It's always great to see companies underpromise and overdeliver, but sometimes the message gets lost in translation.

Coherus BioSciences made a communication error when announcing third-quarter 2022 operating results. Management attempted to set the stage for "underpromise, overdeliver" next year by providing a revenue floor of $275 million. That would represent year-over-year growth of about 30%.

However, the guidance spooked Wall Street analysts. They're expecting $463 million in full-year 2023 revenue, based on the average of eight analyst estimates. The revenue floor is significantly less than that figure and it doesn't quite add up across the portfolio. A back of the envelope calculation (not actual Solt DB Invest modeling, which is provided in the "Forecast & Modeling" section below):

• Udenyca should generate about $200 million in 2022 sales. Let's assume it implodes and delivers only $100 million in 2023 revenue.
• Cimerli is expected to generate over $100 million in 2023 revenue.
• Yusimry could generate $100 million in 2023 revenue with just a 2% market share.
• This assumes toripalimab and Udenyca OBI contribute no revenue in 2023.
• The above adds up to $300 million in revenue next year.

Instead of calmly doing the math or having confidence in their own forecasts, Wall Street analysts appear to have interpreted the revenue floor literally. It also was unnecessary for Coherus BioSciences to provide this figure in November 2022 (or at all). A tactical misstep.

Nonetheless, the communication error hands Coherus BioSciences the third-highest margin of safety in the Solt DB Invest coverage ecosystem as of market close on November 9, 2022.

By the Numbers

Coherus BioSciences is getting crushed in the pegfilgrastim market. The bad news is that put downward pressure on the business, as Udenyca was the only source of revenue through the first nine months of 2022. The good news is Cimerli launched in early October and can provide some relief going forward.

But let's stick with the bad news briefly.

The pegfilgrastim market is split roughly in half, with 54% of the market volume by prescriptions going to prefilled syringes (PFS) and the remaining 46% going to on-body injector (OBI) formulations. Neulasta Onpro from Amgen is the only OBI formulation available, so biosimilars can only compete for PFS market share.

Udenyca held the leading market share among PFS products since the end of 2019, but it recently ceded the lead to Ziextenzo from Sandoz (a subsidiary of Novartis). This is seen in Amgen's 2022 Biosimilar Trends Report with data compiled through the second quarter of 2022. Keep in mind the trend worsened in the third quarter.

(I recently spoke with executives at Amgen about the biosimilars market and will write an article soon.)

The changing of the guard occurred due to Coherus BioSciences sticking to its long-term strategy for the pegfilgrastim market. Udenyca has recently been priced higher than the reference product, Neulasta PFS, which has cost the brand prescription volume. The company thinks it can reignite growth for Udenyca PFS once Udenyca OBI launches, so maintaining pricing discipline now could help generate more revenue in the long run. That's been challenged by Ziextenzo's ruthless price drops. It launched at a steeper discount to Neulasta PFS and has seen the sharpest total price drops since launch.

The risk of course is that Udenyca OBI encounters delays to the launch timeline, which would make the strategy all for naught. The situation is further complicated by the fact Nyvepria from Pfizer is stuck at 3% market share. If Pfizer simply leaves the pegfilgrastim market (more likely than not), then another 3% market share opens up and could lead to higher average selling prices. Welcome to biosimilars.

The long-term strategy for Udenyca negatively impacted third-quarter 2022 operating results.

• Coherus BioSciences reported $45.4 million in revenue, or $10 million below Solt DB Invest forecasts. Second-half 2022 revenue is now expected to be $30 million lower than prior forecasts.
• The business took a $26 million charge to write off inventory at risk of expiration, up from $5.2 million in the year-ago period. These expenses are recorded as cost of revenue, which explains why gross margin fell from over 80% in recent quarters to just 22.4% in the third quarter.

‍*Operating expenses and Operating income exclude payments to Junshi Bioscience for a better apples-to-apples comparison of core operations. Data Source: SEC filings.

Coherus BioSciences ended September 2022 with $286.8 million in cash and $150 million available through credit facilities, so the cash runway and dilution aren't concerns.

A discussion of updated Solt DB Invest forecasts for full-year 2023 revenue – and why the margin of safety range remains unchanged – is included below.

Development, Regulatory, and Commercial Updates

There was a lot of action in the portfolio in recent months.

• Cimerli launch: The launch of Cimerli in October 2022 made Coherus BioSciences a multi-product company, which will make Udenyca PFS revenue a little less meaningful in 2023. There are only three products in the ranibizumab market (two biosimilars and the reference product Lucentis) and Cimerli will be the only interchangeable product until at least August 2023. Management expects at least $100 million in 2023 revenue from this product alone – over $50 million higher than my previous forecast.
• Toripalimab regulatory delay: The Chinese manufacturing site used in the biologics license application (BLA) for toripalimab still hasn't been inspected by FDA officials due to COVID-19 travel restrictions. This is likely to delay the approval decision beyond December 23, 2022. It was originally expected to be approved in April 2022. Keep in mind manufacturing will immediately move to the United States upon approval.
• Preclinical no-go: Scientists decided not to continue development of the CHS-3318 program. The antibody asset targeted CCR8 and represented a potentially important combination with toripalimab. The company intends to explore external licensing opportunities for an anti-CCR8 asset.
• Udenyca OBI launch expectation: Management expects to launch a new pegfilgrastim formulation in 2023. It has stuck to strategic secrecy around FDA approval decision dates, launch dates, and revenue expectations. As previously communicated, I expect the launch to be delayed and don't forecast revenue until 2025.
• Profits return: Management expects to return to profitability on an operating income basis in 2024. It would need to generate at least $550 million in revenue to achieve this goal.

Forecast & Modeling

A competitive pegfilgrastim market has lowered revenue forecasts for 2022 and 2023, although the difference is offset by stronger than expected revenue growth from Cimerli.

Solt DB Invest now forecasts:

• Full-year 2022 revenue of $220 million, down from $255 million. Udenyca contributes $30 million less and Cimerli contributes $5 million less. The latter is due to a later launch (October vs August) than previously expected, which was due to forecasting imprecision not a delay from the company.
• Full-year 2023 revenue of $355 million, down from $365 million. Udenyca contributes $60 million less and Cimerli contributes $50 million more. Expectations for Yusimry ($100 million), toripalimab ($15 million), and Udenyca OBI ($0) remain unchanged.
• The largest sources for a positive surprise are Yusimry and Udenyca OBI.
• My Yusimry model assumes 2% market share of a $10 billion average market opportunity, but only for the six-month period the product will be available in 2023. It could easily be 4%, which adds another $100 million in revenue to next year's total. The uncertainty is mostly upside for this product through 2024.
• If Udenyca OBI somehow manages to launch next year, then it could generate $200 million in revenue over the first 12 months on the market. Not to be confused with contributing $200 million in revenue during the 2023 calendar year.

The number of moving parts makes forecasts for 2024 and 2025 more challenging, but Solt DB Invest expects full-year 2025 revenue of at least $775 million.

Margin of Safety & Allocation

(No change.)

Coherus BioSciences is considered a Growth (Speculative) position. The current margin of safety range for the company is below:

• Current Price (market close November 9):  $7.01 per share
• Likely Undervalued:          <$10.81 per share
• Midpoint:                            $13.45 per share
• Likely Overvalued:            >$16.09 per share
• Allocation Range:              Up to 7.5%

Coherus BioSciences reported 77.78 million shares outstanding as of October 31, 2022. The margin of safety range above doesn't include dilution and assumes 77.78 million shares outstanding.

The margin of safety range remains unchanged. The forecasts were and still are conservative, which leaves room for uncertainty in the form of regulatory delays (such as for toripalimab) and commercial hiccups (such as for Udenyca PFS).

As a back of the envelope calculation to determine fair valuation (roughly where the midpoint price should be), investors can assume biosimilar revenue contributes 3x the valuation and immuno-oncology revenue from toripalimab contributes 5x the valuation.

Based on Solt DB Invest revenue forecasts for 2023, a fair valuation for Coherus BioSciences is roughly $1.1 billion ($340 million*3 + $15 million*5). That's almost exactly where the midpoint sits.

Further Reading

• November 2022 press release for third-quarter 2022 operating results
• November 2022 SEC filing (10-Q) for third-quarter 2022 operating results
• August 2022 company update discussing approval of Cimerli
• August 2022 company update discussing strategic secrecy surrounding Udenyca OBI

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