Orexo AB

Welcome to this half year interim report for Rexo. A quarter and half year which has been a little mixed back with some good progress but also some areas where we have been surprised by a negative reason, negative development. So I think the headline of today is probably the complete response letter we received on OX124 on very late on Tuesday evening and also the press release we had yesterday. I would just start to say that for Rexo that we would receive a complete response letter was not a surprise. We had expected that. We did talk about that in our last quarter report that we would be delayed and that this was due to the human factor study and the instructions for use that needed to be updated. However, there were some requests for technical data that came as a surprise, and that requires a little more work from our side. But I will come back to that. But I think the really positive thing is that there's only one problem in the complete response letter with the product, and that was related to the instructions for use. And we have completed a new human factor study after having updated the instructions for use, which was very successful. So if that had been the only point, we would have been ready to resolve submit that data quite shortly. But now we need to look at some other data requests, which are not prompted by issues with the product, but more that FDA wants more certainty around some of the product or the device reliability parameters that they're looking at. I will also say, because that has been a question I received during the day, that we With a complete response letter, it's not like we have to resend the full file. We have to answer the questions that we received. And with that letter comes very specifically what do we need to do to get it approved. So we have received three areas that they have asked or they've raised concerns. Two of those three areas we have already addressed because we were aware of them. We have been asked by FDA during the process, for example, instructions for use. So we were ready to submit that answer. And actually one of them we have submitted just before approval or before the PDUFA date. The last one, the one that we talked about in the press release is new to us and something that we will need to work on, but also something that we've seen is very manageable and is something that we believe we could handle relatively swiftly, but we need more guidance from FDA before we can come up with a new timeline and guidance on that. Today, I am joined by Fredrik Jastin, who will take us through the financial overview and financial development. I will give a brief update on the business, both U.S. commercial, but also products under the development and a little around our partner products where we have royalty income. So a focus on the key achievements. One thing that is very important for us and important for us long term and where a lot of focus have been internally has been to see how the development was for Subsolid during the quarter after a surprisingly low development in Q1 led by the inventory adjustments we saw from the wholesalers in the first quarter. We've seen now during this quarter that Subsolid is back where we see an alignment between the sales to pharmacies and the wholesalers And since the sales to pharmacies in the first quarter was actually higher than last year, that also transfers into the second quarter where we have higher sales in both dollars and Swedish kronor in sales to wholesalers and also in net sales. Overall, we have a positive EBITDA. We did have some headwind in this quarter because we had to do an adjustment in abstra royalties based on what was accrued in first quarter. We also have this new human factor study that we have completed most of it during the quarter, which have cost us some expenses. And we have some increased legal expenses in the quarter in the U.S. related to the subpoena. I'll come back to that a little later. Subsort revenue growth. As I said, we had a very strong rebound from the first quarter compared to last year. It is a slight growth, even though it's down in the low single digit or 1%. But it is positive compared to last year and definitely very positive compared to the first quarter. OX124, as all of you probably noticed, is now delayed. But I will say that based on the feedback we got from FDA late April, we're basically in two months been able to update instructions for use. We have been able to run a new human factor study, and that has really been a team effort between the Swedish and the U.S. team, to the extent that we have had Swedish employees flying over to the U.S. with some of the material needed for this human factor study. We've had people in the office in the U.S. helping to package the material needed for the study also. On the Amorphox pipeline, so that's very not much a focus on on OX640 but also the partnering projects that we have and here in the partner projects we have continued to collect stability data and have seen very impressive data in particular on large molecules during the quarter. I will highlight also something we have been working on for a long time at OX640 that's around sustainability as you know we raised a corporate social social corporate bond so we got it rated by Sustainalytics but that was also tends into more on the overall OREC. So AB's sustainability, which has now been reviewed by a company called Ecovatis, which is emerging as one of the leading external or independent assessment companies of sustainability. And we rate it as one of the top 5% of all of the 70,000 companies that they have assessed worldwide. we have on soft salt in europe we have seen some traction it's coming from a low level but i think there's a lot of stuff happening for soft salt europe which is is positive which give us some hope for the future and and that is needed because we also see that abstra royalties with the agreement we signed 10 years ago uh with at that time prostraca then it became kuya hiki which was then the european arm was acquired but green and tal met last year, and then Green Natal have now reviewed the contract, and there are some of the countries where we are seeing the contract has expired and will expire during the next one to two years. So very good to see soft salt coming in, but of course, we need that to replace some of the abstract royalties that we have been generating. So a little on the US commercial. Last quarter, we talked about the... very dramatic market events seen both by Orexo and some of our colleagues in the Buprenorphine and Naloxone market. And that was the inventory drop we saw in the Q1. So we have seen that stabilize, but it is still on the same low level as we exited Q1. So we haven't seen a compensation where inventory have gone up. But what we're seeing now is that the sales from Orexo to the wholesalers, from wholesalers to pharmacies and pharmacies to patients, is aligned, whereas in Q1, we saw a significant decrease compared to where we were in Q4. What we think drives this is a growing hesitance to carry inventory of controlled substance, so buprenorphine is a controlled substance, and there are a lot of restrictions on the wholesalers and pharmacists on how much inventory they can carry. And some of them have taken quite a conservative approach to that. So we think that is one impact. The other one is basically the cost of capital. So having a high inventory is costing you capital. And by lowering that could improve your or reduce your working capital cost. Then we have seen a trend that started last year and has actually continued to accelerate during the quarter. And that is the disenrollment from Medicaid. That is driven by some of, during COVID-19, there was, I think the main measure was there was an automatic renewal of Medicaid enrollment. So patients who were on Medicaid were automatically renewed within Medicaid without having to renew their application. That was removed when the COVID-19 emergency measures was withdrawn. And that means that some of the patients who were on Medicaid have either decided not to apply for new Medicaid insurance or they have been found not to qualify to Medicaid. And that has triggered the decline in Medicaid. At the same time, we have seen a significant increase in the commercial insurance this quarter with 19% year over year. So, but the majority of that growth, if you look, appears to be from Medicaid patients now moving into commercial insurance. So rather than driving market growth, it has been some market growth, but a lot of it we believe is actually patients shifting from one insurance plan to the other. And then in the US, there have been a lot of subsidies associated with COVID-19, which have also been reduced as the COVID-19 emergency measures were removed. Taking a little more granular look, we showed this picture in the last quarter. And just to give a comparison, here you can see the development in sales to pharmacies and wholesalers, where you saw this drop in Q1 with the dark blue line. Then in Q2, you see that the sales to pharmacies, which is the very stable A little yellowish, a green yellowish line on my computer at least is aligned with the blue line. So we've seen that normalization in inventory during the quarter, which is, of course, positive long term, in particular, as we are on the sales to pharmacies on a trajectory higher than we were last year. On SubSalt, we have seen a stabilizing demand also. So it's not only the inventory that, of course, what is most important is how does the demand look like. We still have a very low growth market. It is 3% just like last quarter, 1% up since the last quarter. As I said before, we saw that decline in Medicaid and growth in commercial. And when we look at subsoil in particular, we basically saw that we had the same, say, number of prescriptions in the second quarter as we had in the first quarter. That's down 4% from last year. But what is really positive is that we see growth in the commercial segment. That is what we call open segment. We also seen for the first time in five years, we have seen the previous exclusive payers, United Health Group and Humana, grew with 1% from the first quarter. But all in all, it is lower volume in year over year. But these previously exclusive payers together were stable or growing with 1%. In Medicaid, we also saw a decline, but less than the market. So we are taking market share in Medicaid. And that is very much driven by some of the continued growth in Medicaid contracts in New York. You can even add here Indiana, where I believe our growth is more than 200% year over year in Indiana. So some comments on the products under development and our partner products. So OX124 approval and launch timelines have been extended. And here the issues that we knew was the instructions for use. We have successfully addressed that and that has been documented in new human factor studies. So we're ready to submit that back to the FDA. came with new concerns and I want to outline it. It's not driven by problems that the product is not delivering or the quality in the products are not sufficiently or the clinical trials is not good enough. This is based on the data that we have generated to show the reliability of the device and the secondary packaging is meeting the standards for FDA. And to do this, it's customary in the industry to do some you call pilot scale manufacturing so we take certain manufacturing steps we do that in a smaller scale than a full commercial scale and then we are bridging that data into the commercial scale showing that we don't see there is a difference between the pilot scale and the commercial scale here fda have requested more information on the device part not on the manufacturing part it's only on the device part that there is no impact on the device functionality moving from the pilot scale to the commercial scale. We found that it was sufficient data that we have submitted, but we also respect that FDA have a different opinion. So now we need to work with FDA to understand exactly what is it that they are asking for? What kind of data is it that we have to generate to bridge between the two? And the process works the way now that we will, within the next 30 days, submit what we call a briefing book and that's basically us proposing how we will address those issues raised or concerns raised by FDA. Then we'll have a discussion with FDA and we will agree on the path forward and that will guide how much this is. But since we have not seen any issues in the pilot scale, we don't have any issues documented with the quality, We believe this is more about the documentation part. And of course, FDA, we have to respect that they see a risk moving from one step to the other. But it is interesting. It was only the device people. It was not the CMC people at the FDA who had that concern. So we will seek that advice and that will also guide us on the response. But we are very pleased to see that there are no questions on our clinical trials. There were no questions on the manufacturing process or manufacturing partners' quality. So we are quite confident that this is something that we can address relatively swiftly, but there is some uncertainty as we're not certain about how much data the FDA actually requires, and we need to work on that during the next 30 days. Our pipeline in general is advancing. We have, as I said before, we're working on some of the partner molecules, which are large molecules. We're both working on a partnership with SoFi, but we also have a partnership with a vaccine company. And what is really critical here is to see that we can retain activity in the product in room temperatures or even higher temperatures for large molecules that otherwise would require cold chain. And this is a way that you can... enabling that on some of these large molecules, you can have a completely different distribution path, and you can also use the products more broadly than if you need to use it in a cold storage. So this is meaningful from a patient perspective, from a healthcare perspective, and definitely also from the manufacturer perspective. So this is positive and something that we hope will lead into a more established partnership with, in particular, SOPI, but also within the vaccine space as we proceed. OX640, we have continued to work on the formulation and we're preparing to move to manufacturing up to commercial scale. Our focus right now is on OX124, but we're working in parallel to ensure that we quite fast can move into the commercial manufacturing of OX640. We are now planning a smaller exploratory study later this year. Some of those of you have been following the space carefully have seen that last year there was a discussion about allergic rhinitis for some patients and what is the effect on these nasal sprays when you have allergic rhinitis. And we are now planning to do a smaller exploratory study in that group of, we can say, patients only. or healthy volunteers in the fourth quarter. What we are aiming for is we have seen a good uptake through the nose in that patient group, but what is important for us is that when we launch OX640 together with a partner, that we'll have some good clinical differentiation, and that is basically speed of onset and how much epinephrine, how much effect you get from the product. So we're planning to do that later this year. We also seen that our most advanced competitors have now moved forward in Europe and they received a positive response from the Scientific Advisory Board in Europe. That took away some of the regulatory uncertainty for nasal epinephrine in Europe, which I think is very good long term for Wix 640. Although, of course, there will be more competition by the other product having a head start. We are continuing with partner discussions. We had the briefing book approved in the first quarter that has transformed into a clinical development plan that we have then presented and discussed with our potential partners. So we continue to be optimistic that we can find a partner for OX640 during the second half of this year. Then on our partner products, so here with SobSol Europe, we have seen in some smaller European markets have been a very good progress here during the first half of the year, in particular during the second quarter. That's been driven a little by supply issues by other products, but the positive part is that when they tested SobSol, some of the institutions that took in SobSol have actually decided to make SobSol a preferred choice. So that's very positive in the long term when they were forced to make a switch and test the new product, they saw all the advantages would subside. One of the issues that we and our partner Accord have had for Europe is that our product that we're selling in Europe is sourced out from the US and it's sourced from a manufacturer that we don't use for US manufacturing anymore, but they are the one who approved for Europe. mean that the cost of goods in Europe right now is much higher than what we pay in the US and it's not really price competitive in terms of what Accord need to be successful in their commercialization. We work together with Accord to reduce the cost of goods. Accord have shown a very high commitment in this by investing in developing a supply chain and manufacturing capacity in Europe for soft salt and we are ending the final stages of that which would enable our partner Accord to start selling in Europe with a much better cost of goods, which of course will make it much more attractive for the different subsidiaries of Accord to launch the product in our market at a price competitive level in a quite price competitive European market. So we are optimistic. We did see an increase in subsoil revenues for Europe during the quarter, but we think that is just the beginning of what hopefully can be a rewarding journey for both us and our partner Accord. That, on the other hand, our abstract royalties, as we have outlined in our reports, that we are seeing some markets where the contract expires during 2024 due to patent exclusivity expire and also the contract for some markets was a 10-year contract starting in 2014. We have not received historically breakdown on the different markets so it's not been possible for us to follow exactly when did the first launch happen and when oh and when did the product expire and how much volume do we have by market together with our new partner green and salmets who acquired cuba key and european subsidiary in 2023 we've now gone through all of the markets and we have a more accurate estimate of the um of the royalty for this year which had led to a a a um and adjustment of their crude royalties that we have in Q1. Frederik will comment on that later. We do see that the contract for some countries in Europe will expire during the reminder of 2024, some in 2025, but there are other contracts which will actually go on for several years. However, those who are expiring right now are some of the larger volume countries. So we do see that the absolute royalty will decline in this year, but also in 2025 and beyond. But we are optimistic that with the positive news in sub-Saharan Europe with lower cost of goods, high commitment and investment made by Accor to reach that, and now good tractions in some of the European markets that could compensate for the decline in abstract varieties. With that, I leave to Fredrik to go through the financials.

All right.

Thanks, Nicolai. On page 15, we look at revenue. And if we start by looking at the top part of the page, You can see that total revenue in Q2 amounted to 154 million SEK. Of that revenue, obviously, subsoil within U.S. commercial is the main contributor with 148 million for the quarter. And that's slightly up year over year with 1.7%, following a specially favorable pay mix and also supported by a positive impact of 1.9 million from a stronger USD exchange rate. In relation to HQ and pipeline revenues, we had, as Nicolai just talked about, lower abstract royalties for the quarter due to the negative true-up of accrued royalties that we booked in Q1, and that was based on our partner Grunenthal Med's reporting. So we had actually accrued US$615,000 for Q1, and now the royalty report shows actual royalties of $358,000, so that resulted in a negative adjustment of $257,000 this quarter. And we have then used this lower royalty number of $358,000 as an estimate for Q2 royalties. And as we have talked about before, and Nicola just talked about this, going forward, we can envision a continued gradual decline in royalties for as agreements for these individual countries expire. And the decline in absolute royalties, though, partly offset by higher SubSol X US revenues related to royalties and sales of tablets to our partner, Accor Healthcare. If you look at SubSol specifically in Q2 compared to Q1, you can see in the waterfall graph on the bottom part of the page that following the negative effects of the inventory adjustment at the beginning of the year, we had a significant rebound in revenues in Q2 coming from a positive inventory effect, which is the lower inventory destocking you can see in the graph, almost 14 million sec. That is the main explanation why net revenue increased from Q1 with 14.4%. The demand for sub-salt expressed in net revenue terms increased with a net of approximately 1%, As shown in the first three bars, which is the same as for the market for Buprenorph and Naloxone quarter over quarter. The FX effect was also positive quarter over quarter with 3.7 million. And when you compare with average FX rate during the quarters. So in conclusion, you can also see in the graph and in total currency, the low subsoil net revenue increased by 11.6% between the quarters. Next page, our P&L. happy to show a positive EVTA for the third consecutive quarter, 5 million SEK. And also when doing the exercise that we usually do, adjusting for non-repeating costs, that would imply an EVTA of approximately 13 million. To explain this positive EVTA, first of all, when it comes to cost of goods sold, the majority of this 16.3 million related to US commercial, or to be more specific, that is 15.4 million compared to Q2 last year we continue to improve a gross margin in the US commercial from 88 to 90 percent. Second of all looking at operating expenses in Q2 they were on par with prior year following higher expenses for OX124 development and launch preparations, higher admin expenses for legal costs related to the DOJ investigation, And now these expenses, though, were offset by lower R&D costs, especially due to the Moody's study that was finalized in Q3 last year. The US dollar strengthened slightly in the second quarter compared to last year, and the total FX effect on it was a negative four million. So in summary, OPEX came in at one hundred and fifty three point five million this quarter. Now, following US commercial as a segment, the EBITDA contribution from my US business amounted to 47 million for the quarter. That is a margin of 32%, slightly down from 33% last year. The EBIT margin was 24%. Finally, in financial items, we had higher bond loan costs of 21.4 million, of which 8.2 million is non-recurring transaction costs in relation to the refinancing of the old bond, and 13.2 million is recurring higher interest expenses for the new bond. We also have an unrealized FX impact of 0.8 million on a cash held in US dollars, and lower interest income from bank accounts of 1.1 million. Moving to the next page on cash flow, we can see that liquid funds, that is cash, cash equivalents, amounted to 140 million in the Q2. That's a decrease by 58 million from end of Q1. But we should not forget that cash flow this quarter was also heavily affected by the settlement of the second and final part of the refinancing of the bond. So we had cash flow from operating activities of minus 6.5 million, primarily impacted by negative operating earnings and also transaction costs in relation to the refinancing of the old bond. And that was partly offset, though, by positive changes in working capital. Investment activities had a negative impact on cash flow, 2.7 million SEK, primarily from investments in equipment for the development organization. Financing activities, negative impact of minus 48 million. And that's mainly due to the closure of the purchase of 30 million SEK of the new corporate bond, as well as we had issuance costs. which is fees to advisors and lawyers for the new bond loan of 12.3 million. Total cash flow then for the period, minus 57.1 million. And of that, as I said, acquisition of the bond, 30 million. Adding an FX effect on cash of minus 1.2 million, that adds up to the decrease in cash of 58 million since end of Q1. On the next page, Shura Financial Outlook for 2024. We put that up for the first time in the Q4 report. Based on current circumstances, we maintain our guidance for 2024 on these metrics. We do see some risk to the sub-solar revenue guidance with the wholesale inventory adjustment that happened in Q4, although we had a rebound in Q2. It's quite significant. The OPEX and EBITDA guidance may also be impacted by non-recurring legal expenses associated with the DOJ investigation and a potential settlement, as well as some additional expenses for a resubmission of OX124. So with the actions presented today, explanations are given. We can conclude these metrics are reaffirmed. And with that, I'll leave it back to Niklas. Legal updates.