Coherus BioSciences, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Financial statements are unaudited. Coherus is a commercial-stage biotherapeutics company; UDENYCA (pegfilgrastim-cbqv), its biosimilar to Neulasta, was its commercial product and the source of reported product revenue.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net product revenue | $116.2 million | $37.1 million; up $79.1 million |
| Gross margin | 94% | 94% |
| Operating income (loss) | $40.9 million | $(16.6) million |
| Net income (loss) | $35.6 million; $0.50 basic and $0.48 diluted per share | $(20.0) million; $(0.29) per share |
| Operating cash flow | $13.5 million provided | $57.0 million used |
- Revenue growth reflected increased UDENYCA unit sales following its January 2019 launch, partly offset by higher discounts and allowances. McKesson, AmerisourceBergen and Cardinal represented 41%, 35% and 22% of Q1 2020 revenue, respectively.
- Cash, cash equivalents and restricted cash totaled $193.7 million at March 31, including $193.3 million of cash and cash equivalents. Cash and cash equivalents increased from $177.7 million at year-end 2019.
- Total assets were $466.5 million and total liabilities were $309.3 million. Debt carrying values included $105.2 million of 8.2% convertible notes and $73.9 million under the term loan; term-loan principal was $75 million. The term loan is secured by substantially all company and guarantor assets, including intellectual property.
- Inventory was $65.1 million, including $48.6 million classified as non-current. Q1 cash flow reflected working-capital needs, including increases in receivables of $25.6 million and inventory of $9.6 million.
Material changes versus the prior period
- The company moved from a Q1 2019 operating and net loss to operating and net income in Q1 2020 as UDENYCA sales grew substantially.
- R&D expense rose to $33.1 million from $18.8 million, primarily due to a $5 million Innovent upfront payment, CHS-1420 BLA preparation, other pipeline development and additional personnel and consulting costs.
- SG&A rose to $35.4 million from $32.7 million. Higher commercial personnel and marketing costs were partly offset by lower legal expense following the 2019 Amgen trade-secret settlement.
- Operating cash flow improved from $57.0 million used to $13.5 million provided. In Q1 2019, financing cash flow included term-loan and equity-offering proceeds; Q1 2020 financing cash flow was $3.9 million, primarily from option exercises.
Outlook, risks and unusual items
- COVID-19: Management expected UDENYCA sales to decrease in Q2 2020 and potentially increase in the second half if pandemic effects diminished. The filing describes risks to product demand, clinical development, manufacturing, regulatory timelines, employees and access to capital.
- Expenses and margins: R&D was expected to be similar to or slightly higher than Q1 in Q2, then rise in the second half due to development and manufacturing activities and potential license milestones. SG&A was expected to remain relatively constant. Management expected gross margin to moderately decline during the rest of 2020 amid pricing pressure. Q1’s 94% margin benefited from inventory costs expensed before UDENYCA approval; the company expected cost of goods sold to reach the high-single-digit to low-double-digit percentage range of revenue after that inventory was used.
- Pipeline: The company anticipated submitting a CHS-1420 adalimumab biosimilar BLA in the second half of 2020, with U.S. launch no earlier than July 1, 2023 under its AbbVie agreements. It anticipated a CHS-2020 Phase 3 study in 2021. Bioeq planned to withdraw and resubmit its ranibizumab application after the FDA requested additional manufacturing data, potentially delaying approval; Coherus anticipated resubmission in the second half of 2020.
- Financing after quarter-end: In April 2020, Coherus issued $230 million principal amount of 1.5% convertible senior subordinated notes due 2026. Net proceeds were approximately $222.4 million; $18.2 million funded capped-call transactions. The notes are convertible at an initial price of approximately $19.26 per share. This financing was subsequent to the March 31 balance sheet.
- Debt and liquidity: The 2022 convertible notes carry an 8.2% coupon and mature in March 2022, with a 9% principal premium due at maturity or redemption. The term loan bears interest at 6.75% plus LIBOR and has UDENYCA sales covenants, including a $125 million minimum for 2020. Management believed existing resources and expected UDENYCA collections would fund planned operations for at least 12 months from financial-statement issuance, but noted future financing may be needed.
- Legal matters: The trade-secret action brought by Amgen was settled in 2019; Coherus continues to pay Amgen a mid-single-digit royalty on UDENYCA net sales for five years beginning July 2019. Separate Amgen-related patent-fee proceedings remained pending. The company also disclosed risks from biosimilar competition, third-party manufacturing reliance, regulatory and patent uncertainty, and customer concentration.
Most important facts for investors to verify
- Whether UDENYCA sales, unit volumes, net pricing and distributor ordering support management’s expectations, particularly given the forecast Q2 pandemic-related decline.
- How much gross margin depends on previously expensed, zero-cost inventory, when that inventory will be depleted, and the resulting impact of manufacturing costs and the Amgen royalty.
- Progress and timing of the CHS-1420 BLA, Bioeq’s ranibizumab resubmission, and Innovent’s bevacizumab development, including required studies, milestones and royalty obligations.
- Post-April financing liquidity and dilution implications, alongside the 2022 convertible-note maturity, term-loan covenants, interest costs and secured status.
- Whether COVID-19, manufacturing or regulatory disruptions, competition, or pending legal matters materially alter sales, development schedules or funding needs.