Basis for outlook
(Published on 24 October 2018)
Basis for outlook in more detail
The outlook covers the Group's continuing operations excluding Orion Diagnostica.
Items related to the sale of Orion Diagnostica and the profit generated by Orion Diagnostica for the period from 1 January to 30 April 2018 are entered as part of discontinued operations. A capital gain of EUR 128 million was booked for the transaction closed on 30 April 2018. The departure of Orion Diagnostica from the Orion pension fund caused one-off income of EUR 5 million and the transaction process incurred expenses of approximately EUR one million. In addition, Orion has the possibility to receive a variable component of EUR 60 million maximum. The payment of the variable component is based on the return on investment for the buyer (investment fund managed by Axcel Management A/S) at the time of the exit. Due to the uncertainty relating to the variable component, the capital gain does not include any part of the variable component.
Orion’s branded Parkinson’s drugs are Comtess®, Comtan® and Stalevo®. Generic competition to these products commenced in the United States in 2012 and has already extended to nearly all markets. As a result of the competition, Orion’s sales of these products have decreased to low levels in the United States and some other markets, and competition is expected to extend gradually. Sales of the Easyhaler® product family are forecast to continue to grow. In some European countries, marketing authorisation has been granted for a generic version of Dexdor®. Generic competition commenced in Germany in 2017 and has expanded to a few other European countries during 2018. It is to be assumed that generic competition to the product will continue to gradually expand in the EU. Orion has also been informed that a marketing authorisation application has been filed for a generic version of Simdax® in Europe. The impact of generic competition on the sales of Dexdor and Simdax is still difficult to estimate at this stage. The patent for the Simdax molecule expired in September 2015 but this is still not expected to have a material impact on sales of the product in 2018. Orion is continuing actions to defend its rights.
Sales of generic products account for a significant proportion of Orion’s total sales. Competition in Finland, the most important generic market for Orion, remains intense in 2018. However, product launches continue to support Orion’s position as market leader in Finland. At the beginning of 2017, changes were made to the pricing system for substitutable prescription drugs in Finland by narrowing the so-called price band. The decrease in sales caused by this change was estimated at about EUR 15 million in 2017. The outlook for 2018 assumes that the change in the system and its effect in lowering prices will be at the same level as in 2017. The sales of reference priced pharmaceuticals declined by 9% in the Finnish pharmaceuticals market in 2017 and the sales of Orion's reference priced pharmaceuticals declined by 6% (Source: IQVIA).
In 2017, sales of the biosimilar Remsima® generated a significant portion of the growth in net sales of the Specialty Products business division. Sales of Remsima in 2018 are expected to be materially lower than in the previous year because Orion did not win the national tendering competition for 2018 in Norway, nor the national tendering competition held in autumn 2017 in Denmark. In addition, the price level has declined significantly due to intensified competition. Orion has launched a new biosimilar, Ritemvia® (rituximab). However, sales have just commenced, and the product is not expected to compensate for the decline in Remsima sales in 2018. Orion estimates that the sales potential of Ritemvia will be lower than that of Remsima.
Orion’s contract manufacturing sales will significantly decline due to ending of the largest individual collaboration agreement at the end of 2017 as the collaboration partner stopped selling the product manufactured by Orion. Net sales generated by this agreement were EUR 16 million in 2017. It included, among other things, a EUR 4 million advance payment late in the year that was entered as income earlier than planned.
Collaboration agreements with other pharmaceutical companies are an important component of Orion’s business model. These agreements often include payments recorded in net sales that vary greatly from year to year. Forecasting the timing and amount of payments is difficult. Possible future payments relating to agreements already made have in some cases been conditional on, for instance, the progress or findings of research projects, which are not known until studies have been completed. On the other hand, making new agreements is generally a process for which neither the schedule nor the outcome is known before the final signing of the agreement. The outlook for 2018 does not include significant individual payments related to collaboration agreements. The new IFRS 15 standard that came into force at the beginning of 2018 changes the treatment of these payments. Some of the payments received, especially payments related to sales rights, will be entered as income over a longer period of time. Until now they have generally been recognised as one-off payments in sales.
Marketing expenditure will be higher than in the previous year due to additional promotion of sales of the Easyhaler product portfolio in countries where the product was launched in 2017 or will be launched in 2018. Because the registrations and launches of new products are projects that take more than a year, the increases in resources and other inputs required in 2018 were planned mainly during the previous year.
Research and development costs are estimated to be slightly higher than in 2017. They are partly the Company’s internal fixed cost items, such as salaries and maintenance of the operating infrastructure, and partly external variable costs. External costs arise from, among other things, long-term clinical trials, which are typically performed in clinics located in several countries. The most important clinical trials scheduled for 2018 are either continuing from the previous year or at an advanced stage of planning, therefore their cost level can be estimated rather accurately. However, the accrued costs are materially affected by collaboration arrangements and how the costs arising are allocated between Orion and its collaboration partners. For instance, Bayer is paying the majority of the darolutamide research costs.
The Group’s total capital expenditure in 2018 is expected to be lower than in 2017, when capital expenditure was EUR 75 million. The largest single ongoing investment project, the expansion of Fermion’s Hanko manufacturing plant, was completed in June 2018.
Near-term risks and uncertainties
Sales of Orion’s branded Parkinson’s drugs will decrease in 2018 due to generic competition. The effects of the competition have been taken into account in the outlook estimate for the current year. However, the timing of the extension and intensity of generic competition to Stalevo in Europe and elsewhere still entail uncertainty that may materially affect the accuracy of the estimate made at this stage. The basic Dexdor and Simdax patents have expired. However, the products have other product protection that is still valid. In some European countries marketing authorisation has been granted for a generic version of Dexdor. Generic competition commenced in Germany in 2017 and has expanded to a few other European countries during 2018. It is to be assumed that generic competition to the product will continue to gradually expand in the EU. Orion has also been informed that a marketing authorisation application has been filed for a generic version of Simdax in Europe. The impact of generic competition on the sales of Dexdor and Simdax is difficult to estimate at this stage. As regards Simdax, the possible generic competition is still not estimated to materially impact its sales in 2018. Orion is continuing actions to defend its rights.
Sales of individual products and also Orion’s sales in individual markets may vary, for example depending on the extent to which the ever-tougher price and other competition prevailing in pharmaceuticals markets in recent years will specifically focus on Orion’s products. Deliveries of Parkinson’s drugs to Novartis, the most important collaboration partner, are based on timetables that are jointly agreed in advance. Nevertheless, they can change, for example as a consequence of decisions by Novartis concerning among others adjustments of stock levels. In addition, changes in market prices and exchange rates affect the value of deliveries to Novartis.
The structural exchange rate risk due to the US dollar has decreased in recent years because the share of Orion’s net sales invoiced in dollars has fallen to below ten per cent and at the same time the value of purchases in dollars has increased. The greatest exchange rate risk at present relates to European currencies such as the Swedish crown and British pound. However, the overall effect of the risk due to currencies of European countries will be abated by the fact that Orion has organisations of its own in most of these countries, which means that in addition to sales income, there are also costs in these currencies. Changes in the Japanese yen exchange rate have become more important as sales of Parkinson’s drugs in Japan have increased. The exchange rate effect related to the Russian rouble has increased due to the strong volatility of the currency. However, Russian sales are not a significant portion of Orion’s entire net sales.
Orion’s broad product range may cause risks to the delivery reliability and make it challenging to maintain the high quality standard required in production. Authorities and key customers in different countries undertake regular and detailed inspections of development and manufacturing of drugs at Orion’s production sites. Any remedial actions that may be required may at least temporarily have effects that decrease delivery reliability and increase costs. Orion’s product range also includes products manufactured by other pharmaceutical companies. Possible problems related to the delivery reliability or quality of the products of those manufacturers may cause a risk to Orion’s delivery reliability. The single-channel system used for pharmaceuticals distribution in Finland, in which Orion’s products have so far been delivered to customers through only one wholesaler, may also cause risks to delivery reliability. To ensure deliveries, in addition to Oriola Finland Oy, there are also other distributors temporarily distributing certain Orion products.
Research projects always entail uncertainty factors that may either increase or decrease estimated costs. The projects may progress more slowly or faster than assumed, or they may be discontinued. Nonetheless, changes that may occur in ongoing clinical studies are reflected in costs relatively slowly, and they are not expected to have a material impact on earnings in the current year. Owing to the nature of the research process, the timetables and costs of new studies that are being started are known well in advance. They therefore typically do not lead to unexpected changes in the estimated cost structure. Orion generally undertakes the last, in other words Phase III, clinical trials in collaboration with other pharmaceutical companies. Commencement of these collaboration relationships and their structure also materially affect the schedule and cost level of research projects.
Collaboration arrangements are an important component of Orion’s business model. Possible collaboration and licensing agreements related to these arrangements also often include payments to be recorded in net sales that may materially affect Orion’s financial results. In 2014–2017 the annual payments varied from EUR 8 million to EUR 39 million. The payments may be subject to certain conditions relating to the development of research projects or sales, and whether these conditions are triggered and the timing of triggering always entail uncertainties.