Orexo AB

STO:ORX

Earnings Call Transcript 2019-Q4

[Operator]

Hello, and welcome to the Orexo Interim Report Q4 2019. [Operator Instructions]Today, I'm pleased to present Nikolaj Sørensen, Chief Executive Officer; and Joseph DeFeo, Chief Financial Officer. Please go ahead with your meeting.

[Nikolaj Sørensen, President & CEO]

Thank you very much, and welcome to this fourth quarter and full year result presentation for Orexo. It should probably not come to any surprise to you that in the morning when we were publishing our Q report, we were not really expecting the reaction that we've seen on the stock exchange today. So I have to be humble and consider what are those misconceptions that I would need to address during this call, and I hope I have identified a few of those. One of them is definitely around Zubsolv and our ability to grow Zubsolv on the mid- to long term. And let there be no doubt, we are pretty confident that Zubsolv will continue to be a very strong growth driver, both on our top line and our EBIT contribution. The reason why we gave an outlook of a more modest 2020 is simply because of our expectations to Q1, which are a little more, let's say, bearish in terms of Zubsolv, and we'll come back to that. When we then look at other areas in the company where I think -- I'm always surprised that we don't get any more recognition. And that is when we are investing into R&D and investing into products that are basically going to be launched within the next 12 to 18 months. Then it has a negative reaction, like we're increasing our expenses. And of course, we're doing that, but we're increasing expenses to something that is temporary one-off investments to ensure we have more products that we can launch, which, of course, is the foundation for long-term growth of the company. And in particular, this year, we are really looking forward to investing into OX124, which by far is the largest single investment this year, where we're setting up commercial manufacturing, and we're also doing the last pivotal trial in the second half of this year. But again, I will come back to that a little later. So once again, welcome to our fourth quarter result presentation. I will start as usual with an overview of the Q4, a little highlights. So 2019 as a whole, was a record year for us. We've never been even remotely close to the same financial results. We saw our EBIT and EBITDA growing up significantly. Even during the fourth quarter, we saw a significant improvement of our EBITDA, both on a corporate level, but even in our U.S. operations. We have seen that the result in the U.S. is really driven by a very strong development, what we call the open formulary segment of the business. And this is really important because this open formulary business is much more profitable than the previous exclusive contracts. When you look at our average price, that has had a very positive impact on the net sales, whereas the volume had a negative impact from some of these highly rebated exclusive contracts. We remain with a very strong cash balance. The interesting part is we had an operating cash flow of more than SEK 60 million, whereas our cash balance only increased with a few millions and that's simply due to a dip in the dollar in the end of December down to SEK 9.34, whereas, when we had the third quarter, it was SEK 9.84, I think it was. And now we're actually back up to SEK 9.65. So we adjusted our cash balance with SEK 40 million of pure exchange rates reasons, but had that been done today, that adjustment would have been much more modest. The same goes for our net earnings, which, unfortunately, was the one that made it into some of the highlights of the Swedish news flashes because our net earnings, when you compare it to last year, have -- we have a negative exchange rate adjustment. And again, back to how the exchange rate has developed, that would have been much more modest had we done it today because of the appreciation of the dollar the last few weeks. And also, there was a positive tax adjustment a year ago that we didn't have this year. So of course, comparing -- it's a little comparing apple and pears when you're comparing net earnings. But on a full year basis, our net earnings, again, reached an all-time high of nearly SEK 220 million. So that one single quarter would have that negative impact is a little surprising. Coming to what are we going to spend all of those money to. And here, the focus for the company is really on R&D and business development. We have -- during the quarter, we have signed a new agreement with GAIA to commercialize the product, vorvida. I'll come back to that a little later. But we're expecting to launch that second half of this year. We've also invested into our OX338 study. Most of that investments were done in the fourth quarter. A little of that is spilling over into Q1 this year. We had promising results from the OX338 study. So I feel that is very positive and had a positive reaction yesterday also, I saw on the stock exchange. But then most importantly, for this year, the largest single investment, that's in OX124, our rescue medication with naloxone where we are setting up commercial infrastructure for manufacturing. And also, we are paying for the pivotal trial, which is planned for the second half of this year.Finally, I'll just mention that on Zubsolv outside the U.S., we are making good progress. But I must admit that the supply chain has been more cumbersome to set up. And that is basically because we have set up a packaging site in Europe, and we can't use our U.S. packaging site for European material and the same for Australian material, and there's been some issues for our third-party supplier to get the licenses required to import Zubsolv into the market, and before we can start packaging that needs to be in place. But we're still very optimistic about our ability to launch Zubsolv in other markets than the U.S.And then finally, on business development, we are in a continuous hunt for new complementary products, and we have been very close a couple of times last year and so far, it's actually been us who have been jumping off because in our due diligence, we have found issues that we have found being too much of a risk for Orexo to continue with, but this is really an important area to have a strong balance sheet to show for potential partners that we can both pay for the product, but we can also pay for the commercialization of the product. So we continue that hunt. And basically, there's not been a period in time when we have not been in some kind of negotiation, and that also goes for right now. Moving into Page #4. So this is our pipeline overview -- and just to give a perspective, today, we are just focusing on Zubsolv. So we're kind of a single-brand company. But if you look at our pipeline and then you'd look ahead, we actually expect to have 3 more products coming out of our own pipeline within the next 2 years. So we are expecting OX124 is going into pivotal trial in the second half of this year. We had some very strong data from our first Phase I trial. So we feel quite confident that we have a product that can meet the requirements from the FDA in the U.S. The 2 other products we're looking at are both the digital products, the one for Opioid Use Disorder, which is being developed at the moment in GAIA, together with our growing team here at Orexo who's going to work with this. And the other one is vorvida that has already been launched in Germany and Switzerland by GAIA, but we are now -- have already started dialogue with the FDA and we think based on that, we should be in a position where we could launch this in the second half of this year. So we could have 3 more commercial products within the relatively short foreseeable future. Apart from that, we, of course, also have Zubsolv in other markets, where we would now expect, maybe late this year or early next year, we will start to see revenues coming up from Zubsolv in other markets than the U.S. So interesting and exciting pipeline and definitely areas where we think there are good opportunities to invest some of all the cash we have on our balance sheet. So moving to Page #5. The first or the most recent trial we did was on OX338, we came out with results yesterday. I'll just highlight that one of the formulations showed some really strong results. Actually, several of the formulations have some positive results and -- but in particular, one of them showed significantly more rapid absorption compared to a commercially available branded product that exists today. However, the data also showed that there is some more formulation work for us to do to secure we have a product that is commercially attractive. I think we have a product that is close to what the FDA would require but it is important for us that we have sufficient differentiation through other products in the market and also can secure a strong intellectual property right around the product. So -- but we do that from a position of strength because we have a product that has actually delivered on the PK profile that we were looking for. So that's OX338 and here, we will come back with more time lines when we have looked more into the formulation work. OX124 is now rapidly approaching the pivotal trial during the summer. We are making good advancements in our manufacturing processes. We have found partners who can help us with different steps in the manufacturing. We are doing it in a unique nasal formulation, which is different from the ones that exist today, which partly create a little of a hurdle that we need to set up something completely new in the manufacturing process. But I think we are on a very good track to do that. So we are still planning to do our pivotal trial in the second half of this year, and we'll now have a dialogue with FDA about the approval route and if we can gain accelerated -- an accelerated process for this product. So we're expecting to -- with the positive outcome of OX124 in this pivotal trial, to launch it already next year. Moving to Page #7 and our digital ventures. So we have now worked with GAIA and together with GAIA, we are developing a tool for treatment of Opioid Use Disorder. And we're doing that based on their knowledge from Alcohol Use Disorder and prior to that, also from depression. I think I mentioned that several times, but I actually find that GAIA is the world leader in digital therapeutics. I have not found anyone who are even remotely close to the amount of data that they have collected during their many years in business. Then looking further into the vorvida, the one that was announced during the year, that's Page #8. It targets what we've said unmet need in alcoholism. So Orexo paid a lot of attention to Opioid Use Disorder but alcoholism is actually killing an equal amount of people, although on a more long-term track than this immediate overdose that you see with opioids. We still see a disease that is very much hidden. Many patients don't seek support, many patients feel a stigma around the issue and by offering a digital alternative, we hope we can improve the access to treatment and get more patients treated. vorvida, as I've said, is already launched in Germany and Switzerland. It's working in Germany together with one of the largest payers in Germany, DAK. The basis of vorvida is an artificial-intelligence-powered 6 months digital therapy, and is basically been developed by a lot of known techniques for how to treat alcoholism and addictive behavior. One of strong things about GAIA is how much they're focusing on the medical aspects, and they're using known techniques to improve treatment outcome.And just to give you a short highlight on some of the first data, it's on Page 9. As you can see on the graph here, the vorvida study here, which was done together with the German Ministry of Education and Research, after 6 months, the alcohol consumption in the vorvida group was significantly improved compared to the control group. And then there are a lot of other parameters, showing approximately the same, but you're really after is to see that sustained improvement in treatment -- in lower alcohol consumption. And vorvida has definitely proven that in a relatively large, study with 608 adults in Germany. So we're looking forward to take this forward even in the U.S. And we have it in an English version now and have started the dialogue with the FDA. And if everything goes as planned, we would be able to launch this early in the second half of this year. So moving into our key market and sales, so the Zubsolv market on Page #11. If we look at the market, the growth rate compared to what we forecasted at our Capital Markets Day, I think it's now 2 years ago. We are definitely seeing a growth rate, which is exceeding our forecast and expectations. We reached 14% on a full year basis, I believe it was 15% in the last quarter. So we have seen a very strong development of the market. We think there are very strong reasons why this development will continue, for example, just recently, the nurse practitioners and physician assistants were given an opportunity to apply for what they call a 275 waiver, that is moving from 100 patients to 275 patients. And what we really have seen the last year is a lot of nurse practitioners and physician assistants have taken a large volume of this market. So this, we're expecting will generate further growth.And so what does that mean for Zubsolv? For Zubsolv, as a total, we have seen a negative volume development. We can't run away from that. But what's really positive for us is where we have not seen changes in formulary and not the cash segment. So that's basically where Orexo has open formulary open access to the market, we are growing faster than the market. We're growing 19% in the public market and 14% in the commercial market. So that's when Zubsolv is basically competing on equal terms with the generics and sometimes also the other branded product in the market. So a strong development for Zubsolv. On open business on a total level, we have to admit that Zubsolv has lost a little on a year-over-year basis. Moving to Page #12. You can see a more granular picture on the development. And what I will highlight is on the graph out to the right, you can see how the development -- we saw a decline during the first half of last year explained by WellCare and Humana and a little later, UnitedHealth Group. That one has actually planned out, and we even saw in December that Humana reversed its declining trend and actually grew a little in December whereas UnitedHealth Group was stable during the December month. But these 3, WellCare, Humana and UnitedHealth Group, together with the cash segment had had a negative overall volume impact on Zubsolv, and in particular, those 3 who has lost 26% if you compare to a year ago. So it's really been a negative impact. However, they are very highly rebated. And what's been positive is that we have seen that growth in a much more profitable open business of Zubsolv sales.And we can see that on the next picture, Page #13, where you can see the development of our open business basically starting a year ago in Q4, and where we had a 17% growth. And even the last quarter, we saw a 4% growth in this marketplace. And we see no reason why this should not continue if we look over the longer term. So moving to Page #14, give an overview of market access. So we have had, and we've been very proud of our market access in the commercial segment. It was 97% last year. We start the year -- this year with 98% of the patients will have unrestricted access to Zubsolv. We know, even in the commercial segment, that we outgrew the market in open formularies. What's really exciting is to see CVS Caremark has become the #1 growth driver. We grew 53% on a year-over-year basis but what's more exciting is that the last quarter, we actually grew with 34% between Q3 and Q4. An explanation for that is that CVS Caremark took the decision to block access to Suboxone Film. I think that data is very exciting when you look at what you can expect to happen with some of the other insurance companies who are also likely over time, to block the branded Suboxone Film as there is now access to several different alternatives on the generic side. I did talk about the open formula before, so I'll jump that, but I think it's worth mentioning again that while our volume actually declined, the sales of Zubsolv in total has increased, and Joe DeFeo will come back to explain why that is a little later. On the market growth, we can't see any reason why the market growth should not continue with a strong double-digit growth. We are expecting to see that the number of waivered healthcare professionals will -- has increased and will continue to increase that will drive market growth.What's a little exciting right now is what we are looking at with some excitement or maybe nervousness, is the Q1 development. Historically, Q1 has been a drop in the commercial sector. Zubsolv is very dependent on the commercial sector. We are a little bearish about the first quarter results but maybe this overall growth in healthcare professionals and overall market growth can actually compensate that this year. And the first signs we have is actually the first few weeks of 2020, we have not seen the drop that we're used to. We haven't seen the growth that we have seen in the other, but we are seeing more flat development, but that's actually much more positive than what we expected. We did expect the traditional weak first quarter to come in on the commercial side. The authorized generic of Suboxone Film continues to be the dominant player. We did talk about in our last quarterly call how we have seen the announcement by Indivior, who is from -- well, behind the authorized generic, that they would pull it from the market. That has not yet happened. So we are waiting a little to see when that will happen, in fact. There's been no firm time lines announced by Indivior on this one. But we think that, that could have a very positive effect on Zubsolv moving forward. Then to Page #15. And I must admit, this one I did -- the slide we added based on some of the reactions we've seen to our announcement today. And that's a little on what are the drivers of Zubsolv for growth? Have we come to the end of our growth journey with Zubsolv? Or are there reasons to believe? There's absolute no doubt in my mind that Zubsolv will continue to grow. What we expect is a little weaker Q1, and we will start to see quarter-over-quarter growth for the rest of the period. And we don't see any reason why that shouldn't go -- continue to go in '21, '22 and onwards. The reason why we're expecting to develop in Q1 is simply because we're seeing the exclusive contracts and in particular, the largest one of them, UnitedHealth Group. They have a system, what's called high deductibles where patient's getting a reset of the deductible in Q1. That means that the time when they might look for cheaper alternatives is when they have to pay all of the prescriptions themselves, and that happens right now.And that's what we could expect as some of the UnitedHealth Group having been paid for by the insurance company throughout 2019 for Zubsolv. Now when we get to January 1, they have to pay a higher price for Zubsolv in the beginning of the year, and that would have a negative impact on the volume development, on United, and also commercial on Humana. So far, we haven't seen that, but we're just a few weeks into Q1, but there's definitely an opportunity where we see we can go beyond what we we're expecting.Moving ahead from that, we have basically, every quarter, reported how our open formularies continue to grow double digit. And I really believe that will happen in the future also. Another thing and coming back to the authorized generic is something, I think, will have a major impact on the competitive landscape. So we are basically expecting the authorized generic will stop being promoted or being available in the market sometime during the year. We thought, first, it would be in the beginning of the year, but just looking at the data, that seems like that as Sandoz generic, which is the authorized generic of Suboxone Film, maintain their market-leading position. So they are clearly still in the market. What we know from physicians, from patients, basically from data is that patients favor the authorized generic. They're absolutely aware that this is the original thing. It is the original Suboxone Film, just packaged in a different box. When that is withdrawn from the market whenever that will happen, we are quite certain that, that will have a strong impact on the branded alternatives. And the 2 branded alternatives basically, Zubsolv and Suboxone Film, where it's available. Suboxone Film is not available with some of the major insurance companies and PBMs. Like CVS Caremark, we saw all the growth impact when we got -- when Suboxone Film was blocked, 34% Q4 over Q3. Humana, UnitedHealth Group are 2 others where patients today can move to Suboxone original product by taking the authorized generic, but they can't get the branded product. When the authorized generic is pulled, we think that will have a very positive effect on Zubsolv.We also expect, as you would see, and I must admit, I'm impressed with how Suboxone Film have been able to maintain the market access in the market even with several generics available in the market. But over time, I do believe that this market would, you can say, normalize and the branded Suboxone Film will have less market access as more generics come in and take more market share. And again, when that happened, I think CVS Caremark development in Q4 over Q3 is a good proxy for what we can expect happening for Zubsolv moving forward.With that, I will leave the word to Joe DeFeo to talk us through some of the financials before I will come back and round off with our outlook for the future. So Joe, please, over to you.

[Joseph DeFeo, EVP & CFO]

Good afternoon. I'm once again proud to be able to present strong financial results for Orexo. And we'll start with Slide 17, or we start where our profit is generated in the U.S. And you can see from the net sales and in gross profit and in operating profit, we continue to show positive results and tremendous growth. Our EBIT growth of 60% -- our EBIT growth was 64% and our EBIT margin reached 50% for the full year of 2019 and in Q4 was actually over 51%. So very strong positive results. We continue to believe that we will see strong earnings growth in the U.S. Our net sales, despite losing the exclusive positions in a couple of major plans, we still grew our net sales, and we'll get into that in more detail in a few slides. We, as mentioned before, we've had a tremendous improvement in our COGS, and this has been a great driver of profitability for the company. It will fluctuate quarter-to-quarter based on our production, but we do expect that these great gross profit levels will continue in 2020.You can see that our operating profit, over 50%, and we do expect in 2020 to be in that 45% to 50% level. As I mentioned, we're being a little conservative here based on where COGS might fluctuate plus also the Q1 position that Nikolaj mentioned. He has mentioned in -- that in 2020, we do expect flattening of our sales, but there's really, as he's alluded to, a little bit -- there is a really expectation that we will start to see quarter over quarter growth in Q2 to Q3 of next year and then continue to grow the business. As he mentioned, the open business is growing, the open formulary business. And then also another positive around the formerly exclusive plans is, we are seeing the growth, the market growth in those plans accelerate. So once we expect in Q1 to see some bottoming out in them and you can also see that, as he mentioned before, Humana and Med D is already bottoming out in Q4, we're seeing some growth in those plans. So we expect those can be contributed to growth in the future. So this flattening is more of being cautious in Q1, rightfully so and -- but then we expect to see some quarter-over-quarter growth in our sales as we get into the second half of next year. And that would lead to further growth in future years. We'll move to Slide 18. This is our overall revenue position. As you can see, despite losing volume in our exclusive plans, we were able to grow our sales very strongly by 14.3%. And we also, as you can see, we do expect that, as Nikolaj mentioned, to start to see some revenue in the future from ex U.S. Zubsolv. Abstral is something we've mentioned for a while that we will now see those royalties go away for the Europe and the U.S. in 2020, which overall would be a negative impact of approximately SEK 85 million in 2020. We did see some of that decline in Q4, but we still had a pretty strong number for Q4. So overall, we still showed sales growth for the quarter over prior year and for the full year over prior year. Going now to Slide 19, we'll get more in-depth into the U.S. Zubsolv sales. As we mentioned, we grow in the open business. And overall, in the business outside of the cash segment, and those 3 major formulary changes, we did have 3.2% demand growth over previous year. So we expect that to continue. And you can see on the next part, that's the negative part, which is the exclusive plans in cash. We do expect cash to continue to decline as it is more genericized, although it's a much smaller part of our business so it'll have less and less impact on us. The formulary changes, we do expect some of that to continue in Q1. But then we expect in the second half of next year to see that turnaround and not be a drain on our sales growth. We did have some -- which happens at the end of each year, we did have some stocking at the wholesaler level, which is to be expected, that is there. And then we had some positive prior year adjustments on some rebate levels in Q4 and that we also had that in Q3 as well. And another positive thing to continue to go forward is our net price. You can see that we had a good net price mix gross-to-net in Q4, we will have a price increase, and we did have a price increase of 3% for 2020. We also believe, as more of our businesses open, we have better rebate level. So that mix and that gross-to-net level will continue to be a positive on our sales. And also, as we had in Q3, and we continue in Q4, we mentioned, we've been able to reduce our returns level significantly. So that's a good, strong 1% improvement in our gross to net going forward, and we continue to expect that to continue in 2020. And then, of course, we had the positive currency impact in Q4 and Q4 of prior year. Despite seeing it during the quarter of Q4, the U.S. dollar weakened, we still had a positive year-over-year, where the average was SEK 9.6 in 2019 and SEK 9.0 in Q4 2018. So a good 14% growth in our U.S. Zubsolv sales.Going to the next slide, which is our P&L. We talked about the revenue growth, and we've also talked about the significant improvement we had. In the quarter over prior year and also in the year in our COGS, you can see that's added a lot to our gross profit and our bottom line improvement. We also, as mentioned at the beginning of the year, we said we would do approximately SEK 500 million of operating costs, and that's where we came in at SEK 508 million. We had a slight decline in operating costs over prior year. This is mostly driven by not having any more IP litigation cost. And we've -- as mentioned, we've stopped our litigation with Actavis and they have stopped theirs against us. So we don't anticipate any more IP litigation expenses going forward. We did, as we will do in 2020, start to invest in our pipeline more. And that's where you see the increase in our R&D expenses. And so that will continue into 2020 as we launch some of our promising -- as we invest more into some of our promising pipeline investments. You could see on our EBIT level, we grew over 90% in Q4 over prior year. So that's where that strong profit growth is. In net financial items, that's where you'll see some drain on our current quarter earnings. However, that's basically -- I mean, it's really due to our having a U.S. dollar cash position, there was the weakening of the U.S. dollar from SEK 9.84 to SEK 9.34 in Q4. But as Nikolaj mentioned, 60% of that loss is already gone as of the end of January. So it's back up to SEK 9.65. So if we were just to look at that today, 60% of that net financial loss would be gone. And the EBIT would be much stronger. And last year, we did have a tax -- positive tax impact in Q4. So that led to a bit higher net profit level last year. And this year is more normal around the 20%, which is the tax rate. It's very important to note that despite these tax numbers, which are positive or negative, we do have a tax loss carryforward position. So these are more book adjustments on a cash position standpoint. We do not pay taxes and we won't for the next couple of years due to our strong tax loss carryforward position. So overall, you see a basically doubling of our EBITDA. So yes, net profit is lower, but that can really be explained by the net financial items, which is, as I mentioned, is very temporary.We continue to keep our -- if you go to the next slide, we continue to keep our strong cash position, and we keep it in U.S. dollars because, one, as Nikolaj has mentioned, most of our business development opportunities we've been looking at are in the U.S.; and two, a lot of our R&D pipeline investments are in the U.S. So that's why we have most of our cash in the U.S. dollars. We'll continue with that at this point. We will look at opportunities if there's reasons to use this number out -- use our cash outside of the U.S. and more in Sweden or in Europe, we will consider to move some of our funds. But if you took away the exchange rate movement, we did have a very strong operating cash flow, once again, of over SEK 60 million. So positive cash flow continues to be a main driver of our good, strong cash position in the company. And with that, I'll turn it back over to Nikolaj to give you more on our outlook.

[Nikolaj Sørensen, President & CEO]

Thank you, Joe. So just to summarize a little how we're looking at our growth perspectives so -- prospects moving forward. We are absolutely certain that Zubsolv will return to strong growth over time. What we are reflecting on in our outlook for the year is simply a Q1 effect, where we think there will be some negative development in these exclusive contracts. What I can say already now is that we have not really seen that materialize, but it is still early in the quarter. We see that there is a very positive trend in the open formularies. And as they grow, the impact of these exclusive contracts will diminish and the same goes for the cash segment, and we will see a more aligned growth with the open formularies to the overall growth of Zubsolv. So again, we don't see any reasons why that should not continue. On the contrary, there are some triggers, which could really boost that development a little like we have seen with CVS Caremark and that could either be the Suboxone branded film is blocked from some payers or could also be when the authorized generic is removed from the market. We have pipeline assets that are not in 4, 5 years ahead. We have 3 products that we are quite certain we can launch in 2021. We have an OX124, which still requires a clinical study to meet the FDA expectations, but is doing that based on data we have in a pretty large Phase I exploratory trial, where we saw a fantastic outcome in the PK profile. So I at least feel quite confident that we can meet our time lines and meet the requirements from FDA. We have vorvida that has already shown very strong data on how it can help improve the treatment outcome of patients suffering from alcoholism in Germany, with a significant reduction in alcohol consumption and a sustained reduction even after 6 months. We expect to see Zubsolv being launched in other markets. We have had some unforeseen delays in our supply chain, basically based on a certain country needed to give us the licenses to import material from the U.S. This is a controlled substance so it's a little more difficult than many other products. Finally, we have a strong financial position that interestingly enough, had we just reported -- closed to books today, the negative impact from exchange rates would have been much, much smaller. But even with that, when we closed the books in the end of December, we have SEK 860 million on the bank account. And you can say that's a lot for a company of Orexo's size to sit with. And we don't have any reasons why we need to have that long-term unless we find areas to deploy that with. But I can tell you in some of the business development discussions, also some of those we are going into right now, the amount of cash and our ability to finance an acquisition and this -- and the launch of the product is actually a very critical decision parameter for the other parts. So the decision right now is to keep it on our balance sheet. But of course, if we can't find areas to deploy them with, then there's no need for us to have them sitting. But at the moment, I think, it's a good decision to keep them.So looking at the outcome of our financial outlook for 2019 before coming into the outlook for 2020. It's very clear. We have met all of our expectations. We expected to improve our EBITDA, it went up with 133%. We expected that Zubsolv's net sales would increase in the U.S. despite having the threat from competition from Suboxone Film generics and that's maybe something to take in mind. The market we entered in 2019 is definitely not the market we exited. Suboxone Film had 65% in January. We are entering -- and we leave them the year with Suboxone Film being down to 30%, and all of the rest being taken by generic film products.We said that our manufacturing cost, our cost of goods would be reduced by 35%, created an outcome of 40%. It was somewhat better in the Q4, somewhat worse in Q3. And I think that reflects a little our uncertainty of some of the EBIT forecast we have for the U.S. business is that these manufacturing prices really go up and down would help volumes of manufacturing but also with exchange rate fluctuations as part of the manufacturing cost is denominated in the Swedish kroner.Our full year OpEx, we expected to have around SEK 500 million. We ended up with SEK 508 million. One of the big drivers of the cost and also the increased costs were the outcome of the litigation against Actavis. That has now stopped. So that will not come back, but we were very close to SEK 500 million with SEK 508 million.Then we were expecting to see some additional programs entering Phase I trial. We did that with OX338. The trial was nearly done in the end of the year. We just had little data work to be done after Christmas, and we had a positive -- a promising outcome of the OX338 project. And then we were looking for partners to Zubsolv outside the U.S. We did have one partnership, which you can say is a little disappointing for us and I guess, for a lot of you. It was Mundipharma or another part of the Mundipharma family than the one we had in the first round, Mundipharma Australia, who decided to write a new contract with us. That said, we do have agreements in place with other companies in other countries. But before we can finalize the license agreement, we need to see the price and reimbursement and also to be sure that we can supply. So we're basically sitting on some of these agreements right now, but there's still some uncertainty around, in particular, the price and reimbursement process. The supply chain, we will solve. It's more a question about time.So coming to the outlook for 2020. And this is maybe where we should have been a little more granular in insight looking at the reaction today. We believe the market will continue with its strong growth. We think we have a good reason for that, looking at how the number of physicians and -- or healthcare professionals who can actually prescribe Zubsolv is increasing rapidly.We say we are expecting a net sales of Zubsolv in line with 2019, that's based on a conservative estimate of what we know today. So will there be major changes like the authorized generic being removed from the market, which we know will happen, we just don't know when. But will there be changes to the market access for our competitor, Suboxone Film, then there are good opportunities for us to have a better outcome than what we have forecasted right here. But actually, the issue for us is predominantly a Q1 issue, where we do anticipate to see some additional loss in these exclusive contracts. And as we are very reliant on commercial -- the commercial segment, we also expect that the open market in Q1 would probably decline somewhat in the commercial segment. But so far, we haven't seen that, and we have 3 weeks of data, I believe, for this year.The EBIT margin in the U.S., there will not be any major change -- there will not be any real changes to the EBIT in the U.S. compared to where we are right now. But we've put in a range because we do see this fluctuation in COGS over quarters where we've seen some quarters going down, the last quarter was very good, it was 52%, but it's not like we're expecting something that will drive down the EBIT margin in the U.S. compared to where we are right now. It's basically a status quo. Then back to the cost of goods sold. We still see the opportunities to improve our cost of goods sold, but not to the same extent as what we've seen previously. Now we're kind of back to some -- as we always do, turning every stone to find a few cents of savings there, a few cents of savings there. But over time, we expect to see a continuous improvement of our cost of goods, but not enough for us to put a specific outlook on that. The vorvida, our digital therapy for Alcohol Use Disorder, we're right now planning to launch in the second half of 2020. We're looking forward to share more details about that at our Capital Markets Day scheduled in March. Then our investments, we expect our operating expenses to go up to about SEK 550 million to SEK 600 million for the year. But that's not because we have a rapid expansion of our overall cost base, all of that increase are actually one-off investments into the development of our pipeline. And it's -- a lot of it is the investment in setting up the manufacturing. It is into the clinical research organization, or CRO, who is going to run the pivotal trial of OX124, and there are some digital investments into this number also. So this is not like Zubsolv that Orexo will suddenly hire another 50, 60 people. It's basically one-off investments.And then we just have to be very transparent about it. We have been there for a while, but maybe this is when it's getting close, it's getting real. The Abstral royalty for Europe and the U.S. will stop from 2020 and that we estimate to have an impact on -- SEK 85 million on the top line. But as these are royalties, it would have a similar impact on the EBITDA.With that, I will open up for questions, and thank you for listening.

[Operator]

[Operator Instructions] And we've received the first question. It is from Klas Palin of Redeye.

[Klas Palin, Equity Analyst]

I would like to return to the 2020 outlook. You mentioned a couple of times during the presentation that this is primarily a Q1 effect. And I just wonder, should we expect then, from Q2 and going forward, that we will see a year-over-year growth? Or I mean -- because going back to Q1 in 2019, it was like 50% lower than what you reported today in Q4. So yes, if you could help me out there a little bit. And also I have a question about the inventory buildup that was reported during Q4 because previously, this kind of inventory buildup seems to be correlated with some volume uptake also. So if you just could help me out if this has a seasonal effect, a year-end effect or something like that?

[Nikolaj Sørensen, President & CEO]

So on Q1, Klas, we do expect that the Q1 could go or would go down to a level, which is at par with where we were last year. But then we saw some decent growth in Zubsolv for the next couple of quarters. And I think -- and we expect to see a growth quarter-over-quarter, but we'll be able to rebound up to the same level as we had this year is something that -- we expect to get up to the same level, but not to kind of suddenly jump back up on top of where we are. So we expect the Q1 to go down to approximately the same level as last year and then we basically follow the same pattern as we've seen this year. And then on the inventory buildup, I think that what often happens in the end of the year is that some of the wholesalers are expecting us to raise prices, so they build up inventory in anticipation of a price increase in early January, and as they're sitting with a lot of stock and we are increasing the list price, they just got X percent additional margin and we actually did that. We did increase our price with 3% in early January. So that would mean the wholesalers who built up inventory in December, they can now sell it in January for a higher price. And that, of course, from a financial reporting perspective is also something we have built into the forecast, is that we have seen that inventory buildup in Q4. And that is more inventory than what we normally would see compared to the demand. That would have a negative impact on inventory during the first quarter. So it's not only demand-driven, it's also driven by inventory that we expect some of that inventory buildup in Q4 to spill over negatively into Q1.

[Klas Palin, Equity Analyst]

Okay, perfect. Just another question on vorvida that you are preparing to launch in the second half. Do you expect it should be necessary to add more clinical data from used patients to get a strong market uptake? Or are you planning for such studies?

[Nikolaj Sørensen, President & CEO]

The short answer is no. We don't plan for additional clinical trials in a normal pharmaceutical way. But one of the big strengths that you have from digital therapies like vorvida is your access to real data -- real-world data. So we do plan to set up a data management system and also employ people who can work with that to basically work together with the insurance companies and other partners in the U.S. to look at real-world data. So rather than a clinical trial in the normal sense, we are seeing that one of the big value-adds we can offer in particular payers is a continuous monitoring and research into the actual outcome for patients.

[Operator]

The next question we've received is from Samir Devani of Rx Securities.

[Samir Devani, Research Analyst]

I've just got a couple actually. I see that you had a SEK 15.8 million milestone paid in the quarter. I'm assuming that's to do with the GAIA deal, but perhaps if you could just elaborate on what that was? And also when we could expect the next milestone?And second question, just on Edluar, what should we be looking at going forward for Edluar?

[Nikolaj Sørensen, President & CEO]

Okay. On the milestone, we have an agreement with GAIA not to disclose the details around the financials on the deals. But of course, we acquired the right one product, and we had a milestone paid. So I guess, you don't need to be a rocket scientist to connect those 2 dots. And if you look forward, then there are some milestones that we should pay to GAIA, when we reach certain development stages. But the deal is much more based -- is much more back-ended than front-loaded so the larger benefit for GAIA and of course, also for Orexo would be when the product is sold is around the royalties that we're paying to GAIA. And as the product, the cost of goods sold, more or less, by definition, is close to 0 for digital therapy, then the royalties, you can say, also reflecting a kind of cost of goods to them. So I think the -- there's not any major milestones coming up from the GAIA agreement. It is more a play, which is around royalties, and that's -- and which is also based on what price we can get in the end. But I hope that's answering your question. And then on the Edluar. Edluar remains with a IP protection and basically all of the markets for, we believe, another 10 years. So Edluar will continue to exist for the years to come and I would just say for Abstral, that's a part of the Abstral sales, which also coming from other markets than the U.S. and Europe that we can expect to continue for several years moving forward depending on which country. So -- but Edluar, we don't anticipate any change. There have been some supply issues with Edluar off and on, but I think that should all be solved now. So hopefully, we can see a positive development on Edluar.

[Samir Devani, Research Analyst]

Okay, that's great. And then perhaps just one follow-up. Just what drove the onetime rebate adjustment?

[Nikolaj Sørensen, President & CEO]

Joe?

[Joseph DeFeo, EVP & CFO]

The onetime rebate adjustment is related to one of the plans we had that was exclusive a couple of years ago in Medicaid. And the reality is in Medicaid, you assume a certain rebate level. And you may not realize what that total volume is for several years when they come back to pay -- for payments. So in this, that was specific to Maryland Medicaid, we reached the 2-year window and realized that they probably aren't going to be coming back for any more additional revenue than our rebate that we paid them. So that was -- we were able to realize that rebate -- positive rebate adjustment.

[Nikolaj Sørensen, President & CEO]

Maybe just a comment on that and also with regards to Maryland. So the way it works for us is we have IMS or ECREA as they call themselves now, ECREA data, which is broken down by payers. But that is based on estimates. And based on that, we are accruing rebates based on these estimates from ECREA, what is the demand from a particular payer. And for some of the payer, the actual invoice and how many patients that have taken out the product is coming much, much later. And this is a continuous balancing act of accruing these rebates, which are based on some estimates and then when we get the actual invoices, we can get an idea about how much it is. And if there's a large deviation, we, of course, have to go back and investigate and sometimes also wait for them to see if they come back with additional invoices for rebates coming later. But that's an area where we are traditionally quite conservative. We wouldn't like to go back and say, "We have to pay more rebates than what we have said." So if you follow us over time, these prior period adjustment is actually quite recurrent. They're nearly coming every quarter because we reserve based on estimates, and we are taking a conservative approach. That means that the following quarters when we get invoices, we would have a prior period adjustment. So while you can call them a one-off, I think there's not many quarters where we've not had any prior period adjustments in a positive way.

[Operator]

We have no further questions at this time. So I would like to hand back to you.

[Nikolaj Sørensen, President & CEO]

Okay. Thank you very much for taking your time to -- I always try to hit half an hour, but I never meet that demand. But it's -- this time, I felt there was a good need for me to explain some of the background to our outlook and to the report. I think there are some misunderstandings, at least I was pretty proud of the report when I woke up in the morning and then half past 9:00, I got a little more disappointed. Maybe I should have foreseen some of the reaction to, particularly, Zubsolv growth.I hope that you're leaving with a good sense of the growth trajectory for Zubsolv. It's a short-term negative impact. And then we anticipate to be back on track with growing Zubsolv sales moving forward. And that is basically, our future would enable that growth to be invested into our pipeline and new products, and we are expecting to see 3 new products for Orexo within the next couple of years. So thank you for your attention, and I wish all of you a great Thursday afternoon. Bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.