You can definitely create a new DB on a VM to run your SQL server to use with Orion. Once you have the new SQL server online, re-run the "Configuration Wizard" for Orion and follow the steps. When it gets to the DB section, point it at the new server and select a name for the DB to be created; the wizard will handle everything else. Please note that you will be starting with a fresh DB and lose all of your existing Orion data. You could backup the DB from your current SQL Express installation on the Orion server and restore it to the new SQL server if you'd like to keep everything. The SQL server does not need to be a separate physical box.
Hope that helps!