November 26, 2020

Coherus Has A High-Quality Business Model And Good Long-Term Potential (NASDAQ:CHRS)

Coherus Biosciences (CHRS) is a company that develops and markets biosimilar versions of popular biologics that have been out on the market for years with typically high levels of sales. Coherus has built an impressive level of cash flow already, yet shares trade for just over 2.5x this year’s expected sales and 10.5x this year’s expected earnings. With multiple new potential products hitting the market over the next few years, Coherus could more than double its revenue, creating a large opportunity for patient investors. Thanks to Boston Biotech Investor for writing the article that put this company on my radar.

Coherus Has A Validated Business Model And Management Has Shown Good Ability To Execute

Before we go deeper into Coherus’ business model, I want to make sure everyone has at least a rough idea what we are talking about when using the terms biologics and biosimilars.

The FDA says that biologics are products “composed of sugars, proteins, or nucleic acids or complex combinations of these substances, or may be living entities such as cells and tissues.” Basically, these are not chemically derived drugs; rather, they are therapies derived from some sort of living tissue or component thereof. A good example that most people would have heard of are monoclonal antibodies which are used in numerous settings these days, including cancer treatment. Biosimilars then are most easily thought of as generic biologics, although this comparison is not completely fair given some differences like in the process for seeking regulatory approval.

Figure 1: FDA Requirements for Biosimilar Approval under 351(K) (source: FDA Presentation)

The FDA approves biosimilars through the company submitting a 351((k)) BLA. This is considered an “abbreviated licensure pathway” and doesn’t require the company to submit all of the same product-specific preclinical and clinical data that would have been required for approval of the original biologic product. In the case of Coherus’ first product, Udencya, the company was able to get it approved without conducting a Phase 3 trial. This cost savings is critical to Coherus’ strategy because Phase 3 trials can cost hundreds of millions of dollars for the average new therapy.

Coherus’ strategy often involves in-licensing the rights to biosimilars already in use in other areas of the world. The idea is that the product is more likely to work and at less development cost to Coherus’ versus entirely developing a biosimilar on its own. Coherus’ Lucentis biosimilar was in-licensed from Bioeq that developed the product for the European market, and its Avastin biosimilar was in-licensed from Innovent that had developed it for the Chinese market. In my opinion, this is a savvy strategy that provides substantial de-risking to Coherus’ business.

As you will see in more detail below, Coherus managed to get Udencya to market and have a very successful launch. While the experience could be different with another product, management’s demonstrated track record with Udencya provides another element of de-risking in my opinion.

Coherus Is Already Profitable And Has A Lot Left In The Pipeline

Coherus has only one product marketed so far—Udencya as mentioned above to decrease the incidence of infection in certain cancer patients. Udencya just launched in early 2019, and yet Coherus is already hugely profitable, clearly demonstrating the potential of its business model.

Figure 2: Coherus’ Pipeline (source: Coherus’ January 2020 JPM Presentation)

Udenyca is a biosimilar of Neulasta which brought in over $3.9 billion for Amgen in 2017 in the US. Udenyca just launched in early 2019, and its market share was already over 20% at the end of last year. Part of why biosimilars present such a good opportunity is that the average selling price is often not all that much below that of the original biologic product. In the case of Udencya, Coherus launched the product at an average selling price of $4,175 per unit. While this is 33% below on Neulasta’s wholesale acquisition cost of $6,231, it’s only about 5.5% below Neulasta’s average selling price of $4,422.

Figure 3: Neulasta Versus Biosimilars Pricing Comparison (source: Biosimilars Review and Report)

There has since been another biosimilar competitor launched that somewhat underprices Udencya, but even if Coherus had to lower Udencya’s price to match, the company would still be very profitable given its current 93% gross margin.

Lucentis is an anti-VEGF injection that treats several different severe eye diseases by inhibiting blood vessel growth. Coherus views this as a $6 billion+ market opportunity which has potential to generate even higher sales than what is being seen now with Udencya. Coherus and its partner Bioeq submitted their BLA in 2019, but the FDA requested additional information on a manufacturing change in February 2020, which I wouldn’t expect to be a big obstacle to ultimate approval. The partners expect to resubmit the BLA soon and still plan on a 2021 launch, and Coherus has said that they will roughly equally share the net sales if the product makes it to market.

Avastin is an anti-angiogenic therapy that treats several types of cancers by also inhibiting the increase in blood supply, or angiogenesis, that allows cancer to grow and spread. Avastin likely represents a slightly smaller market opportunity for Coherus, at least if you base it off of peak sales of the original biologic, but Avastin still sells over $3 billion a year in the US. Coherus hopes to submit its BLA in 2021, but some of that timing is dependent on feedback from the FDA about the ongoing pharmacokinetic and other studies to demonstrate similarity. Hopefully this required interaction with the FDA won’t delay thing, but it’s definitely worth remembering the news from even just this past week that the FDA is “overburdened” at present. If all goes well, this biosimilar will likely be launching in 2022.

Figure 4: Avastin and Rituxan Opportunities (source: Coherus’ January 2020 JPM Presentation)

As you can see from Figure 4, the biosimilars of both Avastin and Rituxan are huge opportunities for Coherus, and the Avastin biosimilar could potentially be approved by the end of next year. If all goes well, it certainly seems possible that Coherus’ net sales could potentially double over the next 2 years with approvals of the Lucentis and Avastin biosimilars. This sort of upside is very clearly not priced into the stock at present.

Further down the line, Coherus also has the biosimilar version of Rituxan, as well as biosimilars of Humira and Eylea in the works, too. These are possibly bigger opportunities than the ones I just mentioned, and if even one of these makes it to market, it could have a meaningful impact on Coherus’ sales.

Coherus’ Balance Sheet And Sales Make For Little Risk Of Permanent Loss Of Capital From These Levels

Coherus has taken steps lately to make sure its balance sheet is in great shape. As a consequence, there’s little chance Coherus should ever need to raise dilutive capital again. In April, Coherus sold $200 million of 1.5% convertible notes that will mature in 2026. This leaves Coherus with $225 million in cash and equivalents and another $232 million in marketable securities. Add to that the fact that Coherus generated $95 million in net income in the first half of this year, and you have a company that is in very stable financial shape.

Figure 5: Coherus’ Balance Sheet (source: Coherus’ Q2 Press Release)

As you can see from Figure 5, Coherus does have 3 separate rounds of convertible notes totaling about $327 million, $105 million of which comes due in 2022, and additional term loan of $74 million. This doesn’t concern me at all though. Coherus could pay back the 2022 maturities and term loan in cash immediately if it chose to do so, and by 2022, Coherus will have generated significantly more cash than it has even now.

Figure 6: Coherus’ Income Statement (source: Coherus’ Q2 Press Release)

As you can see from Figure 6, Coherus’ fully diluted, annualized earnings per share would be $2.40. With the stock closing on September 11 at $18.23, this results in a current price to earnings ratio of less than 8. This is incredibly cheap on its own but especially so if you factor in the 5-deep pipeline of opportunities to grow these earnings even higher in the coming years.

That notwithstanding, Coherus is not without risk. None of the pipeline innovations could come to fruition leaving the company with little to hang its hat on once Udencya stops having substantial sales. Also the Neulasta biosimilar market could potentially become a race-to-the-bottom with a lower priced entry already having joined the market recently. If that result happened, then Coherus’ margins could severely be undercut. But with Coherus trading at under 2.5x current year sales and 8x current earnings, these downside risks seem largely priced in to me.

Coherus is exactly the type of out-of-favor value pick that I will be covering in my soon-to-be-launched Marketplace Service, Biotech Value Investing. With a target launch date of October 1, this service will provide in-depth coverage of my approach to finding high-quality, value-oriented companies in the biotech sector. Subscribers will get my weekly newsletter on value opportunities in the sector as well as a more detailed look at my research, including access to all my articles and valuation models as well as the options strategies I use to secure good entry and exit points on my positions.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in CHRS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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