Outlook for 2023

Additional information

• Basis for outlook

  Collaboration agreements with other pharmaceutical companies are an important component of Orion’s business model. Agreements often include payments recorded in net sales and operating profit that vary greatly from year to year. Forecasting the timing and amount of these payments is difficult. In some cases they are conditional on terms such as R&D outcomes which are not known until studies have been completed, the progress of R&D projects or the attainment of specified sales levels. On the other hand, neither the outcome nor the schedule of contract negotiations is generally known before the final signing of the agreement. In 2022, Orion received an upfront payment of USD 290 million related to the ODM-208 contract, of which EUR 228 million was recognised in revenue and operating profit. The contract-related expenses amounted to approximately EUR 20 million, resulting in a net impact on operating profit of EUR 208 million.

  Milestone payments received by Orion in 2018–2022

  Year	2018	2019	2020	2021	2022
  EUR Million	5	51	42	3	234

  
  Orion is eligible to receive milestone payments from Bayer based on sales of the Nubeqa® product upon meeting certain global annual sales thresholds for the first time. The outlook for 2023 includes one such milestone payment of EUR 30 million. The outlook does not include any other material milestone payments.

  The outlook assumes that Orion's own production will be able to operate normally throughout the year. Risks to the continuity of production are discussed under 'Near-term risks and uncertainties'.

  The outlook does not include income, expenses or other impacts related to any future material product or company acquisition or divestment.

  Net sales

  The outlook anticipates that the net sales of Nubeqa® booked by Orion will clearly increase in 2023. Orion’s estimate is based on forecasts received from its partner Bayer. The net sales of the Animal Health business division is also expected to increase clearly due to the acquisition of the animal health company VMD in summer 2022. Milestone payments are expected to increase clearly excluding the impact of the ODM-208 upfront payment. In addition, the Easyhaler® product portfolio is expected to act as one growth driver.

  Aggregate net sales of other products are expected to decline from 2022, driven in particular by generic competition from Simdax®, dexdor®, Precedex® and Parkinson's drugs Stalevo®, Comtess® and Comtan®. Also, the sales of Orion’s own generic dexmedetomidine and entcapone products are expected to decline due to competition. The expected decline in sales of other generic medicines is mainly explained by lower prices in Orion's main markets. In addition, the outlook assumes that Orion's turnover in Russia will be substantially lower than in 2022. In 2022, changes in exchange rates and especially in the Russian rouble rate increased net sales. Fermion has been operating at very near full capacity over the past few years. The share of manufacturing of the active pharmaceutical ingredients of Orion's own proprietary drugs is estimated to increase, and consequently Fermion's external net sales reported by Orion are estimated to slightly decline in 2023.

  Operating profit

  Manufacturing costs are expected to increase faster than sales, mainly due to cost inflation, resulting in a lower relative gross margin on product sales than in 2022. Cost inflation is reflected not only in raw material and energy prices, but also in salary costs, among others. The outlook takes into account higher salary increases than in previous years.

  Operating expenses are expected to increase slightly from 2022 reported costs (i.e. including ODM-208 agreement-related costs). The increase in R&D expenses will be influenced by the number and timing of projects in the clinical research phase. In addition, there is a plan to increase investment in early-stage research, and hence in building the company's future growth. Sales and marketing expenses will be driven by, among other things, the costs of the acquired veterinary pharmaceutical company Inovet, the planned launch of ganaxolone in Europe and costs related to Nubeqa, including the royalty payable to Endo Pharmaceuticals. Salary increases also push up operating expenses.

  The operating profit from growing products, above all the royalty from Nubeqa®, is estimated to grow faster than costs. Also, milestone payments are expected to increase clearly excluding the impact of the ODM-208 upfront payment. Due to the factors mentioned above, operating profit for 2023 is estimated to be slightly higher or higher than in 2022, excluding the net impact of the EUR 208 million ODM-208 upfront payment.

  Capital expenditure

  The Group’s total capital expenditure in 2023 is expected to be clearly lower than in 2022, when capital expenditure was EUR 109 million. Investments in 2022 included EUR 20 million upfront payment for exclusive licence to commercialise Amneal’s generic products in Europe, Australia and New Zealand and EUR 15 million upfront payment for Jemincare’s NaV 1.8 blocker (ODM-111). In 2023, the grand total of investments will be still further increased by the revamping of Orion's Enterprise Resource Planning (ERP) system and renovation of the company's head office in Espoo. The renovation of the head office was completed in April 2023.  The outlook of capital expenditure does not include any investments related to any future material product or company acquisition

• Near-term risks and uncertainties

  The outlook is based on the assumption that Orion’s own production can continue to operate normally. The sales of Orion-manufactured products depend on the ability of production and the entire supply chain to operate at the planned level. This involves numerous risks that may cause even material production disruptions. Such risks include the infection of employees, the availability of supplies, equipment and spare parts, deteriorating availability of products, energy, starting materials and intermediate products as well as logistics chain disruptions. Current risks to supply and logistics chains include the effects of the COVID-19 pandemic and the war in Ukraine. Any other unforeseen changes in the operating environment could cause disruptions to Orion's production or other operations. Such risks may include natural disasters, significant geopolitical changes, epidemics and pandemics.

  In the current labour market situation, strikes and other industrial actions are also risks that may affect Orion's production and other operations directly or indirectly.

  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 pharmaceutical markets in recent years will specifically focus on Orion’s products. Changes in pharmaceutical regulation in individual markets or more broadly, for example at EU level, may affect the sales and profitability of 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. Due to Russia’s invasion of Ukraine, the visibility of business in these countries is currently very low. Furthermore, it is uncertain whether all the receivables in Russia can be collected. However, this is not considered to be a significant risk for the Group. Orion has insured its receivables, but only in part. So far, Orion has been able to recover its receivables in Russia normally.

  Currently no single currency is posing a material exchange rate risk for Orion. In Orion’s total net sales, the share of invoicing in US dollars has fallen to around ten per cent. At the same time, the value of purchases in dollars has increased. The weight of the US dollar will increase due to increasing sales of Nubeqa®. Other key currencies that carry an exchange rate risk are European currencies other than EUR. However, the overall effect of the risk arising from currencies of European countries will be abated by the fact that Orion has organisations of its own in most European countries, which means that in addition to sales income there are also costs in these currencies. The exchange rate performance of the Japanese yen is significant due to sales of Parkinson’s drugs in Japan. The exchange rate effect related to the Russian rouble arises in particular due to the strong volatility of the currency. Russian sales do not represent a significant portion of Orion’s total 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 impacts of the COVID-19 pandemic, the war in Ukraine and other challenges in the global supply and logistics chains of pharmaceuticals have increased the already elevated risk of supply disruptions. Moreover, the disruptions, production volume changes and logistical challenges experienced in other industries may also have unexpected and sudden ramifications that can manifest as shortages of necessary raw materials, supplies and equipment in the chemical and pharmaceutical industries and as increases in prices. The rise of raw material prices and other supply chain costs deteriorates the profitability of Orion's products, since in the pharmaceuticals industry it is very difficult to pass on cost increases to the prices of own products, especially prescription medicines, particularly in Europe. Cost inflation will have a negative impact on Orion's profitability in 2023. Due to the inventory turnover rate, the impact of price increases on the cost of goods sold was still limited in 2022 and will be more pronounced in 2023. A continuation of high inflation levels poses a risk to Orion's profitability.  

  Authorities and key customers in different countries carry out regular and detailed inspections of drug development and manufacturing 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 supply active pharmaceutical or other ingredients and components or parts (among these the Easyhaler® products). 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 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 2014–2022 the annual payments varied from EUR 3 million to EUR 234 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.