Good afternoon, ladies and gentlemen, and welcome to Orion's earnings Conference Call and webcast for the financial period of January-September 2022. My name is Tuukka Hirvonen, and I'm the head of IR here at Orion. In a few moments, our CEO, Timo Lappalainen, will present the results after which you will have the possibility to ask questions either from him or from our CFO, Jari Karlson. We will be first taking questions through the Conference Call lines, and after that, we will take questions you may send us through the chat function of the webcast. Today, we have a special broadcast or event as this will be the last interim report of Timo Lappalainen before his retirement. At the same time, this is his 60th, so 60 interim report. I would say that that's quite remarkable achievement.
Let's all enjoy Timo's last presentation as a CEO. Just before I have the honor the last time to welcome Timo on stage, I'd like to draw your attention to the disclaimer regarding forward-looking statements. Now it is my true honor to introduce Timo once more on the stage regarding this interim report broadcast. Timo, please.
Thank you, Tuukka, for your kind introductory words. Now we go straight to the business of today. Focus first on the highlights for the first nine months of the year. It's been an eventful year for Orion thus far. Of course, many of these activities, they've been ongoing behind the curtain for a while, but now we've been able to report those. Of course, first in the year when Bayer updated their estimate on Nubeqa's peak sales potential, that was based on the data that we had released, the headlines a little bit earlier before. In the springtime, we made a decision to focus our research on oncology as well as on pain.
Now, there are many development activities that continue to proceed as planned, but this is for the future in longer- term and our research activities. Dr. Liisa Hurme was elected a new President CEO to succeed me first of November, and of course, it's a great honor that we have the new President CEO who knows the company for more than 20 years to lead the company to the next phase. Early part of the year, we also announced that we've gained rights to a sodium channel blocker for studying that for treatment of pain, and we'll discuss that a little bit more today. In the summer, we acquired an animal health company more specialized on livestock called VMD. That's a legal name, but in marketing we use the Inovet.
That gave us also the rights to the facility or the plant that is in progress and will soon be completed in France, also, of course, new marketing territories. During the summer, we announced also a global development commercialization agreement with MSD for our compound ODM-208 to be studied in prostate cancer. Also now FDA has approved darolutamide for extended indication for metastatic cancer in a patient population for hormone-sensitive prostate cancer. Many events taking place during the first nine months. When we also look at the, of course the, how the business has developed and evolved, the 208 deal will have a material impact for this year and also resulted in the earnings upgrade.
However, when we look at the overall and, of course, the underlying business, the product sales are developing well. We are finally in the stage where we are coming out of the COVID period. We are increasing the activity in sales and marketing. Also, we have new exciting R&D projects where we can invest for the future. One of those is the sodium channel blocker that we've labeled as ODM-111 that has now entered in phase two, and we are taking that then also to the next phases based on, of course, the data, how that looks out. ODM-105, that is in phase one, has completed that, and we are in the process of preparing that for phase two. Very exciting opportunity as well. What we also announced that the Easyhaler tiotropium, we've terminated development of that.
We made a conscious decision based on the commercial outlook for that product compared to the situation in the marketplace, competitive situation, and we think those monies are well better served in other opportunities. The operating environment, the cost inflation, we flagged that in our release by stating the roughly EUR 15 million for the first nine months. That certainly is there. It's not material yet, but we see that there already. Of course, there are some elements that are more impacting us than some others, but so far we've been dealing very well with that. Of course, the availability in general, everybody in the industry are talking about that. We are so far secured on the energy. So far things are good.
Of course, what we see is the cost inflation throughout the supply chain. Like I said, the magnitude of that for the first nine months is roughly EUR 15 million. When we look at now the key numbers, certainly all of those numbers are impacted by the ODM-208 arrangement. Bearing that in mind, the net sales proceeded very well. Of course, the operating profit also, we beat the target there, including the margin. Of course, the cash flow was positively impacted by that, despite the fact that we continue to make certain that we have large inventories should there be disturbances in the supply chain.
When we look at the waterfall for the net sales, here I'm really happy when we look at all these green bars here, of course, the Simdax, Dexdor, given the patent status of those, and we've been telling that now for almost the past two years that those products are going to suffer from generic competition. But the rest are very favorable. Of course, Nubeqa, it's in the early stages still. Easyhaler, you know, plowing ahead as we've indicated. Also other businesses are doing, of course, also nicely and all moving ahead. Then we've had, of course, the large milestone.
When we look at the operating environment, of course, the product sales benefited us, the exchange rate had an effect, and of course, the milestone is the big block. Certainly, we see, we continue to see the prices to be affected, and there's a pressure on pricing, especially on generics, seem to be quite a lot across the board still. Also, as I mentioned, you know, we're finally coming out of the COVID and get back to the business, both in terms of the commercial activities as well as we have new exciting opportunities in our pipeline. When we look at the geographical breakdown and, you know, all of these numbers, they now include the milestone.
However, of course, Finland continues to be the largest single country market, but the share of that has reduced quite dramatically. Here we see the North America growing because of the milestone. Across the board, you know, business has been very reasonable over the past 9 months, and even in a toughly competed market in Scandinavia, we're pretty much at par with the previous year. When we then look at it from the other angle, which is from the business perspective, specialty products is up by 5 points. Proprietary products, we'll look at the product-wise a little bit later. Animal health, of course, is enjoying now the growth from the Inovet acquisition and now Fermion pretty much at par with the year on.
More and more actually Fermion's capacity is geared towards the captive use. Now the league table of the products, so Easyhaler plowing ahead as it has throughout the year. Stalevo our Parkinson's franchise doing nicely, of course, Nubeqa as it should. Simdax and Dexdor they are going down as we've indicated. Also the HRT products there seem to be a very strong global demand for HRT products, and our Divina series is doing nicely there, as is animal sedatives. Now when we look at the proprietary products, the Easyhaler asset has done very nicely. Parkinson's products as well, especially our supplies to partners. Nubeqa we'll discuss that a little bit more.
Then Easyhaler, sorry, the Simdax and Dextor going down as we've indicated throughout the years now. Nubeqa sales, again, want to remind everybody the way this works is that our arrangement with Bayer is such that when we ship product in quarter two or on a preceding quarter, those product sales are deducted from the royalty payments on the following quarter. That means that you will see the volatility on quarter-to-quarter basis, and the Orion sales are not really indicative of the quarterly sales of what happens in the marketplace.
Unfortunately, this makes life a little bit difficult to look at or make any extrapolations from Orion sales, how the product is doing in the marketplace, but that's the way we've arranged our relationship with Bayer. You know, doing still very nicely when we look at the comparable quarter last year, growing strongly, as of course we all expecting at this stage. Easyhaler, again, you know, doing nicely, again comparing to the previous year. As it should be, we are seeing that. We are also of course seeing across the board pretty much in the Northern Hemisphere the upper respiratory tract infections taking place, partly of course affects some of that to Easyhaler, but of course more on the generic side, on the antibiotics, etc.
On the Parkinson's franchise, there is this volatility because we have a part of that business is sales to partners. Across the board, I think when we look at we are nicely at par or a little bit higher compared to last year. On the Simdax, Dexdor, nothing new on that front, so the sales are slowly declining. Of course, probably next year, the comparable is a far lower base, so probably has a lesser effect than this year. Okay, we cruise along to specialty products, and these are the products that are generic prescription products as well as OTC products, either pharmaceutical products or non-pharma products, a little bit depending on the territory.
There, we were able to grow in Finland, which is very nice given the price declines that we've seen. Also in Scandinavia, same deal. Eastern Europe, also small growth, and in the rest of the world, also doing nicely. Of course, we opened up our own operations in Southeast Asia, and we are seeing some of that carryover effect here now. I said both the prescription products as well as OTC self-care products, we saw growth in both segments, and about one quarter are self-care products and the rest are prescription products. The largest country market, Finland, which is an important market for us, and here the largest segment for us is the reference price products.
Here we see that the market of that segment went down about 7%. Orion was able to grow in that segment by 11%, despite the fact that we saw continued price decline of the product prices. Great job in that, which is demonstrated again when we look at then the overall market share of the reference price product. Orion has now 24% of that. In self-care, roughly 26%. In overall pharma market, we continue to have roughly 11% market share. Now turning to research and development. The ARASENS, which is the key study where the indication expansion is based on and where the FDA approval was based on, that's in the regulatory phase driven by Bayer.
We have another study in a similar nature of patient population with a different underlying treatment that is fully enrolled now, and the patients are being treated and expect to complete that in 2024 or so. ODM-208, we discussed that separately, but this is now the compound that we are collaborating with MSD. This is, we have an expansion on phase 2, and I'm sure later on then we will make decisions how to move that forward. On ODM-105, which is, there's an indication for treatment of psychiatric disorders. Here we are planning for the next phases of that program. Very exciting opportunity.
Now to talk about the pain program, as I mentioned, this is now in phase 1, and of course in early stages, but we are in full court press here and pushing that program very aggressively forward for different indications. As I mentioned on the tiotropium, we made a decision based on the commercial attractiveness for that product that we've terminated development of that. Of course, the responsibility is on everybody's lips and despite the fact that there is a lot of talk about the energy, we have set our goal for carbon neutrality in our operations by 2030, and we are systematically working towards that.
There may be in the short- term, given the energy source diversity that Europe is fighting with today, some short-term increase in that. However, the goal is very clear. Of course, we have worked heavily as everybody in the industry to make sure that we have energy available and that we would reduce our dependency on non-renewables. Also, we are working with our partners in our supply chain that we are able to continue operations and of course, also flagging then the carbon neutrality target. Of course, raising awareness.
It's not only that, you know, we're turning a little bit the heat down in the offices, but we have major investments in our operational facilities where we can capture waste energy and utilize that, thus reducing our carbon footprint. We've taken the tradition that we give you, dear audience, also idea of what we think might be important elements to follow on Orion's progress and of course giving you our subjective scorecard on those. Of course Nubeqa is important. That business is doing very nicely. Also Easyhaler is growing faster than what we actually anticipated or what was our goal this year.
Licensing in new products, this means material, new, proprietary type of products, and there we are a little bit behind our schedule. It's work in progress. We don't have any major material to report at this time. Okay, we made 1 deal on animal health, so that allowed us to put the green there. We were able to find the 208 partnering, however, the phase 3 program, we decided jointly with MSD that we want to first expand a little bit on the ongoing phase 2 before entering then a well-balanced phase 3 program. We have now 1 program in clinical development, so our pain program, 111, and also the new arrangements we've been able to cut, both with Alligator and now with Jemincare this year.
After we upgraded our outlook for this year, we estimate that the net sales will be clearly higher and same goes for the operating profit. Some of the key assumptions, of course, the upfront payment was there. On the sales side, Nubeqa is doing nicely. Of course, the acquisition of animal health business is part of that story, and we knew that the Simdax and Dexdor that will put the pressure on sales development. On the same token, of course, operating profit line, the upfront payment plays a role there, Nubeqa as well. Then on the negative side, of course, the Simdax, Dexdor cost inflation, as I flagged, the price competition, generics is nothing new. That continues there. As I said, we're coming out of the COVID.
We have again, we are able to invest in sales and marketing. We have great opportunities also in R&D. Our next scheduled event for Orion will be then the release of the 2022 financial statements that will take place on February the ninth. At this stage, I invite our CFO, Jari Karlson, to join me here to the podium, and we will take questions first live from the lines and thereafter should you have anything, please use the chat box and you can type in your questions and Tuukka here kindly will moderate any questions you may have. Please.
Thank you. Ladies and gentlemen, if you would like to ask a question, please signal by pressing star one on your telephone keypad. A voice prompt on the phone line will indicate when your line is open. Please state your name before posing your question. Once again, that is star one for your questions today. We take our first caller now. Please go ahead. Your line is open.
Hi there, it's Harry Sefton from Credit Suisse. I had two questions on the costs to start with and then two questions on R&D. Starting with costs. Looking at the underlying gross margins in the quarter, they appeared much weaker than we normally see in the Q3 of the year. I wanted to understand what were the material contributors there, and if there's anything that you can highlight on the gross margin that could be a headwind into next year. My second question on the cost is on the OpEx, and you highlighted that there was a big pickup. Is this level of sales and marketing spend now a good run rate to assume for the end of the year and into 2023? For R&D, clearly there's a pickup from expanding the ODM-208 study and the pain study.
Is this now a good run rate that we should assume, or is there anything exceptional that you would flag for the Q3?
Okay.
Okay.
You wanna take the gross profit?
Maybe these are mine.
Yeah.
The gross margin first, of course, typically the Q3 is weaker than many of the other quarters and as discussed so many times over the years, one of the reasons is that there are these summer shutdowns for maintenance at our plants. Of course, looking at the numbers, one needs to remember that now we have one additional manufacturing plant. In addition to the old plants we have had here in Finland for many, many years, we now also for the first time have the plant in Arques, France for the animal health business. That definitely was one of the contributors. Of course, the product mix is always having an impact on the businesses.
Even within the business units. For example, in the generics business, not all the products have the similar type of profit margin. There's quite a lot of variety and depending a little bit how the sales hit which specific quarter or month of the year, there can be quite significant variances in the margins. We already discussed, of course, the cost inflation, which has not had a major impact so far, roughly EUR 15 million on the gross margin level this year. Of course, maybe a little bit more during the Q3 than the average of the previous quarters. Also one needs to remember there the impact of the timing of the Nubeqa deliveries. We have the royalty, which of course is pure profit.
During the months and quarters, when we have reasonable quantities of the tablet deliveries to Bayer, that takes down the profitability and margin of that product line. We had fair amount of those deliveries during the Q3. Also, there has been a change in the transfer price to Bayer as agreed years back already. That, of course, doesn't have impact on the overall profitability of the business because the value of the tablets is deducted from the royalties the quarter later, but for specific quarter that also has impact. There are lots of different type of things which have had the impact during the quarter.
No one single specific event which would have caused the somewhat lower than typical growth profit level during the summer months. Nothing which really would say that it's there to last. Of course, the cost level is now higher than it used to be, because the inflation and the current cost probably will not go down in the coming quarters either. Maybe I continue with the other cost elements. Sales and marketing. Well, of course, there is some variability between quarters, but in principle, I'd say that this was a fairly normal quarter. We didn't have any specific items. Of course, maybe good to add that on—like we discussed on the 208 program, we had the milestone, and then there were costs- related.
Some of those costs are actually shown up in pretty much every line in the profit and loss statement. This EUR 20 million of cost, in main part of that is in the administration, but there are some millions in pretty much every other line as well. That is shown up in the numbers. The R&D, like always, it's very dependent on the timing of the clinical programs. The underlying base R&D is not varying that much, but what happens in the clinical trials, that changes the numbers. I'd say that the quarter probably was not that unusual. I'd say that it was a fairly normal R&D quarter.
Like I said, even closing down one program can have a major impact on the cost on any quarter or adding one new clinical program as well. I guess as a summary one could say that there are these EUR 20 million related to the ODM-208 deal on the cost side, some timing effects on the other costs, and then the fact that we now have one additional plant where we have several weeks shut down during the summer. All of those had impact on the margins and costs.
That's very helpful color, Jari. I also had two questions on the pipeline. You previously highlighted that you were reviewing the pipeline for Easyhaler, and you've now decided to discontinue the tiotropium study. Can you maybe give some more detail on why you've made that decision now, given that I would expect that given how long it's been in the pipeline, that you are already well through development of that product? On ODM-208, the current phase 2 study is looking at some of the late-line patients in prostate cancer. Do you plan to study this product in earlier lines, should it be successful? Specifically, would you look to study this product in patients with androgen receptor mutations? Thank you.
Okay, I'll take those. The timing of the Easyhaler development, it always depends really what type of data we have at hand, what will be the next data point, how much would we need to invest to get into that data point. Also, of course, we don't really look how much we've spent on the product 'cause, you know, that's water under the bridge. We cannot do anything about that, but, you know, we look forward. This was the point of decision when we would have needed to invest in the program a little bit more. As I said, we looked at the opportunities elsewhere, we think we are better served with that.
In terms of the ODM-208, I would actually advise you to discuss the future patient populations as well as the potential phase 3 with MSD, 'cause they have the lead on this and, with the existing phase 2 that we are expanding, that's also jointly agreed with MSD, but they clearly have the lead on here and you'd need to contact them. I think they're better advised there.
Understood. Thank you. Timo, I just wanted to wish you a very happy retirement on behalf of all the Credit Suisse team. Thank you.
Thank you.
Thank you. We now move on to our next questioner. Please go ahead. Your line is open.
Yes. Hi. It's James Heaney from Jefferies. Timo, yeah, if I can just ask a question on underlying profitability in terms of the bridge. It's very helpful in the slide having the 9-month EBIT bridge. I mean, with the guidance which you've given in terms of clearly higher, it gives a lot of scope in terms of where the number is ultimately gonna land. I guess if my math is right, looking at slide 8, on a 9-month basis, if you have EUR 399 million, you take out the EUR 228 million of the milestone, you add back some of the costs, which gets you to roughly, I think, EUR 191 million, which is -6%.
When I look at the Q3 numbers of EUR 245 million, if you do the same adjustment, I get to EUR 37 million versus EUR 57 million last year, which is a decline of -35%. I was just wondering, you know, it's obviously the milestone is, you know, very accretive to the P&L this year. If you can give us a sense in terms of how the underlying dynamics are in the business, is that kind of assessment broadly correct? And is that the right FX rate we should be thinking as we go into Q4 and into next year? Thank you.
Well, I would refer to my remarks on the quarterly statement, where we say that when we exclude the 2 OA impact both on the milestone as well as the cost, the year is actually proceeding as we anticipated in the beginning of the year when we said that, you know, it's pretty much going to be on par with 2021. That's kind of where we are today. This despite, of course, that nobody knew at that time that we would have the energy inflation that we are seeing today, all of that. I think from that perspective, we are pretty well on track on that. There is clearly a quarterly variation when we look at 2021. The last quarter was not the best kind.
Certainly, the Q3 was stronger. Now this year, the Q3 was probably not the stronger ones, but you know, as we said here, we expect that, you know, or we see that the year is proceeding as we originally planned.
Thank you. Just so I can clarify that. At the start of the year, looking at our underlying and I guess -6% at nine months. Is it fair to say that's kind of the right run rate we should be thinking for the end of the year? Or do you expect, you know, a recovery of that to get back? Then how should we think about underlying profitability into next year and the year-over-year changes? Thank you.
I think your question is very fair. Unfortunately, you know, we've given the guidance, which is the official guidance, and we're trying to help you with the statement that the year is proceeding as we anticipated in the early part of the year. That's pretty much where we need to stick, unfortunately.
Like Timo said, quarters vary. Now, we had relatively weak quarter three when excluding the ODM-208 impact. Last year, we had a relatively weak quarter four, and some other years we had weak other quarters. One quarter is a little bit short period because there are all kinds of of events which have impact, delivery time schedules, time schedule of plant maintenance charts, and so forth and so forth. I guess the statement Timo was saying is fairly clear that overall the business is performing as expected. Of course, there are variations. Slightly higher R&D expenses than last year and inflation on the other hand, product sales have been higher than last year and so forth.
Understood. Thank you.
Thank you. We now move on to our next questioner. Please go ahead. Your line is now open.
Hi, it's Graham Powell from Bank of America. A couple on the underlying cost trends. When you talked about the EUR 15 million inflation over the nine months, where in the cost lines you're actually seeing that, and is most of that in Q3? Should we expect a similar number therefore in Q4? As you go into 2023, just in base, in terms of what you're seeing already on wage contract negotiation, procurement, should we expect to see significant inflationary pressure, or much higher inflationary pressure in 2023 than in 2022? On Nubeqa, who bears the margin- risk on Nubeqa manufacturing costs? You mentioned that you had a capacity price to Bayer increase. Does that run in line with inflation under the terms of the agreement?
Do you take some of the margin hit from higher manufacturing costs? Lastly, just on the underlying trend on sales, if we just took the year to date, is that a good guide for where you think the underlying trend really is? Do you think we could see pickup in the amount of sales to Bayer ex royalty due to the hormone-sensitive prostate cancer indication? Thank you.
Okay, I can maybe take the.
Mm.
The cost inflation to start with that. I mean, like we said, EUR 15 million is basically the impact on growth margins where of course most of the inflation-type cost hit so far because the. For example, in Finland where the majority of our people are still located, the salary-type payroll-type costs have not really changed yet, and time will show what will happen next year. The costs, I mean, the costs were relatively high in Q3, but most of the changes were not related to the inflation at all. You cannot calculate the in that sense that the cost increases in the quarter three compared to the earlier quarters, most of those were related to completely different things than the inflation.
The inflation may be a little bit more in the Q3 than the earlier quarters, but not dramatic changes there. I don't think we expect during the rest of this year any dramatic changes either. Next year we are not yet giving guidance for next year. There are lots of uncertainties, and we will get back to those when we are more ready with next year plans and come out with the outlook for 2023.
But, uh-
Yes.
Yeah.
Yes.
Yeah. Yeah, yes. Of course.
Yes.
I mean, the EUR 15 million for nine months and not. Like, the questions asked and had calculated that they were quite high cost in Q3.
Yeah.
Majority of those were related to completely different things than inflation.
Then there was a question about the collective bargaining agreements. We are not there yet, and no country has yet closed any of those. Of course, there are discussions going on, whereas the largest proportion of the payroll takes actually still today place in Finland. The negotiations will resume sometime probably in November. There was the arrangement in collective bargaining agreements here in Finland was such that there was an option- year for next year, where the discussion would have only focused on only one thing, and which is the increase in salaries. The parties were not able to agree on those. There will be a full round of discussions, and you know, those take their time.
Also, when we look at outside Finland, there have been no official discussions yet. There are some countries where the collective bargaining agreement is actually based on the inflation. However, in our understanding, in many of those countries, the industry has taken up that that is not possible, that's not feasible, and are discussing with the employee representatives on that. So we don't have any good number to give you at this stage. Even more so I would be fairly wary of giving any number because of the ongoing discussions.
Yeah. There was a question of the Nubeqa tablet pricing. I mean, I guess one needs to remember that remind that the structure of the deal is such that we earn the royalty and we carry all the cost of goods. If the cost of goods increase because of inflation, that's something we have to carry. The pricing of the tablets ultimately doesn't really have much of an impact on our overall revenues. Of course there is a timing effect because in some quarters we ship more tablets, and in that quarter we are burdened with the cost of goods sold. Then in the quarters where we ship less tablets and earn more royalties, then of course the profitability for that quarter is better.
In the long- run, the outcome is that we earn the royalty from Bayer, which is roughly 20% of their net sales, and our cost is the actual cost of goods sold. Bayer doesn't have any role in the cost of goods sold. If it increases, then it's our cost. If it decreases, it improves our profitability. That's this one goes.
I think the last question, if I noted that was on the Nubeqa volume development. There, we need to advise you to address this question to Bayer, as they are responsible for booking the sales. Of course, I trust that the interest really focuses on the US, and as they are on the front line here, I think Bayer's quarterly release would be an excellent opportunity to discuss that with them.
Great. Thank you.
Thank you. As a brief reminder, to ask a question today, please signal by pressing star one. We will now move on to our next questioner. Please go ahead.
Hi. It's Sami Sarkamies from Danske Bank. Can you hear me?
Yes, we can. Excellent.
Okay. Yeah, a couple of questions still. Firstly, revisiting the OpEx topic. If we look at the year-to-date costs, sales and marketing costs are up by 12%, R&D up by 27%. Are those sort of indicative regarding the full- year budgets you have for this year? Should we expect like material variations going into Q4?
Well, on the sales and marketing side, as well as R&D, there are some elements in that that relate to the ODM-208 deal, so that little bit distorts that. When we look at the sales and marketing, there has been clear ramp up of the activities and we're seeing that. We don't think that there is any substantial material variation in the activity level. Of course, there are always these timing effects, and we know that the month of December is a fairly slow month from the commercial activity side. Already it starts to wind down in the second week typically. So no really material impact there.
On R&D side, that is really, really dependent on the trials and how those trials, first of all, how they are initiated, in which phase, and then how they are recruiting. The reason is because most of the R&D costs, especially in the development costs, I mean, those are out-of-pocket for Orion, 'cause we pay the CRO who runs the trials, and typically, the CRO gets compensated upfront something. As the patients are recruited, then there's an ongoing payment to that. If these are the major impacts on that. That is why it is not that easy to give you specific guidance on R&D, but we try to give that there are now opportunities.
You know, we have a full court press here that we want to progress these programs what we have now.
Okay, thanks. Secondly, looking at the legacy products, Simdax and Dexdor. Simdax down by a bit more than 20% year-to-date, Dexdor more than 40%. Are these kind of reflecting the underlying trends you're seeing on the market, or are there sort of some timing impacts perhaps included?
No. These are as we are selling the product ourselves. I mean, these are pretty well reflects the impact of how the pricing is going in the market. Of course, there are deliveries again, 'cause these are to hospital products, so sometimes you deliver large lumps of these products, but other than that, this is the situation where we are. Of course, at some point in time, we will see that levels down as with the Dexdor, you know, slowly it is becoming a fairly small product, so the variation is not that material anymore.
Okay. Finally on ODM-105, where you have decided to move into phase two, can you talk about this program and perhaps targeted indications?
At this stage, we prefer not to talk for competitive reasons. Of course, once we have then the CTA or the IND submitted, then it will become public domain. Of course, then we will certainly disclose that, 'cause it will be discussed in or published in ClinicalTrials.gov.
Yeah. When do you expect this to happen?
Next year.
Okay, thank you. I don't have any further questions.
Thank you.
Thank you. At the moment, we have no further questions in the queue.
Okay. Thank you to the Conference Call lines. We actually currently have only one question in the chat, so please take the opportunity and type in your questions, any that you may have, using the chat box in the webcast. This question is actually from a media representative from Reuters news agency. The question goes, according to local media in Russia, Orion is closing its office in the country and that layoffs are underway. Could you please comment on that and disclose what are the company's plans regarding operations in Russia?
Okay. Thank you. We are aware that there is media speculation in Russian media, which apparently has been a source to some other further interest in the topic. As a policy, we do not comment on media speculations. We don't take a position there. We advise who proposed the question to verify the data at Orion's latest earnings release on page five. There is a specific section on impacts of the war in Ukraine on Orion. We have nothing to add to that.
Thank you, Timo. We have questions from Iiris Theman from Carnegie. She has two questions. First one, with regards to your VIRPI trial, how are your partnering negotiations ongoing, and is there interest in this study? Secondly, do you expect to sign a typical partnering deal that could lead to milestones?
On the VIRPI trial, which is our digital therapy program, we are looking for various alternatives, including structures whereby this could be subject to a spinoff of some kind, and Orion taking, you know, even a share again, whether that's through ownership or royalties or that kind. I think any milestone reflected to that would not be material in Orion's books.
Thank you, Timo. Moving forward, you have mentioned that first sales milestone from Bayer could take place in 2023. Does it mean that you are likely to include these milestones in your next year's EBIT guidance, which you are likely to announce in February?
Well, I don't know. Well, I guess we need to see how the sales proceed. This year, I guess we have said that we are not expecting it this year, the first milestone. Time will show whether we will receive them next year. Of course, like all the elements in the guidance we evaluate the probability. At that point, when we publish the guidance and whether this is included or not, depends on our assessment of the situation at that specific moment. I think it's now too early to say anything about next year's guidance.
Thank you, Jari. I have no further questions on the chat, but I have a message that there should be one follow-up in the teleconference line. Operator, please go ahead.
Thank you. Yes, we take our next question. Please go ahead. Your line is open.
Yes. Hi, thanks so much for taking my follow-up question. Again, just regarding the underlying business for this year. The EUR 20 million of costs. The first part of the question is, are they all below gross profit or, are any of those EUR 20 million included as part of gross profits? The first part of the question.
Well, the biggest part of that is actually in the administration line, then the next largest part, but it's in R&D and sales and marketing. There is a little bit also above gross profit, but that's only a small part of the total. Clear majority of the costs are below gross profit line. That specific thing didn't really have that much to do with the gross profit development. Some impact, but fairly small.
Okay, thank you. 'Cause the next part of my question is when I look at Q3, if I was just to, you know, look at the net revenues and gross profit and essentially take out the EUR 220 million, the gross margin was around 48%. At least on a quarterly basis, this, in my mind, is probably the lowest it's ever been for 15 years, and I guess it's comfortably 10 percentage points below what is sort of seasonally in Q3. I was just kind of wondering if there's, I guess, a gap down structurally if this is temporary or whether as we kind of look into next year, not asking for a specific guidance, but, you know, should we be thinking that this is a business, you know, doing underlying gross margins in the mid-50s or so? Thank you.
Well, I guess like said earlier, there were certain specific elements, for example, now adding one additional plant with the plant shutdown and so forth, which had an impact on the summer period growth margins. I don't think there's that much to add. I mean, we have said for many years that in the generic business, there are pricing pressures which continuously gradually push down the margins. We have had the Simdax and Dexdor, which have had a major impact on our margins because they used to be a very high-margin product, and now the prices are significantly down. There are those type of elements included. Of course, when Nubeqa sales grow, that of course works the other way around and should then increase the margins.
It's all a question of timing how these elements. Of course, Dexdor and Simdax are already down quite a lot. The negative impact from those products is now getting smaller in the coming years because especially Dexdor is already so low price that it's very difficult to probably see there that much price decline any more. Like said, many times the predictability of the pricing development on the generics, it's difficult to say. Especially here in Finland, it has been over the last years varying quite a lot. This year, compared to last year, we actually have seen fairly big decline. A year ago, it was a little bit less, it's volatile.
As a summary, the longer- term development is very dependent on how fast Nubeqa is growing compared to some other elements.
Just to follow up on that, at least sequentially, looking from Q2 to Q3, you know, you very helpfully give a slide looking at the Nubeqa contribution in terms of what's royalties and what's product. At least, you know, very roughly, it looks as if in Q2, you know, the royalties aspect was only maybe around 10%, whereas, in Q3 on slide 14, it's more like 50%. You know, would that essentially have the gross margin accretive to Q3, so are the underlying pressures, you know, even more? I understand there's a new plant, but I guess you've got a lot of kind of new plants.
What I'm really trying to get to is, you know, how much of this is temporary or is there a case of the pricing, the year-over-year, you should hopefully get into a floor sometime into next year and then kind of look to grow the margin from there? Is that a fair way to look at it or is there anything else which we should be mindful of?
Well, I guess, like said earlier, we're analyzing and when we come up with next year's guidance, then we'll see a little bit more how this goes. Like you were referring to the Nubeqa, I think I already mentioned that there in the tablets during this quarter, the margin from the tablets actually declined quite significantly from the earlier quarters due to the changes in the transfer price, which then, of course, should then increase the royalties in the coming quarters because less compared to the earlier will be deducted from the royalty. It's a fairly complicated method, but during this quarter especially, it had this type of an overall impact because actually the price happened to change just in the middle of this quarter.
That's great. Thanks for the follow-up.
Thank you. We have another further question. Please go ahead, caller. Your line is open.
Thanks. This is Graham Powell with a follow-up. Just a slightly high-level strategic question, which may be more on to Liisa when she arrives. I would say, is there a scenario if Nubeqa royalty income becomes a more meaningful proportion of sales and company value that Orion would consider any strategic options for that royalty to provide more capital for business expansion and investment in R&D and the rest of the pipeline?
Thank you for the question. Of course, you can understand that we've been approached also to that effect. So far when we looked at the opportunities for capital allocation, the funding of any of those has not been the issue. We have the capacity to raise debt if that's needed. You know, our gearing is negative today. That has not been the case so far. Of course, that, you know, can be held in the pocket, back pocket if that need arose. So far, we've determined that that type of funding, which is effectively selling royalties to some effect, it's very expensive money. It was extremely expensive money six months ago. Of course, the interest rate level is different today.
Still, that's sort of the factor that we looked at so far and as said, the funding has not been an issue for us in the opportunities that we looked at so far.
Great. Thank you.
Thank you.
Thank you. We have no further questions in the queue.
Operator, we have a couple of more questions coming from online chat. These are regarding our new ODM-111 program. The first one is that where is the phase one trial expected to be conducted? The second one is, that to which indication ODM-111 will focus first.
The first-in-man trial takes place in Belgium. The indications, what we've indicated are both acute and then the chronic pain. Developing a pain product is a little bit complicated. You have to have a positive outcome in different settings before you get the broad indication, which is pain. Otherwise you get the sub-segment also only. There are also, of course, larger which are pain- related but don't go under that such as osteoarthritis. You know, at this stage it's too early to say where we are focusing on, but as I was attempting to indicate, you know, we are going at the full court press here, so very broad aspect.
That's our intention at this time to go with this and not to do maybe as traditionally often have been done, is that you'd go sequentially indication by indication. It's, as said, it's too early to say we're still in the single dose mode in the trial.
Thank you, Timo. This next one comes from Carlo Yrjölä from OP Markets. First one: How do you see the current M&A market, and are we going to see any potential bolt-on acquisitions during 2022, 2023?
Well, I mean, we do work on the M&A market all the time, both in terms of the licensing portfolio, acquisitions and of course also company transactions. We follow the market. Of course, today the market's shaky. However, when we look at the pipeline, what we understand is going on in the private market, there's quite a lot of activity in this sector still in the private market. It is when they become operational, that's when we have to see, you know, do they still make sense from the buyer's perspective versus if the seller is what the valuations they are expecting. Of course, I mean, that's. We said that that's part, that's one tool in our toolbox, but we have nothing to report at this stage.
One additional one, regarding the ODM-208 upfront payment. What are the plans to do with the money? Are you going to allocate it to dividend payments or M&A activities?
Well, today the money is safely in the cash box. The board will make their recommendation to the AGM, and that will be published then on February the ninth. That when, you know, this piece of puzzle will be resolved, when we look at the then M&A capacity, while the funding is, you know, it is material. However, when we look at the overall debt capacity, including the funding capacity, it's an add-on to that. The overall funding capacity for the company is still way beyond that milestone. It really does not have an impact on our thinking of the investment opportunities.
Thank you, Timo. We have no further questions online, and as far as I'm concerned, we don't have any follow-ups on the Conference Call lines either. That means, Timo, that is now your time to conclude your 15-year tenure as Orion CEO to this audience.
Well, of course, you know, this moment is here now. I'm happy for your interest, your continued interest in Orion throughout this year. Some of you have been with the joyride here for many years, so thank you for your interest. Also, genuinely, your questions, they have actually sharpened our own thinking. You may not always believe that, but that is true. You know, the more difficult questions there are, you know, it makes us to think, you know, have we thought this and this angle? So that has helped. So thank you very much for those. I wish you all great continuation for the starting fall and be safe. Then in February, Liisa will be here at the podium with Jari. Thank you.