Coherus BioSciences, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The filing identifies the registrant as Coherus BioSciences, Inc. (Nasdaq: CHRS). Financial statements are unaudited.
Business context and financial performance
Coherus is a commercial-stage biosimilars company. UDENYCA, its biosimilar to Neulasta, was its first commercial product; U.S. sales began January 3, 2019. The company also has biosimilar and small-molecule candidates in development.
| Metric | Q2 2019 | Six months 2019 | Comparable 2018 |
|---|---|---|---|
| Net product revenue | $83.4 million | $120.5 million | No product revenue |
| Gross margin | 99% | 98% | Not meaningful; no product revenue |
| Operating income (loss) | $27.5 million | $10.9 million | Losses of $44.9 million and $86.9 million |
| Net income (loss) attributable to Coherus | $23.6 million | $3.6 million | Losses of $43.6 million and $87.9 million |
| Diluted earnings (loss) per share | $0.32 | $0.05 | Losses of $0.68 and $1.42 |
| Net cash used in operating activities | Not presented by quarter | $44.3 million | $69.1 million |
The reported gross margin is unusually high partly because some UDENYCA manufacturing costs incurred before FDA approval were expensed earlier as R&D rather than in cost of goods sold. Six-month cost of goods sold also included $1.3 million of canceled manufacturing reservations and $0.4 million of excess or obsolete inventory write-offs.
Liquidity, cash flow and debt
- At June 30, cash and cash equivalents were $105.9 million and short-term marketable securities were $6.0 million, or $111.9 million combined. Operating cash use was driven substantially by $77.4 million of receivables and $16.7 million of inventory investment, partly offset by $20.7 million of accrued rebates and other items.
- Cash, cash equivalents and restricted cash increased $33.6 million in the first half, to $106.8 million. Financing provided $84.5 million, including $73.1 million net proceeds from a $75 million term loan and $8.2 million net proceeds from ATM share sales. Investing activities used $6.4 million.
- Debt carrying values were $103.9 million for convertible notes and $73.3 million for the term loan. The convertible notes have $109 million of scheduled principal and premium payments, mature in March 2022, and bear an 8.2% coupon. The $75 million term loan matures in January 2025, bears interest at 7.0% plus LIBOR, is secured by substantially all company and guarantor assets, and includes a 4% exit fee and prepayment premiums.
- Term-loan covenants require minimum UDENYCA net sales of $70 million in 2019, $125 million in 2020 and $150 million annually thereafter. Failure to meet covenants could accelerate amounts due. The company reported compliance with convertible-note covenants; the filing does not state a term-loan covenant breach.
Changes, outlook and material items
- Compared with 2018, 2019 results reflect UDENYCA launch revenue and a shift from substantial losses to quarterly and year-to-date profitability. R&D expense fell to $18.9 million in Q2 and $37.7 million in the first half, mainly as approved-product manufacturing costs moved from R&D to inventory. SG&A rose to $36.5 million and $69.1 million, respectively, chiefly to support commercial launch and sales operations. Interest expense increased, primarily due to the new term loan.
- Management said profitability depends on maintaining operating expenses relatively constant and avoiding a decline in UDENYCA sales. It expected R&D expense for the rest of 2019 to be similar to or slightly higher than the first-half level, and SG&A to remain relatively stable. Management believed available funds and expected UDENYCA collections would cover planned expenditures and obligations for at least 12 months after issuance, while cautioning that future additional capital may be needed.
- Under a May 2019 settlement with Amgen, Coherus may continue marketing UDENYCA but must pay Amgen a mid-single-digit royalty on net product revenue for five years beginning July 1, 2019. Settlement details are confidential; management expected the royalty to reduce gross margin.
- On July 29, 2019, after quarter-end, the Federal Circuit affirmed dismissal of Amgen’s patent-infringement case concerning the ’707 patent. The filing notes Amgen could seek further review. Coherus’s separate suit alleging that Amgen’s Humira biosimilar infringes Coherus patents remained pending.
- Pipeline developments included opening an IND for CHS-131 in June 2019, with a planned NASH clinical program. Coherus planned U.S. launch of CHS-1420 no earlier than July 1, 2023 under its AbbVie settlement and license. Management cited additional manufacturing investment before certain candidate filings and significant regulatory, manufacturing, competition, reimbursement, intellectual-property and financing risks.
Key investor verification points
- Track UDENYCA sales, collections, market share and rebate accruals; three wholesalers represented 98% of Q2 revenue.
- Assess post-June Amgen royalties and their impact on gross margin, and confirm the timing and accounting for settlement-related payments.
- Monitor liquidity and operating cash burn, including receivable collection, inventory needs and the potential for additional financing.
- Review term-loan sales covenants, LIBOR-linked interest, security and prepayment or exit fees alongside the convertible-note maturity and 9% premium payable at maturity or redemption.
- Follow the pending Coherus-Amgen patent litigation, any further appeal in the ’707 case, and the development, regulatory and manufacturing milestones for pipeline candidates.