Coherus: Biosimilar Specialist With Approval Shot For Cancer Drug (NASDAQ:CHRS)

Investment Overview

Redwood City, California based biotech Coherus BioSciences (NASDAQ:CHRS) ought to be an interesting stock to keep an eye on through 2023 and for the next several years.

Coherus has a market cap valuation of $633m at the time of writing, yet the company – according to a presentation delivered at this year’s JP Morgan Healthcare conference – is guiding for revenues of “$1.2bn or greater” by 2026.

Presently, Coherus earns all of its revenues from a single source – UDENCYA – a biosimilar version of the large Pharma Amgen’s >$1.5bn per annum selling Neulasta.

Neulasta is PEGylated form of the recombinant human granulocyte colony-stimulating factor analog filgrastim, which is used to help reduce the chance of infection due to a low white blood cell count in people with certain types of non-myeloid cancer who are receiving chemotherapy.

Biosimilars are versions of already existing drugs that have lost patent protection, that are not identical in chemical composition to the existing drug, but similar enough to achieve the same therapeutic and clinical result.

Unlike generic drugs, which are chemically identical to the original drug, but can only work as substitutes for synthetic drugs i.e. those made using chemical processes, biosimilars can reproduce the effect of so-called “biologics” drugs, made from living organisms like yeast, bacteria, or animal or plant cells.

Biologics drugs are newer to the market – and significantly more expensive – than synthetic / chemical drugs, but first generation biosimilars are now beginning to lose their patent protection, opening up the biosimilars market.

Across the first 9 months of 2021, Coherus earned $253m of revenues from UDENCYA, but across the same period in 2022, that figure fell to $165.7m, which management explains (in Coherus’ Q3’22 10Q submission) is down 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.

As we can see above, however, Coherus has been busy lining up new products to offset the declines in UDENCYA revenues and help Coherus grow.

It’s pretty clear that, if Coherus were to successfully commercialize each of these products and achieve annual revenue figures >$1bn per annum, provided the company is also profitable, or following a clear path to profitability, it ought to achieve a market cap valuation at least double what it is today.

Losses are an issue at Coherus – the company reported a net loss of $233m for the year as of Q3’22, and $241m across the same period in 2021 – but its R&D spending is the main culprit, being $312m in 2021 to Q3’22, and $170m across the same period in 2022.

The company has a strong current cash position of $448m, although current liabilities were $171m as of Q3’22 and term loans and convertible notes totaled ~$470m.

In short, and as shown above, Coherus – its shares currently trading at a 36% discount to their 2014 IPO launch price of $13.5 – is not just looking to offset falling sales of UDENCYA, but to create triple-digit-million dollar selling franchises in 3 separate fields – Ophthalmology, Oncology, and Inflammatory Disease – and not just through biosimilar drugs, but in Oncology, with an immunology drug which is already approved for multiple indications in China.

To assess the likelihood of Coherus succeeding, and delivering strong gains for shareholders over a ~3-year period, let’s begin by looking at the oncology division and the likelihood of anti-PD-1 antibody toripalimab being granted approval in the US.

Toripalimab – Can Coherus Succeed Where Eli Lilly Failed By Bringing A China Approved PD-1 Inhibitor To US Market?

Immune checkpoint inhibitors (“ICI”) interfere with the mechanisms that cancer cells use to try to evade detection and destruction by the body’s natural immune system i.e. T-cells.

The most commonly targeted “checkpoints” – which prevent T-cells from doing their work – are Programmed Death 1 and Programmed Death Ligand 1 (“PD-1” and “PD-L1”) and the most renowned examples of these are Merck’s (MRK) Keytruda, and Bristol Myers Squibb’s (BMY) Opdivo, which made sales of ~$17bn, and ~$8bn respectively in FY21.

These drugs have revolutionized cancer therapy and improved survival rates in a wide range of solid tumor cancers, and it is therefore not a surprise that every pharmaceutical company dreams of developing its own, equally effective ICI.

Last year, the Pharma giant Eli Lilly (LLY) and its China based partner Innovent Biologics attempted to secure approval for its China developed PD-1 inhibitor Sintilimab in Non-small Cell Lung Cancer (“NSCLC”).

Despite the drug already being approved in China, an FDA advisory committee voted 14-1 that additional studies would be required, and the FDA issued a Complete Response Letter (“CRL”) outlining the reasons why it would not approve the Sintilimab, despite its demonstrating extended Progression Free Survival (“PFS”) in a pivotal study in China, without further studies being completed.

Coherus would like to do something similar with Toripalimab, a drug it is attempting to bring to the US market in partnership with Junshi Biosciences, who market and sell the drug as Tuoyi in China, across multiple cancer indications. According to its Q3’22 10Q submission:

The original BLA for toripalimab seeks FDA approval for the use of toripalimab in combination with gemcitabine and cisplatin for first-line treatment of adults with metastatic or recurrent locally advanced nasopharyngeal carcinoma (“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.

This BLA was rejected back in April last year with the FDA “requesting certain manufacturing process changes” that Coherus and Junshi Biosciences believed were “readily addressable”. The FDA subsequently accepted a revised BLA and set a target action date of December 23rd, 2022, but was forced to postpone that date by 3 months, since it has been unable to complete an investigation of Junshi’s facilities due to COVID restrictions in China.

Meanwhile, a few days ago Junshi announced that Toripalimab had “met the main goal of event-free survival (“EFS”)” in a phase 3 trial in patients with NSCLC in China.

With the drug consistently meeting endpoints in pivotal studies – including achieving a median PFS of 11.7 months in NPC in combo with chemo, versus 8 months with chemo alone – it certainly seems as though, provided the FDA can complete its factory inspection, Toripalimab has a decent chance of securing an approval in the US in March.

Admittedly, that would be in an indication that offers a peak sales opportunity of ~$100 – $200m, based on ~2k treated NPC patients and ~1.2k first and second line patients, but nevertheless, Coherus would be achieving something no other Pharma has if it successfully persuades the FDA to grant an approval based on China based study data. Should Toripalimab perform well in a real-life setting, it could open the door for multiple label expansion opportunities.

Coherus has ambitious plans for Toripalimab, a drug which it believes presents numerous advantages versus currently US approved ICI’s, including signs of efficacy alongside a type of ICI that targets TIGIT, an immune receptor present on some T cells and natural killer (“NK”) cells that is a popular, albeit elusive target for many biotechs and pharmas. A Phase 1/2 study of Toripalimab + TIGIT has already been initiated in the US, with data expected in 2024.

To summarize this opportunity, I would still probably class it as “high risk”, for several reasons – the FDA may not be able to complete its inspection by March, it may maintain its stance against approving drugs based on overseas studies, and it may insist on more study data.

Nevertheless, an approval may singlehandedly offset lost UDENCYA revenues, and over time, Toripalimab could even enter markets such as NSCLC where its ability to generate revenue ought to improve exponentially.

Ophthalmology – Coherus’ Drugs Cover All Of The Blockbuster Drug Bases

On January 9th Coherus announced that it had signed a deal with Klinge Biopharma for the exclusive commercialization rights to Klinge’s candidate FYB203, a biosimilar candidate to Eylea, the eye-disease mega-blockbuster that earned $6.3bn for New York based Pharma Regeneron (REGN) last year.

In August last year Coherus was able to win approval for CIMERLI, its biosimilar version of Roche (OTCQX:RHHBY) and Novartis’s (NVS) blockbuster selling Lucentis (ranibizumab), for the treatment of neovascular (“wet”) age-related macular degeneration (“AMD”), macular edema following retinal vein occlusion, diabetic macular edema, diabetic retinopathy, and myopic choroidal neovascularization.

Importantly, CIMERLI also comes with an “interchangeability” tag, meaning the drug can be substituted for Lucentis at the pharmacy counter in many states, which gives it an edge over another approved Lucentis biosimilar developed by Biogen (BIIB) and Samsung Bioepis, Byooviz. Coherus expects CIMERLI to drive >$100m sales in 2023.

With CIMERLI potentially able over time to challenge Avastin, often prescribed off-label to treat certain eye diseases, and the new Eylea biosimilar – for which it expects to file a Biologics License Application (“BLA’) this year, with a view to a launch in 2025 – Coherus may be able to contend for all 7.2m annual units of Avastin, Lucentis, Eylea, and Vabysmo sold each year in the eye disease market.

Of course, Coherus’ biosimilars will never match the multi-billion dollar per annum sales of the original drugs, but it seems as though Coherus, having invested heavily in this field, expects a significant chunk of its $1.2bn target revenue generation by 2026 to come from this source – likely >$500m.

Jumping On The Humira Biosimilar Bandwagon

As most people with a working knowledge of the biosimilar markets likely knows, 2023 is the year that AbbVie’s (ABBV) all-time best-selling drug Humira – indicated for a range of autoimmune and inflammatory conditions – loses its patent protection.

Humira has been a ~$20bn per annum selling drug for many years, but finally, the door is open for biosimilars to compete in its markets, and as might be expected, there is a large field of biosimilars waiting to launch in the second half of 2023, including versions developed by Pfizer (PFE), Boehringer Ingelheim, Organon (OGN), Biocon, and Sandoz, whilst Amgen’s (AMGN) Amjevita is permitted to launch in January.

Coherus expects to launch its candidate YUSIMRY – which has been approved since 2021 – in Q3’23, although its likely peak sales are uncertain. AbbVie says that Humira continues to be covered for 90% of insured lives across all of its indications – from Psoriasis to Crohn’s Disease – and the Pharma will drop its price point to directly compete against generics. That being the case, and with at least 7 other biosimilars to choose from, it is difficult to say how many physicians will end up prescribing YUSIMRY.

Nevertheless, a 1% share of Humira’s revenues would hand Coherus a blockbuster (>$1bn per annum) selling product and likely help the company to easily exceed its forecast for $1.2bn of revenues by 2026.

I would be more conservative since price points will drop significantly from the days when Humira had the markets to itself, and today, there are drugs on the market across all of Humira’s indications with an arguably superior efficacy and safety profile – most notably AbbVie’s Skyrizi and Rinvoq, which the Pharma believes will one day drive combined sales higher than Humira. $200m of revenues would be a decent return.

Conclusion – So Many Catalysts, So Little Time – Coherus Stock Looks Undervalued To Me, Although The Risk Of Losses Is Also High

To summarize all of the above as briefly as possible.

Coherus in 2023 is a company that can no longer depend on revenues from UDENCYA to support it business going forward, since sales are falling in the face of heightened competition and the drug is unlikely to generate $150m of revenues this year.

In Toripalimab Coherus has a drug with a seemingly good chance of being approved in March, provided the FDA can complete an investigation of partner Junshi’s factory in time.

An approval in NPC ought to lead to a $100 – $200m revenue opportunity, which provides Coherus shareholders with an attractive near-term upside catalyst.

Longer term, if the drug wins approvals in other indications, Toripalimab may even have blockbuster potential, but of course the risk that the FDA does not approve it is high, so the upside opportunity here may be no better than 50/50, and investors could end up with heavy losses if the FDA declines the approval of Toripalimab in March.

Given that Coherus is likely to keep investing heavily in R&D, the company needs more approvals and sources of revenues to cover the risk of Toripalimab not making it to market, and this is where the Ophthalmology division comes in.

With biosimilars for Lucentis and, if approved, Eylea, Coherus can establish itself as a major player in markets that management believes exceed $12bn in value, and a best case scenario could see this division achieve blockbuster sales, although $500m per annum is more realistic.

Having a Humira biosimilar is another potential source of triple-digit million dollar sales, and as such, in a moderately optimistic scenario, it is possible to see how management can come close to generating $1bn of revenues per annum, even if $1.2bn by 2026 strikes me as over-optimistic.

In my view, provided Coherus meets its debt obligations and keeps R&D spending consistent at <$300m per annum, say, then even $600m sales by 2026 would likely drive a 100% uplift in the company’s valuation at least, given a price to sales ratio of only 2x is a very attractive ratio – companies usually trade at a higher multiple. If blockbuster sales are achieved, Coherus stock ought to end up trading substantially above its all-time high of $22.5, achieved in February 2020.

The good thing is that with so many approval shots and revenue targets in play, Coherus shareholders have multiple opportunities to see their holding increase in value by as much as 2.5x over time, whilst one or two failures ought not derail the underlying business plan, with the diversity of the commercialized product portfolio and pipeline offering downside protection.

As such, I’ll be watching Coherus’ progress closely in 2023, and my conclusion would be that the company deserves a “BUY” recommendation.