Business context and reporting period
Coherus BioSciences, Inc. (the registrant named in the filing) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2017. It is a clinical-stage biosimilar developer with no commercial product sales; revenue to date came from collaboration and license agreements.
Key candidates included CHS-1701, a pegfilgrastim biosimilar; CHS-1420, an adalimumab biosimilar; and CHS-0214, an etanercept biosimilar. The company also reported preclinical CHS-3351 and sought a partner for CHS-131.
Financial performance and liquidity
| Metric | Q3 2017 | First nine months 2017 |
|---|---|---|
| Collaboration and license revenue | $0 | $1.6 million |
| Research and development expense | $42.6 million | $130.9 million |
| General and administrative expense | $14.0 million | $56.3 million |
| Operating loss | $56.6 million | $185.7 million |
| Net income (loss) attributable to Coherus | $(59.0) million | $(189.1) million |
| Net loss per share, basic and diluted | $(1.09) | $(3.68) |
| Net cash used in operating activities | Not provided for quarter | $170.4 million |
- Margins: Product gross margin is not applicable because there were no commercial product sales. The filing does not provide a meaningful product-margin measure.
- Cash and investments: At September 30, 2017, cash and cash equivalents were $135.6 million and short-term marketable securities were $14.5 million, totaling $150.1 million. Cash and equivalents increased from $124.9 million at December 31, 2016.
- Cash flows: Nine-month investing cash use was $18.8 million, including purchases of property and equipment and net investment purchases. Financing provided $199.9 million, principally from common-stock sales. Cash and equivalents increased by $10.6 million during the period.
- Debt: Convertible notes had a net carrying amount of $101.3 million, including $25.3 million classified as related-party debt. The notes carry an 8.2% coupon, mature in 2022, and include a 9% premium payable at maturity or upon specified repurchase or redemption. The company reported compliance with note covenants and no defaults.
- Balance sheet: Total assets were $189.8 million, total liabilities $134.9 million, and total stockholders’ equity $54.9 million. Accumulated deficit was $726.4 million.
- Funding: The company stated that available cash and investments were expected to fund planned expenditures and obligations for at least 12 months after issuance of the financial statements, but that it would need to raise additional funds in the future. It had $39.2 million remaining under its ATM equity program at September 30.
Material changes versus the prior comparable period
- Q3 revenue fell from $162.8 million in 2016 to zero in 2017; nine-month revenue declined from $189.3 million to $1.6 million. The principal reason was the prior-year recognition of revenue following termination of the Baxalta agreement. The 2017 nine-month amount included recognition of $1.4 million of remaining Daiichi Sankyo deferred revenue after that partner opted out of CHS-0214 development in Japan.
- Q3 2016 reported net income attributable to Coherus of $83.9 million, versus a $59.0 million loss in Q3 2017. Nine-month net loss attributable to Coherus widened from $51.4 million in 2016 to $189.1 million in 2017; the periods are not directly comparable given the large, non-recurring 2016 collaboration-related revenue.
- R&D expense decreased 34% for the first nine months, to $130.9 million, primarily because CHS-0214 Phase 3 work was completed and spending on other programs was reduced. G&A increased 55% to $56.3 million, largely reflecting higher legal and professional costs, personnel and stock-based compensation.
- Operating cash use was $170.4 million, compared with $165.7 million in the first nine months of 2016. The company raised approximately $199.9 million net from common-stock issuances in 2017, including a $74.9 million net private placement to Temasek in August.
Outlook, management commentary, risks and unusual items
- CHS-1701: The FDA issued a complete response letter in June 2017 and said the BLA could not be approved in its current form. Identified matters included reanalysis of some samples using a revised immunogenicity assay and additional manufacturing-process information. Management planned to resubmit the BLA in the first quarter of 2018; approval and timing remained uncertain. The European application was under review.
- Other programs: Management said it was prioritizing CHS-1701. It anticipated additional manufacturing investment before potential CHS-1420 or CHS-0214 submissions. Daiichi Sankyo ended its CHS-0214 Japan development collaboration in 2017, and Coherus regained the territory rights. The company had deprioritized related European filing work.
- Cost actions: A June 2017 restructuring following the CHS-1701 FDA letter generated $3.6 million of charges. The company expected R&D expense to decrease for the rest of 2017 as it focused on CHS-1701, and G&A to decrease as pre-commercial spending was curtailed. It expected to pay remaining restructuring obligations by the end of Q1 2018.
- Unusual accounting item: Nine-month other income included a $2.8 million gain from remeasurement of contingent consideration tied to the InteKrin acquisition; the liability was reduced to $2.8 million at September 30. Such fair-value changes may continue.
- Litigation: Amgen brought a California action alleging unfair competition and misappropriation of trade secrets, among other claims, and a separate Delaware patent-infringement action relating to CHS-1701. Coherus said it intended to defend the claims and believed they lacked merit. It could not estimate the likelihood or amount of loss; an injunction could delay CHS-1701 commercialization. Separately, the PTAB invalidated claims in three AbbVie patents, but AbbVie appealed; the PTAB declined to institute Coherus’s challenges to another AbbVie patent. The outcomes of patent challenges and litigation could affect development and market-entry timing.
- Principal risks: Continued losses and cash burn, dependence on future financing, regulatory and manufacturing uncertainty, competition from other biosimilar developers, reliance on third-party manufacturers and research organizations, intellectual-property disputes, and the ability to obtain commercial partners and market acceptance. Management reported disclosure controls were effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the company resubmitted the CHS-1701 BLA on its stated Q1 2018 schedule, and what the FDA subsequently required or decided.
- Cash, investments, operating cash burn and financing needs against the stated expectation of at least 12 months of funding; also verify availability and terms of any additional financing.
- Progress and costs for CHS-1420 and CHS-0214, including manufacturing readiness, regulatory plans and the commercial implications of regained Japan rights.
- Status, potential timing effects and any financial exposure from the Amgen actions and the relevant patent proceedings.
- Share-count and dilution effects of the 2017 equity raises, any further Temasek investment, the ATM program and convertible-note conversion rights.