Coherus Oncology, Inc. Q1 FY2020 Earnings Call

Ladies and gentlemen, thank you for standing by. And welcome to the Coherus BioSciences 2020 First Quarter Earnings Conference Call. My name is Lorie, and I will be your conference operator for the call today. As a reminder, this conference call is being recorded. I would now like to turn the call over to David Arrington, Coherus’ Investor Relations and Corporate Affairs. Please go ahead.

Thank you, Lorie, and good afternoon, everyone. After the close of market today, we issued a press release on our first quarter 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 Viret, Chief Financial Officer; Thomas Fitzpatrick, Chief Legal Officer; and Chris Thompson, Executive Vice President, Sales and Market Access. Before we begin our formal remarks, I would like to remind you that we will be making forward-looking statements, including risks and uncertainties related to the impact of the COVID-19 pandemic on Coherus’ business and results of operations. In addition, other forward-looking statements, such as our plans and expectations with regards to our ongoing commercialization of UDENYCA, product candidate pipeline, product development plans, 2020 financial projections, and use of capital, all 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 in the earnings press release and our latest SEC disclosure documents. Please also note that the non-GAAP financial measures included in our press release should be used to help you understand the Coherus business performance and should not be a substitute in reviewing our GAAP financial risks. The GAAP to non-GAAP reconciliations are also provided in the earnings press release. I will now turn the call over to Denny.

Thank you, David. And welcome, everyone, to our Q1 earnings call. First, I’d like to thank our frontline providers for all they’re doing during this pandemic, and I’d like to acknowledge our internal teams, who have so rapidly and effectively adapted to the new environment. Our first quarter performance reflects a strong demand for UDENYCA and continued success in executing on our plan. We increased market share, and we maintained high gross margins. We continue to make good progress on our core mission and advance our 5-year strategy. Today, I’ll discuss our first quarter performance in our pipeline, and then I will turn the call over to Jean Viret, the company’s CFO, to discuss our financial performance. We’ll then conclude with a few comments on the remaining quarters for 2020, which will include SG&A and R&D guidance for the remainder of the year. Let’s review first quarter performance and note where COVID had a modest impact and where impact was immaterial. First, let me comment on unit growth of the overall pegfilgrastim market. While market dynamics are fluid, the overall market unit growth is in the low single digits, notwithstanding COVID, consistent with previous quarters. There are signs around the healthcare system that various treatments are being temporarily postponed due to the pandemic. As you’d expect, cancer treatment is much less vulnerable than other therapeutic areas to this phenomenon, as cancers typically grow very fast and a treatment delay is dangerous to patients. Secondly, our market share was up from approximately 20% at the end of the year to about 22% over the quarter. There was a slight uptick in Onpro share related to COVID near the end of Q1; we’ll discuss this in a little more detail later. Third, with respect to unit sales and price, I would first say, we saw a significant stocking inventory decrease at the end of Q1 relative to Q4. We also sold more units on a relative basis to the 340B hospital segment during the quarter. And finally, we realized a modest increase in discounts as well as a typical increase in Co-Pay assistance as patients’ deductibles are reset with the new calendar year. We anticipate that demand will continue to grow through the end of 2020 as cancer patients and providers continue to benefit from the value provided by UDENYCA and as cancer patients return for treatment. Now let me turn to our long-term growth and discuss the company's internally developed pipeline as well as our partner products. Overall, we continue to make good progress on our plan to have 6 FDA approved biosimilars on the market by the end of 2020. Together, these 6 assets represent more than approximately $30 billion in US market opportunity. In terms of ophthalmology and with respect to our Lucentis biosimilar, in-license from Bioeq, we continue to work with Bioeq as its manufacturing partner on the resubmission of the BLA. Together, we are interacting with the FDA and are currently focused on supporting our partner to generate the additional manufacturing data as requested by the FDA and required for the resubmission. We currently anticipate Bioeq will file a BLA with the FDA in the fourth quarter of 2020, upon completion of these efforts and certain regulatory interactions. Now with respect to the company’s internally developed ophthalmology program, CHS-2020, our Eylea biosimilar, we are very pleased with our progress towards an expected Phase III clinical trial initiation in 2021. To support that objective, we advanced preliminary biosimilarity exercises and initiated the commercial-scale manufacturing efforts necessary to supply the Phase III trial and ultimately to supply the market. The cost of these efforts are reflected in our R&D guidance for the remainder of 2020, which we will provide later. Our Lucentis biosimilar entry into the $6 billion anti-VEGF ophthalmology market will enable the company to have a significant role in the biosimilar market formation and lays the groundwork for a subsequent Eylea biosimilar market entry. There is a portfolio value of having both Lucentis and Eylea biosimilar. Our two ophthalmology assets constitute a complete product offering to better serve the needs of patients and providers. Coherus believes its proven commercial expertise in oncology will translate well into ophthalmology as both therapeutic areas share the same reimbursement dynamics. We expect a relatively efficient commercial investment will be needed to address the ophthalmology marketplace as more than 80% of the VEGF market units are concentrated in a little more than 400 accounts. Let me turn now to our immunology product, CHS-1420, an internally developed biosimilar candidate for HUMIRA, addressing an $18 billion market. We have now gained concurrence with the FDA on the analytical and clinical strategy to support a BLA filing. We are currently drafting and reviewing key sections of the BLA, which we project to file in the second half of 2020. Concurrently, we continue to implement our manufacturing strategy to enable large-scale competitive market entry in the United States on or after July 1, 2023. Costs associated with advancing this product are reflected in the R&D and SG&A guidance we will provide for the rest of the year. Now let me go back to oncology and make a few additional remarks with respect to business development. As you know, in Q1, we completed a license agreement with Innovent Biologics to commercialize its biosimilar candidate to Avastin in the United States and Canada. We are currently engaged with Innovent on preparations to file an IND as a precursor to filing the BLA. We expect to initiate a 3-way PK study using the innovator Avastin from the United States and China compared to Innovent’s Avastin biosimilar. We will also perform additional analytical biosimilarity exercises. We expect to submit the BLA in 2021 depending on the outcome of these exercises and the timing of required interactions with the FDA. Additionally, we continue to diligence the option to complete the development and commercialize Innovent’s Rituxan oncology biosimilar in the United States. However, we have no further updates on that program for you at this time. Now I’ll let the company’s Chief Financial Officer, Jean Viret, summarize the Q1 financials. Jean?

Thank you, Denny. First, let me preface that it has now been a full year earnings reporting cycle since we launched and commercialized UDENYCA. With that context, I will now review the main financial results for the first quarter of 2020. Net product revenue for the first quarter of 2020 was $116.2 million, with a non-GAAP net income of $49.8 million and related diluted non-GAAP earnings of $0.67 per diluted share. Net revenue for the first quarter of 2019 was $37.1 million, with a non-GAAP net loss of $10.5 million and a non-GAAP net loss of $0.15 per diluted share. Our gross profit margin remained high at approximately 94% for each quarter. Net product revenue increased year-over-year markedly as a result of market penetration and our disciplined pricing strategy. Research and development expenses for the first quarter of 2020 were $33.1 million as compared to $18.8 million for the same period in 2019. The increase in R&D expenses was largely due to an upfront payment obligation of $5 million pursuant to the Innovent license agreement and increased expenses related to preparations for the filing of the CHS-1420 BLA and the development of other biosimilar product candidates. Selling, general, and administrative expenses over the first quarter of 2020 were $35.4 million as compared with $32.7 million over the same period in 2019, when we initially launched UDENYCA. We anticipate that R&D and SG&A expenses combined will range between $285 million and $310 million for the full fiscal year 2020, excluding upfront or milestone from any potential new collaborations. We started our first quarter with $177.7 million in cash and cash equivalents and ended the quarter with $193.3 million, a $15.6 million increase. This is our fourth quarter in a row with positive cash flow from operations. We used net cash generated from the sales of UDENYCA to increase our inventory by $9.6 million and paid down $5 million of our accounts payable, which together represent another $15.6 million increase in net current assets. Finally, I would like to mention that our strong balance sheet and discipline in allocation of our capital has positioned us to continue to grow and build the business. We remain very confident in the durability of our business and expect to continue to generate positive operating cash flow during 2020. Now I would like to turn the call back to Denny.

Thank you, Jean. Now let’s take a look ahead to the remainder of 2020. Overall, we expect continued unit share growth through 2020. However, Q2 results so far appear to be modestly impacted by the pandemic, which by quarter end may result in lower utilization of UDENYCA than had the pandemic not occurred. The two primary drivers of this are: first, the reduction in cancer treatments as the healthcare system reacted in late March and early April to the COVID crisis. Secondly, we saw what we believe to be a transient increase in Onpro use that we expect will reverse upon market normalization. COVID is impacting patients’ ability to access hospitals in certain parts of the country, particularly in the Northeast and the Upper Midwest. However, we expect UDENYCA’s strong momentum will resume as these patients return for treatment and as referrals return to normal. As one would expect, all of the therapeutic areas in the healthcare system, such as cardiology, dermatology and others, oncology appears to be the least impacted in terms of treatment delays. Now let me make a few comments with respect to our strategic deployment of capital. We believe it is prudent for the company to have a strong balance sheet at a time of overall economic uncertainty. As announced in April, we completed a convertible notes financing of $230 million at a 1.5% coupon. The excellent terms we were able to negotiate provided us with additional flexibility to raise the strike price to $25.93, well above our 52-week high, thereby protecting our equity investors. We believe that this makes sense when capital is well priced and dilution is low to bolster our balance sheet, and we did so opportunistically. For this financing, we are well positioned for additional pipeline acquisitions, and given our successful track record with UDENYCA, we are largely seen as the oncology partner of choice in the United States. However, I would point out that our financing was disciplined and opportunistic, and our use of capital will be disciplined and opportunistic as well. In terms of our future growth trajectory, the total addressable market available to Coherus will expand to about $10 billion in 2022 and will expand further to about $30 billion in 2023. Over our 5-year planning horizon, we expect that our total addressable market will have thus grown considerably, particularly given our demonstrated ability to execute deals as well as internally developed assets. We are confident in our ability to replicate our UDENYCA in new therapeutic areas and deliver long-term growth to our investors. And with that, we’re happy to take your questions.

We have a question from Stacy Ku from Cowen and Company. Your line is open.

Good afternoon. And thanks for taking my question. I have two. So first, what are you seeing in Q2 in terms of the COVID-19 impact, and how might that relate to dynamics in H2? Can you give us an idea of the amount of patients that are still coming into the office, given that it is a critical care product? And importantly, what’s going on with your customer base with the competitors, are they making gains, and what are your expectations for 2020?

Thank you for the question. I understand your question to be, first of all, what are the COVID dynamics that are impacting Q2, and what types of things will impact that are COVID-related? And secondarily, what is the competitive oversight of that particular thing? I would have Chris Thompson answer that. Chris?

Thanks, Denny. And thanks, Stacy, for your question. First, while COVID had an impact on the initiation of treatment, we really have some tailwinds for growth at the same time. Recently, the ASCO and NCCN guidelines have been expanded, and we’ll see increased progressive and utilization thresholds. Additionally, sequestration has been suspended. So now reimbursement is the full 6% of Neulasta’s ASP and Medicare. So we see some upside there. But as COVID began to work its way through the healthcare system, we did see an uptake in Onpro at the expense of Neulasta pre-fill syringe as well as UDENYCA, along with a decrease in new patient business, as Denny has said. That said, we believe that these changes are really going to be transient in nature. As the delaying treatment is dangerous, as Denny has pointed out, in the cancer area. We’ve had great momentum from Q4 to Q1, and we expect this momentum to continue.

Yes. Thanks, Chris. I would just say that with respect to the other biosimilar competitors, we do not believe there’s any COVID-related effect.

I guess just to clarify my question. The first one is just to sort of figure that out. If there are any follow-through to H2, given what you’re seeing in Q2? And then potentially, what the competitors are doing since they were aiming to start negotiations in mid-year. Just trying to understand if that’s something that hospitals are focused on right now.

Well, I think that is fair. Chris can add some additional color. But I think that it’s fair to say that particularly in the hospital segment and particularly in the hot spots, such as the Northeast and the Upper Midwest, people are very concerned about dealing with COVID. So that’s been front and center. I think that’s actually a competitive disadvantage for other biosimilar competitors. As we indicated on the back side of COVID, whether that happens in Q3 or Q4, as some would expect, we see a return to growth during that period of time and a resumption. So I don’t really see a read-through for that particular competitive dynamic at this particular point in time. Chris, any further comment on that one?

No, I agree, Denny. On Q3, Q4, obviously, it’s fluid, right? And right now, we’re watching it very carefully as everyone else is, but it’s a fluid environment right now.

That’s fair. And then second question on Lucentis. Just wondering if you’ve been in contact with Bioeq. And then have you already finished running the validation? And could you maybe remind us of the issue and any details on if it was already developed? Thank you.

Yes. We are in very close communication with Bioeq as well as their manufacturing partner. I just had a call with Bioeq this morning as a matter of fact. We have a very good handle on the requirements that the FDA wants to see. As you may recall, it was pursuant to relocating a firm to enter into an additional building on the same campus and running the same process in that same vessel but in another building. They want to see some additional data. We are in the process of developing that data. We indicated earlier that it would take about four months to develop that data once it started. So that process has initiated. We will then have to analyze that data include it in the BLA and file it, and that would drive the timing into Q2. I would just appreciate the other callers asking one question, please. Thank you.

Your next question is from Mike Ulz from Baird. Your line is open.

Hey, guys. And thanks for taking the question. Maybe just you can share your current thoughts on additional business development activities from here. I’m just curious how you’re thinking about that? Is it maybe 1 or 2 additional products? And kind of what does the profile look like or preference for the profile in terms of indication, for example, oncology? And then maybe in terms of a launch timing, is it something that you’re interested in more near term? Or could that be potentially longer-term as well? Thanks.

Sure, Mike. As we discussed before, our primary focus for deals is oncology assets, particularly additional assets, which would dovetail very well with UDENYCA. I think the Avastin agreement with Innovent was representative of that. We would seek to strike other such agreements. Our preferred time for launch of one of those products is certainly between now and 2023. That is to say, products that show up post-2023 are significantly less interesting to us. And we do not rule out doing a non-biosimilar asset. However, I would say that we are sharply focused in oncology at this point, very sharply focused, given that that’s where the commercial force is at this time. Lastly, I believe that we’re making good progress in a number of directions. We’ve talked previously about completing additional transactions. We have one additional oncology asset in plan for launch prior to 2025, as you can see, to comprise the 6 assets. We technically have five assets right now.

Great. Thank you.

Our next question is from Mohit Bansal from Citigroup. Your line is open.

Hey, guys. Thank you very much for taking my call and question, and also I hope everyone is staying safe out there. Just wanted to dwell a little bit deeper on the trends you talked about in the first quarter regarding one inventory drawdown as well as the 340B trends. So on inventory, is it possible to quantify, or was it a material impact of inventory drawdown? And do you anticipate this coming back as we move through the year? And on the pricing side, the 340B dynamic is interesting. Do you think it was a one-off phenomenon? And as unemployment rates rise, do you expect it could pretty much be something which could impact you or other companies as well in 2020 as well as 2021 going forward? Thank you.

So I’ll give you one question, Mohit. Actually, I’ll give you two. I’ll let JV answer. We can get you the inventory question. And then I understand you to inquire with respect to the 340B impact and whether we see that as transient. Jean, do you want to take that one?

Yes. Let me first address your question on inventory. We started the year at the high end of the range and then ended Q1 at the low end of what we observed over the past year. The wholesalers built up inventory at the end of the fourth quarter. Going forward, we expect inventory to be in the mid-range of what we've seen. Regarding your second question about the 340B mix shift, I would expand on that in the context of GTN expansion. There was some GTN expansion, but it comprised three major components of roughly equal importance. First, there was a shift in the sales mix toward the 340B segment, which I believe is temporary as this segment generally prefers biosimilars over the originator. Second, there was an increase in Co-Pay, which is not expected to continue throughout the rest of the year. Lastly, there was an increase in discounting as we implemented 2020 contracts to drive unit share growth for the remainder of the year.

Got it. Very helpful. Thank you for answering my question.

Thank you. We’ll give you another shot, Mohit.

Your next question is from Douglas Tsao from H.C. Wainwright. Your line is open.

Hi, good afternoon. Thanks for taking the questions. Just curious, Denny, what you’re seeing from a competitive landscape standpoint? And obviously, it sounds like you picked up some share in the 340B mix in Q1. How do you see that playing out? I think one of your competitors will get pass-through status or their Q-Code at the beginning of April. Have you seen any change there? And have you taken any action to defend your share where you’ve been so successful? Thank you.

Thanks for your question. Chris, do you want to take a shot at that one?

Sure. Thanks, Denny. So you had mentioned pass-through status; that’s true that Sandoz did receive pass-through status in April, but they have not received their Q-Code yet. And we believe that not having that really presents a real barrier for them, but not only for them, but it will present a barrier for Pfizer and all other competitors to follow not having a Q-Code. Right now, their share is pretty insignificant, and I think that you’ll see that with future entrants into the market. The originator at 70% market share really represents a huge reservoir of opportunity that all biosimilars can go after. And we believe the additional market entrants will create increased pressure on the innovator, and that’s where the share will come from rather than from each of the biosimilars against one another.

Is that helpful, Doug?

Yes, it is. And just a - when would we expect Sandoz to get the Q-Code?

I think around July, maybe July 1, Chris? Something like that?

Yes. But you’d have to confirm with them.

Great. Thank you so much. So that’s very helpful.

Thanks very much. Just maybe a two-parter on UDENYCA in Q2. I think you mentioned earlier a transient uptick in Onpro use. Can you maybe just quantify what you’re seeing there in terms of share as you move through April? So basically, how much of a share gain are we thinking about? And just a bigger picture question on UDENYCA in Q2. I guess when we consider your ongoing share gains balanced against some of this reduced patient access. Is it still reasonable to think about sequential growth for UDENYCA in the quarter? Or at this point, could we actually see UDENYCA temporarily kind of down sequentially and then rebounding as the year continues? Thanks so much.

Let me take the last one. Let me take the last one first, Chris, and then I’ll let Chris Thompson take the first part. There’s no question that there will be a COVID impact in Q2. It would be modest. There are areas of the business which are not impacted. But there are areas which are impacted, right? So no, we will not have maintained unit growth into Q2, I would not say. That’s pretty tough in the face of COVID, particularly in the Northeast and Upper Midwest and some of those particular areas. However, I think that it’s also important to keep in mind that people are planning their exit out of the COVID crisis in terms of treatment, and particularly on the clinic side, I think they’re very active in getting back to business. And hospitals have very active programs, for example, for resuming cancer care. So we think that referrals and so forth are going to improve. But there’s no question that Q2 is going to be a very fluid quarter with COVID wafting through significantly on the front. And then whatever happens as we tend to work through it on the back side, very, very tough to call Q2, I would say. And Chris, do you have additional comment?

Yes, thank you, Denny. As I mentioned earlier, we have observed some minor shift to Onpro. However, it's still early regarding COVID, and the situation is fluid, making it difficult to assess. We lost some ground to Onpro, but this has primarily occurred in areas with high COVID rates, such as major cities in the Northeast and Upper Midwest. We also lost some market share to the Neulasta pre-filled syringe. We think this trend will be temporary. Hospitals and clinics are currently expressing a strong preference for drug supplies manufactured in the United States, which is significant at this time. UDENYCA is produced in America and is readily available with a stable supply. Additionally, hospitals and clinics are facing resource constraints and are not in a position to alter their systems, such as electronic medical records and treatment protocols, to accommodate new drugs. Thus, changing drugs is not something they will do unless absolutely necessary. Finally, I believe that UDENYCA provides exceptional value along with comprehensive service, so any market share lost during this COVID period will likely be short-lived, and I expect a quick recovery.

Great. Thank you.

Thank you, Chris.

Your next question is from Balaji Prasad from Barclays. Your line is now open.

Yeah, hi. This is Stephen on for Balaji. Thanks for taking our questions. My question is on the biosimilar Lucentis. Just be interested to get your thoughts on the recently announced Bausch partnership with Stada to commercialize the biosimilar Lucentis in the US and how if at all this changes your view on the biosimilars Lucentis market? And then for your own partnered biosimilar with Bioeq, is it still your expectation to launch this in 2021 if the BLA is final by the end of the year? Thank you.

Thanks for your question. First of all, I would say that we’ve been tracking that Stada asset, and we knew they would be seeking a US partner. However, I would also say we believe we’re very well positioned, given our demonstrated expertise in Part B to do very well in this particular therapeutic area. With respect to the ophthalmology market, our progress with the company's Bioeq biosimilar, we expect, will enable us to be there at market formation. And we will go ahead and get the BLA filed near the end of this year. And at that time, we’ll provide some additional comments on the particular launch window and timing. So to the point where we’ve got everything boxed up for the FDA, and we’ve got that ready to go, we’ll give you an update, in particular, on the launch timing. But overall, we don’t see the entry of Stada changing our calculus or aspirations for the ophthalmology market.

And there are no further questions at this time. Presenters, you may continue.

Thank you, everyone, for attending our earnings call, good day.

Yes. Thank you very much, and we’ll be providing you additional updates on Q2. And hopefully, we’ll be on the backside of COVID around that time. Bye-bye.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.