erus BioSciences(CHRS) - 2020 Q4 - Annual Report

PART I Business Coherus BioSciences is a commercial-stage biopharmaceutical company focused on biosimilars and immuno-oncology, leveraging UDENYCA® cash flows to develop a diverse pipeline Overview and Pipeline Coherus, a commercial biopharmaceutical firm, launched UDENYCA® in 2019 and is building an immuno-oncology franchise with toripalimab, alongside other biosimilar candidates - The company's first product, UDENYCA® (pegfilgrastim-cbqv), a biosimilar to Neulasta®, was launched commercially in the United States in January 2019[13] - Coherus is investing cash flows from its biosimilars business to build an immuno-oncology franchise, initiated by in-licensing toripalimab, a novel anti-PD-1 antibody, from Junshi Biosciences in February 2021[14] Product Candidate Pipeline Summary | Category | Product/Candidate | Description | | :--- | :--- | :--- | | Oncology | Toripalimab | Anti-PD-1 antibody in collaboration with Junshi Biosciences. BLA submission expected in 2021 for nasopharyngeal carcinoma. | | | UDENYCA® | Pegfilgrastim-cbqv, biosimilar to Neulasta®. Additional presentations are in development. | | | Bevacizumab Biosimilar | Biosimilar to Avastin®, licensed from Innovent. | | Immunology | CHS-1420 | Adalimumab biosimilar candidate for Humira®. BLA submitted in Q4 2020, with a potential U.S. launch on or after July 1, 2023. | | Ophthalmology | Ranibizumab Biosimilar | Biosimilar to Lucentis®, licensed from Bioeq. BLA resubmission planned for 2021. | | Small Molecule | CHS-131 | Oral drug candidate for NASH. The company is seeking strategic alternatives for external financing. | Market and Franchise Opportunities The company targets a significant market opportunity with its biosimilar and immuno-oncology candidates, addressing multi-billion dollar markets for key reference drugs 2020 U.S. Market Size for Key Reference Drugs | Reference Drug | Coherus Candidate/Product | 2020 Estimated U.S. Sales | | :--- | :--- | :--- | | Neulasta (pegfilgrastim) | UDENYCA® | $2.6 billion | | Avastin (bevacizumab) | Bevacizumab Biosimilar | $1.9 billion | | Lucentis (ranibizumab) | Ranibizumab Biosimilar | $1.5 billion | | Humira (adalimumab) | CHS-1420 | $16.0 billion | | Anti-PD-1 Antibodies | Toripalimab | $15.0 billion | - The company has deprioritized its CHS-131 (NASH) program, seeking strategic alternatives, and discontinued the development of CHS-2020 (Eylea® biosimilar) to reallocate resources to immuno-oncology[43][45] Operations, Manufacturing, and Competition Coherus employs a focused commercial strategy, relies on CMOs for manufacturing, and faces significant competition across its biosimilar and immuno-oncology portfolio - The company utilizes a relatively small, highly concentrated commercial organization focused on oncologists, which it plans to leverage for its bevacizumab biosimilar and toripalimab if approved[47] - Coherus relies on agreements with several contract manufacturing organizations (CMOs) for the manufacturing and supply of its commercial and pipeline products[48] - UDENYCA® faces competition from originator Amgen and biosimilar developers including Viatris, Mylan, Sandoz, and Pfizer[50] - Toripalimab, if approved, will compete in a crowded U.S. market against established anti-PD-1/PD-L1 antibodies such as Keytruda® (Merck), Opdivo® (BMS), and Tecentriq® (Genentech)[51] Collaboration and License Agreements Coherus has established key strategic partnerships for toripalimab, ranibizumab, and bevacizumab biosimilars, including a Humira biosimilar settlement with AbbVie Key Collaboration and License Agreement Terms | Partner | Product/Candidate | Key Financial Terms | | :--- | :--- | :--- | | Junshi Biosciences | Toripalimab (anti-PD-1) | $150M upfront, 20% royalty on net sales, up to $380M in milestones. Options for two other assets. | | Bioeq AG | Ranibizumab (Lucentis) Biosimilar | €10M paid to date, up to €25M in future milestones, low to mid 50% profit share. | | Innovent | Bevacizumab (Avastin) Biosimilar | $7.5M paid to date, up to $37.5M in future milestones, mid-teens to low 20% profit share. | | AbbVie Inc. | CHS-1420 (Humira Biosimilar) | Global, royalty-bearing, non-exclusive license to commercialize CHS-1420, with a U.S. license period commencing July 1, 2023. | Intellectual Property and Government Regulation The company's success depends on protecting its intellectual property through patents and navigating extensive government regulation, including the FDA approval process for biologics and biosimilars - The company owns a patent portfolio of 25 patent families related to its biosimilar product candidates, covering formulations, manufacturing methods, and drug products[82] - The Biologics Price Competition and Innovation Act of 2009 (BPCIA) created an abbreviated approval pathway (351(k)) for biosimilars, requiring demonstration of high similarity to a reference product without clinically meaningful differences in safety, purity, and potency[107] - The BPCIA provides reference products with 12 years of marketing exclusivity from the date of first licensure, during which the FDA cannot approve a biosimilar application[116] - The company is subject to numerous healthcare laws, including the federal Anti-Kickback Statute, False Claims Act, and transparency laws like the ACA's 'sunshine' provisions, which require reporting payments to physicians[123][124][125][130] Risk Factors The company faces substantial risks including COVID-19 impacts, dependence on UDENYCA®'s commercial success, intense competition, financial needs, development uncertainties, manufacturing reliance, intellectual property litigation, and complex regulations Risks Related to COVID-19 and Financial Condition The COVID-19 pandemic poses risks to sales and clinical trials, while the company faces financial challenges including a cumulative deficit of $762.8 million and ongoing need for future funding - The COVID-19 pandemic could harm business operations through decreased sales of UDENYCA®, delays in clinical trials, and disruptions in the third-party manufacturing supply chain[162] - The company has a limited history of profitability, generating net income in 2019 and 2020 but incurring net losses in all prior years, with an accumulated deficit of $762.8 million as of December 31, 2020[167][168] - Future funding requirements are substantial and depend on factors like the commercial success of UDENYCA®, clinical study costs, and manufacturing expenses. Failure to obtain necessary capital could force delays or termination of development efforts[177][179] Risks Related to Commercialization and Competition Commercial success is uncertain due to market acceptance, reimbursement pressures, and intense competition from originator products and other biosimilars, including potential life cycle extensions - Commercial success depends on market acceptance, which is influenced by factors like safety, efficacy, cost, and the ability to secure adequate third-party coverage and reimbursement[191][192] - UDENYCA® and other biosimilar candidates face significant competition from reference products and other biosimilars, which could lead to price competition that detrimentally affects market share and revenue[214][226] - Originator companies may develop improved versions of their products (life cycle extension), potentially capturing significant market share and reducing the market for Coherus's biosimilars[232][233] Risks Related to Personnel, Third-Party Reliance, and Manufacturing The company is highly dependent on key executives and third parties for clinical studies and manufacturing, facing risks from supplier failures and complex biologic production - The company is highly dependent on its key executives, particularly President and CEO Dennis M. Lanfear, and the loss of their services could harm the business[236][237] - Coherus relies on third-party CROs to conduct clinical studies and is responsible for ensuring their compliance with GCP and other regulations. Failure by CROs to perform can delay or terminate development programs[241][242] - The company depends on a single supplier, KBI Biopharma, for the long-term commercial manufacturing of UDENYCA®, and the loss of this supplier could materially harm the business[262][263] - The manufacturing of protein-based therapeutics is inherently complex and variable. Failure to achieve the requisite degree of biosimilarity and consistency acceptable to regulators could prevent product approval[272] Risks Related to Intellectual Property Success is contingent on avoiding infringement and protecting IP, facing high risks of patent litigation from originator companies and complex BPCIA disputes - The company faces a significant risk of patent infringement claims from third parties, particularly originator companies, which could prevent or delay development and commercialization efforts[287] - The BPCIA created a complex patent dispute resolution process that could result in patent infringement litigation prior to FDA approval, potentially blocking or delaying market entry of a biosimilar product[315][319] - On May 2, 2019, the company settled a trade secret lawsuit with Amgen. Under the settlement, Coherus continues to market UDENYCA® and began paying Amgen a mid-single digit royalty for five years starting July 1, 2019[308] - On January 24, 2019, Coherus and AbbVie Inc. entered into settlement and license agreements granting Coherus global, non-exclusive rights to commercialize its Humira biosimilar (CHS-1420), with the U.S. license period starting July 1, 2023[294] Risks Related to Product Development and Regulation Future success depends on successful development and regulatory approval, with risks including evolving biosimilar pathways, failure to demonstrate biosimilarity, and competitive interchangeability designations - The company's future success depends on its ability to develop, obtain regulatory approval for, and commercialize its product candidates beyond UDENYCA®[323][324] - The regulatory approval process is lengthy and unpredictable. A 351(k) BLA for Bioeq's ranibizumab biosimilar was withdrawn after the FDA requested additional manufacturing data, with a resubmission planned[330][332] - Failure to demonstrate biosimilarity to the satisfaction of regulatory authorities is a key risk that could prevent approval and commercialization of pipeline candidates[335] - If a competitor's biosimilar is determined to be "interchangeable" with a reference product and Coherus's is not, the competitor could gain market exclusivity and a significant commercial advantage[352][354] Unresolved Staff Comments Not applicable - The company reports no unresolved staff comments[457] Properties The company's headquarters are in Redwood City, California, and its analytical and process development laboratory in Camarillo, California, both leased and deemed adequate for current needs - Corporate headquarters are leased in Redwood City, CA, until September 2024[458] - The analytical and process development laboratory is leased in Camarillo, CA, until May 2027[458] Legal Proceedings The company has been involved in several legal proceedings, primarily with Amgen, settling a trade secret action and prevailing in a patent infringement case - A trade secret lawsuit with Amgen was settled on May 2, 2019. Coherus continues to market UDENYCA® and began paying a mid-single digit royalty to Amgen for five years starting July 1, 2019[460] - A patent infringement suit by Amgen regarding its '707 patent' was dismissed in Coherus's favor, and the dismissal was affirmed by the Federal Circuit in July 2019[461] Mine Safety Disclosures Not applicable - The company reports no mine safety disclosures[465] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Coherus's common stock trades on The Nasdaq Global Market under the symbol "CHRS"; the company has never paid cash dividends and did not repurchase equity in fiscal year 2020 - The company's common stock is listed on The Nasdaq Global Market under the symbol "CHRS"[467] - The company has never paid cash dividends and does not plan to in the foreseeable future. It is also precluded from doing so by the terms of its outstanding convertible notes[470] - No equity securities were repurchased during the fiscal year ended December 31, 2020[475] Selected Financial Data Not required - This item is not required[476] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2020, Coherus reported net product revenue of $475.8 million, a 34% increase from $356.1 million in 2019, driven by higher UDENYCA® sales volume, with net income of $132.2 million Results of Operations For FY2020, net product revenue increased to $475.8 million from higher UDENYCA® sales, resulting in $132.2 million net income despite increased R&D expenses of $142.8 million Comparison of Key Financial Metrics (2020 vs. 2019) | Metric | FY 2020 (in millions) | FY 2019 (in millions) | Change (in millions) | | :--- | :--- | :--- | :--- | | Net Product Revenue | $475.8 | $356.1 | $119.7 | | Cost of Goods Sold | $37.7 | $17.1 | $20.6 | | Gross Margin | 92% | 95% | -3% | | R&D Expense | $142.8 | $94.2 | $48.6 | | SG&A Expense | $139.1 | $137.0 | $2.1 | | Net Income | $132.2 | $89.8 | $42.4 | - The increase in R&D expense in 2020 was primarily due to a $16.0 million increase in costs for CHS-1420 BLA submission activities and a $14.2 million increase for CHS-2020 manufacturing scale-up[549] - A portion of the manufacturing costs for UDENYCA® sold in 2020 and 2019 was expensed as R&D prior to approval, which favorably impacted the gross margin. The company expects to utilize this zero-cost inventory by Q1 2021[546] Liquidity and Capital Resources As of December 31, 2020, the company had $541.2 million in cash, with $154.1 million from operations and $223.9 million from financing, including $230.0 million in new convertible notes Cash Flow Summary (in millions) | Cash Flow Activity | FY 2020 | FY 2019 | FY 2018 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $154.1 | $28.4 | $(159.3) | | Net cash used in investing activities | $(14.4) | $(12.7) | $(1.2) | | Net cash from financing activities | $223.9 | $89.4 | $105.4 | - The company ended 2020 with $541.2 million in cash and cash equivalents, compared to $177.7 million at the end of 2019[576][622] - In April 2020, the company issued $230.0 million of 1.5% convertible senior subordinated notes due 2026, with net proceeds of $222.2 million[515][590] - Management believes current cash and cash from UDENYCA® sales will be sufficient to fund planned expenditures for at least the next 12 months[576] Critical Accounting Policies and Estimates Critical accounting policies involve significant judgment for revenue recognition, inventory valuation, and income taxes, including a full valuation allowance against deferred tax assets of $200.9 million - Net product revenue is recorded at a transaction price that includes estimates of variable consideration for chargebacks, rebates, co-pay assistance, and returns. These reserves are based on historical data, contracts, and market trends[526] - Inventory costs for UDENYCA® began to be capitalized upon FDA approval in November 2018. Costs incurred before this date were expensed as R&D[533][535] - The company maintains a full valuation allowance against its net deferred tax assets ($200.9 million as of Dec 31, 2020) due to its history of operating losses, meaning it is not currently recognizing these assets on its balance sheet[538][539] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk on cash equivalents and foreign currency exchange risk from international contracts, but does not currently use derivative instruments to hedge these - The company's primary market risks are interest rate risk on its cash equivalents and foreign currency exchange risk from international contracts[602][603] - Exposure to interest rate risk is considered not significant due to the short-term duration of cash equivalent investments[602] - Foreign exchange risk exists due to transactions with global CROs and manufacturers. The company does not currently use forward exchange contracts to hedge this exposure[603] Financial Statements and Supplementary Data This section includes the company's audited consolidated financial statements and the independent auditor's unqualified opinion on financial statements and internal controls Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on Coherus BioSciences' financial statements and internal controls, identifying chargeback and rebate estimates as a critical audit matter - The independent auditor, Ernst & Young LLP, issued an unqualified (clean) opinion on the company's consolidated financial statements[610] - The auditor also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[611] - The audit identified the 'Estimate of Reserves for Chargebacks and Rebates' as a critical audit matter due to the significant judgment required for assumptions like channel and payer mix[617] Consolidated Financial Statements The consolidated financial statements show significant growth in 2020, with total assets reaching $841.6 million and net income of $132.2 million, reflecting a strengthened financial position Key Balance Sheet Data (as of Dec 31, in thousands) | Account | 2020 | 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $541,158 | $177,668 | | Total current assets | $767,479 | $343,009 | | Total assets | $841,649 | $408,927 | | Total current liabilities | $145,653 | $114,969 | | Total liabilities | $560,675 | $303,713 | | Total stockholders' equity | $280,974 | $105,214 | Key Statement of Operations Data (Year ended Dec 31, in thousands) | Account | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Net product revenue | $475,824 | $356,071 | $0 | | Total operating expenses | $319,505 | $248,303 | $204,416 | | Income (loss) from operations | $156,319 | $107,768 | $(204,416) | | Net income (loss) | $132,244 | $89,833 | $(209,409) | | Diluted EPS | $1.62 | $1.23 | $(3.22) | Notes to Consolidated Financial Statements The notes detail accounting policies, revenue recognition, licensing agreements, debt obligations including 2026 and 2022 convertible notes, stock-based compensation, and income tax positions - Revenue from UDENYCA® is recognized upon delivery to the customer, net of estimated variable consideration for chargebacks, rebates, and other discounts[673][674] - The company's three largest customers, McKesson, AmeriSource-Bergen, and Cardinal, accounted for 38%, 37%, and 23% of total revenue in 2020, respectively[737] - As of December 31, 2020, the company had total debt obligations with a net carrying amount of $404.0 million, consisting of the 2026 Convertible Notes ($223.0M), 2022 Convertible Notes ($106.5M), and the Term Loan ($74.5M)[756][771][784] - Total unrecognized stock-based compensation expense as of December 31, 2020, was $81.1 million ($68.5 million for stock options and $12.6 million for RSUs), expected to be recognized over a weighted-average period of approximately 2.6 and 1.8 years, respectively[811][816] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None - The company reports no changes in or disagreements with its accountants on accounting and financial disclosure[848] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2020, with no material changes during the fourth quarter of 2020 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2020[849] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2020, based on the COSO 2013 framework[852] - No changes in internal control over financial reporting occurred during the fourth quarter of 2020 that have materially affected, or are reasonably likely to materially affect, these controls[864] Other Information Not applicable - The company reports no other information[865] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2021 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the forthcoming 2021 Proxy Statement[869] Executive Compensation Information regarding executive compensation is incorporated by reference from the forthcoming 2021 Proxy Statement - Information regarding executive compensation is incorporated by reference from the forthcoming 2021 Proxy Statement[870] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the forthcoming 2021 Proxy Statement - Information regarding security ownership is incorporated by reference from the forthcoming 2021 Proxy Statement[870] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the forthcoming 2021 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the forthcoming 2021 Proxy Statement[871] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the forthcoming 2021 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the forthcoming 2021 Proxy Statement[872] PART IV Exhibits and Financial Statement Schedules This section lists financial statements filed under Item 8 and all exhibits, including corporate governance documents, material contracts, and certifications - The financial statements required by this item are filed in Item 8 of the report[874] - An index of all exhibits filed with the report is provided, including material contracts and certifications[875][878] Form 10-K Summary No Form 10-K summary is provided - No Form 10-K summary is provided[876]