Business context and reporting period
Coherus BioSciences, Inc. (Nasdaq: CHRS) filed this Form 10-K for the fiscal year ended December 31, 2019; it is an annual report, not a standalone quarterly filing. The company is a commercial-stage biosimilars developer. UDENYCA (pegfilgrastim-cbqv), its first commercial product, began U.S. sales in January 2019. The filing also presents unaudited fourth-quarter results.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $356.1 million | $0 |
| Cost of goods sold / gross margin | $17.1 million / 95% | $0 / not meaningful |
| Research and development | $94.2 million | $110.2 million |
| Selling, general and administrative | $137.0 million | $94.2 million |
| Operating income (loss) | $107.8 million | $(204.4) million |
| Net income (loss) | $89.8 million | $(209.4) million |
| Diluted EPS | $1.23 | $(3.22) |
| Operating cash flow | $28.4 million | $(159.3) million |
Fourth-quarter 2019 revenue was $123.9 million, gross profit $116.1 million, operating expenses $78.8 million, and net income $39.2 million; diluted EPS was $0.53. Revenue increased sequentially from $37.1 million in Q1 to $123.9 million in Q4.
Year-end cash and cash equivalents were $177.7 million, working capital $228.0 million, total assets $408.9 million, and stockholders’ equity $105.2 million. Operating cash flow turned positive, but included a $51.1 million increase in accrued rebates, fees and reserves; trade receivables rose $142.0 million and inventory rose $48.2 million. Financing provided $89.4 million, including net term-loan proceeds of $73.0 million. The company reported it expected available cash and UDENYCA collections to fund planned operations beyond the next 12 months.
Debt included $75.0 million principal under a secured term loan and $109.0 million principal under 8.2% convertible notes; their year-end carrying values were $73.7 million and $104.7 million, respectively. The term loan matures in 2025 and bears interest at LIBOR plus 7.00%, reduced to LIBOR plus 6.75% effective January 2020. The notes mature in 2022 and include a 9% maturity or redemption premium. The term loan is secured by substantially all company and guarantor assets, with UDENYCA sales covenants and prepayment fees.
Material changes versus prior periods
- 2019 revenue reflects the first full year of UDENYCA sales; comparisons with 2018, when there were no product sales, are not like-for-like. Coherus reported 2017 collaboration and license revenue of $1.6 million.
- The company moved from net losses of $209.4 million in 2018 and $238.3 million in 2017 to $89.8 million net income in 2019, principally as UDENYCA sales commenced.
- SG&A increased $42.9 million, mainly from commercial staffing and launch costs. R&D declined $16.1 million, primarily because approved-product manufacturing costs shifted from R&D to inventory and cost of goods sold.
- Interest expense increased $7.9 million to $17.6 million, principally due to the January 2019 term loan. Cash rose from $72.4 million to $177.7 million, supported by operating cash flow and financing.
Outlook, commentary, risks and unusual items
- Management expected 2020 R&D expense to increase as oncology and ophthalmology programs advanced and licensing milestones were incurred; SG&A was expected to be slightly higher to support ophthalmology commercialization. Management said continued annual profitability depended on growing net sales while keeping operating expenses below sales.
- UDENYCA held an estimated 20.5% of U.S. pegfilgrastim unit market share at December 31, 2019. Three wholesalers accounted for 98% of 2019 revenue: McKesson 42%, AmerisourceBergen 33%, and Cardinal 23%.
- The reported 95% gross margin is unusually high partly because manufacturing costs for some UDENYCA inventory were expensed as R&D before approval. The company expected to use this zero-cost inventory by Q1 2021; afterward it estimated COGS would be a high-single- to low-double-digit percentage of revenue, including a mid-single-digit royalty to Amgen. The royalty began July 1, 2019 and runs for five years under a trade-secret settlement.
- Bioeq’s ranibizumab (Lucentis) biosimilar application was to be withdrawn and resubmitted after the FDA requested additional manufacturing data following equipment relocation. Coherus estimated about four months to generate the data and anticipated a possible approval delay.
- In January 2020, after year-end, Coherus licensed Innovent’s bevacizumab biosimilar for U.S. and Canadian development and commercialization and obtained a 12-month option for rituximab. The agreement included a $5 million upfront payment, potential milestone payments, and sales sharing. Coherus anticipated a bevacizumab BLA submission in late 2020 or early 2021, subject to additional studies and regulatory review.
- Other pipeline timing remains uncertain: management anticipated a 2020 BLA submission for adalimumab biosimilar CHS-1420 and a 2021 Phase 3 start for aflibercept candidate CHS-2020; CHS-0214’s U.S. commercialization is constrained by patents expected to expire in 2028 and 2029. Competition, pricing and reimbursement, regulatory/manufacturing requirements, and dependence on contract manufacturers and licensors are material risks.
- Auditors issued an unqualified opinion on the financial statements and internal controls. The audit highlighted judgment in estimating chargeback and rebate reserves; year-end reserves included $29.9 million of chargebacks and $27.1 million of rebates.
Important facts for investors to verify
- UDENYCA’s sales trajectory, market share, pricing, payer coverage, wholesaler concentration, and collection of receivables.
- The assumptions and sensitivity of chargeback and rebate accruals, and whether inventory converts to sales before expiry.
- Post-zero-cost inventory gross margin, including manufacturing costs and the Amgen royalty.
- Term-loan sales covenants, interest-rate exposure, repayment and prepayment costs, and the convertible notes’ cash or dilution implications.
- FDA timelines and manufacturing readiness for Bioeq’s ranibizumab candidate and Innovent’s bevacizumab program; costs and terms of the Innovent option and milestones.
- Pipeline development spending and whether management’s profitability and liquidity expectations are achieved.