Coherus BioSciences, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The filing identifies the registrant as Coherus BioSciences, Inc.; the request metadata says “Coherus Oncology, Inc.” Financial statements are unaudited and prepared on a consolidated basis.
Business context and period highlights
Coherus is a commercial-stage biotherapeutics company focused on biosimilars. UDENYCA (pegfilgrastim-cbqv), its biosimilar to Neulasta, received U.S. FDA approval in November 2018 and European Commission approval in September 2018. U.S. sales began January 3, 2019, making this the first reported quarter with product revenue. Pipeline candidates include CHS-1420 (adalimumab), CHS-0214 (etanercept), CHS-3351 (ranibizumab), CHS-2020 (aflibercept) and CHS-131, a small-molecule candidate.
Key financial metrics
| Metric | Q1 2019 | Q1 2018 / comparison |
|---|---|---|
| Net product revenue | $37.1 million | No product revenue |
| Cost of goods sold / gross margin | $2.2 million / 94% | No product sales |
| Research and development | $18.8 million | $25.5 million |
| Selling, general and administrative | $32.7 million | $16.6 million |
| Operating loss | $16.6 million | $42.0 million |
| Interest expense | $4.2 million | $2.4 million |
| Net loss | $20.0 million; $0.29 per share | $44.3 million; $0.74 per share |
| Operating cash flow | Use of $57.0 million | Use of $33.6 million |
| Investing cash flow | Use of $15.2 million | Use of $13.2 million |
| Financing cash flow | Source of $81.5 million | Source of $1.9 million |
Reported gross margin was 94%, but some UDENYCA manufacturing costs had been expensed as R&D before FDA approval rather than included in cost of goods sold. Q1 cost of goods sold also included $1.3 million of prepaid manufacturing write-offs related to cancelled reservations and $0.4 million of excess and obsolete inventory.
At March 31, cash and cash equivalents were $81.5 million, short-term marketable securities were $14.9 million, and restricted cash was $0.8 million. Cash, cash equivalents and marketable securities totaled $96.4 million; total assets were $186.1 million. Trade receivables were $46.5 million, reflecting the launch and associated sales. Accumulated deficit was $1.0 billion and stockholders’ deficit was $38.5 million.
Debt included $75.0 million principal under a new term loan and $109.0 million aggregate principal on convertible notes; their combined net carrying amount was $176.6 million. The notes carry an 8.2% coupon and mature in 2022; the term loan bears interest at 7.0% plus LIBOR and matures in 2025. The term loan is secured by substantially all company and guarantor assets, including intellectual property.
Changes versus the prior comparable period
- Revenue increased from zero to $37.1 million following UDENYCA’s U.S. launch. Three wholesalers accounted for 97% of revenue: McKesson 44%, AmerisourceBergen 34% and Cardinal 19%.
- Net loss narrowed by $24.3 million, largely as product revenue began and R&D expense fell by $6.7 million. The R&D decline primarily reflected capitalization of UDENYCA manufacturing costs after approval and lower CHS-0214 study close-out costs.
- SG&A rose by $16.1 million, principally from commercial hiring and launch-related legal, marketing and professional costs. Interest expense increased by $1.8 million, primarily because of the January 2019 term loan.
- Operating cash use increased by $23.4 million year over year, despite the lower net loss. Key launch-related working-capital uses included the $46.5 million receivables build and $6.4 million inventory increase.
- Financing included $72.9 million net proceeds from the term loan and $8.2 million net ATM share-sale proceeds. The ATM program ended when its shelf registration expired in January 2019.
Outlook, commentary and risks
- Management expected available cash, marketable securities and cash collections from UDENYCA sales to fund planned expenditures and obligations for at least 12 months after financial statement issuance. It cautioned that additional capital may be needed and may not be available on acceptable terms; shortfalls could require delaying or reducing development or commercialization activity.
- Management expected R&D expense for the remainder of 2019 to be similar to or slightly higher than Q1, and SG&A to remain relatively stable. It expected gross margin to decline due to the Amgen royalty.
- On May 2, 2019, after quarter-end, Coherus and Amgen settled the California trade-secret action. Coherus may continue marketing UDENYCA but must pay Amgen a confidential mid-single-digit royalty for five years. The filing does not provide a clearer royalty rate or settlement terms.
- The term loan requires minimum UDENYCA net sales of $70 million in 2019, $125 million in 2020 and $150 million annually thereafter. Falling short could trigger default remedies, including acceleration. A sales level above $250 million in 2019 would reduce the loan rate beginning in 2020; scheduled principal repayment timing is also conditional on sales thresholds.
- Other key risks include intense biosimilar competition and pricing pressure, reliance on third-party manufacturers, payer coverage and reimbursement, regulatory and product-quality requirements, intellectual-property disputes, and the company’s history of substantial losses. The filing reports the convertible-note covenants were in compliance at March 31, 2019.
- Management reported disclosure controls and procedures were effective at quarter-end. The company adopted lease accounting in January 2019, recognizing a $7.2 million right-of-use asset and $9.2 million lease liabilities at adoption.
Important facts for investors to verify
- UDENYCA sales trajectory, wholesaler concentration, customer collections and the size and timing of rebates, chargebacks and other variable-consideration adjustments.
- Whether reported gross margin is sustainable after the Amgen royalty, launch-related manufacturing costs and inventory write-offs.
- Liquidity and cash runway against operating cash use, future commercial investment, development spending and debt-service obligations.
- Compliance with the term loan’s annual UDENYCA sales covenants, and the effects of its collateral, prepayment premiums and 4% exit fee.
- Settlement-related royalty costs and the status and potential outcomes of other Amgen and Coherus patent litigation.
- Progress, required investment, regulatory timing and commercialization plans for the pipeline, including CHS-1420’s U.S. launch timing, which the filing says is planned for no earlier than December 15, 2023.