erus BioSciences(CHRS) - 2019 Q2 - Quarterly Report

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS Forward-Looking Statements Overview This section outlines forward-looking statements in the Form 10-Q, highlighting inherent risks and uncertainties in business, operations, and financial performance. - Forward-looking statements include expectations regarding increasing sales for UDENYCA® in the U.S. and commercialization in Europe[7] - The company's ability to obtain domestic or global regulatory approvals for product candidates like CHS-1420 (adalimumab biosimilar), CHS-0214 (etanercept biosimilar), and CHS-131 (therapeutic small molecule) is a forward-looking statement[7] - Financial performance, including maintaining profitability, gross margins, and R&D/SG&A expenses for 2019 and future years, are considered forward-looking statements[9] PART I. FINANCIAL INFORMATION ITEM 1. Unaudited Condensed Consolidated Financial Statements This section presents Coherus BioSciences' unaudited condensed consolidated financial statements, including balance sheets, operations, and cash flows. Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in thousands) | (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Cash and cash equivalents | $105,927 | $72,356 | | Investments in marketable securities | $5,991 | $— | | Trade receivables, net | $77,385 | $— | | Inventory | $4,333 | $1,659 | | Total current assets | $205,630 | $84,433 | | Total assets | $240,456 | $99,467 | | Total current liabilities | $61,226 | $33,261 | | Total liabilities | $244,441 | $138,058 | | Total stockholders' deficit | $(3,985) | $(38,591) | Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in thousands, except share and per share data) | (in thousands, except share and per share data) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :---------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net product revenue | $83,433 | $— | $120,531 | $— | | Cost of goods sold | $601 | $— | $2,826 | $— | | Research and development | $18,883 | $26,519 | $37,672 | $51,974 | | Selling, general and administrative | $36,456 | $18,391 | $69,139 | $34,968 | | Income (loss) from operations | $27,493 | $(44,910) | $10,894 | $(86,942) | | Net income (loss) attributable to Coherus | $23,567 | $(43,638) | $3,563 | $(87,935) | | Basic net income (loss) per share | $0.34 | $(0.68) | $0.05 | $(1.42) | | Diluted net income (loss) per share | $0.32 | $(0.68) | $0.05 | $(1.42) | Condensed Consolidated Statements of Comprehensive Income (Loss) Condensed Consolidated Statements of Comprehensive Income (Loss) (in thousands) | (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income (loss) | $23,567 | $(43,685) | $3,563 | $(87,987) | | Other comprehensive income (loss): | | | | | | Foreign currency translation adjustments, net of tax | $(93) | $226 | $(229) | $213 | | Comprehensive income (loss) attributable to Coherus | $23,474 | $(43,411) | $3,334 | $(87,722) | Condensed Consolidated Statements of Stockholders' Deficit Condensed Consolidated Statements of Stockholders' Deficit (in thousands) | (in thousands) | Balances at December 31, 2018 | Balances at June 30, 2019 | | :--------------- | :---------------------------- | :------------------------ | | Common Shares | 68,302,681 | 69,627,148 | | Common Stock Amount | $7 | $7 | | Additional Paid-In Capital | $946,515 | $977,787 | | Accumulated Other Comprehensive Loss | $(282) | $(511) | | Accumulated Deficit | $(984,831) | $(981,268) | | Total Stockholders' Deficit | $(38,591) | $(3,985) | - Net income for the six months ended June 30, 2019, was $3,563 thousand, contributing to a reduction in accumulated deficit[16][22] - Issuance of common stock from offerings, stock option exercises, RSU vesting, and ESPP purchases contributed to an increase in Additional Paid-In Capital[22] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in thousands) | (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :--------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(44,306) | $(69,114) | | Net cash used in investing activities | $(6,381) | $(29,785) | | Net cash provided by financing activities | $84,487 | $101,770 | | Net increase in cash, cash equivalents and restricted cash | $33,571 | $3,084 | | Cash, cash equivalents and restricted cash at end of period | $106,762 | $130,840 | Notes to Condensed Consolidated Financial Statements Note 1. Organization and Operations This note describes Coherus BioSciences as a commercial-stage biotherapeutics company, highlighting UDENYCA® approvals, sales, and liquidity. - Coherus BioSciences, Inc. is a commercial-stage biotherapeutics company focused on the global biosimilar market[34] - UDENYCA® received regulatory approval from the European Commission on September 25, 2018, and from the U.S. FDA on November 2, 2018, with U.S. sales beginning on January 3, 2019[35] - As of June 30, 2019, the company had an accumulated deficit of $981.3 million and cash, cash equivalents, and short-term investments of $111.9 million, believing current resources are sufficient for at least 12 months but may need additional funds[36] Note 2. Basis of Presentation and Summary of Significant Accounting Policies This note details the basis for preparing unaudited condensed consolidated financial statements, outlining key accounting policies and the adoption of new pronouncements. - The company adopted ASU 2016-02, Leases, on January 1, 2019, using the optional prospective transition method, recognizing $7.2 million in right-of-use assets and $9.2 million in lease liabilities[78][79] - The adoption of Topic 842 increased total operating expenses by $82 thousand for the three months and $170 thousand for the six months ended June 30, 2019[80] - The company is currently evaluating the impact of ASU 2016-13 (Credit Losses), ASU 2017-04 (Goodwill Impairment), and ASU 2018-13 (Fair Value Measurements), which are effective for periods ending December 31, 2020[84][85][86] Note 3. Fair Value Measurements This note describes the company's fair value measurements for financial assets and liabilities, categorizing them by input levels and detailing valuation techniques. Fair Value Measurements (in thousands) | Financial Assets (in thousands) | June 30, 2019 Total | Level 1 | Level 2 | Level 3 | | :------------------------------ | :------------------ | :------ | :------ | :------ | | Money market funds | $83,326 | $83,326 | $— | $— | | Restricted cash (money market funds) | $835 | $835 | $— | $— | | Corporate notes and commercial paper | $12,573 | $— | $12,573 | $— | | Total financial assets | $96,734 | $84,161 | $12,573 | $— | | Financial Liabilities (in thousands) | | | | | | Contingent consideration | $64 | $— | $— | $64 | - The fair value measurement of contingent consideration (Level 3 liability) uses a probability-weighted discounted cash flow approach, with a 20% risk-adjusted discount rate and an 8% credit spread[101] - The change in fair value of contingent consideration was a $4 thousand gain for the six months ended June 30, 2019, significantly lower than the $3.2 million gain for the same period in 2018[103] Note 4. Inventory This note breaks down inventory components, their classification, and the capitalization of UDENYCA® inventory costs post-FDA approval. Inventory Breakdown (in thousands) | (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Raw Materials | $3,911 | $2,851 | | Work in process | $15,587 | $1,576 | | Finished goods | $3,300 | $1,244 | | Total Inventory | $22,798 | $5,671 | | Inventory (current) | $4,333 | $1,659 | | Inventory, non-current | $18,465 | $4,012 | - The company began capitalizing inventory costs for UDENYCA® in November 2018 after receiving FDA approval[52][106] - Prepaid manufacturing costs were $6.3 million as of June 30, 2019, expected to convert to inventory within 12 months[107] Note 5. Balance Sheet Components This note details the composition of property and equipment, net, and accrued liabilities, showing changes between periods. Property and Equipment, Net, and Accrued Liabilities (in thousands) | (in thousands) | June 30, 2019 | December 31, 2018 | | :--------------- | :------------ | :---------------- | | Property and equipment, net | $5,646 | $6,660 | | Accrued clinical and manufacturing | $4,884 | $3,950 | | Accrued other | $3,411 | $3,058 | | Total Accrued liabilities | $8,295 | $7,008 | - Depreciation and amortization expense was $1.4 million for the six months ended June 30, 2019, compared to $1.8 million for the same period in 2018[109] Note 6. Revenue This note reports net product revenue from UDENYCA® sales, breaking down revenue by major customers and detailing sales discounts and allowances. Net Product Revenue (in thousands) | Net Product Revenue (in thousands) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :--------------------------------- | :------------------------------- | :----------------------------- | | Net product revenue | $83,433 | $120,531 | Revenue by Major Customer (Six Months Ended June 30, 2019) | Revenue by Major Customer (Six Months Ended June 30, 2019) | Percent of Total | | :------------------------------------------------------- | :--------------- | | McKesson | 43% | | AmeriSource-Bergen Corp | 32% | | Cardinal | 23% | | Others | 2% | | Total revenue | 100% | Product Sales Discounts and Allowances (in thousands) | Product Sales Discounts and Allowances (in thousands) | Balance at December 31, 2018 | Activity related to 2019 sales | Payments and customer credits issued | Balance at June 30, 2019 | | :------------------------------------ | :--------------------------- | :----------------------------- | :----------------------------------- | :----------------------- | | Chargebacks and Discounts for Prompt Payment | $— | $65,726 | $(42,368) | $23,358 | | Rebates | $— | $8,593 | $(1,095) | $7,498 | | Other Fees, Co-pay Assistance and Returns | $— | $22,843 | $(9,692) | $13,151 | | Total | $— | $97,162 | $(53,155) | $44,007 | Note 7. Convertible Notes and Term Loan This note details the company's long-term debt, including Convertible Senior Notes and a Term Loan, outlining their terms and covenants. Convertible Notes (in thousands) | Convertible Notes (in thousands) | June 30, 2019 | December 31, 2018 | | :------------------------------- | :------------ | :---------------- | | Principal amount | $109,000 | $109,000 | | Unamortized debt discount and debt issuance costs | $(5,112) | $(5,908) | | Net carrying amount | $103,888 | $103,092 | Term Loan (in thousands) | Term Loan (in thousands) | June 30, 2019 | | :----------------------- | :------------ | | Principal amount | $75,000 | | Unamortized debt discount and debt issuance costs | $(1,714) | | Net carrying amount | $73,286 | - The Term Loan bears interest at 7.00% per annum plus LIBOR, with a reduced rate if UDENYCA® net sales exceed $250.0 million for FY2019[127] - Term Loan covenants require UDENYCA® consolidated net sales not to be lower than $70.0 million for FY2019, $125.0 million for FY2020, and $150.0 million for each fiscal year thereafter[132] Note 8. Commitments and Contingencies This note outlines the company's purchase commitments and legal contingencies, including a trade secret settlement with Amgen. Purchase Commitments (in thousands) | Purchase Commitments (in thousands) | Remainder of 2019 | 2020 | 2021 | 2022 | Total | | :---------------------------------- | :---------------- | :--- | :--- | :--- | :---- | | Total obligations | $9,845 | $24,975 | $600 | $600 | $36,020 | - On May 2, 2019, the company settled a trade secret action with Amgen, agreeing to pay a mid-single digit royalty on UDENYCA® net product revenue for five years, starting July 1, 2019[137] Note 9. Leases This note details operating lease agreements for facilities, including Topic 842 adoption and resulting lease liabilities and assets. Operating Lease Liabilities (in thousands) | Operating Lease Liabilities (in thousands) | June 30, 2019 | | :--------------------------------------- | :------------ | | Other liabilities (current portion) | $2,198 | | Lease liabilities, non-current | $5,977 | | Total operating lease liabilities | $8,175 | - The weighted average remaining lease term is 3.4 years, and the weighted average operating discount rate is 7.0% as of June 30, 2019[146] Note 10. Common Stock and Stock-Based Compensation This note provides information on common stock offerings, ATM program termination, and stock-based compensation expense. - In Q1 2019, the company sold 761,130 shares of common stock through its ATM Offering Program for $8.2 million in net proceeds, with the program terminated on January 19, 2019[148] Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :---------------------------------------------- | :------------------------------- | :----------------------------- | | Research and development | $2,963 | $6,622 | | Selling, general and administrative | $5,028 | $10,864 | | Total | $7,991 | $17,486 | Note 11. Net Income (Loss) Per Share Attributable to Coherus This note presents the computation of basic and diluted net income (loss) per share, including weighted-average shares and dilutive securities. Net Income (Loss) Per Share Attributable to Coherus | Net Income (Loss) Per Share Attributable to Coherus | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2019 | | :-------------------------------------------------- | :------------------------------- | :----------------------------- | | Net income (loss) attributable to Coherus (in thousands) | $23,567 | $3,563 | | Basic net income (loss) per share | $0.34 | $0.05 | | Diluted net income (loss) per share | $0.32 | $0.05 | | Weighted-average common shares outstanding (Basic) | 69,479,016 | 69,310,791 | | Weighted-average common shares outstanding (Diluted) | 72,963,972 | 72,281,564 | - Approximately 14.8 million potential dilutive shares (stock options, RSUs, convertible notes) were excluded from diluted EPS calculation for Q2 2019 due to their anti-dilutive effect[151] Note 12. Related Party Transactions This note discloses related party transactions, including agreements with Medpace, recruiting services, and Convertible Notes issuance. - The company issued $25.0 million in aggregate principal amount of Convertible Notes to certain related party investors in February 2016[116][155] - Recruiting services from a firm where a board member is a partner resulted in $50,000 in R&D expense and $1,000 in SG&A expense for the six months ended June 30, 2019[153] ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's discussion and analysis of financial condition and results, covering business overview, performance, policies, and liquidity. Overview - Coherus is a commercial-stage biotherapeutics company focused on the global biosimilar market, aiming to be a leader by leveraging expertise in process science, analytical characterization, protein production, and clinical-regulatory development[158] - UDENYCA® (pegfilgrastim-cbqv) received EU approval on September 20, 2018, and US FDA approval on November 2, 2018, with US sales commencing January 3, 2019[159] - The company achieved profitability for the three and six months ended June 30, 2019, with net income of $3.6 million for the six-month period, a significant improvement from a $43.7 million net loss in the prior year period[160] - Clinical-stage pipeline includes CHS-1420 (adalimumab biosimilar), CHS-0214 (etanercept biosimilar), and CHS-131 (small molecule for NASH); preclinical pipeline includes CHS-3351 (ranibizumab biosimilar) and CHS-2020 (aflibercept biosimilar)[161][163] Financial Operations Overview - Net product revenue for the three and six months ended June 30, 2019, was $83.4 million and $120.5 million, respectively, driven by UDENYCA® sales[175] - Cost of goods sold primarily includes third-party manufacturing, distribution, and overhead for UDENYCA®, with a portion of manufacturing costs expensed as R&D prior to FDA approval[176] - Research and development expenses are charged as incurred, including external costs for clinical trials and manufacturing supplies, and internal costs like personnel and facilities, expected to be similar or slightly higher in the remainder of 2019[177][178][179] - Selling, general and administrative expenses include personnel, allocated facilities, and professional services, particularly for UDENYCA® commercialization, and are expected to remain relatively constant[183][223] Critical Accounting Policies and Estimates - The company adopted ASU 2016-02 (Leases) on January 1, 2019, recognizing operating lease right-of-use assets and liabilities based on the present value of lease payments[188][201] - Revenue recognition follows Topic 606, where revenue from product sales (UDENYCA®) is recognized when the customer obtains control, net of variable consideration for discounts, rebates, and allowances[189][190][191][192] - Estimates for product sales discounts and allowances (chargebacks, prompt payment, rebates, co-pay assistance, returns) are based on historical experience, contractual requirements, market events, and forecasted buying patterns[192] Recent Accounting Pronouncements - ASU 2016-02 (Leases) was adopted on January 1, 2019, recognizing $7.2 million in right-of-use assets and $9.2 million in lease liabilities[201] - ASU 2018-07 (Nonemployee Share-Based Payment) was early adopted on January 1, 2019, with no material impact[202] - SEC amendments (Securities Act Release No. 33-10532) for stockholders' equity analysis were adopted on January 1, 2019, with no material effect[204] - The company is evaluating ASU 2016-13 (Credit Losses), ASU 2017-04 (Goodwill Impairment), and ASU 2018-13 (Fair Value Measurements), all effective for periods ending December 31, 2020[206][207][208] Results of Operations Results of Operations (in thousands) | (in thousands) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Change | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | Change | | :--------------- | :------------------------------- | :------------------------------- | :----- | :----------------------------- | :----------------------------- | :----- | | Net product revenue | $83,433 | $— | $83,433 | $120,531 | $— | $120,531 | | Cost of goods sold | $601 | $— | $601 | $2,826 | $— | $2,826 | | Research and development | $18,883 | $26,519 | $(7,636) | $37,672 | $51,974 | $(14,302) | | Selling, general and administrative | $36,456 | $18,391 | $18,065 | $69,139 | $34,968 | $34,171 | | Interest expense | $4,433 | $2,417 | $2,016 | $8,649 | $4,825 | $3,824 | | Other income, net | $558 | $3,642 | $(3,084) | $1,369 | $3,780 | $(2,411) | | Income tax provision | $51 | $— | $51 | $51 | $— | $51 | - Net product revenue for the three and six months ended June 30, 2019, was $83.4 million and $120.5 million, respectively, due to U.S. sales of UDENYCA® commencing in January 2019[210][175] - Research and development expense decreased by $7.6 million (QoQ) and $14.3 million (YoY) primarily due to capitalizing UDENYCA® manufacturing costs post-FDA approval, partially offset by increased costs for other biosimilar candidates[214][215][217][218] - Selling, general and administrative expense increased by $18.1 million (QoQ) and $34.2 million (YoY) due to increased sales force personnel, commercial functions, legal, marketing, and facility-related expenses for UDENYCA® commercialization[220][221][222] Liquidity and Capital Resources - As of June 30, 2019, the company had an accumulated deficit of $981.3 million and $111.9 million in cash, cash equivalents, and marketable securities[239] - The company believes current available cash, investments, and UDENYCA® sales will fund operations for at least the next 12 months, but may need additional funds[239] Cash Flows (in thousands) | Cash Flows (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------ | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(44,306) | $(69,114) | | Net cash used in investing activities | $(6,381) | $(29,785) | | Net cash provided by financing activities | $84,487 | $101,770 | - Operating cash outflow decreased due to net income, increased accrued rebates, and decreased prepaid manufacturing, despite increases in trade receivables and inventory from UDENYCA® sales[241][242][244][245] Off-Balance Sheet Arrangements - The company has not engaged in any off-balance sheet arrangements since its inception[255] Contractual Obligations Contractual Obligations (in thousands) | Contractual Obligations (in thousands) | Total | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | | :------------------------------------- | :---- | :--------------- | :----------- | :----------- | :---------------- | | Long-term debt obligations - Convertible notes | $131,550 | $4,100 | $16,400 | $111,050 | $— | | Long-term debt obligations - Term loan | $112,174 | $3,641 | $14,468 | $46,570 | $47,495 | | Non-cancelable purchase commitments | $36,020 | $9,845 | $25,575 | $600 | $— | | Operating lease obligations | $9,218 | $1,333 | $5,367 | $2,518 | $— | | Contingent payments to InteKrin Stockholders | $64 | $— | $— | $64 | $— | | Total contractual liabilities | $289,026 | $18,919 | $61,810 | $160,802 | $47,495 | ITEM 3. Quantitative and Qualitative Disclosure About Market Risk This section discusses the company's market risk exposure, primarily interest rate risk on short-term cash and marketable securities, deemed not significant. - As of June 30, 2019, the company held $111.9 million in cash, cash equivalents, and marketable securities, primarily in money market funds, corporate notes, and commercial paper[260] - The company believes its exposure to interest rate risk is not significant due to the short-term duration of its cash equivalents and marketable securities, with a 1% movement in market interest rates not expected to have a significant impact[260] ITEM 4. Controls and Procedures This section details the evaluation of disclosure controls and procedures, concluding their effectiveness and noting new controls for product launch and lease accounting. - The CEO and CFO concluded that the company's disclosure controls and procedures were effective in design and operation as of June 30, 2019[261] - New internal controls were implemented during the six months ended June 30, 2019, in connection with the product launch and the adoption of Topic 842 (Leases)[265] PART II. OTHER INFORMATION ITEM 1. Legal Proceedings This section updates on legal proceedings, including a trade secret settlement with Amgen and patent infringement suits. - On May 2, 2019, Coherus settled a trade secret action with Amgen, agreeing to pay a mid-single digit royalty on UDENYCA® net product revenue for five years starting July 1, 2019[269] - A patent infringement suit filed by Amgen (regarding the '707 patent) was dismissed by the U.S. District Court for the District of Delaware and affirmed by the Federal Circuit on July 29, 2019[270] - On January 24, 2019, Coherus filed a patent infringement suit against Amgen in the U.S. District Court of Delaware, alleging that Amgen's Humira® biosimilar, Amgevita™, infringes Coherus's adalimumab formulation patents[271] ITEM 1A. Risk Factors This section details various risks that could materially affect the company's business, financial condition, operations, and prospects. - The company has a limited operating history, incurred significant losses ($981.3 million accumulated deficit as of June 30, 2019), and anticipates continued losses, with future profitability dependent on UDENYCA® sales and expense management[275][281] - Commercial success of UDENYCA® and future product candidates depends on market acceptance, adequate third-party coverage and reimbursement, and effective competition against reference products and other biosimilars[298][301][316] - Significant intellectual property risks include potential infringement of third-party patents, challenges to the company's own patents, the complexity of BPCIA patent dispute resolution, and difficulty protecting trade secrets[380][381][394][433] - The company relies heavily on third parties for nonclinical and clinical studies, manufacturing, and supply, posing risks of delays, quality issues, and regulatory non-compliance[337][342][357] - Regulatory approval processes are lengthy and unpredictable, with evolving requirements for biosimilars, and failure to demonstrate biosimilarity or obtain full originator labels could adversely affect commercialization[447][453][454] ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable, indicating no unregistered sales of equity securities or use of proceeds to report. ITEM 3. Defaults Upon Senior Securities This item is not applicable, indicating no defaults upon senior securities to report for the period. ITEM 4. Mine Safety Disclosures This item is not applicable, indicating no mine safety disclosures to report for the period. ITEM 5. Other Information This item is not applicable, indicating no other information to report for the period. ITEM 6. Exhibits This section lists exhibits filed with the Form 10-Q, including XBRL financial statements and key legal agreements. - The report includes financial statements formatted in eXtensible Business Reporting Language (XBRL)[526] - Exhibit 10.1 includes the Confidential Litigation Settlement Agreement and Release, dated April 30, 2019, between Amgen Inc. and Coherus BioSciences Inc[528]