Coherus Oncology, Inc. (CHRS) FY 2021 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

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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 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 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 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, 2020, filed with the SEC on February 25, 2021.

Overview

We are a commercial-stage biopharmaceutical company focused on the research, development and commercialization of innovative immunotherapies to treat cancer. 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 two FDA-approved biologics. Our first product, UDENYCA, a biosimilar to Neulasta, a long-acting granulocyte-colony stimulating factor, was launched commercially in the United States in January 2019. In December 2021, the FDA-approved YUSIMRY, formerly CHS-1420, our Humira biosimilar product, which we plan to launch in the United States on or after July 1, 2023, per the terms of an agreement with Humira manufacturer, AbbVie. In addition to our two FDA-approved biologics, we also have two additional product candidates in the late stage of review with the FDA, toripalimab and CIMERLI, a Lucentis biosimilar candidate. The PDUFA action date for the toripalimab BLA is April 30, 2022, and if approved, we are planning to launch toripalimab in the United States following approval. In 2021, our partner Bioeq, submitted to the FDA a BLA for CIMERLI. The FDA has accepted the application for filing and set a target action date of August 2022. If approved, we expect CIMERLI commercial launch following approval, depending on importation timing with the United States Customs. We are also conducting a pharmacokinetic study to facilitate a potential Section 351(k) BLA seeking FDA approval for 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, supporting the successful commercialization of UDENYCA. We expect to leverage these capabilities as we build and launch our immuno-oncology franchise.

2027 Term Loans

In January 2022, we entered into a Loan Agreement that provides for a senior secured term loan facility of up to $400.0 million (inclusive of a $100.0 million uncommitted additional facility amount) to be funded in four committed tranches: (i) a Tranche A Loan in an aggregate principal amount of $100.0 million that was funded on January 5, 2022; (ii) a Tranche B Loan in an aggregate principal amount of $100.0 million to be funded no later than April 1, 2022, subject to the delivery of evidence of repayment, repurchase or redemption of indebtedness outstanding under our 8.2% Convertible Notes due March 2022 and certain customary deliverables; (iii) a Tranche C Loan in an aggregate principal amount of $50.0 million to be funded at the our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate toripalimab in the United States; and (iv) a Tranche D Loan in an aggregate principal amount of $50.0 million to be funded at our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate CHS-201 (ranibizumab biosimilar) in the United States. We have the right to request an uncommitted additional facility amount of up to $100.0 million. The 2027 Term Loans mature in 2027.

In January 2022, we used funds from the Tranche A Loan to voluntarily prepay all amounts outstanding under the 2025 Term Loan. (See “Note 14. Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for additional details). We expect to use proceeds from the Tranche B Loan to fully redeem the outstanding 2022 Convertible Notes due in March 2022.

Junshi Biosciences – TIGIT Option Exercises

In January 2022, we initiated the process for the exercise of our option to license JS006, a TIGIT-targeted antibody, in the United States and Canada from Junshi Biosciences, expanding our 2021 immuno-oncology collaboration agreement. We will lead further development of JS006 and will be responsible for the associated development costs as set forth in the Collaboration Agreement.  Antibodies blocking TIGIT (T cell immunoglobulin and ITIM domain) have shown potential for enhanced anti-tumor activity in combination with PD-1/PD-L1 inhibitors. In preclinical studies, JS006 demonstrated strong binding affinity and inhibition of the TIGIT pathway. A dose escalation, dose expansion clinical trial (clinicaltrials.gov identifier# NCT05061628) evaluating the safety, tolerability and pharmacokinetic

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properties of JS006 as monotherapy and in combination with PD-1 inhibitor toripalimab in patients with advanced solid tumors is ongoing in China. The FDA has cleared an IND allowing clinical trials of JS006 in the United States, and we plan to advance toripalimab in combination with JS006 in a clinical trial in North America later in 2022.

JS006 has emerged as a promising novel immuno-oncology agent that can potentially be used in combination with PD-L1 agents to improve upon the durable clinical antitumor activity of current PD-L1 regimens. Moreover, a JS006 and PD-L1 combination could be practice changing in numerous tumor settings by providing a chemotherapy free option, thereby improving upon the safety profile of current regimens. Our current hypothesis is that the TIGIT class of agents could be effective in the same tumor types and settings where PD-L1 therapies have proven efficacy, but with a potentially better safety profile than chemotherapy containing PD-L1 regimens or a broader patient population, and as such, the market potential for this class of agents is likely to be as large, or larger, than that of PD-L1 therapies.

Products and Product Candidates

Our portfolio includes the following products and product candidates:

Oncology

Together with Junshi Biosciences, in the third quarter of 2021 we completed the submission of the toripalimab BLA 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 and the FDA granted the BLA Priority Review with a target action date of April 30, 2022. We believe there is a high unmet need in NPC based on the current FDA-approved treatment alternatives and the lack of any approved immmunotherapies.

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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. The FDA has also granted toripalimab Fast Track designation for the treatment of mucosal melanoma and orphan drug designations for treatment of NPC, mucosal melanoma soft tissue sarcoma, and esophageal cancer.

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In addition to NPC, we plan to submit supplemental BLAs to the FDA for toripalimab within the next two years for the treatment of rare and highly prevalent cancers.

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A dose escalation, dose expansion clinical trial (clinicaltrials.gov identifier# NCT05061628) evaluating the safety, tolerability and pharmacokinetic properties of JS006 as monotherapy and in combination with PD-1 inhibitor toripalimab in patients with advanced solid tumors is ongoing in China. The FDA has cleared an IND allowing clinical trials of JS006 in the United States, and we plan to advance toripalimab in combination with JS006 in a clinical trial in North America later in 2022.

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Immunology

Ophthalmology

License Agreement with Junshi Biosciences

On February 1, 2021, we entered into an Exclusive License and Commercialization 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, options in these territories to Junshi Biosciences’ anti-TIGIT antibody JS006 and 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 January 2022, we took steps that we expect will result in the payment to Junshi Biosciences of an additional $35.0 million upon the closing of the exercise of our option to license JS006, a TIGIT-targeted antibody, in the United States and Canada. We will lead further development of JS006 and will be 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 and up to an aggregate $255.0 million for the achievement of various milestones, including 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 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 recognized research and development expense of $39.4 million in the consolidated statement of operations for year ended December 31, 2021, and had $1.9 million recorded in accrued and other current

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liabilities on the consolidated balance sheet as of December 31, 2021 related to the co-development, regulatory and technology transfer costs.

We accounted for the licensing transaction as an asset acquisition under the relevant accounting rules. 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, 2021, we did not have any outstanding milestone or royalty payment obligations to Junshi Biosciences. The $35.0 million payment for the option to license JS006 will be reflected in our first quarter 2022 financial statements. The additional milestone payments, option fees and royalties are contingent upon future events and, therefore, will be recorded when it is probable that a milestone will be achieved, option fees will be incurred or when royalties are due.

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 the Company. Pursuant to the Stock Purchase Agreement, on April 16, 2021, we issued 2,491,988 unregistered shares of our common stock to Junshi Biosciences, at a price per share of $20.0643, for an aggregate value of approximately $50.0 million 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 years period following its effective date. The Collaboration Agreement and the Stock Purchase Agreement were negotiated concurrently and were therefore evaluated as a single agreement. We used the “Finnerty” and “Asian put” valuation models and determined the fair value for the discount for lack of marketability to be $9.0 million at the date the shares were issued. The fair value of the DLOM was attributable to the Collaboration Agreement and was included as an offset against the research and development expense in the consolidated statement of operations for the year ended December 31, 2021.

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. Until the COVID-19 pandemic is controlled, we expect it may continue to adversely impact our sales growth. In addition, the spread of more contagious and/or deadly variants, such as the Delta or omicron variants, could cause the COVID-19 pandemic to last longer than expected and could result in the reinstatement of restrictive orders that could disrupt our business.

While the long-term economic impact and the duration of the COVID-19 pandemic may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, 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 spread of COVID-19 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, per the terms of an agreement with Humira manufacturer, AbbVie. Net revenues from sales of UDENYCA were $326.6 million and $475.8 million in 2021 and 2020, respectively.

Cost of Goods Sold

Cost of goods sold consists primarily of third-party manufacturing, distribution, and certain overhead costs. Prior to the second quarter of 2021, a portion of the costs of producing UDENYCA sold was expensed as research and development before the FDA approval

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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.

For the years ended 2021 and 2020, cost of goods sold included write-offs for inventory that did not meet our acceptance criteria, net of credits received from the manufacturers, of $5.1 million and $2.2 million, respectively.

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:

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 clinical development and manufacturing process development of our product candidates.

Products manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. For all the periods presented, we expensed manufacturing costs as incurred as research and development expense for products that had not been approved. We began to capitalize inventory costs associated with UDENYCA after receiving regulatory approval in November 2018.

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.

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

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. 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.

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Results of Operations

Comparison of Years Ended December 31, 2021 and 2020

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 decline in net realized price due to increased competition and COVID-19 impacts. Our net revenue and market penetration may continue to be adversely impacted by the COVID-19 pandemic and is subject to pricing trends and competitive dynamics in the overall pegfilgrastim market.

We expect our net revenue to decrease during 2022, as a result of increased competition for UDENYCA, with the potential for such decreases to be slightly offset by new product launches, if FDA approval is obtained.

Cost of Goods Sold

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The increase in cost of goods sold was primarily because a portion of the costs of producing UDENYCA sold through the first quarter of 2021 was expensed as research and development prior to the FDA approval of UDENYCA and, therefore, was not reflected in the cost of goods sold. During the first quarter of 2021, the UDENYCA inventory with no inventory value was fully utilized, and since then cost of goods sold fully reflects per unit acquisition cost of UDENYCA. The cost basis of product sold that was expensed prior to approval, was $3.3 million and $21.1 million in 2021 and 2020, respectively. Had such inventories been valued at acquisition cost, it would have resulted in corresponding increases in cost of goods sold and corresponding decreases in gross margin. In addition, cost of goods sold included write-offs for inventory that did not meet our acceptance criteria, net of credits received from the manufacturers, of $5.1 million and $2.2 million in 2021 and 2020, respectively. The increase in cost of goods sold was partially offset by a reduction in the number of units of UDENYCA sold in 2021 compared to 2020, which also resulted in lower royalty costs of $7.3 million.

We expect our gross margin to decrease during 2022 as a result of declining net realized price per unit sold and higher average annual costs per unit sold due primarily to the transition in the first quarter of 2021 from inventory with manufacturing costs that were partly recognized as research and development expenses prior to the regulatory approval of UDENYCA.

Research and Development Expense

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

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The increase was partially offset by:

We expect our research and development expense in 2022 to be lower than in 2021 because 2021 included an exceptional license expense in the form of the $136.0 million expense related to the upfront license payment to Junshi Biosciences, which were partially offset by the $35.0 million payment expected to be made in 2022 for the option to license JS006, potential milestone payments related to our product candidates and other incremental development costs.

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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:

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We expect our selling, general and administrative expense in 2022 to be higher than in 2021 as a result of anticipated increased commercial activities to support UDENYCA sales and potential initiation of our ophthalmology and immuno-oncology commercial activities if any additional product candidates are approved.

Interest Expense

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The increase in interest expense was primarily due to the interest expense related to our 2026 Convertible Notes that were issued in April 2020.

Income Tax Provision

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There was no income tax provision for the year ended December 31, 2021 due to our tax loss for 2021 and the tax effect of the valuation allowance against the deferred tax assets. Income tax expense of $3.5 million for the year ended December 31, 2020, primarily related to state taxes in jurisdictions outside of California, for which we have a limited operating history. We maintain a full valuation allowance against our net deferred tax assets due to our history of losses.

Liquidity and Capital Resources

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

[table omitted - see filing]