Coherus BioSciences, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Unaudited consolidated financial statements. The filing identifies the registrant as Coherus BioSciences, Inc.
Business context
Coherus is a commercial-stage biosimilar company. Its only U.S. commercial product was UDENYCA (pegfilgrastim-cbqv), a biosimilar to Neulasta. Its pipeline and licensed programs included biosimilar candidates for Humira, Eylea, Lucentis and Avastin, plus an option for a Rituxan biosimilar. Dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net product revenue | $135.7 | $83.4 | $251.9 | $120.5 |
| Gross margin | 93% | 99% | 93% | 98% |
| Operating income | $65.3 | $27.5 | $106.2 | $10.9 |
| Net income | $59.0 | $23.6 | $94.6 | $3.6 |
| Diluted earnings per share | $0.70 | $0.32 | $1.20 | $0.05 |
| Operating cash flow | — | $73.7 | $(44.3) |
At June 30, cash and cash equivalents were $224.6 million, marketable securities $231.9 million, and combined cash, cash equivalents and marketable securities approximately $456.5 million. Current assets were $675.9 million and current liabilities $129.8 million. Total assets were $756.6 million; stockholders’ equity was $213.4 million.
Debt carrying values included $222.4 million of 2026 convertible notes, $105.6 million of 2022 convertible notes (including related-party notes), and $74.1 million of term debt—about $402.1 million combined. Principal amounts were $230 million, $109 million and $75 million, respectively. The 2026 notes bear 1.5% interest and mature in 2026; the 2022 notes bear 8.2% and mature in 2022. The term loan is secured by substantially all company and guarantor assets, including intellectual property.
Changes and notable items
- Revenue rose 63% year over year in Q2 and 109% for the first half, primarily reflecting increased UDENYCA unit sales. Three wholesalers accounted for 98% of Q2 revenue.
- Q2 revenue included a $13.3 million favorable adjustment: a $7.5 million refund from payers relating to 2019 and a $5.8 million reduction in accrued rebates, primarily relating to Q1 2020. The adjustment increased Q2 and first-half basic EPS by $0.19.
- Gross margin declined year over year as product costs and the Amgen royalty entered cost of goods sold. Coherus pays Amgen a mid-single-digit royalty on UDENYCA net sales for five years beginning July 1, 2019. Some UDENYCA inventory had been expensed as R&D before approval, temporarily supporting reported margins.
- First-half R&D expense increased to $59.3 million from $37.7 million, including CHS-1420 regulatory preparation, CHS-2020 manufacturing scale-up and the $5.0 million Innovent upfront payment. SG&A was nearly flat year over year for the half.
- In April, Coherus issued $230 million principal amount of 2026 convertible notes, receiving approximately $222.2 million net proceeds, and spent $18.2 million on capped calls intended to reduce potential conversion dilution. Financing cash flow was $214.3 million; investing cash outflow was $240.9 million, largely reflecting purchases of marketable securities.
Outlook, risks and contingencies
- Management stated that available cash, investments and expected UDENYCA collections should fund planned expenditures and obligations for at least 12 months after issuance of the statements. It cautioned that future financing may still be needed and is not assured.
- Excluding the payer-invoice adjustment, management expected product revenue to remain unchanged or increase modestly through year-end 2020. It expected gross margin to moderately decrease in the rest of 2020 due to competitive pricing pressure, and R&D expense to rise as programs advance and license milestones become due.
- Management expected the pre-approval UDENYCA inventory to be used by Q1 2021; thereafter, cost of goods sold was estimated at high-single-digit to low-double-digit percentages of net product revenue, including the Amgen royalty.
- COVID-19 could weigh on UDENYCA sales growth and disrupt clinical trials, manufacturing, supply, regulatory reviews and access to capital. The company reported remote work but no material impact on internal financial controls during the quarter.
- Bioeq planned to withdraw and resubmit its Lucentis biosimilar BLA after the FDA requested additional manufacturing data; Coherus anticipated a submission in the second half of 2020 and warned of possible approval delay. Coherus anticipated submitting the CHS-1420 BLA in Q4 2020, with U.S. launch no earlier than July 1, 2023. It expected to start a CHS-2020 Phase 3 study in 2021, with a projected 2025 launch if successful.
- Following a July 1, 2020 Federal Circuit decision upholding relevant etanercept patents, Coherus said it was discontinuing CHS-0214 development and had no U.S. BLA filing plans.
- The term loan includes UDENYCA sales covenants, including a $125 million minimum for 2020 and $150 million annually thereafter; if 2021 sales are below $375 million, principal repayments begin earlier. The filing stated the company was in compliance with debt covenants and had no note defaults at June 30.
- Amgen trade-secret litigation was settled in 2019, with the continuing royalty obligation noted above. Other patent-related matters included a pending Coherus motion for attorneys’ fees in one Amgen case; the filing reported no other material legal proceedings.
Important facts for investors to verify
- How much of reported Q2 growth and profitability reflects recurring UDENYCA demand versus the $13.3 million payer adjustment, and how payer rebates and reserves are estimated.
- UDENYCA unit volumes, realized pricing, competitive share, customer concentration and the expected effect of the Amgen royalty and depletion of pre-approval-cost inventory on future margins.
- Liquidity and debt-service capacity, including convertible-note dilution or repayment exposure, term-loan collateral and sales covenants, and any future financing needs.
- Regulatory timing and execution for the Bioeq Lucentis resubmission, CHS-1420 BLA, Innovent programs and CHS-2020 clinical development, including COVID-19 and manufacturing-related delays.
- Whether COVID-19 disruptions, product competition, payer coverage or supply constraints materially change the company’s sales and development outlook.