Basis for outlook
(Published on 17 July 2020)
Orion continues persistent actions to generate growth more rapidly than growth of the market in the long term. However, significant growth investments to be made in research and development and sales and marketing in 2020-2021 will affect annual profitability.
In March and April of 2020, the COVID-19 pandemic caused a significant increase in demand, as a result of which the company's net sales and operating profit for the first half of 2020 clearly exceeded the forecast levels. This was partly due to product hoarding and stockpiling and partly to an increase in actual demand for products. In May and June, the sales levelled off, and in many product groups they were weaker than in the previous year.
As regards Specialty Products unit, the company estimates the sales growth that was caused by the spike in demand in the early part of 2020 to level off during the year. The sales of generic products in Orion‘s portfolio manufactured by other pharmaceutical companies are estimated to be slightly lower than in the previous year due to weaker than normal availability in the second half of the year caused by the COVID-19 pandemic. Orion still estimates the full-year 2020 net sales to be at a similar level as in the previous year even though in the first half of 2020 the net sales clearly increased.
Orion expects the overall operating profit for 2020 to be higher than previously estimated due to the strong first year-half and to the fact that the full-year sales of Dexdor® and some other proprietary products are now expected to exceed the previously estimated levels, while the operating expenses are expected to be slightly lower than forecast.
The outlook is based on the assumption that during 2020 Europe will not experience a significant second wave of COVID-19 that would materially increase the demand of Orion products. In addition, the outlook is based on the assumption that Orion‘s own production can continue normal operations despite the COVID-19 pandemic. This requires that Orion continues to succeed in protecting its employees and employee absence rates do not significantly increase, that personal protective equipment, starting materials, intermediate products and materials are available and that the logistics chains are sufficiently functional.
The outlook does not include any income or expenses associated with possible product or company acquisitions.
The sales of the Easyhaler® product family will continue to grow also in 2020 due to the combined formulations (budesonide-formoterol and salmeterol-fluticasone) launched in the past few years. The COVID-19 pandemic increased the demand for Easyhaler® products at least temporarily, but this is not estimated to have a material impact on overall annual sales.
Orion reacquired from Novartis the European sales and distribution rights for the Parkinson‘s drugs Stalevo® and Comtan® in December 2018 and April 2019, respectively. Except for Japan, Orion‘s arrangements with Novartis in other markets will expire during 2020 and in most of these markets, Orion is transferring the distribution to new partners. In a few Southeast Asian markets, Orion is planning to sell these products through its own sales organisations, which are being set up. After these changes, the sales of Orion‘s branded Parkinson‘s drugs (Comtess®, Comtan® and Stalevo®) are estimated to remain at the same level as in the previous year.
Generic competition for Dexdor® started in Germany in 2017 and has since expanded to almost all countries in the European Union, resulting in a decline in the sales of the product. However, the strong increase in the demand for intensive care sedatives in March and April 2020 brought about by the
COVID-19 pandemic temporarily increased the sales of the product substantially. The full-year sales are also expected to exceed the original estimate, but are unlikely to surpass the 2019 level. Even so, it is difficult to make accurate estimates on the sales of Dexdor® in 2020.
Orion has also been informed that marketing authorisation applications have been filed for a generic version of Simdax® in Europe, and that a generic dry-powder infusion concentrate of levosimendan has received marketing authorisation in a few European countries. The levosimendan used in Simdax® is a liquid infusion concentrate. It is, however, difficult to make precise estimates on the impact of generic competition on the sales of Simdax®. The formulation patent for Simdax® will expire in September 2020. The expiry of product protection and start of generic competition is not estimated to materially affect Simdax® sales in 2020.
Sales of generic products account for a significant proportion of Orion’s total sales. Towards the end of the first quarter of 2020, the COVID-19 pandemic caused significant increase in demand but the spike in demand in the early part of 2020 is estimated to level off during the year. At the same time availability disruptions and price competition in generic drugs have affected and continue to affect the net sales negatively in all markets. The prices of reference-priced prescription drugs in Finland, which is Orion‘s biggest individual market, continued to decrease slightly in the first half of 2020 compared with the first half of 2019. The sales of generic products in Orion‘s portfolio manufactured by other pharmaceutical companies are estimated to be slightly lower than in the previous year due to weaker than normal availability in the second half of the year caused by the COVID-19 pandemic.
Net sales of Orion‘s biosimilars (Remsima®, Ritemvia® and Amgevita®) have fluctuated heavily in the past few years. Their net sales were EUR 57 million in 2017, EUR 25 million in 2018 and EUR 38 million in 2019. The changes are due to varying success in national or regional tendering competitions. Tendering competitions for 2020 have been challenging for Orion, and therefore the net sales of biosimilars are estimated to decline significantly in 2020.
Collaboration agreements with other pharmaceutical companies are an important component of Orion’s business model. Agreements often include payments recorded in net sales that vary greatly from year to year. Forecasting the timing and amount of these payments is difficult. In some cases they are conditional on, for instance, the progress or findings of research projects, which are not known until studies have been completed. On the other hand, neither the outcome nor the schedule of contract negotiations is generally known before the final signing of the agreement. In 2019, milestone payments amounted to EUR 51 million, including the EUR 45 million milestone payment from Bayer for the commercialisation of the prostate cancer drug darolutamide in the United States. The outlook for 2020 includes milestone payments worth around EUR 40 million, the largest single payments among which are EUR 20 million for the commercialisation of darolutamide in the EU and EUR 8 million for its commercialisation in Japan. Of the EUR 40 million milestones included in the outlook, EUR 33 million was booked in January-June 2020.
Sales and marketing expenditure for 2019–2020 includes a EUR 12 million annual depreciation related to the acquisition of the European sales and distribution rights for the Parkinson‘s drugs Stalevo® and Comtan®. Orion paid a total of USD 28 million for the transfer of the sales rights in December 2018 and in April 2019, and the investment will be depreciated over two years. The outlook also includes an estimated expenditure of EUR 5 million for preparing the launch of the ALS drug as well as costs associated with Orion‘s potential branching out to the United States. Most of these costs will only materialise in the second half of the year, provided that upon completion, the results of the ongoing Phase III REFALS clinical trial are considered sufficiently positive for obtaining marketing authorisation in the United States.
Because the registrations and launches of new products are projects that generally take more than a year, the increases in resources and other inputs required in 2020 were mainly planned during the previous year.
Research and development costs are estimated to be roughly equal to those in 2019. The expenses from the Phase III REFALS clinical trial investigating levosimendan (ODM-109) for the treatment of symptoms of amyotrophic lateral sclerosis (ALS) will slightly decline from previous year, since the trial will come to an end in 2020. On the other hand, investments in earlier research phases will increase. Research and development expenses partly consist of the Company’s internal fixed cost items, such as salaries and maintenance of the operating infrastructure, and partly of 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 2020 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.
Costs are estimated to fall slightly below the forecast level due to the COVID-19 pandemic.
The Group’s total capital expenditure in 2020 is expected to be higher than in 2019, when capital expenditure was EUR 43 million. However, the COVID-19 pandemic may slow down the execution of planned investments and thus slightly reduce the volume of investments originally planned for 2020.
Near-term risks and uncertainties
Orion’s outlook is based on the assumption that during 2020 Europe will not experience a significant second wave of COVID-19 that would materially increase the demand of Orion products. In addition, the outlook is based on the assumption that Orion‘s own production can continue normal operations despite the COVID-19 pandemic. The sales Orion-manufactured products depend on the ability of production and the entire supply chain to operate at planned level. This involves numerous pandemic-related risks that may cause even material production disruptions. Such risks include the infection of employees, poor availability of personal protective equipment, poorer availability of starting materials and intermediate products as well as logistics chain disruptions.
The reacquisition of European sales and distribution rights for Stalevo® and Comtan® has generated additional sales for Orion’s branded Parkinson’s drugs since 2019. With the expiration of the Novartis contract in 2020, the distribution of these products will be handed over to new partners in most non-European markets, with the exception of Japan. In a few Southeast Asian markets, Orion is also taking over sales on its own. Sales will continue to be negatively affected by continued generic competition. All these changes and impacts have been taken into account in the outlook for the current year. However, they still entail uncertainty that may materially affect the accuracy of the estimate made at this stage.
The basic Dexdor® and Simdax® patents have expired and Dexdor®‘s indication patent expired at the end of March 2019. The last product protection for Simdax® will expire in 2020. Generic competition for Dexdor® started in Germany in 2017 and has since expanded to most countries in the European Union, turning down sales of the product. However in March-April 2020, the strong increase in demand for intensive care sedatives caused by the COVID-19 pandemic has temporarily brought a significant increase to the sales of Dexdor®. It is therefore difficult to make precise estimates on the impact of generic competition on the sales of Dexdor® in 2020. Orion has been informed that a generic levosimendan dry-powder infusion concentrate has received marketing authorisation in a few European countries. The levosimendan used in Simdax® is a liquid infusion concentrate. However, the launch of generic competition is not estimated to materially impact the sales of Simdax® in 2020.
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. Product deliveries to key partners are based on timetables that are jointly agreed in advance. Nevertheless, they can change, for example as a consequence of decisions concerning adjustments of stock levels. In addition, changes in market prices and exchange rates affect the value of deliveries.
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 and Norwegian 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 relevance due to sales of Parkinson’s drugs in Japan. 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. The impact of availability disruptions on our net sales has increased in the past few years. The ongoing COVID-19 pandemic has clearly raised this risk. The travel and other restrictions in place around the world may cause disruptions to the global pharmaceutical supply and logistics chains with a delay. 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 contains products manufactured by other pharmaceutical companies and products that Orion manufactures on its own but for which other companies deliver active pharmaceutical or other ingredients. 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 been delivered to customers through only one wholesaler, may also cause risks to delivery reliability.
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, for example due to the COVID-19 pandemic, are reflected in costs relatively slowly and 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 often 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 2014–2019 the annual payments varied from EUR 5 million to EUR 51 million. The payments may be subject to conditions relating to the progress of research projects or sales or to new contracts to be signed, and whether these conditions or contracts materialise and what their timing is will always entail uncertainties. The outlook for 2020 includes milestone payments worth around EUR 40 million, the largest single payments among which are EUR 20 million for the commercialisation of darolutamide in the EU and EUR 8 million for its commercialisation in Japan. Of the EUR 40 million milestones included in the outlook, EUR 33 million was booked in January-June 2020.