Orexo AB (publ) (ORX) Earnings Call Transcript & Summary

Welcome to Orexo Q4 report 2023. [Operator Instructions] Now I will hand the conference over to CEO, Nikolaj Sorensen; and CFO, Fredrik Jarrsten. Please go ahead.

Thank you very much, and welcome to this Fourth Quarter and Full Year Result Presentation for Orexo. Thank you for joining us here on a Thursday afternoon, Swedish time. I will start moving into the agenda. So we will start, as usual, going through our key achievements or summary of the quarter, some business update before Fredrik will take over and take us through the financial results, and I will sum up with our future value drivers. So if we go into our key achievement; this quarter, I think, has been a quite strong quarter for Orexo, one of the better quarters for the last several years for several reasons. I think the main reason is that we do have a positive EBITDA. We did guide that, but we did have some headwind during this quarter from the exchange rates, which made it a little more challenging to reach the target of having a second half of 2023 with a positive EBITDA. But we did make it. We had SEK 12 million positive EBITDA in Q4, and that take us positive in the second half. And that actually follows on also on a positive Q2 for this year. So we had 3 quarters where we together have a quite positive development in EBITDA. The third quarter did, if you recall, we paid the fee to FDA for the submission of OX124. But excluding that, we would have had 3 quarters in a row with a positive EBITDA. And that also lead us into maybe the overarching title of this report is that we're aiming for pass-through EBITDA for next year, which would be natural after some years of quite high expenses. The other thing that I think is very positive for this quarter is that we have seen a good development in Zubsolv. The third quarter was a little disappointment, both for Zubsolv, but also for the market, but we have seen somewhat of a rebound into the fourth quarter where both Zubsolv was growing and actually Zubsolv was growing both in U.S. dollar and in Swedish krona, both from Q3, but also from last year. And this U.S. dollar growth in Zubsolv that we've seen from last year is actually the first one for a few years. And the explanation for that is relatively stable demand, improved prices, both coming from price increases, but also more positive payer mix and then a year ago, we had some -- somewhat lower inventory. But the increase in inventory, of course, also come that the inventory we have has a higher value due to the price increase. We continue to work very actively with our cost, and we have lowered the cost with 23% from Q4 of 2022. Some of that is coming natural from our repetitive investments have gone down. So our cost for development of OX124, MODIA study, and legal expenses are lower, but they are also due to changes in the organization. For example, in the first half of 2023, we took away most of the team that have worked with digital therapies at that time and now we call Digital Mental Health Programs. That mean that when we are looking ahead right now, we're consolidating our -- we're taking a consolidated view on our U.S. commercial operations, digital health and U.S. Pharma. Today, it's basically the same people who are working with those 2. We have a couple of dedicated people who just work with digital mental health, but the majority of resources comes from shared resources with our U.S. pharma organization. And if we just look at that commercial unit as one in this quarter and compared to last year, we see a 65% increase in the EBIT contribution from our U.S. pharma or U.S. commercial operations. So that is digital mental health plus Zubsolv. Looking a little ahead, we're also pleased to announce that both Vorvida and MODIA have been added to the Veteran Affairs' Federal Supply Schedule and will be reimbursed from the 1st of January. To ensure that we can get the reimbursement and distribution process in place, that's something we have been struggling with for the last year. We have now taken in a distribution partner called Lovell Government Services, who is one of the largest supplier of medical equipment to the Veteran Affairs, and they will manage that part for us. I would say that is not coming at any fixed fee, they will actually get their money from a part of the future revenues for the products. For Zubsolv, one of the things that we've seen have been a good driver of stabilization and where we're seeing good growth is as usual, when you see changes in reimbursement. And therefore, I'm pleased to see that we're now reimbursed in New Hampshire from the 1st of January this year. That keeps our overall reimbursement in the public sector at 50% and you say, okay, we are adding one, how can we still be at the same? That's because of a mix where we see Medicare growing and Medicaid actually declining a little during 2023. Then finally, FDA review of the OX124, I think there shouldn't be a big surprise, but that is ongoing, taking a lot of resources at the moment. What is happening right now is an audit of our external contract manufacturers. We think that is positive. They took it early in the process because that's where we have seen other device drug combinations often needs to complement that file, and this gives us a little time if they have any questions or things where they need more data, to solve those issues that they start early on with that part. If we take a full year perspective, our revenues for the full year was nearly SEK 640 million. We saw a positive increase in revenues, primarily due to favorable exchange rates, but also, of course, growing Zubsolv in both U.S. dollars and SEK in the fourth quarter is helping us. We see an improvement in gross margin. Our OpEx is reduced quite dramatically with nearly SEK 50 million. And if we look at our group EBITDA, that has improved with SEK 82.7 million from last year. So just to read this correctly, the improvement is SEK 82.7 million. The result of this is minus SEK 32.5 million. And as I said before, EBITDA have been profitable for the last 3 quarters if we exclude the FDA submission fee that we had in Q3. Our expectation for this year is to have a full year positive EBITDA. I would also then say, we have appointed ABG and Carnegie to look at the refinancing of the bond, and that actually -- that's renewing the bond. So that's a process that has been kicked off now in the first quarter. So we will look to that. If you recall, our bond is expiring in a year from now, and you normally start looking at the refinancing or renewal of the bond a year ahead of the expiry date. So we have a year to do this, but now we're working with ABG and Carnegie in this process. Looking at the financial outlook that we had for 2023. I'm pleased to inform that we met all of our targets. The market development was plus 4%, but that's basically on the margin. So the market growth has slowed down compared to what we expect and we lower our guidance a little for 2024. Zubsolv net sales is improving from last year, 2022. Some of that is, of course, exchange rate. But again, I'm pleased to see that we had a positive development dollars in the last quarter. Group OpEx, we will have lower OpEx in the second half than the first half, and we did lower OpEx quite dramatically into the second half and Fredrik will come back to the guidance for 2024, where we lower our OpEx estimates even further. And we expect this to have a balance in the second half of this year. And despite having a headwind from currency, we actually made that with a SEK 3 million plus in the second half of the year. Moving into our commercial products. So Zubsolv, and this is a little crowded slide, but I will highlight some of the more important part. And as I said before, we were a little disappointed with the development in Q3, and I think that is partly explained by changes in the U.S. between Medicaid and commercial, which is not specific to our category, but going across several categories. But we did see a little rebound in Q4, where we saw the market is again growing, as you can see to the graph to the right, a little peak upwards. So we took, again, what we lost in the third quarter. Zubsolv comparing quarter-over-quarter is basically stable. There is a decline with 4% from last year, but that decline is actually explained by a decline earlier in this year. So we start going into for the fourth quarter on a lower level. And now the decline is fully explained by United Health Group and Humana, our former exclusive contract, but we see growth in both Medicaid and commercial. When it comes to the Medicaid segment, we actually outgrow the market, and we take a little market share in Medicaid. And that is very much explained by some of the improvement we have seen in some of the new contracts we added during 2023 and late 2022. So both New York, Kentucky, and Indiana have shown good increase during the year, and we're looking forward to add New Hampshire to this list also. What is positive also, if we look at some of the larger Medicaid states, which are not new to the company, we are actually seeing some decent growth in some of those also. So in Medicaid, we have grown overall, and that has resulted in taking market share in the Medicaid segment. For our market access, we have the same market access going into 2024 as we had in 2023 as part of the market. In the public segment, we did get New Hampshire coming in here by 1st of January. But what we have seen in 2023 is that the Medicare, which is part of public, but where Zubsolv is much less reimbursed than Medicaid. The Medicare segment has actually increased and Medicaid has decreased. So without any changes, we would have a little less coverage in the public segment, but by adding New Hampshire here in the fourth quarter, we are maintaining our 50% coverage, which for a product competing in the generic market is a quite stellar performance. I'd also just say that we are increasing our prices with 4% here from 1st of January. We do expect a slight increase in the overall rebates, but I do believe that we will have a net positive price effect for the year. If we look at 2024, we have had an okay start of the year, a little mixed bag, but it's always a little difficult in the first weeks because of holidays, but we have seen the market so far has grown about 3%. We're seeing Zubsolv is keeping decent pace with the market for the start of the year. So keeping the market share from where we ended last year. This year is going to be a little turbulent as all of us know that we have an election coming up in the U.S., which we believe will have an impact on larger political initiatives to improve access to treatment. There was a big initiative in the beginning of 2023 with where we basically opened up for a prescription of buprenorphine products for all physicians. That has impacted the number of prescribers, but what we see is still that the vast majority, actually, more than 75% of all prescriptions is from a relatively small group of physicians of about 12%. And that group has not really increased. On the contrary, during COVID-19, we saw that group was getting smaller. So while we're getting more prescribers, what we need to see are more prescribers who are frequently prescribing and not just describing to 1 or 2 patients occasionally. There's a lot of stuff to do, but I think one of the important part is to improve financing of treatment of opioid use disorder. And of course, the abatement funds coming out of the opioid litigations, we believe, will be very important contributors. And we see basically during '23, every state in the U.S. have set up a process for these abatement funds. But the process is quite bureaucratic so far. And the first allocations we have seen have primarily been to smaller local initiatives. We are playing a role in this, and we are still very optimistic that we can take part of these abatement funds with innovative approaches to improve treatment of OUD patients where we combine our treatment offering, both including digital mental health programs, but also pharmaceuticals when needed. The market has been impacted by the injectable depot formulations, but not so much. But of course, they are taking from the market growth. But we still see that depot formulations are priced much higher and due to the distribution of these programs, we rarely see the sales representatives from these companies out where we are seeing Zubsolv getting prescribed. It is more institutional sales. It's more larger facilities where the majority of Zubsolv sales is coming from smaller clinics. And as we talked about before, the fentanyl crisis that we have in the U.S. is putting up new obstacles for both physicians to prescribe, patients to stay on treatment and with that difficulty becomes, also have a negative impact on the overall market for Zubsolv. But there are a lot of initiatives going on by now to optimize the treatment of patients on fentanyl because to have a successful treatment, there is no better product than buprenorphine to find ways to ensure that patients stay in treatment will be important for the market in the U.S. And we're optimistic that there will be improvement, which will also have a positive impact on Zubsolv. Then a few words on how we work in the U.S. because one of the -- I think it's a little tricky when we look at Orexo because of the profitability and of different regions, we are looking very much into how much market access do we have in a specific region. And it's very important to have Medicaid because they are in the local regions, often a very big player covering more than -- of more than 50% of the patient population. So if you don't have Medicaid, it doesn't really make sense to have a sales rep. So what we're looking at is basically for every single region, we're looking at how much is the total volume, what is the growth rate? How much is covered by our reimbursement? Again, it's not commercial, but it's really Medicaid and Medicare that are decisive, whether it's worth for us to have a sales rep. So today, we have around 36 sales regions in the U.S., and we're constantly optimizing this. And if you look at how we have distributed our sales reps today, we cover about 50% of the market volume. So as you can see here, the big problem with opioid addiction is up in the Northeast and in the Appalachian Trail or Roosevelt, as you can see here, where we have a concentration of sales regions and in those regions that account for about 70% of our total Zubsolv volume. Our market share on average where we have a sales rep is about 3.5%, but that includes some new regions where we're testing to see if we can take part of the growth. And we have also other regions where we've been for quite a long time where market share is 7%, 8% and even higher than 9% in one region. What we're doing here moving forward is that we are, of course, looking at when we're working with our digital mental health, where are we strong, and we believe here we're strong in the Northeast. So this is also where we are looking to test our digital mental health programs in the U.S. Coming into digital mental health program. After we restructured the entire organization last year, we have had a big restructuring of our commercial efforts and a lot of focus has been placed on the VA, where we had an agreement with deprexis. We have, with the new team come up, that the distribution process and reimbursement process is we need to find a way that people are used to within the VA rather than creating a new system. So we teamed up with a group called Lovell Government Services, and they will now cover the distribution and reimbursement process, and we will basically then be responsible for the promotional efforts. We even went to the stage where we have gone away from distributing this digitally to actually distributing a heart package with your login information for the digital mental health programs because one of the issues we've seen was how do we get the quotes 17:28 out to the patients through digital distribution. Now together with Lovell, we have set up a process for physical distribution of the quotes. Together with Lovell, we also reapproached the VA and the federal supply schedule that's their reimbursement mechanism. And together with Lovell, we managed to get both more MODIA and Vorvida added to the federal supply schedules. Now we can come out with all 3 products to the VA, which improves, I guess, our commercial synergies because there are more products and also think it becomes easier to get access having more than one product when you get into the VA. We just -- due to the results of the MODIA study, as you know, we received in Q2, we have been forced to upgrade our MODIA program, and we've done that together with our partner, GAIA, and we expect that upgrade to be completed now here early in Q1. So we are ready to relaunch MODIA into the VA. So the way that we're organized and have been organized the second half of this year is that the leadership of all our commercial operations in the U.S. have been sitting with one team. We have dedicated people, but not that many, who are working with digital mental health, but they are then leveraging resources from the rest of the organization. That means that we, in the digital mental health, a lot of the expenses and resources have come from U.S. Pharma. And to ensure that we have a good governance of these expenses and are allocating resources in the best optimal way moving forward, we are now starting to look at this as one unit called U.S. commercial. And as you can see here to the right, just looking at how it has proceeded. So basically, 2021 was when we did the biggest investment in digital mental health programs, partly triggered of COVID-19 because literally our sales force in the U.S. had no access to the prescribers of Zubsolv. So we decided to let them push the digital mental health programs with some limited success because, of course, they also had a difficulty to reach out with the -- to reach out to the physicians and to the health care providers with digital mental health. But we thought that in 2021, there is a big need for alternative ways to treat patients who does not require face-to-face interaction. So it felt the right thing to take the field force we had, which were partly sitting idle because their access to physicians, as we have reported about before, have more or less been half of what we saw before COVID. When we saw it opened up in 2022, we took away the field force from the digital mental health and focused on other teams and as you can see here, basically improvement in '21, '22 and '23, to a large degree is a result of reducing the direct expenses into the digital mental health and more working on shared resources. So we will report this from the start of this year. Then a few words on our products under development. On the amorphOX, we continue to test this a lot, focused on larger molecules. All of the testing we've done so far have been successful. And that has led to a discussion with some of the partners we have about what are the next steps and how can we proceed into a longer-term collaboration. So that's something that is ongoing at the moment to see if we can take these exploratory studies we have done on large molecules into the next phase. OX124, I mentioned in the beginning, we now have PDUFA date in July. We expect approval during Q3, and it's okay, July is Q3, but why are you not more specific? And I would say that our experience looking at other drug device combinations in the U.S. is that the reviews often get a little more delayed because FDA comes back with specific questions on the supply chain or similar, requiring more data coming out of the company. So our guidance is Q3 even though the PDUFA date is in July, which we are, of course, aiming for, but experience tell us that it often is a little delayed. And we have what's the big focus right now in the FDA review is audits of our contract manufacturer, and that's basically ongoing as we speak. Finally, OX640. As you understand, we got the surprising Complete Response Letter in September for one of the competing products that has led us and other players in the space to go back to FDA to say what is the required development program. And we have submitted a briefing book to the FDA and we expect the result with the feedback from FDA in late Q1, early Q2 on our proposed development program. In late February, we will present in Washington, D.C. on the AAAAI meeting, which is the large conference for allergy. We were invited as a presenter to the conference. So we will have a presentation. And in parallel, we have dialogue with several companies about potential partnership agreements moving forward. A few words on OX124, which is clearly going to be one of the growth drivers for Orexo. It is a market where there's a significant need because of the increased use of fentanyl. It's a quite big market. It's a quite fast-growing market, but it's also a market in quite a transformation with the market leader, Narcan, going to OTC. With the OTC shift, we also changed the reimbursement landscape. So it takes away reimbursement, but you expect it to have a lower price. So they have lowered the price. But to some extent, I think that replaces some of the rebates that are paid to pay us before. We've also seen OPVEE coming in, that's Indivior, has a nalmefene product. And there's a lot of focus right now in the U.S. on how to use these high-dose naloxone like OX124 and there's another product [indiscernible] in the market and OPVEE, which is nalmefene versus the lower standard dose. We are convinced that there is a need for these higher dose. From a pharmacology perspective, if you want to be sure that you reverse and overdose with fentanyl, you do need a higher dose than what is in the standard Narcan package of 4 milligrams. Taking OX124 into the market, we are seeing that OX124 have several unique features. So it is naloxone compared to nalmefene. It is a high dose compared to the low dose in Narcan. It's a powder compared to the liquid that is in the -- in the other nasal sprays out there. It's a unique device, quite small. And very important, it is a device and powder that is not sensitive to temperature variations. And in particular, if you go below sub-0, so low temperatures, it won't freeze because it's a powder and our testing showing that you can still use it when it's very, very cold. And we will have, over time, get a very long shelf life. And on top of that, we have an existing infrastructure in the U.S. We have good relationships. We've been in the OUD market for quite a while, and we believe together with our existing infrastructure, a unique product, we have good opportunities for OX124 moving forward. With that, I will leave the word to Fredrik who will take us through the financials.

Thanks, Nikolaj. On Page 19, a look at our revenue and if we start by looking at the top part of this page, you can see that our total revenue in Q4 of SEK 166 million is approximately 6% higher than in Q4 last year. Of that revenue, obviously, Zubsolv within U.S. Pharma is the main contributor with SEK 151 million for the quarter, which is up 6.1% from SEK 143 million. And in U.S. dollar, the growth is 6.7%. The main explanation for that growth is a higher wholesale stocking effect from a normalization of inventory levels as well as a favorable payer mix. Now this is partly offset by lower demand following lower market growth in the open commercial segment as well as a negative impact of SEK 1.1 million from the weaker U.S. dollar exchange rate in the last quarter. In relation to Zubsolv ex-U.S. revenues in Q4 from sale of tablets to our partner Accord. The reason for the decline in Q4 compared to last year is that Q4 2022 included a buildup of a launch inventory products. Now royalties from Accord on their product sales has though increased in Q4. If you look at Zubsolv specifically in Q4 compared to Q3 this year, you can see in the graph on the bottom part of the page, the higher wholesale inventory stocking of almost SEK 13 million is also from a quarter-over-quarter perspective, the main explanation why net revenue increased by 7.8%. The demand for Zubsolv expressed here in net revenue terms remained stable from Q3 as shown in the first 3 bars, and that is reflecting an overall flat market growth for the buprenorphine and naloxone quarter-over-quarter. There's also slightly favorable pay mix effects, but the FX effect was negative quarter-over-quarter with SEK 2.5 million, and that partly offset the increase overall. In conclusion, you can also see in the graph in local currency, Zubsolv net revenue increased by 9.6% between the quarters. Going to the next page, our P&L. So I just mentioned the positive development in total net revenues for the quarter. And for the full year, that growth is 2.3%. Again, the majority of that growth is attributable to Zubsolv. The decrease in COGS year-over-year is a large extent, the result of favorable production costs in U.S. Pharma, improving the gross margin from 83% to 88% in Q4 this year. When you look at our operating expenses in Q4, we have significantly lower OpEx compared to Q4 last year, following lower expenses for the IP litigation, the digital mental health products, leaner organization and more cost-efficient processes resulted in a 43% decrease in direct expenses since last year. And with the MODIA study finalized in Q3, that's also a big save in expenses in Q4. The U.S. dollar weakened in the last quarter for the year, the total FX effect on EBIT was a negative SEK 3 million in quarter. So in summary, OpEx came in at SEK 154 million this quarter, which is SEK 47 million or 23% lower than in Q4 2022. For the full year, OpEx was SEK 660 million, and we thereby reach our financial guidance with reduced OpEx in the second half of the year compared to the first half. The EBIT contribution from our U.S. Pharma business amounted to SEK 75 million for the quarter, which is a margin of 50%. That's down from 54% last year following mainly larger selling expenses. So we are therefore very happy to report a positive EBITDA for the quarter of SEK 12.4 million, which is an improvement by SEK 65 million or, if you will, 123%. And with that, we also reached our financial guidance of H2 EBITDA imbalance with a positive SEK 3 million or even SEK 11 million if we apply a constant exchange rate from end of 2022. In financial items, we have an unrealized FX impact of SEK 2 million on our cash held in U.S. dollar. We have high costs for the corporate bond of SEK 9.6 million, following an increase in interest rates, and that's partly offset by earned interest on our bank accounts of SEK 1.1 million. Next page, we just wanted to highlight the point we usually make looking at EBITDA, if we separate what we define as distinct external nonrepeating costs. For Q4, these nonrepeating costs amounted to total SEK 11 million, one of them related to external costs for OX124 and SEK 10 million for legal processes. And our EBITDA would, in that case, be positive SEK 23 million. And for the full year, as shown on the bottom part of the page, these nonrepeating costs amounted to a total SEK 121 million. EBITDA would, in that case, be positive SEK 88 million instead of what we have now a negative SEK 32 million. So these external nonrepeating costs. Now with the conclusion of the clinical trial from MODIA, the refiling of OX124 completed and the win in the IP litigation case, they have decreased significantly over the year and are expected to remain at a lower level. But for next year, we could potentially experience additional nonrepeating costs in relation to the legal processes. We cannot either rule out any additional external costs during the remaining approval process of OX124. But in summary, this core EBITDA, excluding nonrepeating costs, has been a key metric, confirming our route to returning to profitability, which now is proven by reaching our financial guidance with a balanced EBITDA in H2 2023. Moving to the next page on cash flow. You can see that liquid funds, cash and cash equivalents amounted to SEK 171 million end of Q4. That's a decrease by SEK 13.2 million from end of Q3. Cash flow from operating activities was negative for the quarter with SEK 2.6 million, which was primarily impacted by negative operating earnings and changes in working capital. And then we had investment activities of SEK 1 million from investments in equipment to the development organization, and we also had financing activities, negative impact of SEK 6 million coming from amortization of lease liabilities. Then financial outlook. So the financial outlook for 2024. We have already talked about the key market development, the expectancy for 2024 is a growth of 2% to 5% based on current growth trajectory. On lead product net sales, we expect Zubsolv net sales in U.S. dollar being in line with 2023. And remember that net sales in 2023 was USD 54.4 million. Group OpEx and cost control is still a high priority for us. OpEx, excluding depreciation and amortization, will decline from SEK 582 million, which we had in 2023 to below SEK 530 million in 2024. And then we have the group EBITDA, which we already comment on. That is an expectancy of positive EBITDA for full year 2024. And with that, I'll leave give to Nikolaj again for legal update.

Thank you, Fredrik. And for the legal update, what has cost us a little during the quarter is that we have completed the appeal documentation. So the way it works is that Sun Pharmaceuticals, they are filing the appeal, and they come in with that documentation, which we answer. We have done that in the quarter. It was submitted in the beginning of January. So most of the expenses were in the fourth quarter. And then Sun will respond to that before we then will have an oral hearing in the Court of Appeal, which is expected during the summer and then we start coming in the second half of the year. The documentation from this appeal process, most of it is public information. And I can say, based on what I have read and our team has gone through the material, there's nothing there, really, which is a surprise, and we believe that the very positive outcome of the District Court has a very strong probability of also the same outcome of the Federal Court when they have reviewed the case. On the government investigation or the subpoena process, it's not a lot has happened during the quarter. There is a sporadic interaction, and then it's very quiet for a while, and we have been in a quiet period for the last few months. So right now, not a lot of stuff has happened in this process. Looking ahead in Orexo, so what are we looking forward? Of course, one of the things that is important, I believe, in the financial market that we have at the moment and looking at some of our peers and the cost of raising capital, it is very important for us to continue a strong focus on cost control and EBITDA in balance or reaching a positive EBITDA. So that's something we're looking at. And where we also in that number need to have the money to go through the approval process of OX124 and also prepare for the launch of OX124, which we believe will be in the early part of 2025. Zubsolv sales is something that we find as a fundamental, again, looking at some of our peers in the industry and looking at how much money we receive from Zubsolv this is equal to what most of the other companies are doing in their rights issues at the moment is what we get from Zubsolv to feel a stabilization around Zubsolv, we believe, is important. And that is very pleasing to see how we actually had a positive quarter. I will comment on, you saw, okay, there was a lot of inventory buildup in Q4. That's not really true. What happens is that we had a lot of inventory decline during the third quarter. So we had a higher inventory in Q2 when we entered the third quarter, which started with the July 4th week. And during that week, there was very little sales. And then what has happened during Q4 is actually more normalization of inventory that was helping us in this quarter. So we see right now and starting this year, we actually -- unusually, we normally see a buildup of inventory in the end of the year. We didn't see that in 2023. So we believe we have a good start of 2023 from that perspective. So Zubsolv sales is very important to continue to see that we have that stable contribution from a product that has patents until September of 2032. Partnering of pipeline projects, we had high expectations last year on OX640. There were some external events that came surprising to us and our potential partners, but we are still in a process with several companies and are optimistic that we can find solution maybe on OX640, but also on the technology finding other partners who will take the technology into more projects. So that's another area we believe both can contribute to our financials, but also, of course, long-term growth story for the company. And then we have our digital health where we have improved our listing with the Veterans Affairs. The way we're approaching it for 2024 is that we are testing with some areas where we are strong in particular in the Northeast. So we're allocating a little time from other Orexo employees to test whether we can get traction within Veterans Affairs in one region before we will then expand to other regions. You can say other approach would be that you go with all of this positive reimbursement, you push nationally on the U.S., but that would require a lot of investment. And which from experience from the digital health is that we have to learn as we go and so will the customer, so it's better that we take a little more step-by-step approach rather than going all in from the beginning. And then our legal process is, of course, something where we know we will have a resolution in the end of this year on the Sun litigation process. It's unlikely it will go to the Supreme Court. And of course, also the government investigation is something we would like to put behind us, but it's really out of our control and something which is, as I said, is moving very sporadic. With that, we will move into the question-and-answer session. So thank you for your attention.

[Operator Instructions]

We have received some questions in writing.

The next question comes from [ Ned Brown ] from Prairie Capital.

I'm calling from Charleston, South Carolina, and I congratulate you on your expense reduction. I think that's a very positive step. I have a comment this morning on Zubsolv sales, which I think you'll find pleasing, and also a suggestion on MODIA. So first on Zubsolv sales, and we are piloting the first mail order, buprenorphine, naloxone pharmacy in South Carolina with the University of South Carolina College of Pharmacy. And in case you're wondering, and it goes directly to the use of the $360 million that we state got from the settlement funds. So why South Carolina? So we have roughly 54,000 people who are opioid use dependent in South Carolina. Only 1/4 are in opioid treatment. And of our 46 counties in the state, probably half have little to no opioid treatment. And as the College of Pharmacy knows well down here, the major big-box pharmacies are pulling out of the buprenorphine script filling business. So we've been working closely, and this is -- a lot of this is very dependent on DEA compliance. So the DEA has basically said to our counsel in Washington that they are more comfortable with a buprenorphine naloxone product, which obviously then limits the universe where Zubsolv is one of them, and we think very highly of Zubsolv. So we're planning to launch our pilot in South Carolina around July 1 with funding of what is known as the South Carolina Opioid Relief Fund that they administer the $360 million. But my observation is really on your sales. We believe that we're going to get to 1,000 customers in South Carolina, very quickly because we will be the low-cost provider and the most convenient provider will be able to deliver within 72 hours from the facility and will be fully DEA-compliant. So my observation is once we get this going, I will tell you, it will go like this. Our expansion plans are to immediately go into North Carolina, where the potential is 5x to 6x greater. Then New Jersey, where Governor Murphy has asked me personally to help bring the program to pilot to New Jersey to be overseen by his wife Tammy, the First Lady. And during the last 6 months, I've been in discussion with Dartmouth College in their treatment center up there where they only have 300-some-odd patients. And they want to enter into the mail order business. Now the second issue as it relates to MODIA and from what I know about MODIA, as you probably know that in order for people to qualify for their monthly buprenorphine script, they need to be in a supervised drug rehabilitation program. We are working with, again, the University of South Carolina to develop a telehealth asynchronous technology that people can access 24/7 that will get them in the program. It will be much lower cost than in-person treatment. It's designed to get people into more treatment at a lower cost.

If I may jump in here, fantastic that how you set up a business to leverage the abatement funds or the settlement funds that have gone to South Carolina. It's something that we are spending quite a lot of resources on to try to come up with innovative approaches to improve treatment. So exactly the patients that you're highlighting here, the 50% living in areas where there are no treatment centers. The 75% who are not active in treatment who should be in treatment. The one thing I will because this call is for us to present our Q4 presentation. I took your phone number here, and because you registered that when you dial in and my suggestion is that we actually reach out to you after the call with our U.S. organizations to discuss how we could find ways of collaborations in the U.S. But I must say, it's impressive what it appears to that you're building up. But I would like to ask if we can reach out to you after and then have a discussion directly on this topic.

I'm happy to help. And I think Fredrik and Lena have my e-mail address, so feel free to use that.

Yes. No, we will reach out.

The next question comes from Klas Palin from Carnegie.

I guess a little bit more financial focus. My first question is just about your guidance when it comes to the cost, looking at the run rate then in Q4 and what Fredrik mentioned about perhaps additional legal costs and costs surrounding OX124. Is that how we should view your outlook for 2024 when it comes to cost that you have sort of a room for some increase of the cost. It's not driven by that you are planning to increase costs in any part of your business?

Your interpretation is correct. I think we're entering our fundamental business and will have lower cost than what we have in the guidance. But we are in a situation where we have a few processes which are outside our control is the legal processes. And also the OX124 process is something that FDA could come back and ask us to do more qualification and the supply chain or that could be doing specific batches to test something in the supply chain. We know they have done that for other and not knowing what they could come back with. I wouldn't like to come back and say we have to breach our cost guidance. So we did say below SEK 530 million, but it does leave a little room for these unexpected expenses.

Out of curiosity, this Veterans Affair list that you have now got MODIA and Vorvida. I mean, how large is this list today and when it comes to digital mental health products? Is there any product that is in sort of being used today or is this something that you're hoping to?

First, one of the issues, we did have an agreement with from the start of '23 with Veterans Affairs or actually from the autumn of '22. What we have encountered is this pure digital product is there, we haven't seen anything like that in the way that we have set it up within the Veterans Affairs that have made any commercial progress at least. We do know that others have been listed, but they have not put a lot of efforts or they have not started to sell. What has been one of the issues is very material is, for example, we can't get e-mail addresses for U.S. veterans or active military. So it was hard for us to find a digital distribution pathway that would work. And it sounds like, okay, this should be possible to solve. But the solutions that we have been presented digging deeper has not been feasible due to data privacy and particularly around veterans and U.S. military, there's a lot of sensitivities around this. So what we have done together with Lovell is we do actually make a box, so it's become a physical product and hope that will overcome the some of the hurdles. What we have seen is other products where you have a combination of a device where you can say, 75% of the product is the digital product, but there is a device. And there, we have seen products that have made some decent progress within the Veterans Affairs. And the Veterans Affairs is about 9 million people, but then you have active military, you have the Department of Defense and you even have the Indian Health Services. And should you add all of them, I believe it's 15 million to 16 million people who receive their health care from this where we will have the initial focus is on the veteran side, but the other ones are included in this federal supply schedule. Then when you have the federal supply schedule, you will then need to work with the individual hospitals. And hospitals are often one hospital and then several primary care clinics associated with that hospital. And there in that hospital, you need to get on their local formulary to start supplying. So this is where we are right now. We're working with the hospitals in the Northeast region to show we come on their formulary and then we can start the promotion.

And my last question then is related to your optimistic about partnering and particularly then OX640. I mean, is this partnering process is this sort of on a pulse waiting for more feedback from the FDA process when it's come to [ NEFI ] or is this progressing?

No. We have ongoing -- we have companies in the data room at the moment. Some new, some have been there for a while. We have companies who have been in there waiting for the feedback on the briefing book and also some are looking very tightly on what happens with NEFI. Then we had some very advanced discussions during the autumn, which unfortunately has not materialized yet. I'm very optimistic that we will see progress on the AmorphOX OX640, there are some external Orexo drivers also that we need to monitor. What we're doing with 640 right now is we have submitted the briefing book. We have been working with the supply chain. And then based on the feedback, we will probably look to see if we should add some smaller patient studies so similar to show some of the things that have come up from the FDA, we believe, have come up. And that's maybe one comment I will make because I've heard that from several comments why you already know what were the issues with NEFI. That's not entirely true because we know what is public, but it's not public what the FDA has told [ ARS ] Pharma. It's only public what ARS Pharma has told to the market. So there are definitely other aspects that are not public. So I do think the feedback on it from FDA on the briefing book is very important to understand the size and timing of the full development program.

The next question comes from Samir Devani from Rx Securities.

Congrats on a good Q4. I just got a question really on Zubsolv. And I appreciate what you were saying about the inventory, Nikolaj. The report talks about increased wholesaler stocking in Q4. So I was just wondering if you could maybe quantify what that was and whether you've taken any price increases since the beginning of the year?

So there has been, you can say, the issue was rather that we had a negative development in Q3 rather than we had a positive development. So in Q3, we started that quarter with a high inventory at the wholesalers because it was the timing on the 4th of July and shipping days in that first week of July, they had ordered most of that in the last week of June, which made a Q2 sale. We record sales when we ship it to the wholesalers. What we have seen here in the fourth quarter is more that we didn't have that dip when you compare to Q3 as we had in Q3, so comparing quarter-over-quarter. So looking at where we are with the inventory, there's always a little inventory buildup in the end, but it was not material this year. So I would say mainly explained when you compare quarter-over-quarter, is that the last comparative quarter was low. Then when it comes to comparing to last year, I would say that actually the stocking was not the biggest effect. There was a onetime adjustment in Q4 of 2023 that we didn't have this year, which is related to the gross to net calculations. So I think right now, we are just simply back to the same to normalized inventory level, which is good for Q1 because we would normally see more buildup in Q4. Then when it comes to price increase, we did take a price increase of 4% from January 1. Some of the sales in January is orders made in before New Year, and they will be shipped at 2023 prices. So the full effect will come from the second half of January. We will then also see, and that, in particular, we have seen some of the PBMs in the U.S. have new fees that they expect us to pay and for data fees, I think they call it. So we have seen a slight increase in those from year-over-year. But I do actually think this time, we will have a net positive price effect from the price increase.

And then just a question on OX124. I appreciate your sort of cautious approach to the approval. But I'm just wondering what sort of prelaunch marketing activities, are you planning? And what sort of payer discussions have you had to date?

So one of the tasks we have given to the U.S. leadership team now is all of them are out meeting their respective customers to start looking at where can we be. There's a limit to how much, we can't speak about a product that has not been approved yet. So we can't have any concrete negotiations. But of course, we can have a discussion with the payers. One of the things that we have looked into is whether they are expecting to pay for the OTC products. And so far, most of them have been very cautious to pay for OTC products, which we think could be important for our opportunities that we could get reimbursement for a prescription product. That's, of course, you have 2,000 payers in the U.S. So there's not one answer to this. But that has been more business intelligence than actual negotiations. But the team in the U.S. have started this year with an ambition to go out and basically meet customers on both on the medical side, from the sales side, from the market access side. Then we will start slowly staffing up the organization here during the first half of the year before we will start more concrete. The second we have an approval, we can start talking to payers, and that's something we anticipate to do in the second half of the year ahead of the launch in first quarter of 2025. And one thing I'll just mention again for people to understand why are we pushing it into 2025. It is because we have a drug device combination, we do need to print the label on the actual device. So before we have an approved label, it's very hard to start manufacturing or you can't start manufacturing without taking a big risk of having to scrap all the material you have. So we can't start the manufacturing of our launch products before we have received the final label.

There are no more questions at this time. So I hand the conference back to the speakers for any written questions for closing comments.

I have received a question about OX640 and how it is, as we have indicated, we had very advanced discussions with a potential partner in the autumn. And this is a question, if they are still here when FDA comes back. And of course, we still have an active dialogue with that company. I met the management team just a month ago. Whether it will turn out to an agreement that's always hard to say. It's another company, they have their priority strategies. But so far, there's nothing that has changed or believe that they could be a very good partner, should we be able to finish this deal, but there are no guarantees. But the dialogue is still there, and both of us are waiting for the FDA feedback and also, we'll see where this company is when we are there probably late in this quarter. With that, I have not received any other questions. So thank you so much for your time, and I think we're running out of the 1 hour that we have allocated for this also. Thank you for joining. And again, I would just say, we believe this quarter was a really strong quarter. It's not been an easy year 2023, but we have had some really strong accomplishment, for example, winning the patent litigation with Sun. We have filed a second product. There's not many Swedish companies who have as many products with the FDA as we have had and also have a product in approval process right now. We have seen Zubsolv stabilizing. We've seen improved profitability across the line, reduced expenses. So I think we're at a much stronger place now than we were a year ago, and we think we have got a lot of opportunities moving ahead. So thank you a lot for your confidence in Orexo and to taking an hour out of this Thursday afternoon to listen to us. Thank you.