Coherus BioSciences, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2019. The filing identifies the registrant as Coherus BioSciences, Inc.
Business context and financial results
Coherus is a commercial-stage biosimilar company. UDENYCA, its biosimilar to Neulasta, began U.S. sales on January 3, 2019 and was the source of reported product revenue. All amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net product revenue | $111.7 | $0 | $232.2 | $0 |
| Cost of goods sold | $6.4 | $0 | $9.3 | $0 |
| Gross margin | 94% | Not applicable | 96% | Not applicable |
| Operating expenses | $59.8 | $57.0 | $169.5 | $143.9 |
| Operating income (loss) | $51.8 | $(57.0) | $62.7 | $(143.9) |
| Net income (loss) | $47.0 | $(58.8) | $50.6 | $(146.8) |
| Diluted earnings (loss) per share | $0.63 | $(0.87) | $0.69 | $(2.39) |
Gross margin includes manufacturing costs for UDENYCA incurred before approval that were expensed earlier as R&D rather than in cost of goods sold. The company also began paying Amgen a mid-single-digit royalty on net product revenue on July 1, 2019.
Cash, liquidity, debt and cash flow
- At September 30, 2019, cash and cash equivalents were $165.1 million and short-term marketable securities were $5.4 million, totaling $170.5 million in cash and investments. Current assets were $276.4 million and current liabilities were $82.7 million.
- Debt carrying value was approximately $177.8 million: $104.3 million for convertible notes and $73.5 million for the term loan. The notes carry an 8.2% coupon and mature in 2022; the $75 million 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.
- For the first nine months of 2019, operating cash flow was $10.6 million, investing cash outflow was $6.7 million, and financing cash inflow was $88.2 million. Cash, cash equivalents and restricted cash increased by $92.0 million.
- Operating cash flow reflected substantial working-capital movements, including an $89.6 million increase in receivables and a $31.2 million increase in inventory, partly offset by a $37.1 million increase in accrued rebates, fees and reserves.
- Management said available funds and expected UDENYCA collections were sufficient to fund planned operations and obligations for at least the next 12 months. It also cautioned that additional capital may be needed and is not assured.
Material changes versus prior comparable periods
- UDENYCA sales drove the change from no product revenue and substantial losses in 2018 to $50.6 million of net income for the first nine months of 2019.
- Nine-month R&D expense declined to $59.2 million from $83.6 million, primarily because UDENYCA manufacturing costs were capitalized as inventory after FDA approval. This was partly offset by investment in CHS-131, CHS-1420 and other pipeline programs.
- Nine-month selling, general and administrative expense rose to $101.0 million from $60.3 million, mainly reflecting the expanded commercial organization and marketing activity for UDENYCA.
- Nine-month interest expense increased to $13.1 million from $7.3 million, primarily due to the term loan entered into in January 2019.
- Stockholders’ equity was $56.0 million at September 30, 2019, compared with a $38.6 million deficit at December 31, 2018.
Outlook, risks and unusual items
- Management expected quarterly R&D expense for the remainder of 2019 to be similar to or slightly above the average for the first nine months, and expected SG&A to remain relatively stable. It expected gross margin to moderately decline over time as competitive pressure lowers revenue per unit.
- UDENYCA revenue was highly concentrated: three wholesalers represented 98% of revenue for both Q3 and the nine-month period. Competition, pricing, payer coverage and reimbursement, and continued product acceptance are key commercial risks.
- The term loan requires minimum UDENYCA net sales of $70 million in 2019, $125 million in 2020 and $150 million in each year thereafter. Failure to comply with covenants could allow acceleration of the debt. The loan also includes prepayment premiums and a 4% exit fee.
- The May 2019 settlement of Amgen’s trade-secret action permits continued UDENYCA marketing but requires a mid-single-digit royalty for five years beginning July 1, 2019. In a separate patent case, the Federal Circuit affirmed dismissal of Amgen’s claim; Coherus reported filing a motion for attorneys’ fees. Coherus’s patent suit against Amgen concerning Humira biosimilar formulation patents remained pending.
- Pipeline and timing remain uncertain. CHS-131 entered clinical development in Q3 2019; Coherus planned CHS-1420 U.S. launch no earlier than July 1, 2023 under its AbbVie settlement; and it halted its own CHS-3351 development after licensing Bioeq’s ranibizumab candidate.
- On November 4, 2019, after quarter-end, Coherus entered a U.S. commercialization license with Bioeq for a ranibizumab biosimilar. Terms disclosed include a €5 million upfront payment, up to €30 million in development and regulatory milestones, and a low-to-mid-50% share of U.S. gross profits.
- Coherus reported an accumulated deficit of $934.2 million despite 2019 profitability. Management’s outlook depends substantially on sustaining UDENYCA sales; the filing warns that weaker or delayed collections or increased spending could require further financing or reductions to development and commercialization activity.
Most important facts for investors to verify
- Whether UDENYCA sales, collections and market share support the term-loan sales covenants and management’s liquidity outlook.
- The composition and timing of receivables, accrued rebates and reserves, and the extent to which current profitability converts into recurring operating cash flow.
- How competition, pricing pressure and the Amgen royalty affect realized net price and gross margin.
- The full costs, milestone conditions and profit-sharing economics of the Bioeq agreement, including the eventual supply agreement.
- Debt service, covenant headroom, prepayment and exit fees, and potential dilution from convertible notes and equity awards.
- Regulatory, manufacturing, reimbursement and intellectual-property developments affecting UDENYCA and pipeline candidates.