 400,000 tablets, and then I think there are also -- we do have some institutional sales that is not seen in the weekly statistics. So we do sell to some institutions also in a more larger scale. So our supply is ahead of -- is more than 400,000, even in weeks where IMS or Symphony is showing numbers below that, but that's, of course, reflected in our sales data.

[Operator]

And there are currently no further questions registered. So I'll hand the call back to the speakers. Please go ahead.

[Nikolaj Sørensen, President & CEO]

Thank you very much for all of you who took the time to support us for nearly an hour on this busy afternoon. As I said in the beginning, I feel that 2018 has truly been an amazing year for Orexo. We have reached financial numbers that, I think, a lot of people would have been skeptical to before the year started. But what's even more positive is that when I'm looking forward, I think we are in -- continue to strengthen our position. We have a situation in U.S., which is stronger in terms of market access and really improved in the latter part of Q4, with new contracts being announced. But also when we look at Zubsolv on the global basis, I think, it's a good opportunity for Orexo now to fully leverage the opportunities we have for Zubsolv outside the U.S. And based on the cost of goods and what I have seen for the European market right now, I actually think there are some significant opportunities for Zubsolv based on markets. With that, I want to wish all of you a good afternoon and good morning in the U.S. And please reach out if you have any further questions. Thank you, operator.

[Operator]

Thank you. And this now concludes the conference call. Thank you all for attending. You may now disconnect your lines.