Description

Business Description: Based in California, Coherus Biosciences (CHRS) develops and sells biosimilars (which are essentially generic versions of reference/originator biologic drugs).  Biologics are drugs made from biological sources (cells, tissues, sugars, etc.). CHRS’s product portfolio consists on one approved oncology biosimilar (Udenyca, a biosimilar to Neulasta which had ~$4B in US sales in 2018) and an announced pipeline of four biosimilar assets (two immunology biosimilars with ~$30B in combined sales, both of which have completed phase 3, and two ophthalmology biosimilar assets that are still pre-clinical).

Investment Thesis: While the market is skeptical of biosimilars in general, particularly given the complex, multi-payer US healthcare system, we believe that CHRS is an attractive long because it will take a large chunk of the Neulasta market and then be able to build off that momentum to monetize its pipeline of biosimilar assets, both through partnerships abroad and its direct sales in the US (with little additional investment given the salesforce was just built out to introduce the Neulasta biosimilar).  Our base case assumption is that Udenyca can justify the entire current market cap, which means you get the pipeline for free.  If our bull case hits, the single approved asset (Udenyca) is worth 2x the current market cap on its own.

Valuation: We value CHRS as a sum of 3 parts: Udenyca (Neulasta biosimilar), Announced Pipeline (Humira and Enbrel biosimilars and the two ophthalmology assets), and the White Space (assuming some level of success in future biosimilars).

-          The Neulasta Opportunity in the US: We expect only 3 players (Amgen (the originator), MYL and CHRS, having entered in that order) for the majority of 2019, and a fourth player (Sandoz) entering late 2019/early 2020.  Conservatively, assuming equal unit share (we use the Neupogen market as an analogue where 2 biosimilars have been competing for ~3 years and the unit share is roughly 1/3 for each player…note a fourth biosimilar from PFE just launched in Oct 2018 but it is too early to see any share shift), 25% unit share would be $1B of originator sales.  Discount this by ~40% to account for the lower price of a biosimilar as well as potential price cutting by the originator, and we could still end up with $600mm in sales. 

Bears argue that 60% of the Neulasta market is not addressable as Amgen has shifted this portion to use OnPro (an on-body delivery device as opposed to the original intravenous infusion).  Even if we cede that assumption and discount the market by another 60%, that still leaves $240mm in sales as our base case.  That said, we believe that CHRS will be able to take more than an equal share and that OnPro can be overcome by discounting/CHRS’s experienced oncology salesforce, so we can see revenues for Udenyca of nearly $600mm in our bull case.  Using the heuristic that a drug is worth 3x-5x peak sales, Udenyca is worth $720mm-$1.2B on our conservative base case numbers.

-          Announced Pipeline: We think that a successful launch in the Neulasta market will be the starting point for CHRS to monetize its two advanced pipeline biosimilar assets (biosimilars for Humira and Enbrel).  With ~$30B in combined sales between Humira (US patent protection until 2023) and Enbrel (US patent situation is unclear, possibly protected until 2029 but Sandoz is currently suing AMGN to invalidate the patents which would allow a much earlier US lunch).  It is difficult to put an exact value on these assets, but you only need to believe that CHRS will take 3% share at a 75% discount to current pricing to arrive at $225mm in additional sales.  If CHRS is able to leverage the same salesforce to sell these immunology products, this would flow through at an extremely high incremental margin, close to our assumed 80%+ gross margins. The two ophthalmology assets are not even in Phase I clinical trials, so we don’t assign much value to them.  Using the same 3x-5x sales, the pipeline would be worth another $675 – $1.125B in the future.  Even discounting this to today at a high discount rate to account for the risk, there could be a few hundred million dollars of value here.

-          “White Space”:  There are another 30+ blockbuster biologics with >$75B in revenue that are likely to come off patent in the next decade.  We are giving CHRS credit for the platform they have built, with both scientific expertise to be able to successfully create 3 strong biosimilar assets and the knowledge of navigating the FDA approval process.  We believe this will put them in a position to replicate this success as future biologics come off patent.  You only need to believe that CHRS can take 0.5% market share of this untapped universe (at similar levels of discounting and biosimilar uptake as we assume in Neulasta and the announced pipeline) to get to north of $100mm in future sales (remember, when discounted back 7-10 years this becomes less relevant, but still worth noting).  Admittedly this is probably the most aggressive assumption we make (ie giving CHRS credit for assets they haven’t even started to work on) but we believe they are more likely to be successful in this market than most and wanted to reflect that.

-          Other Value Drivers:

o   Expensed Inventory: CHRS has disclosed they have ~300k units of Udenyca (Neulasta biosimilar).  Almost 100% of this was produced before approval and was expensed as a result).  Even if you assume a 50% discount (although we believe current discount to branded Neulasta ASP is closer to 30%), this would be about $2,000/unit, or $600mm market value of inventory of an approved product.  Since this was expensed, this will flow through at a 100% gross margin (rather than the more normal 80-90% gross margins we would otherwise model).

o   Deferred tax asset: Listed at $237mm in the most recent 10-K, but fully netted off by an equal valuation allowance (“Due to the Company’s history of losses, and lack of other positive evidence, the Company has determined that it is more likely than not that its net deferred tax assets will not be realized, and therefore, the net deferred tax assets are fully offset by a valuation allowance at December 31, 2018 and 2017”) If CHRS is as successful as we think they will be, we believe this to be too conservative.

o   Sales Organization: CHRS recently hired about 70 sales reps to be sure they would have a successful Udenyca launch in Jan 2019.  Theoretically any other company could do the same (and pharma salespeople are notorious mercenaries so it’s possible a competitor could hire away part of the CHRS salesforce if momentum slows), but the more successful the launch of Udenyca is, the more valuable the sales organization becomes.  The entrenched relationships with oncology clinics and hospitals, connectivity with the GPOs (Group Purchasing Organizations) and IDNs (Integrated Delivery Networks), and relationships with the payers make the salesforce more valuable as a whole than it would be in parts.  We think this could be attractive for a potential acquirer, particularly one with a biosimilar portfolio that lacks a Neulasta asset.

Variant Perception:

-          Biosimilar uptake will be faster in oncology than Rheumatology:  We believe that investors are missing that share shift should be much faster in oncology (based on calls with doctors and hospitals) because it is acute rather than chronic care (ie we don’t need to have patients switch drugs, just to have new patients use the biosimilar, a much lower bar).  Consensus 2019 sales are $85mm. We think that this is too conservative and that weakness in the Remicade biosimilar market is being extrapolated in the Neulasta market.  This consensus sales implies only 3% unit share (assuming a 30% discount to ASP this year…so $4B*3%*70% =85mm) and we are already seeing about high single digit % unit share shift to biosimilars and CHRS gaining share faster than MYL despite MYL’s 6 month head start.

-          CHRS CEO/Sales force are former Amgen: We believe the street is skeptical of CHRS’s ability to take share as the second biosimilar to market (there has been a strong first mover advantage in other biosimilars, but Amgen was only 6 months behind Mylan’s lackluster launch in July 2018).  We believe the CEO fully understands the market and can replicate AMGN’s success at CHRS based on his experience actually working at AMGN. On top of that at least a dozen members of the CHRS salesforce are former AMGN employees (per LinkedIn) including at least 4 people who are “Oncology Account Managers” (ie field salespeople).  .

-          CHRS is focused on biosimilars; it’s not a side business.  We believe this will drive them to be more aggressive than players like AMGN who have both a biosimilars business and a novel drug business that is under assault by biosimilars).  We have already heard that they have been more aggressive in their contracting than Mylan (the first Neulasta biosimilar maker) and expect this to result in broader payer coverage and physician use.

Risks:

-          OnPro limits uptake: Amgen has been aggressively shifting the market from the original Neulasta delivered via intravenous infusion (IV) to the on-body device (OnPro) that automatically injects after 24 hours (note you need to wait 24 hours to receive the drug post-chemo, so the auto-injector saves the patient a trip back to the hospital).  Currently ~60% of Neulasta sales are delivered via OnPro.  The shift to OnPro was driven by financial incentives as Amgen realized biosimilars were coming in the IV market. We are under the impression that payers are not willing to pay for convenience and that the economics of the biosimilar discounts (financial incentives again, this time against AMGN) mean that the entire ~$4B TAM is addressable.  If we are wrong, the TAM would shrink to the ~$1.6B of Neulasta intravenous sales.

-          Aggressive discounting by originator:  We believe that AMGN does not want to compete aggressively on price as CHRS would have no choice but to undercut, which would shrink the market faster than necessary.  We think Amgen is particularly sensitive to this as it has 2 major products dealing with biosimilar competition: Neulasta (20% of sales), and Epogen (5% of sales). Additionally, Enbrel (22% of sales) could face potential US biosimilar competition depending on an ongoing patent infringement case with Sandoz.  We believe AMGN wants to keep competition as rational as possible so as not to sabotage 2 of their major products and have investor fear about their largest product creep further into the stock price.  Also, we note that in Neupogen (basically Neulasta 1.0), there are now 3 US biosimilars and Amgen has not cut price at all (see exhibit #1)  If we are wrong, and they are willing to cut price aggressively, our assumed TAM will be too large and our revenue numbers will be overly optimistic. That said, the risk is that we are wrong because Amgen was willing to not compete on price in Neupogen because they were moving the market to Neulasta (basically Neupogen 2.0).  Now they have moved the market to OnPro but if that fails to hold up, they may have no choice but to cut price.

-          More aggressive competition among biosimilar competitors:  We are baking in 40% discounts in our base case, which is right in-line with where Neupogen biosimilars are pricing after 3 years on the market.  Discounts on recent biosimilar launches in Europe on products like Humira have been north of 50% in many markets.  We believe that the US market dynamics are completely different, which is why the analogue to Neupogen is more appropriate than recent European launches.  Mylan has not been particularly aggressive on price, but if Sandoz enters the market in late 2019/early 2020 at a 40%+ discount to Neulasta ASP, our TAM and consequently our revenue numbers will be too high.

-          More players than expected: We said we expect 4 players in the US Neulasta market (AMGN, MYL, CHRS, NOVN SW (Sandoz), in that order).  A potential fifth player, a private company named Apotex in Canada applied for FDA approval in 2014, but has not been approved.    What is concerning is that they received approval for their Neulasta biosimilar in Canada and Europe in mid- 2018.  It’s difficult to know where they stand as they are private and do not disclose this, but we have gotten comfortable with this risk as we have gathered from other players in the industry that Apotex is not in the picture, at least in the near term.  If we are wrong, this would likely lead to increased competition.   

Exhibit 1: Neupogen pricing, no discounting by the originator to compete

Source: CMS

Disclosure:

We and our affiliates are long Coherus Biosciences (CHRS) and may buy additional shares or sell some or all of our securities, at any time. We have no obligation to inform anybody of any changes in our views of CHRS. This is not a recommendation to buy or sell securities. Our research should not be taken for certainty. Please conduct your own research and reach your own conclusion.

Business Description: Based in California, Coherus Biosciences (CHRS) develops and sells biosimilars (which are essentially generic versions of reference/originator biologic drugs).  Biologics are drugs made from biological sources (cells, tissues, sugars, etc.). CHRS’s product portfolio consists on one approved oncology biosimilar (Udenyca, a biosimilar to Neulasta which had ~$4B in US sales in 2018) and an announced pipeline of four biosimilar assets (two immunology biosimilars with ~$30B in combined sales, both of which have completed phase 3, and two ophthalmology biosimilar assets that are still pre-clinical).

Investment Thesis: While the market is skeptical of biosimilars in general, particularly given the complex, multi-payer US healthcare system, we believe that CHRS is an attractive long because it will take a large chunk of the Neulasta market and then be able to build off that momentum to monetize its pipeline of biosimilar assets, both through partnerships abroad and its direct sales in the US (with little additional investment given the salesforce was just built out to introduce the Neulasta biosimilar).  Our base case assumption is that Udenyca can justify the entire current market cap, which means you get the pipeline for free.  If our bull case hits, the single approved asset (Udenyca) is worth 2x the current market cap on its own.

Valuation: We value CHRS as a sum of 3 parts: Udenyca (Neulasta biosimilar), Announced Pipeline (Humira and Enbrel biosimilars and the two ophthalmology assets), and the White Space (assuming some level of success in future biosimilars).

-          The Neulasta Opportunity in the US: We expect only 3 players (Amgen (the originator), MYL and CHRS, having entered in that order) for the majority of 2019, and a fourth player (Sandoz) entering late 2019/early 2020.  Conservatively, assuming equal unit share (we use the Neupogen market as an analogue where 2 biosimilars have been competing for ~3 years and the unit share is roughly 1/3 for each player…note a fourth biosimilar from PFE just launched in Oct 2018 but it is too early to see any share shift), 25% unit share would be $1B of originator sales.  Discount this by ~40% to account for the lower price of a biosimilar as well as potential price cutting by the originator, and we could still end up with $600mm in sales. 

Bears argue that 60% of the Neulasta market is not addressable as Amgen has shifted this portion to use OnPro (an on-body delivery device as opposed to the original intravenous infusion).  Even if we cede that assumption and discount the market by another 60%, that still leaves $240mm in sales as our base case.  That said, we believe that CHRS will be able to take more than an equal share and that OnPro can be overcome by discounting/CHRS’s experienced oncology salesforce, so we can see revenues for Udenyca of nearly $600mm in our bull case.  Using the heuristic that a drug is worth 3x-5x peak sales, Udenyca is worth $720mm-$1.2B on our conservative base case numbers.

-          Announced Pipeline: We think that a successful launch in the Neulasta market will be the starting point for CHRS to monetize its two advanced pipeline biosimilar assets (biosimilars for Humira and Enbrel).  With ~$30B in combined sales between Humira (US patent protection until 2023) and Enbrel (US patent situation is unclear, possibly protected until 2029 but Sandoz is currently suing AMGN to invalidate the patents which would allow a much earlier US lunch).  It is difficult to put an exact value on these assets, but you only need to believe that CHRS will take 3% share at a 75% discount to current pricing to arrive at $225mm in additional sales.  If CHRS is able to leverage the same salesforce to sell these immunology products, this would flow through at an extremely high incremental margin, close to our assumed 80%+ gross margins. The two ophthalmology assets are not even in Phase I clinical trials, so we don’t assign much value to them.  Using the same 3x-5x sales, the pipeline would be worth another $675 – $1.125B in the future.  Even discounting this to today at a high discount rate to account for the risk, there could be a few hundred million dollars of value here.

-          “White Space”:  There are another 30+ blockbuster biologics with >$75B in revenue that are likely to come off patent in the next decade.  We are giving CHRS credit for the platform they have built, with both scientific expertise to be able to successfully create 3 strong biosimilar assets and the knowledge of navigating the FDA approval process.  We believe this will put them in a position to replicate this success as future biologics come off patent.  You only need to believe that CHRS can take 0.5% market share of this untapped universe (at similar levels of discounting and biosimilar uptake as we assume in Neulasta and the announced pipeline) to get to north of $100mm in future sales (remember, when discounted back 7-10 years this becomes less relevant, but still worth noting).  Admittedly this is probably the most aggressive assumption we make (ie giving CHRS credit for assets they haven’t even started to work on) but we believe they are more likely to be successful in this market than most and wanted to reflect that.

-          Other Value Drivers:

o   Expensed Inventory: CHRS has disclosed they have ~300k units of Udenyca (Neulasta biosimilar).  Almost 100% of this was produced before approval and was expensed as a result).  Even if you assume a 50% discount (although we believe current discount to branded Neulasta ASP is closer to 30%), this would be about $2,000/unit, or $600mm market value of inventory of an approved product.  Since this was expensed, this will flow through at a 100% gross margin (rather than the more normal 80-90% gross margins we would otherwise model).

o   Deferred tax asset: Listed at $237mm in the most recent 10-K, but fully netted off by an equal valuation allowance (“Due to the Company’s history of losses, and lack of other positive evidence, the Company has determined that it is more likely than not that its net deferred tax assets will not be realized, and therefore, the net deferred tax assets are fully offset by a valuation allowance at December 31, 2018 and 2017”) If CHRS is as successful as we think they will be, we believe this to be too conservative.

o   Sales Organization: CHRS recently hired about 70 sales reps to be sure they would have a successful Udenyca launch in Jan 2019.  Theoretically any other company could do the same (and pharma salespeople are notorious mercenaries so it’s possible a competitor could hire away part of the CHRS salesforce if momentum slows), but the more successful the launch of Udenyca is, the more valuable the sales organization becomes.  The entrenched relationships with oncology clinics and hospitals, connectivity with the GPOs (Group Purchasing Organizations) and IDNs (Integrated Delivery Networks), and relationships with the payers make the salesforce more valuable as a whole than it would be in parts.  We think this could be attractive for a potential acquirer, particularly one with a biosimilar portfolio that lacks a Neulasta asset.

Variant Perception:

-          Biosimilar uptake will be faster in oncology than Rheumatology:  We believe that investors are missing that share shift should be much faster in oncology (based on calls with doctors and hospitals) because it is acute rather than chronic care (ie we don’t need to have patients switch drugs, just to have new patients use the biosimilar, a much lower bar).  Consensus 2019 sales are $85mm. We think that this is too conservative and that weakness in the Remicade biosimilar market is being extrapolated in the Neulasta market.  This consensus sales implies only 3% unit share (assuming a 30% discount to ASP this year…so $4B*3%*70% =85mm) and we are already seeing about high single digit % unit share shift to biosimilars and CHRS gaining share faster than MYL despite MYL’s 6 month head start.

-          CHRS CEO/Sales force are former Amgen: We believe the street is skeptical of CHRS’s ability to take share as the second biosimilar to market (there has been a strong first mover advantage in other biosimilars, but Amgen was only 6 months behind Mylan’s lackluster launch in July 2018).  We believe the CEO fully understands the market and can replicate AMGN’s success at CHRS based on his experience actually working at AMGN. On top of that at least a dozen members of the CHRS salesforce are former AMGN employees (per LinkedIn) including at least 4 people who are “Oncology Account Managers” (ie field salespeople).  .

-          CHRS is focused on biosimilars; it’s not a side business.  We believe this will drive them to be more aggressive than players like AMGN who have both a biosimilars business and a novel drug business that is under assault by biosimilars).  We have already heard that they have been more aggressive in their contracting than Mylan (the first Neulasta biosimilar maker) and expect this to result in broader payer coverage and physician use.

Risks:

-          OnPro limits uptake: Amgen has been aggressively shifting the market from the original Neulasta delivered via intravenous infusion (IV) to the on-body device (OnPro) that automatically injects after 24 hours (note you need to wait 24 hours to receive the drug post-chemo, so the auto-injector saves the patient a trip back to the hospital).  Currently ~60% of Neulasta sales are delivered via OnPro.  The shift to OnPro was driven by financial incentives as Amgen realized biosimilars were coming in the IV market. We are under the impression that payers are not willing to pay for convenience and that the economics of the biosimilar discounts (financial incentives again, this time against AMGN) mean that the entire ~$4B TAM is addressable.  If we are wrong, the TAM would shrink to the ~$1.6B of Neulasta intravenous sales.

-          Aggressive discounting by originator:  We believe that AMGN does not want to compete aggressively on price as CHRS would have no choice but to undercut, which would shrink the market faster than necessary.  We think Amgen is particularly sensitive to this as it has 2 major products dealing with biosimilar competition: Neulasta (20% of sales), and Epogen (5% of sales). Additionally, Enbrel (22% of sales) could face potential US biosimilar competition depending on an ongoing patent infringement case with Sandoz.  We believe AMGN wants to keep competition as rational as possible so as not to sabotage 2 of their major products and have investor fear about their largest product creep further into the stock price.  Also, we note that in Neupogen (basically Neulasta 1.0), there are now 3 US biosimilars and Amgen has not cut price at all (see exhibit #1)  If we are wrong, and they are willing to cut price aggressively, our assumed TAM will be too large and our revenue numbers will be overly optimistic. That said, the risk is that we are wrong because Amgen was willing to not compete on price in Neupogen because they were moving the market to Neulasta (basically Neupogen 2.0).  Now they have moved the market to OnPro but if that fails to hold up, they may have no choice but to cut price.

-          More aggressive competition among biosimilar competitors:  We are baking in 40% discounts in our base case, which is right in-line with where Neupogen biosimilars are pricing after 3 years on the market.  Discounts on recent biosimilar launches in Europe on products like Humira have been north of 50% in many markets.  We believe that the US market dynamics are completely different, which is why the analogue to Neupogen is more appropriate than recent European launches.  Mylan has not been particularly aggressive on price, but if Sandoz enters the market in late 2019/early 2020 at a 40%+ discount to Neulasta ASP, our TAM and consequently our revenue numbers will be too high.

-          More players than expected: We said we expect 4 players in the US Neulasta market (AMGN, MYL, CHRS, NOVN SW (Sandoz), in that order).  A potential fifth player, a private company named Apotex in Canada applied for FDA approval in 2014, but has not been approved.    What is concerning is that they received approval for their Neulasta biosimilar in Canada and Europe in mid- 2018.  It’s difficult to know where they stand as they are private and do not disclose this, but we have gotten comfortable with this risk as we have gathered from other players in the industry that Apotex is not in the picture, at least in the near term.  If we are wrong, this would likely lead to increased competition.   

Exhibit 1: Neupogen pricing, no discounting by the originator to compete

Source: CMS

Disclosure:

We and our affiliates are long Coherus Biosciences (CHRS) and may buy additional shares or sell some or all of our securities, at any time. We have no obligation to inform anybody of any changes in our views of CHRS. This is not a recommendation to buy or sell securities. Our research should not be taken for certainty. Please conduct your own research and reach your own conclusion.

Business Description: Based in California, Coherus Biosciences (CHRS) develops and sells biosimilars (which are essentially generic versions of reference/originator biologic drugs).  Biologics are drugs made from biological sources (cells, tissues, sugars, etc.). CHRS’s product portfolio consists on one approved oncology biosimilar (Udenyca, a biosimilar to Neulasta which had ~$4B in US sales in 2018) and an announced pipeline of four biosimilar assets (two immunology biosimilars with ~$30B in combined sales, both of which have completed phase 3, and two ophthalmology biosimilar assets that are still pre-clinical).

Investment Thesis: While the market is skeptical of biosimilars in general, particularly given the complex, multi-payer US healthcare system, we believe that CHRS is an attractive long because it will take a large chunk of the Neulasta market and then be able to build off that momentum to monetize its pipeline of biosimilar assets, both through partnerships abroad and its direct sales in the US (with little additional investment given the salesforce was just built out to introduce the Neulasta biosimilar).  Our base case assumption is that Udenyca can justify the entire current market cap, which means you get the pipeline for free.  If our bull case hits, the single approved asset (Udenyca) is worth 2x the current market cap on its own.

Valuation: We value CHRS as a sum of 3 parts: Udenyca (Neulasta biosimilar), Announced Pipeline (Humira and Enbrel biosimilars and the two ophthalmology assets), and the White Space (assuming some level of success in future biosimilars).

-          The Neulasta Opportunity in the US: We expect only 3 players (Amgen (the originator), MYL and CHRS, having entered in that order) for the majority of 2019, and a fourth player (Sandoz) entering late 2019/early 2020.  Conservatively, assuming equal unit share (we use the Neupogen market as an analogue where 2 biosimilars have been competing for ~3 years and the unit share is roughly 1/3 for each player…note a fourth biosimilar from PFE just launched in Oct 2018 but it is too early to see any share shift), 25% unit share would be $1B of originator sales.  Discount this by ~40% to account for the lower price of a biosimilar as well as potential price cutting by the originator, and we could still end up with $600mm in sales. 

Bears argue that 60% of the Neulasta market is not addressable as Amgen has shifted this portion to use OnPro (an on-body delivery device as opposed to the original intravenous infusion).  Even if we cede that assumption and discount the market by another 60%, that still leaves $240mm in sales as our base case.  That said, we believe that CHRS will be able to take more than an equal share and that OnPro can be overcome by discounting/CHRS’s experienced oncology salesforce, so we can see revenues for Udenyca of nearly $600mm in our bull case.  Using the heuristic that a drug is worth 3x-5x peak sales, Udenyca is worth $720mm-$1.2B on our conservative base case numbers.

-          Announced Pipeline: We think that a successful launch in the Neulasta market will be the starting point for CHRS to monetize its two advanced pipeline biosimilar assets (biosimilars for Humira and Enbrel).  With ~$30B in combined sales between Humira (US patent protection until 2023) and Enbrel (US patent situation is unclear, possibly protected until 2029 but Sandoz is currently suing AMGN to invalidate the patents which would allow a much earlier US lunch).  It is difficult to put an exact value on these assets, but you only need to believe that CHRS will take 3% share at a 75% discount to current pricing to arrive at $225mm in additional sales.  If CHRS is able to leverage the same salesforce to sell these immunology products, this would flow through at an extremely high incremental margin, close to our assumed 80%+ gross margins. The two ophthalmology assets are not even in Phase I clinical trials, so we don’t assign much value to them.  Using the same 3x-5x sales, the pipeline would be worth another $675 – $1.125B in the future.  Even discounting this to today at a high discount rate to account for the risk, there could be a few hundred million dollars of value here.

-          “White Space”:  There are another 30+ blockbuster biologics with >$75B in revenue that are likely to come off patent in the next decade.  We are giving CHRS credit for the platform they have built, with both scientific expertise to be able to successfully create 3 strong biosimilar assets and the knowledge of navigating the FDA approval process.  We believe this will put them in a position to replicate this success as future biologics come off patent.  You only need to believe that CHRS can take 0.5% market share of this untapped universe (at similar levels of discounting and biosimilar uptake as we assume in Neulasta and the announced pipeline) to get to north of $100mm in future sales (remember, when discounted back 7-10 years this becomes less relevant, but still worth noting).  Admittedly this is probably the most aggressive assumption we make (ie giving CHRS credit for assets they haven’t even started to work on) but we believe they are more likely to be successful in this market than most and wanted to reflect that.

-          Other Value Drivers:

o   Expensed Inventory: CHRS has disclosed they have ~300k units of Udenyca (Neulasta biosimilar).  Almost 100% of this was produced before approval and was expensed as a result).  Even if you assume a 50% discount (although we believe current discount to branded Neulasta ASP is closer to 30%), this would be about $2,000/unit, or $600mm market value of inventory of an approved product.  Since this was expensed, this will flow through at a 100% gross margin (rather than the more normal 80-90% gross margins we would otherwise model).

o   Deferred tax asset: Listed at $237mm in the most recent 10-K, but fully netted off by an equal valuation allowance (“Due to the Company’s history of losses, and lack of other positive evidence, the Company has determined that it is more likely than not that its net deferred tax assets will not be realized, and therefore, the net deferred tax assets are fully offset by a valuation allowance at December 31, 2018 and 2017”) If CHRS is as successful as we think they will be, we believe this to be too conservative.

o   Sales Organization: CHRS recently hired about 70 sales reps to be sure they would have a successful Udenyca launch in Jan 2019.  Theoretically any other company could do the same (and pharma salespeople are notorious mercenaries so it’s possible a competitor could hire away part of the CHRS salesforce if momentum slows), but the more successful the launch of Udenyca is, the more valuable the sales organization becomes.  The entrenched relationships with oncology clinics and hospitals, connectivity with the GPOs (Group Purchasing Organizations) and IDNs (Integrated Delivery Networks), and relationships with the payers make the salesforce more valuable as a whole than it would be in parts.  We think this could be attractive for a potential acquirer, particularly one with a biosimilar portfolio that lacks a Neulasta asset.

Variant Perception:

-          Biosimilar uptake will be faster in oncology than Rheumatology:  We believe that investors are missing that share shift should be much faster in oncology (based on calls with doctors and hospitals) because it is acute rather than chronic care (ie we don’t need to have patients switch drugs, just to have new patients use the biosimilar, a much lower bar).  Consensus 2019 sales are $85mm. We think that this is too conservative and that weakness in the Remicade biosimilar market is being extrapolated in the Neulasta market.  This consensus sales implies only 3% unit share (assuming a 30% discount to ASP this year…so $4B*3%*70% =85mm) and we are already seeing about high single digit % unit share shift to biosimilars and CHRS gaining share faster than MYL despite MYL’s 6 month head start.

-          CHRS CEO/Sales force are former Amgen: We believe the street is skeptical of CHRS’s ability to take share as the second biosimilar to market (there has been a strong first mover advantage in other biosimilars, but Amgen was only 6 months behind Mylan’s lackluster launch in July 2018).  We believe the CEO fully understands the market and can replicate AMGN’s success at CHRS based on his experience actually working at AMGN. On top of that at least a dozen members of the CHRS salesforce are former AMGN employees (per LinkedIn) including at least 4 people who are “Oncology Account Managers” (ie field salespeople).  .

-          CHRS is focused on biosimilars; it’s not a side business.  We believe this will drive them to be more aggressive than players like AMGN who have both a biosimilars business and a novel drug business that is under assault by biosimilars).  We have already heard that they have been more aggressive in their contracting than Mylan (the first Neulasta biosimilar maker) and expect this to result in broader payer coverage and physician use.

Risks:

-          OnPro limits uptake: Amgen has been aggressively shifting the market from the original Neulasta delivered via intravenous infusion (IV) to the on-body device (OnPro) that automatically injects after 24 hours (note you need to wait 24 hours to receive the drug post-chemo, so the auto-injector saves the patient a trip back to the hospital).  Currently ~60% of Neulasta sales are delivered via OnPro.  The shift to OnPro was driven by financial incentives as Amgen realized biosimilars were coming in the IV market. We are under the impression that payers are not willing to pay for convenience and that the economics of the biosimilar discounts (financial incentives again, this time against AMGN) mean that the entire ~$4B TAM is addressable.  If we are wrong, the TAM would shrink to the ~$1.6B of Neulasta intravenous sales.

-          Aggressive discounting by originator:  We believe that AMGN does not want to compete aggressively on price as CHRS would have no choice but to undercut, which would shrink the market faster than necessary.  We think Amgen is particularly sensitive to this as it has 2 major products dealing with biosimilar competition: Neulasta (20% of sales), and Epogen (5% of sales). Additionally, Enbrel (22% of sales) could face potential US biosimilar competition depending on an ongoing patent infringement case with Sandoz.  We believe AMGN wants to keep competition as rational as possible so as not to sabotage 2 of their major products and have investor fear about their largest product creep further into the stock price.  Also, we note that in Neupogen (basically Neulasta 1.0), there are now 3 US biosimilars and Amgen has not cut price at all (see exhibit #1)  If we are wrong, and they are willing to cut price aggressively, our assumed TAM will be too large and our revenue numbers will be overly optimistic. That said, the risk is that we are wrong because Amgen was willing to not compete on price in Neupogen because they were moving the market to Neulasta (basically Neupogen 2.0).  Now they have moved the market to OnPro but if that fails to hold up, they may have no choice but to cut price.

-          More aggressive competition among biosimilar competitors:  We are baking in 40% discounts in our base case, which is right in-line with where Neupogen biosimilars are pricing after 3 years on the market.  Discounts on recent biosimilar launches in Europe on products like Humira have been north of 50% in many markets.  We believe that the US market dynamics are completely different, which is why the analogue to Neupogen is more appropriate than recent European launches.  Mylan has not been particularly aggressive on price, but if Sandoz enters the market in late 2019/early 2020 at a 40%+ discount to Neulasta ASP, our TAM and consequently our revenue numbers will be too high.

-          More players than expected: We said we expect 4 players in the US Neulasta market (AMGN, MYL, CHRS, NOVN SW (Sandoz), in that order).  A potential fifth player, a private company named Apotex in Canada applied for FDA approval in 2014, but has not been approved.    What is concerning is that they received approval for their Neulasta biosimilar in Canada and Europe in mid- 2018.  It’s difficult to know where they stand as they are private and do not disclose this, but we have gotten comfortable with this risk as we have gathered from other players in the industry that Apotex is not in the picture, at least in the near term.  If we are wrong, this would likely lead to increased competition.   

Exhibit 1: Neupogen pricing, no discounting by the originator to compete

Source: CMS

Disclosure:

We and our affiliates are long Coherus Biosciences (CHRS) and may buy additional shares or sell some or all of our securities, at any time. We have no obligation to inform anybody of any changes in our views of CHRS. This is not a recommendation to buy or sell securities. Our research should not be taken for certainty. Please conduct your own research and reach your own conclusion.

Catalyst

Drug launch