Coherus Oncology (NASDAQ:CHRS) Q4 2019 Earnings Call

0:00 Ladies and gentlemen, thank you for standing by, and welcome to the Coherus Biosciences 2019 Fourth Quarter Earnings Conference Call. My name is May, and I will be your conference operator for the call today. At this time, all participants are in a listen-only mode, and as a reminder, this conference call is being recorded. I would now like to turn the call over to David Arrington, Vice President of Investor Relations and Corporate Affairs. Please go ahead.

0:28 Thank you, May, and good afternoon, everyone. After close of market today, we issued a press release on our fourth quarter and year-end financial results. This release can be found on the Coherus Biosciences website. Joining me for today's call will be Denny Lanfear, Coherus' CEO, Dr. Jean Barret, Chief Financial Officer, Vince Anicetti, Chief Operating Officer, and Thomas Fitzpatrick, Chief Legal Officer. Before we begin our formal remarks, I would like to remind you that we will be making forward-looking statements with respect to product development plans all of which involve certain assumptions, risks, and uncertainties that are beyond our control and could cause actual results to differ from these statements. A description of these risks can be found on our most recent filings with the SEC. In addition, Coherus Biosciences does not undertake any obligation to update any forward-looking statements made during the call. I will now turn the call over to Denny.

1:21 Thank you, David, and welcome, everyone, to our Q4 earnings call. Today we will cover four broad areas for you. First of all, I'll review the performance of Udenica, both Q4 2019 and the entire year, with which, of course, we're very pleased. Secondly, we'll review the progress on our pipeline, including both our wholly owned internally developed assets, as well as our in-license products. And we will provide you an update with respect to our thinking on our CHS131 small molecule. Following that, I'll make a few remarks about the company's further transaction efforts for 2020 before handing it off to our Chief Financial Officer, Jean Verret, who will review our financial performance for the quarter and the year.

2:08 First, with respect to the company's commercial performance of Udenica, we are very pleased we've met our goal of achieving 20% or more market share by the end of 2019, as guided in our Q2 earnings call last year. These market share gains were achieved across all segments, 340B hospitals, non-340B hospitals, clinics, and against both pre-filled syringe and on-body injector formats. During 2019, we made substantial progress with both our national and regional payers, achieving over 95% access for Udenica patients. We believe this performance validates our overarching commercial strategy as conceived prior to launch with our focus on branded biologics positioning, robust guaranteed supply, comprehensive patient support services such as Coheres Complete, as well as individualized contracting to support biosimilar conversion, all in the context of ASP pricing discipline to preserve long-term value.

3:13 During 2020, you will see the company's commercial efforts continue in a highly integrated and effective manner, to pursue additional market share gains. Now let me make a few remarks with respect to our pipeline. One year after launch, the success of Udenica has validated our biosimilar business model. As a result, our pipeline strategy is now focused on leveraging our R&D and commercial strengths in selected therapeutic areas that can provide the greatest value to patients and the healthcare system while also generating the best return for our shareholders. Let me first discuss the company's ophthalmology franchise. With respect to our Lucentis Biosimilar in license from BioAg, we are currently focused on supporting our partner to generate the additional manufacturing data as requested by FDA and expect to resubmit the application upon completion of these efforts and certain regulatory interactions.

4:10 With respect to our CHS 2020 ILEA Biosimilar, we are very pleased with our progress and are now in position to initiate commercial-scale GMP manufacturing efforts in support of the expected Phase III clinical trials in 2021 with launch projected in 2025. As we have previously discussed, these products will compete in a $6 billion anti-VGF U.S. market with favorable order of entry and competitive dynamics. Optimology is reimbursed under the buy-and-bill model, a reimbursement dynamic in which we have demonstrated proficiency in biosimilar market conversion, delivering greater patient access and healthcare system savings. Now, with respect to our immunology franchise and CHS 1420, our hemoglobin biosimilar, over the past year and a quarter, we have held a series of type 3 meetings with FDA and have now gained concurrence with FDA on the analytical and clinical strategy in support of a BLA-filing in the second half of 2020.

5:13 We've also made good progress with the further development of our manufacturing strategy for this product in preparing for a large-scale launch in mid-2023. As we have discussed previously, we believe this will be an $18 billion market in the US prior to our launch, and we expect to take our fair share of that market as we leverage our biosimilar commercial infrastructure. Now, as mentioned, We are now focused on oncology, ophthalmology, and inflammation. We have determined that CHS-131, our small molecule program currently in development with NASH, while highly valuable, does not align with the company's strategic priorities, and thus we plan to pursue strategic alternatives for this asset.

6:00 We believe that focusing on our core biosimilar business in these key therapeutic areas is in the best interest of generating shareholder value. Thank you, Danny. I will now review the main financial results for our full year and fourth quarter 2019. First,

6:39 Thank you very much. both on an annual and quality basis. Second, our cash position increased steadily through 2019. We started the year with $72.4 million in cash and cash equivalent and ended the year with $177.7 million, a more than $100 million increase as a result of borrowing $73 million to commercially launch Udenica in January 2019 and and generating cash from the sale of Udenica across all healthcare provider segments.

7:43 Third, our balance sheet has strengthened considerably. We ended the year with slightly over $400 million in total assets, a balance that is up fourfold since the beginning of 2019, which was shy of $100 million. Similarly, our working capital more than quadrupled from $51.2 million at the beginning of 2019 Thank you very much. and resulting in a gross margin of 95%. Research and development expenses for the fourth quarter of 2019 were $34.9 million as compared to $26.7 million for the same period in 2018.

8:49 The increase in R&D expenses for the quarter year-over-year was mainly due to the expensing of $11.1 million in upfront and milestone payments to BioEC for the development of BioEC's Lucentis Biosimilar In the fourth quarter of 2019. R&D expenses for the fiscal year 2019 were $94.2 million as compared to $110.2 million for the same period in 2018. Here, the decrease in R&D expenses full year over year was due primarily to the capitalization of Udelica manufacturing costs that had a 33.9 million dollars impact since the approval of Udenica in November 2018. This decrease was offset by an increase of 15.6 million dollars, primarily related to 11.1 million dollars upfront and milestone payments to BioEC and the development of our other biosimilar product candidates.

9:51 Selling general administrative expenses for the fourth quarter of 2019 were 36.1 million dollars, as compared to $33.8 million for the same period in 2018. SG&A for the full year 2019 were $137 million as compared to $94.2 million for the same period in 2018. The increases in SG&A expenses for the quarter year-over-year and the full year-over-year were mainly attributable to an increase in sales force personnel and related commercial functions in connection with the commercialization of Udenica. Net income attributable to career risk for the fourth quarter of 2019 was $39.2 million or 53 cents per share on a fully diluted basis compared to a net loss of $62.6 million or 92 cents per share on a basic and fully diluted basis for the same period in 2018. Net income attributable to career risk for 2019 was $89.8 million or $1.23 per share on a fully diluted basis Thanks, JV. We are, of course, pleased with our financial and commercial performance, both in Q4 2019 and the year 2019 overall.

11:04 And as you've seen, we achieved over 20% market share.

11:26 Thank you for joining us. and project to have six or more approved products in the portfolio by 2025. We believe the company's success today is driven by our focus on areas where we have successfully aligned our commercial and R&D capabilities with market opportunity and patient needs.

12:12 I'm happy now to take any questions you may have as we go to the operator.

12:17 Thank you very much, Denny. I'll hand this over to the operator to take questions from the line. Ladies and gentlemen, if you have a question at this time, please press the star and then the number one key on your touchtone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Your first question is from the line of Mohit Bansal. Your line is now open. Mr. Mohit Bansal, your line is now open.

12:50 Sorry, I think I was on mute. So thanks for taking my question and congrats on the progress and launch in 2019. Maybe if we can touch upon Udanica going forward, now that it has been a couple of months since you have seen a new player in the market and Milan has been talking about more supply. So what sort of competition you are seeing in the marketplace at this point? and when we try to project or try to think about 2020 and beyond, how should we think about Utanica? Can it grow from here or do you think you can maintain the share here?

13:34 Thanks, Mohit. As you recall, last year right at launch, we were asked to forecast the entire year and our reply to that at that time at a similar point last year was that Thank you very much. and therefore there's more value to be had in the conversion of the Nulasta, existing Nulasta users, which is the high-priced option, to a biosimilar.

14:28 So that is to say that the biosimilar benefit that is primarily derived from converting patients from Nulasta and thus we expect the additional market entrance to put additional pressure on Nulasta's share, which is still quite substantial in the market, as you know. Lastly, I would say, with respect to Sandoz, we haven't seen a lot of movement in terms of market share thus far with that.

14:53 Got it. And if I may ask one more, regarding your Avastin bias, similar candidate, so can you just help us understand the timelines here? So the three-way study you have to perform, would you start the study before talking to the FDA or after talking to the FDA, and how much FDA input would be necessary to in designing that study versus, I mean, could FDA input change your strategy there? That's what I'm getting to.

15:25 Well, of course the FDA input could change one's strategy. We believe that it's prudent to review that entire program with the FDA before initiating any studies, even if they were at risk and even if they were modest in cost. We are, of course, continuing our diligence on both those assets, both the Avastin asset and the Rituxan asset, consistent with our agreement. We don't have any further updates for you with respect to advancing those programs. At the current time, it's been about a month only since we did that. But we'll be happy to update you probably on the next call. We'll have a little more to say about that.

16:04 And anything we should think about in terms of R&D spend? which could go up because of this deal, at least in this quarter. Any lumpiness in the spend this year?

16:14 Yeah, we expect R&D expenses to increase somewhat modestly because we're only going to be focused on our in-house molecule, which is CHS 2020 for R&D. We're filing CHS 1420, so there may be some manufacturing run that needs to be done. So it will increase, but modestly.

16:35 Got it. Very helpful. Thank you.

16:37 Thank you, Mohit. Your next question is from the line of Douglas Chow. Your line is now open.

16:44 Hi. Good afternoon. Thanks for taking the questions. Danny, are you ready to give an update in terms of when you might be in position to launch your own OnPro or sort of extended release delivery device?

17:02 Thanks for the question, Doug, very much. I would say that we are very pleased with the progress that we're making on our IonPro device, but no, we are not in a position where we're ready to update the market and project, for example, when it would launch and so on. We have not disclosed just at what stage of development that product currently is in, and we probably won't say too much about that until we're much closer to the launch window for it, primarily for competitive reasons.

17:40 Okay. And, Danny, just sort of thinking about your pipeline and sort of going forward, obviously you've had a lot of success developing products internally. You've recently become more aggressive from a business development standpoint. Just curious how, when you think about project the company forward, what's that balance between internally developed biosimilars versus ones that you can in-license that have, you know, to some extent been de-risked by others' works?

18:12 That's a great question, Doug. You know, I think that it's fair to say that we like the synergy that we are currently pursuing with having in-licensed products in tandem with internally developed products. I think a prime example of that is Lucentis Biosimilar, Hand-in-hand with the ILEA about similar. It balances the launch timing. It balances, for example, the economic alignment issues and so on. Similarly with Udenica, wholly owned product, strong in the oncology space, and so we feel comfortable adding additional oncology products that are in license that may not have all the same sorts of margins due to licensing fees. We think that the return on investment for internally purchased for externally brought in products is very high.

19:04 And we also feel that leveraging the commercial footprint both in terms of oncology and ophthalmology is very wise, as we said, further to the overall strategy of the company. So we look at it very much in that sort of balance. You know, biosimilars are perhaps $150 million per product to develop. So you probably don't want to take all that risk with every single product. Thank you very much. I believe that we have, you know, we have, first of all, you know, the 2019 launch of Udenica, and then we have the 2023 launch of the Humayra Balsamor, and then the 2025 launch of ILEA. So that's three products, and what we're projecting is overall six products, so three additional licensed-in products on top of that.

20:12 So I think that it's less an issue of being selected internally as I think it is an issue of maximizing the commercial and R&D synergy of bringing these products in in each of these therapeutic areas as we find them. Okay, great. Thank you so much. That's helpful. Your next question is from the line of Mike Olds. Your line is now open.

20:46 Hey, guys. Thanks for taking the question. Maybe just another follow-up just sort of on BD, and I guess specifically you have an option on a Rituxan biosimilar. Maybe you can just talk about some of the considerations in determining whether you decide ultimately to opt in on that or to pass. Thanks.

21:10 Hi, Mike. Thanks for the question. That's a good one. I think that in terms of any of these products that you bring in from another country, the very first thing you have to do is understand how the FDA is going to view the clinical trials that were performed externally. The patient population, the particular protocol that was used, the stage of disease of the patients, the treatment period, the margins, all that. The second thing you have to do is consider How you're going to bridge from the external product, the external innovator product, in the case of the innovative products, the Chinese Avastin or the Chinese Rituximab and how you're going to bridge that to U.S.

22:03 Avastin and U.S. Rituximab and just what that looks like. What types of studies are you going to do analytically, bioanalytically, and clinically Thank you. Yep. Thanks. Your next question is from the line of Chris Schott.

22:48 Your line is now open. Hi, this is Ekaterina on for Chris. Thank you for taking our questions. My first question is on Udenica. Are you noticing any notable changes in Amgen's or hospitals' or clinics' behaviors with Sandoz coming in, or is it simply too early to tell, given kind of the limited share gains that they've made? And then my second one is on Avastin. Can you talk about the competitive landscape for the product and your expectations about how many players you expect there? and does that kind of change, you know, your commercial strategy kind of given the time to market disadvantage? Thank you.

23:21 Yeah, thanks a lot. Catherine, I think that it's, first of all, with respect to, you know, Amgen and the others, I think it's fair to say that we haven't seen a lot of activity which is incongruent, you know, with the defensive strategies and so forth that Amgen put forward in 2019. It's very much an on-pro focus defensive strategy, as you know. With respect to additional competitors, such as Sandoz, I don't believe they had the reimbursement code yet, and I don't believe they'll have that for another quarter or so. I don't believe they'll have it passed through until mid-year about. So we'll have to see how that develops. And so far, we haven't seen, of course, any substantial inroads with respect to Sandoz, and nothing that's sort of popped up in the data to us thus far.

24:09 with respect to Avastin, it is true that others are ahead and have various strategies in terms of launch. But I don't think that's really going to deter us from going out there and getting our fair share of the market. I believe that we've shown that we can show up third in the market like we did with Udenica, have a very strong value proposition, understand the customer base, and understand how to go forward with the customer base and be successful. One of the things that we are currently doing since we've done the agreement is discussing the OncMab competitive dynamic with the customers, understanding their needs, very much along the lines of what we did before we launched Udenica. As you recall, we did over 1,000 interviews. We talked to the payers. We went to various health care congresses and so on.

24:55 We are currently in that process now, and we'll be fleshing out our strategy for these OncMabs over 2020. But I will assure you we'll get our fair share of those markets. Thank you. Your next question is from the line of Salim Syed. Your line is now open.

25:16 Hey, thanks so much for the questions, guys, and congrats on all the progress, Denny and team. So one for me on accounting and then the second one just on Udenica. So, JV, one question I had was just on the trade receivables. It looks like it's at $141 million for the end of the year. Transcripts provided by Transcription Outsourcing, LLC.

26:01 but also at the rebates and charge accrual because trade receivables is only and solely from the wholesalers, right? However, we have to disburse rebates under a liability account so you have to look at them combined. Receivables now are coming between 30 and 60 days so they're coming on a regular basis so I expect The $142 million will be collected by the end of

26:35 tomorrow. Is there just a little lumpiness in it? No.

26:38 This is just from the wholesaler's side. Then you have to use these proceeds, if you will, and then you have to pay the payers and you have to pay the clinics and hospitals that have performed rebates.

26:56 Okay, but generally speaking, the terms there is 30 days or 60 days?

27:04 Some are 30 days, some are 60 days.

27:06 Okay, but nothing longer than 60?

27:08 No, and then it's very current, actually.

27:11 Okay, got it. And then just on Udenica, if I may, on Udenica, when I look at, Consensus seems to be modeling on a quarter, like a Q1 over Q4 and a Q2 over Q1, sort of flattish sales. And so at the end of the year, you get to something like $4.60 for 2020. In the press release, it mentions that you plan to increase penetration and maintain price, which should imply quarter-over-quarter growth. So it's Are you willing to say that consensus is under modeling what your qualitative guidance suggests?

28:00 Well, I appreciate the question, Salim, and I don't mind you asking. But no, I'm not willing to make further comments with respect to the overall consensus at this particular point in time. I think that we – I think that we are confident we'll have additional share penetration throughout 2020, quarter to quarter. Probably be lumpy as things go forward and so on. But we are uncertain of exactly how the pricing will evolve with respect to the various competitors and so on. You know, Sandoz is going to show up and so forth. So, you know, but overall, I think we're going to do quite well as far as maintaining the trajectory on share growth. But I can't really nail it down for you further than that at this particular point in time.

28:53 Okay. Last one for me, and then I'll hop in the queue again. Some people comment on the Udenica long-term trajectory as being, you know, the bimodal peak or single peak or, you Is there a general framework that you guys think about internally? Because there's going to be pricing pressure at some point, perhaps, right? Should people be thinking about peak sales here being two years into launch or three years into launch? How are you guys generally thinking about that?

29:29 Well, I would observe that the... The Buy and Build Medicare Part B space is quite a bit different in terms of financial incentives and overall market structure than, for example, the Part D space. And one of the things that I would emphasize is that it is not in the interest of any market participant to aggressively cut prices and prematurely diminish their ASP. So I think when some folks have looked at this market They may have not focused sufficiently on the fact that the market participants, if they wish to have staying power in the market and wish to have a multi-year trajectory with some steadiness in that market, will be conservative in terms of price decreases in the context of trying to gain share.

30:24 So I think that while we have not guided the street as to how we see the trajectory, I would say sometime in the two to three year time frame we would probably see a peak sales and then a gentle roll off thereafter. But I think we'll see how things evolve through 2020 to nail that down a little closer for you. But I would again make the point though that Medicare Part B is a space where there are incentives to maintain pricing and not simply go in and cut pricing because there's certainly a Okay, super

31:08 helpful. Thanks so much, guys.

31:11 Thank you, Salim. Your next question is from the line of Jason McCarthy. Your line is now open.

31:19 Hey, guys. Thanks for taking the question. This is Michael Akunowich on for Jason.

31:24 Hey, Michael.

31:25 Hi, Michael. I'd like to get your idea on the... Thank you very much.

31:52 The additional manufacturing work required, you know, that the FDA wanted to see as far as the movement of this piece of equipment. As we indicated earlier, it's like four months worth of work. And as soon as we schedule that and wrap that up, we can go ahead and get the file resubmitted. We don't have guidance for you right now as to exactly how fast that can get scheduled. We're scheduling that sort of as we speak. And so it's difficult to address your question in terms of, you know, when do we think. I would say that we believe that we'll get that file resubmitted certainly within 2020, which you get it approved in 2021. But I don't have any further granularity for you, fortunately, at this time in terms of actual timing, or I would tell you.

32:37 All right. Well, thank you very much. Yeah, no, it's definitely helpful. I appreciate it. That's all from me, though. All right. Very good. Thank you. Thank you. See you on the next call. Bye-bye.