Earnings Call Transcript - CHRS Q2 2021

Operator, Operator

Good day and thank you for standing by. Welcome to the Quarter 2, 2021 Coherus Conference Call. At this time, all participants are in a listen-only mode. Operator Instructions: I would now like to hand the conference over to your speaker today, McDavid Stilwell, Chief Financial Officer. Please go ahead, sir.

McDavid Stilwell, Chief Financial Officer

Thank you. Good afternoon, everyone, and thank you for joining us. We issued a press release earlier announcing our 2021 second quarter results. This release can be found on the Coherus BioSciences website. Today's call includes forward-looking statements regarding Coherus' current expectations. These statements include, but are not limited to, our ability to advance our biosimilar and immuno-oncology product candidates through development and registration; our commercialization of UDENYCA and other potential products in the future; our ability to meet our R&D and SG&A expense guidance for 2021; as well as our uses of capital, all of which involve certain assumptions, risks and uncertainties that are beyond our control and could cause actual results to differ from these statements. These statements are not guarantees of future performance and are subject to certain risks and uncertainties that are discussed in documents that we file with the Securities and Exchange Commission, specifically in our quarterly report on Form 10-Q for the quarter ended June 30, 2021 that we filed earlier this afternoon. The forward-looking statements stated today are made as of this date and we undertake no duty to update such information, except as required under applicable law. With me on today's call are Denny Lanfear, Chief Executive Officer of Coherus; Paul Reider, Executive Vice President of Commercial Operations and Market Access; and Chris Thompson, Executive Vice President of Sales. And I will now turn the call over to Denny.

Denny Lanfear, Chief Executive Officer

Thanks, McDavid, and thank you all for joining us this afternoon. Today I'll provide updates on UDENYCA performance, our biosimilar pipeline and progress with toripalimab, our PD-1 antibody. We're pleased with our progress since we transformed Coherus from a single product biosimilar company to a diversified multi-product biopharma company with multiple oncology assets. Over the next two years, we anticipate bringing four new products to market in the United States, complementing UDENYCA. Our diversified product portfolio will generate growing and durable cash flows to invest in the large and rapidly developing immuno-oncology market with toripalimab as our foundational asset. Now, let me first turn to UDENYCA. In the second quarter of 2021, we recorded $88 million in net sales of UDENYCA as compared to $83 million in the first quarter. UDENYCA market share as reported by IQVIA declined one point quarter-to-quarter from 20% to a 19% share. Wholesaler inventory was stable in the second quarter compared to the prior quarter end and was not a factor in second quarter revenue. Recall the first quarter revenue was negatively impacted by the burn-off of about nine days of wholesaler inventory that accumulated from seasonal buy-ins at year-end 2020. Later in the call, Paul Reider will provide additional details with respect to our expectations for the second half of UDENYCA performance. Now, let me update you on the excellent progress we're making with our biosimilar pipeline. Together with UDENYCA, our biosimilars of Lucentis, Humira and Avastin address an aggregate $28 billion in market opportunity. We've already demonstrated our ability to use our branded marketing and commercial capabilities to penetrate competitive areas with biosimilars. We believe we will experience similar success taking significant share in these new biosimilar markets. Our objective is to take at least 10% in each of these new markets, and in some cases, as with UDENYCA, even greater market share. Our next expected biosimilar launch is CHS-201, our Lucentis biosimilar candidate. I'm pleased to report that our partner, Bioeq, recently submitted the BLA to the FDA. Assuming the filing is accepted for review, we anticipate a standard 12-month review and approval cycle. We are excited about the potential approval of this product in 2022 and believe it will be among the first biosimilar Lucentis candidates to market, actively participating in the market formation. Launch planning is underway. Now with respect to our Humira biosimilar, CHS-1420, the FDA review is progressing well, and we believe that the application is on-track for a December 2021 target date. You may recall that we expect to launch CHS-1420 in the United States on or after July 1, 2023. Regarding CHS-305, our Avastin biosimilar, we are currently conducting a three-way PK study to support a BLA, which we expect to file in the first part of 2022. Once approved, the Avastin commercial opportunity will further leverage our commercial oncology capabilities with a nearly identical customer base as UDENYCA and toripalimab, adding incremental margin to our bottom line. Now, let me make a few remarks with respect to toripalimab and provide you with a positive update regarding our BLA filing in nasopharyngeal carcinoma, or NPC. As you may recall, the registration strategy calls for filing the second- and third-line NPC BLA and then post-approval filing a supplemental BLA for first-line treatments. The FDA has now agreed to accept the first-line submission for concurrent evaluation with the second- and third-line data, thereby accelerating time to potential approval for the first-line indication. JUPITER-02, the clinical trial evaluating toripalimab in first-line NPC, generated strong progression-free survival and overall survival data that were presented this June in the preliminary session at ASCO. The rolling BLA submission for all NPC indications is expected to be completed this quarter, and we continue to project approval in the first half of 2022. Now, I'm also pleased to report that toripalimab clinical data will be presented in September at two medical conferences. Data from the Phase III first-line non-small cell lung cancer study, which we earlier reported had met the primary endpoint of progression-free survival, will be presented at the World Conference on Lung Cancer. The JUPITER-06 Phase III study in esophageal squamous cell carcinoma, which also met its co-primary endpoints of progression-free and overall survival, will be featured at the Annual Meeting of the European Society for Medical Oncology. Junshi continues to make good progress with additional toripalimab clinical trials in lung cancer, which represents approximately 45% of the PD-1 market opportunity. Phase III/B studies evaluating toripalimab in neoadjuvant and small cell lung cancer and EGFR-positive patients who have failed TKI treatment are enrolling rapidly with data expected next year. A Phase II study in small cell lung cancer with co-primary endpoints of progression-free and overall survival is now fully enrolled and is also expected to read out in 2022. You will find details of these studies on Slide 20 of the August Investor Presentation which we posted to our website earlier today. Beyond lung cancer, in 2022 we also project data from a Phase III study in first-line treatment of triple-negative breast cancer and two Phase III trials in hepatocellular carcinoma — one for the first-line treatment and one in the neoadjuvant setting, as detailed on Slide 21 of the Investor Presentation. Toripalimab is the foundation of our immuno-oncology franchise and developing it in combination with other agents that can improve response rate is a key part of our strategy. JS006, the TIGIT antibody for which we have option rights, is now being evaluated by Junshi in a Phase I clinical trial and is progressing well. I'll now turn the call over to Paul Reider, our Executive Vice President of Commercial Operations and Market Access, for some additional color on the market dynamics we see going forward for UDENYCA. Paul?

Paul Reider, Executive Vice President, Commercial Operations and Market Access

Thank you, Denny. The pegfilgrastim market grew approximately 2% quarter-to-quarter. UDENYCA ended the quarter with 19% share of the overall pegfilgrastim market. This 1% decline in UDENYCA market share in the quarter came primarily from the least profitable segment of the market for 340B hospitals. Since the end of 2020, overall Neulasta shares declined 5 percentage points, validating customers' willingness to move away from OnPro, and we expect this trend to continue. Going forward, despite the COVID-19 pandemic, we believe that taking share from OnPro will be a source of growth for biosimilars and especially for UDENYCA. We are projecting increased market share within the second half of 2021, driven by the stability in our third quarter ASP compared to competitor ASPs and the redeployment of our field teams to in-person sales calls. With respect to revenues, we expect modest second half growth compared to the first half of 2021. However, there are two major uncertainties that are largely beyond our control and therefore difficult to handicap. First is COVID resurgence with dependent impact on market growth, share movement and sales force access. And the second is the level of price erosion precipitated by our competitors. We remain confident in our ability to respond quickly to manage either challenge to maximize our available opportunities.

McDavid Stilwell, Chief Financial Officer

Thanks, Paul. The details of our financial results are in the press release and in the 10-Q we filed this afternoon. So I'll focus now on just a few highlights. For the second quarter of 2021, we reported a $29.9 million net loss on a GAAP basis. Cash flow from operating activities was essentially breakeven at negative $200,000 for the second quarter of 2021. As detailed earlier in the call, net product revenue was $88 million, an increase from the $83 million in UDENYCA net sales recorded in the prior quarter. Wholesaler inventory was stable compared to the prior quarter end. Cost of goods as a percentage of net revenues increased from the prior quarter. In the first quarter, we depleted the inventory manufactured and fully expensed prior to UDENYCA approval. So the second quarter was the first period with per unit acquisition costs fully reflected within COGS. We expect a similar gross margin in the third quarter and then an improvement in the fourth quarter. For the full year 2021, we expect gross margins of around 85%, including a mid-single-digit royalty we owe through mid-2024. In the long run, starting in 2024, we expect UDENYCA gross margins to return to 90% or higher as we realize the benefits of a significant manufacturing process improvement and the royalty expiration. Research and development expenses for the second quarter of 2021 were $54.8 million compared to $26.2 million for the same period in 2020. The increase reflects cost to advance our late-stage pipeline. Recall that we expect to bring four additional products to market in the next two years, and we are investing in activities such as regulatory affairs and manufacturing scale-up for CHS-1420, development and BLA filings for toripalimab and a clinical trial for CHS-305. R&D expense for the quarter was partially offset by a $9 million credit due to the accounting treatment of the Coherus equity purchased by Junshi Biosciences in the second quarter. Selling, general and administrative expenses were $40.3 million in the second quarter of 2021 as compared to $34.1 million in the year-ago quarter. The increase was primarily driven by higher stock-based compensation expense as well as UDENYCA commercialization activities, which increased compared to the year-ago quarter that was heavily impacted by the COVID lockdowns of the spring of 2020. We ended the second quarter with cash, cash equivalents and marketable securities of $454.4 million compared to a balance of $399.5 million at March 31, 2021. And recall that during the second quarter, Coherus received $50 million from Junshi Biosciences' purchase of common stock associated with the toripalimab licensing transaction. We are maintaining our full year guidance for R&D and SG&A expenses of $370 million to $400 million, excluding the first quarter upfront payments to Junshi Biosciences, and this range includes approximately $50 million to $55 million in stock-based compensation expense.

Denny Lanfear, Chief Executive Officer

Thank you, McDavid. In closing, I'd like to congratulate and thank my colleagues and teammates at Coherus on the strong progress we are making on the transformation to a diversified biopharma company with multiple products in oncology. Their hard work is very much appreciated. The results of our team's efforts are two products currently in the registration process, plus a third BLA soon to be filed for toripalimab. We're advancing rapidly on our objective to transition from one approved product, UDENYCA, to four approved products in the United States over the next year. In 2023, we expect to have five products launched and generating revenue. Over the next several months, we anticipate clinical data announcements, medical presentations and regulatory milestones for both our biosimilars and toripalimab. We look forward to providing updates through the fourth quarter, when we'll have our Analyst Day event in New York City. Operator, we can now turn the line over to questions. Thank you.

Operator, Operator

Operator Instructions: Our first question is from the line of Douglas Tsao of H.C. Wainwright. Sir, your line is open.

Douglas Tsao, Analyst, H.C. Wainwright

Hi, good afternoon, thanks for taking the questions. Just Denny as a starting point, just curious to hear your perspective in terms of what we're seeing in the UDENYCA market. It seems like from the biosimilar makers' pricing, it has sort of stabilized, but the innovator continues to take some pricing discount. How do you see that playing out through the balance of the year?

Denny Lanfear, Chief Executive Officer

Hi Doug, thanks for the question. Yes, I'll hand that question over to Paul Reider, our Executive Vice President of Commercial Operations and Market Access. Paul, would you like to address that question?

Paul Reider, Executive Vice President, Commercial Operations and Market Access

Yes, sure, Denny. Yes, I mean, we definitely are watching the race to the bottom from Amgen in pushing the price down. They have the lowest ASP in market. And really the biosimilar competitors need to recognize that meaningful growth will only come from taking share from the originator; swapping growth among biosimilars is not a sustainable strategy. From a pricing standpoint, our Q3 published ASP has increased 1% over Q2. So by comparison to the originator, you can see the declines there. But we remain focused on value over the long term and on maintaining the highest ASP while maximizing share.

Douglas Tsao, Analyst, H.C. Wainwright

And another question — I know it's maybe a little early, but just looking ahead to 1420, given you said the likelihood of approval at the end of this year and then launching 18 months later, would we expect to see some commercial build-out for that product?

Denny Lanfear, Chief Executive Officer

That's a great question, Doug. We are currently performing some market research around the potential structure for the sales force. But we are on record earlier as indicating that we believe that CHS-1420 will be primarily a payer-driven, market-access-driven opportunity. So we do not see substantial increases on the commercialization side to support that product. Although there probably will be some marginal increases, they will not be substantial.

Douglas Tsao, Analyst, H.C. Wainwright

Okay. And so just given the fact that you're not going to be spending that much, would we anticipate those efforts would start just a few months before the actual launch?

Denny Lanfear, Chief Executive Officer

I'll decline to describe at this point the breadth of our efforts in various parts of the organization to support that. But we do not expect, for example, to put a substantial number of boots on the ground to move that product.

Operator, Operator

Next question is from the line of Salim Syed of Mizuho. Sir, your line is open.

Salim Syed, Analyst, Mizuho

Great, thanks so much for the question and good afternoon. So a couple from me, if I can, both on UDENYCA. When we look at the data, it looks like ZIEXTENZO is starting to pick up a little more pegfilgrastim share more quickly than previously, even though they have a slightly higher ASP. Could you give us a little more color on that dynamic? And then second, on your on-body device — given the trial mentions on ClinicalTrials.gov and other registries, it seems to suggest we could get data potentially this summer or early fall from those trials. Is that a correct assumption, and what would it mean for you to potentially be the only biosimilar with an approved on-body device, if that were to occur? Thank you.

Denny Lanfear, Chief Executive Officer

Well, thanks for the question, Salim. I'll take the second question first and I'll let Paul address the ZIEXTENZO dynamics. With respect to the on-body device, I would reiterate our previous comments that we are pleased with the progress we are making with respect to that product. As you know, we have had some expenditures disclosed over the past year for other delivery modalities for UDENYCA. I'll decline to give timelines for data, but I think that product is moving along.

Paul Reider, Executive Vice President, Commercial Operations and Market Access

Yes, sure. Hey Salim, I'm going to reiterate our focus here at Coherus, which is to gain share from OnPro. OnPro has over 50% of the market. It's likely that any of the new biosimilar entrants will pick up a couple of share points for now. What we're seeing is their share is coming primarily from that 340B segment. It's the least profitable segment for us. So that's where we're seeing some market share gains. Our focus is really to take share from OnPro, both in the short and long term.

Operator, Operator

The next question is from the line of Chris Schott of JPMorgan. Your line is open.

Chris Schott, Analyst, JPMorgan

Great, thanks so much for the questions. Just one on UDENYCA and then a bigger picture one. On UDENYCA, I think — sorry if I misheard this — during the prepared remarks, I thought you expected ASP stability going forward. Is that relative to peers or on an absolute basis? As I think about price going forward, is the more stable dynamic being driven by mix or are you actually seeing some of the competitive dynamics in the space maybe starting to normalize a bit? And then my bigger picture question: you've talked about building out the I-O portfolio over time, but there also seems to be a lot of opportunities in the broader oncology market. Would there be any interest in the company to add non–I-O oncology assets to the mix? There seem to be a number of ex-U.S. me-too assets being developed as well. Could that be something you would look at, or is the focus very much on I-O specific assets? Thank you.

Denny Lanfear, Chief Executive Officer

Thank you for the question, Chris. Let me take the ASP question first. As you know, we consider ourselves to be good guardians of ASP. We try to keep our price decreases as modest as possible, and our track record reflects that. That being said, we can't control the pricing behavior of other competitors in the market, regardless of their motivations. We are currently somewhat stable with our ASP for this quarter, but looking forward over several quarters there might be additional changes and decreases as required. With respect to oncology products, I think you bring up a very interesting point. Of course, we currently have a few immuno-oncology products that came over with the Junshi collaboration — the TIGIT, engineered IL-2, et cetera. Our focus is on the cancer immunity cycle. But it is fair to say that in conjunction with toripalimab, our PD-1, we are getting a fair amount of incoming overtures and partnership opportunities for various assets to use with toripalimab. So I would say we remain open-minded about the assets that we look at. But I would also say that the Junshi TIGIT is front and center for us as that data reads out at the end of the year and into 2022. Our entry into the market with the PD-1 is causing significant interest.

Operator, Operator

Next question is from the line of Jason Gerberry of Bank of America. Sir, your line is open.

Unidentified Analyst (Ashwin on for Jason), Analyst, Bank of America

Hi, this is Ashwin on for Jason. I have two questions. One is on Humira. AbbVie is now saying that they expect two interchangeable biosimilars, and we've seen the first two interchangeable biosimilars get approval recently. To what extent is your 10% projected share predicated on any assumption around interchangeability, either for you or for competitors? And second, on gross margin: you said around 85% in 2021; should we expect around the same level for 2022 and 2023 before it jumps to 90% in 2024? Thanks.

Denny Lanfear, Chief Executive Officer

Thanks for your question. I'll speak to the issue of interchangeability with Humira. We don't believe that the lack of interchangeability is a significant impediment to market penetration. We think interchangeability is more of a segmentation issue. As we've said previously, we believe payers will probably have the loudest voice in terms of selection of the biosimilar of choice for them. We consider ourselves to be very adept biosimilar competitors and we think that we will do very well in the market, which is why we are projecting a 10% market share for the Humira biosimilar post entry.

McDavid Stilwell, Chief Financial Officer

Yes, thanks, Ash. As we said in the prepared remarks, the second quarter was the first period in which the full per unit acquisition cost of UDENYCA was realized, and that was mostly responsible for the increase in cost of goods as a percent of net sales. I would add that a separate element to the second quarter, which will also be evident in the third quarter, is that the lots of UDENYCA we were utilizing in the second and third quarters were manufactured prior to a process improvement. Those lots were relatively low-yielding and therefore more expensive. We expect to move through those by the end of the third quarter and then for gross margin to improve in the fourth quarter and be relatively stable through 2022 and 2023. So that's the trajectory we expect for cost of goods.

Operator, Operator

There are no further questions. Presenters, please continue.

Denny Lanfear, Chief Executive Officer

Thank you very much for joining us today. Again, thank you very much. We look forward to providing you with another update on our next quarterly call, and we look forward to seeing you at our Analyst Day in New York in Q4. Thank you.

Operator, Operator

That concludes today's conference call. Thank you everyone for participating. You may now all disconnect.