Coherus Oncology, Inc. (CHRS) FY 2022 MD&A

Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K (“Form 10-K”). This Form 10-K, including the following sections, contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the “Risk Factors” section in Item 1A of this Form 10-K. We caution the reader not to place undue

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reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.

This MD&A section generally discusses 2022 and 2021 items and year-to-year comparisons between 2022 and 2021. Discussions of 2020 items and year-to-year comparisons between 2021 and 2020 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 23, 2022.

Overview

We are a commercial-stage biopharmaceutical company focused on the research, development and commercialization of innovative cancer treatments and the commercialization of our portfolio of FDA-approved biosimilars. Our strategy is to build a leading immuno-oncology franchise funded with cash generated through net sales of our diversified portfolio of FDA-approved therapeutics.

Our commercial portfolio includes three FDA-approved biosimilar products. Our first product, UDENYCA, a biosimilar to Neulasta, a long-acting G-CSF, was launched commercially in the United States in January 2019. Our second product, CIMERLI, was approved by the FDA in August 2022 as a biosimilar product interchangeable with Lucentis for the treatment of neovascular (wet) age-related macular degeneration, macular edema following retinal vein occlusion, diabetic macular edema, diabetic retinopathy, and myopic choroidal neovascularization. The FDA also granted CIMERLI 12 months of first interchangeable exclusivity. We launched CIMERLI commercially in the United States on October 3, 2022. In December 2021, the FDA-approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, pursuant to the terms of an agreement with Humira’s manufacturer, AbbVie.

In addition to our three FDA-approved biosimilar products, we also have an original BLA under review by the FDA for toripalimab. Toripalimab is being developed for its ability to block PD-1 interactions with its ligands, PD-L1 and PD-L2 by binding to the FG loop on the PD-1, and for enhanced PD-1 receptor internalization (endocytosis function). We believe blocking PD-1 interactions with PD-L1 and PD-L2 have the potential to promote the immune system’s ability to attack and kill tumor cells. The original BLA for toripalimab was for the use of toripalimab in combination with gemcitabine and cisplatin for first-line treatment of adults with metastatic or recurrent locally advanced NPC, and for use as a monotherapy in the second- or later-line treatment of patients with recurrent unresectable or metastatic NPC that have progressed on or after a platinum-containing chemotherapy. On April 29, 2022, we received a CRL from the FDA for the original BLA for toripalimab requesting certain manufacturing process changes that we and Junshi Biosciences believe are readily addressable. On July 6, 2022, we announced that the FDA accepted the resubmission of the original BLA for toripalimab and announced that the FDA set a PDUFA action date for December 23, 2022. On December 24, 2022, we announced that we did not receive an action letter from the FDA by the PDUFA action date. The FDA previously communicated that an on-site inspection of Junshi Biosciences’ manufacturing facility for toripalimab is required before the FDA can approve the original BLA; however, they were unable to conduct the inspection by December 23, 2022 due to the impact of COVID-19 related restrictions on travel in China. The BLA for toripalimab remains under review, and we and Junshi Biosciences are engaged in ongoing discussions with the FDA about the pre-approval inspection plans. Since the decision in February 2022 by the FDA to not approve the BLA for sintilimab, the FDA’s current stance is to reject most product candidates that do not have data that is reflective of U.S. medical practice and/or the U.S. patient population and in particular with clinical trials conducted in a single country such as China. However, we believe that our original BLA for toripalimab for NPC is a distinct case because there are no approved immunotherapies for NPC in the United States and the FDA has stated that NPC warrants regulatory flexibility with respect to the sufficiency of single country clinical data. We plan to launch toripalimab in the United States in the third quarter of 2023, if approved by July 1, 2023. In January 2023, we and Junshi Biosciences acted to reduce the scope of the ongoing development plan for toripalimab in the United States that is used as part of the calculation for reimbursable research and development expense under the Collaboration Agreement.

In May 2022, we discontinued development of CHS-305, an Avastin biosimilar candidate.

We have built an experienced and robust oncology market access, key account management and medical affairs capability in the United States, which have supported the successful commercialization of UDENYCA and CIMERLI. We expect to leverage these capabilities as we build and launch our immuno-oncology franchise, continue to grow our ophthalmology product portfolio and launch the commercialization of other biosimilar products.

We primarily operate in the United States and partner with companies that operate in other countries. We have no material direct exposure to Russia and Ukraine; however, we are monitoring any broader economic impact from Russia’s invasion of Ukraine and the ongoing war between the two nations, including heightened risk of cyberattacks, increased prices of fuel and other commodities, and potential impacts to our partners’ supply chains.

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Business Update

On January 9, 2023, we announced that we entered into the Term Sheet with Klinge Biopharma for the exclusive commercialization rights to FYB203, a biosimilar candidate to Eylea® (aflibercept), in the United States. The parties to the Term Sheet expect to execute the Definitive Agreements contemplated by the Term Sheet and complete the transaction in the first half of 2023. Under the Term Sheet, we will make a total upfront payment of approximately €30 million, comprised of cash and our common stock, thirty days after the execution of the Definitive Agreements. We also agreed to make other regulatory and launch milestone payments and to make royalty payments based on approximately equal sharing of profits from the sale of FYB203 in consideration for the commercialization rights to FYB203 in the United States.

The material terms of the transaction with Klinge Biopharma will be set forth in the Definitive Agreements, which we will include in a subsequent filing when such Definitive Agreements are executed.

On November 8, 2022, we filed a registration statement on Form S-3, which was declared effective on November 17, 2022 (the “Registration Statement”). Under the Registration Statement, we may offer and sell up to $150.0 million in the aggregate of our common stock, preferred stock, debt securities, warrants and units from time to time in one or more offerings. Also on November 8, 2022, we entered into a sales agreement (“Sales Agreement”) with Cowen and Company, LLC (“Cowen”) pursuant to which we may issue and sell from time to time up to $150.0 million of our common stock through or to Cowen as our sales agent or principal in an at-the-market offering (“ATM Offering”). Any shares of our common stock offered and sold in the ATM Offering are to be issued pursuant to the Registration Statement and the 424(b) prospectus supplement relating to the ATM Offering dated November 17, 2022. As of December 31, 2022, we sold 916,884 shares of common stock at a weighted-average price per share of $7.30 for gross proceeds of $6.7 million pursuant to the ATM Offering and received net proceeds of $6.5 million, net of $0.2 million of commissions and fees. In January 2023, we settled an additional 295,200 shares at a weighted-average price per share of $7.41 for gross proceeds of $2.2 million pursuant to the ATM Offering and received net proceeds of $2.1 million, net of $0.1 million of commissions and fees.

In January 2022, we entered into the Loan Agreement with the Collateral Agent and the Lenders that provides for a senior secured term loan facility of up to $300.0 million to be funded in four committed tranches: (i) a Tranche A Loan in an aggregate principal amount of $100.0 million (the “Tranche A Loan”) that was funded on January 5, 2022 (the “Tranche A Closing Date”); (ii) a Tranche B Loan in an aggregate principal amount of $100.0 million (the “Tranche B Loan”) that was funded on March 31, 2022; (iii) a Tranche C Loan in an aggregate principal amount of $50.0 million (the “Tranche C Loan”) that was not funded; and (iv) a Tranche D Loan in an aggregate principal amount of $50.0 million (the “Tranche D Loan” and, together with the Tranche A Loan, the Tranche B Loan, and the Tranche C Loan, the “2027 Term Loans”) that was funded on September 14, 2022. We have the right to request an uncommitted additional facility amount of up to $100.0 million that is subject to new terms and conditions.

The 2027 Term Loans mature on either (i) the fifth anniversary of the Tranche A Closing Date; or (ii) October 15, 2025, if the outstanding aggregate principal amount of our 2026 Convertible Notes is greater than $50.0 million on October 1, 2025. The outstanding tranches of the 2027 Term Loans accrue interest from inception through March 31, 2023 at 8.25% plus three-month LIBOR per annum with a LIBOR floor of 1.0%; and, starting April 1, 2023, accrue interest at 8.25% plus the sum (the “Adjusted Term SOFR”) of three-month SOFR and 0.26161% per annum, with a floor on Adjusted Term SOFR of 1.0%. The interest rate for the fourth quarter of 2022 was 12.00%. Interest is payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year. Repayment of outstanding principal of the 2027 Term Loans will be made in five equal quarterly payments of principal commencing March 31, 2026.

Products and Product Candidates

Our portfolio includes the following products and product candidates:

Oncology

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Together with Junshi Biosciences, in the third quarter of 2021 we completed the submission of the original BLA for toripalimab to the FDA seeking approval for the use of toripalimab in combination with gemcitabine and cisplatin for first-line treatment of adults with metastatic or recurrent locally advanced NPC, and for use as a monotherapy in the second- or later-line treatment of patients with recurrent unresectable or metastatic NPC that have progressed on or after a platinum-containing chemotherapy. The FDA issued a CRL for the original BLA for toripalimab requesting certain manufacturing process changes. On July 6, 2022, we announced that the FDA accepted the resubmission of the original BLA for toripalimab and announced that the FDA set a PDUFA action date for December 23, 2022. On December 24, 2022, we announced that we did not receive an action letter from the FDA by the PDUFA action date. The FDA previously communicated that an on-site inspection of Junshi Biosciences’ manufacturing facility for toripalimab is required before the FDA can approve the original BLA; however, they were unable to conduct the inspection by December 23, 2022 due to the impact of COVID-19 related restrictions on travel in China. The BLA for toripalimab remains under review, and we and Junshi Biosciences are engaged in ongoing discussions with the FDA about the pre-approval inspection plans. We plan to launch toripalimab in the United States in the third quarter of 2023, if approved by July 1, 2023. We believe there is potentially a high unmet need in NPC based on the current FDA-approved treatment alternatives and the lack of any approved immunotherapies.

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The FDA has granted Breakthrough Therapy designation to toripalimab for the treatment of patients with recurrent or metastatic NPC with disease progression on or after platinum-containing chemotherapy and for toripalimab in combination with chemotherapy (gemcitabine and cisplatin) for the first-line treatment of recurrent or metastatic NPC.

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A dose escalation, dose expansion clinical trial (clinicaltrials.gov identifier# NCT05061628) evaluating the safety, tolerability and pharmacokinetic properties of CHS-006 as monotherapy and in combination with PD-1 inhibitor toripalimab in patients with advanced solid tumors is ongoing in China. The FDA has allowed clinical trials for CHS-006 to proceed in the United States under an IND, and we plan to advance toripalimab in combination with CHS-006 in a clinical trial in North America in the second quarter of 2023.

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Immunology

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Ophthalmology

On August 2, 2022, the FDA approved CIMERLI as a biosimilar product interchangeable with Lucentis for the treatment of neovascular (wet) age-related macular degeneration, macular edema following retinal vein occlusion, diabetic macular edema, diabetic retinopathy, and myopic choroidal neovascularization. The FDA also granted CIMERLI 12 months of first interchangeable exclusivity. On October 3, 2022, we launched CIMERLI commercially in the United States in both 0.3 mg and 0.5 mg dosage forms.

Discontinued Product Candidates

In January 2020, we entered into a license agreement with Innovent for the development and commercialization of a biosimilar version of bevacizumab (Avastin) in any dosage form and presentations in the United States and Canada. On May 3, 2022, we provided notice of termination of the Innovent Agreement to Innovent to discontinue development of CHS-305, a bevacizumab (Avastin) biosimilar candidate, because regulatory approval of the licensed product could not be reasonably obtained within the agreed time period.

In October 2022, we discontinued development of our preclinical immuno-oncology program, CHS-3318, an antibody targeting CCR8.

License Agreement with Junshi Biosciences

On February 1, 2021, we entered into the Collaboration Agreement with Junshi Biosciences for the co-development and commercialization of toripalimab, Junshi Biosciences’ anti-PD-1 antibody in the United States and Canada.

Under the terms of the Collaboration Agreement, we paid $150.0 million upfront for exclusive rights to toripalimab in the United States and Canada, an option in these territories to Junshi Biosciences’ anti-TIGIT antibody CHS-006, an option in these territories to a next-generation engineered IL-2 cytokine, and certain negotiation rights to two undisclosed preclinical immuno-oncology drug candidates. We will have the right to conduct all commercial activities of toripalimab in the United States and Canada. We will be obligated to pay Junshi Biosciences a 20% royalty on net sales of toripalimab and up to an aggregate $380.0 million in one-time payments for the achievement of various regulatory and sales milestones.

In March 2022, we paid $35.0 million for the exercise of our option to license CHS-006. We and Junshi Biosciences are jointly developing CHS-006 with each party responsible for the associated development costs as set forth in the Collaboration Agreement. If we exercise our remaining option for the IL-2 cytokine, we will be obligated to pay an additional option exercise fee of $35.0 million. Additionally, for each exercised option, we will be obligated to pay Junshi Biosciences an 18% royalty on net sales, up to $85.0 million for the achievement of certain regulatory approvals, and up to $170.0 million for attainment of certain sales thresholds. Under the Collaboration Agreement, we retain the right to collaborate in the development of toripalimab and the other licensed compounds, including CHS-006, and will pay for a portion of these co-development activities up to a maximum of $25.0 million per licensed compound per year. Additionally, we are responsible for certain associated regulatory and technology transfer costs for toripalimab and other licensed compounds and will reimburse Junshi Biosciences for such costs.

We accounted for the licensing transaction as an asset acquisition under the relevant accounting rules. The $35.0 million payment for the option to license CHS-006 was reflected in our first quarter of 2022 financial statements. We recorded research and development expense of $145.0 million during the first quarter of 2021, related to an upfront payment for exclusive rights to toripalimab in the United States and Canada. We had entered into a Right of First Negotiation agreement with Junshi Biosciences and paid a fee of $5.0 million which was expensed as research and development expense in the fourth quarter of 2020. The Right of First Negotiation fee was fully credited against the total upfront license fee obligation under the Collaboration Agreement. As of December 31, 2022, we did not have any outstanding milestone or royalty payment obligations to Junshi Biosciences. The additional milestone payments, option fee for the IL-2 cytokine and royalties are contingent upon future events and, therefore, will be recorded if and when it becomes probable that a milestone will be achieved, or when an option fee or royalties are incurred.

In connection with the Collaboration Agreement, we entered into a Stock Purchase Agreement with Junshi Biosciences agreeing, subject to customary conditions, to acquire certain equity interests in us. Pursuant to the Stock Purchase Agreement, on April 16, 2021,

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we issued 2,491,988 unregistered shares of our common stock to Junshi Biosciences, at a price per share of $20.06, for an aggregate amount of approximately $50.0 million in cash. Under the terms of the Stock Purchase Agreement, Junshi Biosciences is not permitted to sell, transfer, make any short sale of, or grant any option for the sale of the common stock for the two year period following its effective date.

COVID-19 Update

As a result of the COVID-19 pandemic, we have experienced and may continue to experience disruptions that could severely impact our business, clinical trials and preclinical studies. See “Risk Factors – Risks Related to COVID-19.” These and other factors arising from the COVID-19 pandemic could result in us not being able to maintain UDENYCA’s market position or increase its penetration against all Neulasta’s dosage forms and could result in our inability to meet development or regulatory milestones for our product candidates, each of which would harm our business, financial condition, results of operations and growth. Although cases and deaths from the COVID-19 pandemic have generally declined in the United States in the past year, outbreaks of COVID-19 in China recently resulted in a protracted lockdown covering all of Shanghai where our partner Junshi Biosciences has its headquarters. The lingering impacts of recent outbreaks of COVID-19 in China may impact the timeline to manufacture toripalimab and the FDA has communicated to us the COVID-19 pandemic will impact the FDA’s ability to conduct foreign inspections of our partner’s manufacturing facilities in China. Until further outbreaks of COVID-19 are controlled, we expect it may continue to adversely impact our sales growth. In addition, the spread of more contagious and/or deadly variants could cause future outbreaks of COVID-19 and could result in the reinstatement of restrictive orders that could disrupt our business.

While the long-term economic impact and future outbreaks of  COVID-19  may be difficult to predict, the pandemic has resulted in, and future outbreaks may continue to cause, significant disruption of global financial markets, which could reduce our ability to access capital and could negatively affect our liquidity and the liquidity and stability of markets for our common stock and our convertible notes. In addition, a recession, market correction or depression resulting from the world’s ongoing recovery from  the COVID-19 pandemic could materially affect our business and the value of our notes and our common stock.

Financial Operations Overview

Revenue

Our first FDA-approved product, UDENYCA, was approved in November 2018, and we initiated United States sales of UDENYCA on January 3, 2019. In December 2021, the FDA-approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, pursuant to the terms of an agreement with Humira’s manufacturer, AbbVie. On August 2, 2022, the FDA approved CIMERLI, which we launched on October 3, 2022. Total net revenues were $211.0 million and $326.6 million in 2022 and 2021, respectively.

Cost of Goods Sold

Cost of goods sold consists primarily of third-party manufacturing, distribution, and certain overhead costs. During the third quarter of 2022, we recorded an inventory write-down of $26.0 million for inventory at risk of expiration, and in the year ended December 31, 2021 we recorded a net $5.1 million inventory write-off for inventory that did not meet acceptance criteria. Through March 31, 2021, a portion of the costs of producing UDENYCA sold was expensed as research and development before the FDA approval of UDENYCA and therefore is not reflected in cost of goods sold. All the inventory expensed prior to approval of UDENYCA was fully utilized by March 31, 2021; thus, the costs of producing UDENYCA are fully reflected in cost of goods sold beginning April 1, 2021. On May 2, 2019, we settled a trade secret action brought by Amgen. As a result, cost of goods sold reflects a mid-single digit royalty on net product revenue, which began July 1, 2019 and continues for five years from then. Additionally, we will share a percentage of gross profits on sales of Bioeq Licensed Products in the United States with Bioeq in the low to mid fifty percent range, and pursuant to the Genentech Agreement we incur a royalty that is a low single-digit percentage of net sales of CIMERLI that must be paid through the end of 2023.

Research and Development Expense

Research and development expense represents costs incurred to conduct research, such as the discovery and development of our product candidates. We recognize all research and development costs as they are incurred. We currently track research and development costs incurred on a product candidate basis only for external research and development expenses. Our external research and development expense consists primarily of:

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Internal costs are associated with activities performed by our research and development organization and generally benefit multiple programs. These costs are not separately allocated by product candidate. Unallocated, internal research and development costs consist primarily of:

The largest component of our total operating expense has historically been our investment in research and development activities, including the licensing and collaboration costs, clinical development and manufacturing process development of our product candidates.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time consuming. Furthermore, in the past, we have entered into collaborations with third parties to participate in the development and commercialization of our product candidates, and we may enter into additional collaborations in the future. In situations in which third parties have substantial influence over the development activities for product candidates, the estimated completion dates are not fully under our control. For example, our partners in licensed territories may exert considerable influence on the regulatory filing process globally. Therefore, we cannot forecast with any degree of certainty the duration and completion costs of these or other current or future clinical trials of our product candidates. We may never succeed in achieving regulatory approval for any of our pipeline product candidates. In addition, we may enter into other collaboration arrangements for our other product candidates, which could affect our development plans or capital requirements.

The following table summarizes our research and development expense incurred during the respective periods:

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Selling, General and Administrative Expense

Selling, general and administrative expense consists primarily of personnel costs, allocated facilities costs and other expense for outside professional services, including legal, insurance, human resources, outside marketing, advertising, audit and accounting services, as well as costs associated with establishing commercial capabilities in support of the commercialization of UDENYCA, CIMERLI, YUSIMRY and our product candidate, toripalimab. Personnel costs consist of salaries, benefits and stock-based compensation.

Interest Expense

Interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and debt issuance costs associated with our outstanding debt agreements.

Loss on Debt Extinguishment

Loss on debt extinguishment consists of losses incurred related to the early repayment of debt obligations.

Other Income (Expense), Net

Other income (expense), net consists primarily of interest earned on our cash, cash equivalents and investments in marketable securities, foreign exchange gains (losses) resulting from currency fluctuations, and gains (losses) from disposal of long-lived assets.

Results of Operations

Comparison of Years Ended December 31, 2022 and 2021

Revenue

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The decrease in net revenue was primarily due to a decrease in the number of UDENYCA units sold and a reduction in the average net selling price per unit resulting from competition and lower patient enrollment. Our net revenue and market penetration may continue to be adversely impacted by pricing trends and competitive dynamics in the overall pegfilgrastim market. In addition, the COVID-19 pandemic has negatively impacted the pre-filled syringe pegfilgrastim market due to preferences to administer medication at home. These negative factors were partially offset by our CIMERLI launch in October 2022 which contributed $6.9 million of net revenue in 2022.

We expect our net revenue to increase during 2023, as a result of CIMERLI’s launch in October 2022 and the planned launches in 2023 of toripalimab and YUSIMRY and additional presentations of UDENYCA.

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Cost of Goods Sold

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The increase in cost of goods sold primarily resulted from the $26.0 million write-down in the third quarter of 2022 of inventory at risk of expiration compared to the $5.1 million net write-off of inventory in 2021 for inventory that did not meet acceptance criteria, partially offset by decreases in the number of UDENYCA units sold, lower royalty costs by $3.0 million as well as the sale of $3.3 million of previously expensed UDENYCA batches that were required to be expensed as research and development prior to the FDA approval of UDENYCA and, therefore, was not reflected in the cost of goods sold in 2021.

We expect our gross margin to decrease during 2023 primarily driven by royalties paid for CIMERLI sales, sales of YUSIMRY in a very competitive market and continued declines in net realized prices of UDENYCA. This decrease is expected to be partially offset by the $26.0 million write-down of UDENYCA inventory at risk of expiration in 2022.

Research and Development Expense

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The decrease in research and development expense was primarily due to:

The decrease was partially offset by:

We expect our research and development expense in 2023 to be lower than in 2022, excluding potential milestone payments related to our product candidates, because of the reduced scope of the development plan for toripalimab in the United States based on changes approved by us and Junshi Biosciences.

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Selling, General and Administrative Expense

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The increase in selling, general and administrative expense was primarily due to the following:

We expect our selling, general and administrative expense in 2023 to be lower than in 2022 primarily as a result of decreased commercial costs.

Interest Expense

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The increase in interest expense in 2022 was primarily due to a higher average outstanding debt balance and interest rate increases in the United States in 2022, which has led to a higher weighted-average interest rate in 2022 as compared to 2021. In addition, the increase in interest expense was due to $3.9 million of interest expense related to the 2027 Term Loan discount and debt issuance costs that were allocated to unfunded tranches and subsequently amortized over the respective commitment periods for tranches, including $2.3 million allocated to Tranche B that was fully amortized in the first quarter of 2022.

Our 2027 Term Loans have a variable interest rate component that resets the first day of every quarter, and the total interest rate ranged from 9.25% in the first quarter of 2022 to 12.00% in the fourth quarter of 2022. The interest rate on the 2027 Term Loans increased to 13.03% for the first quarter of 2023. As a result of the higher interest rate and higher average outstanding debt balance, we expect higher interest expense in 2023.

Loss on Debt Extinguishment

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The $6.2 million loss on debt extinguishment recorded in 2022 resulted from voluntarily prepaying all amounts outstanding under the loan agreement between us and affiliates of Healthcare Royalty Partners dated as of January 7, 2019 (the “2025 Term Loan”) in January 2022.

Other Income (Expense), Net

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In 2022 other income (expense), net increased primarily as a result of interest income on our cash, cash equivalents and marketable securities. The interest rate in 2022 was higher than in 2021 due to several interest rate increases in the United States in 2022. The net expense in 2021 was due to the realized loss upon liquidating our investments in marketable securities.

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Liquidity and Capital Resources

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Certain relevant measures of our liquidity and capital resources are summarized as follows:

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[table omitted - see filing]