Coherus (CHRS) Could Be Worth $30-$40 a Share

Coherus Biosciences ("Coherus", “CHRS”) is a pure play biosimilars company. With recent controversies regarding sky high biologic prices, biosimilars are looked upon to enhance market competition, contain prices, and broaden patient access.

Coherus currently has one product that just launched – Udenyca (biosimilar Neulasta). It also has a bunch of stuff in the pipelines, with the next product being CHS-1420 (biosimilar Humira) coming around 2023.

The stock trades at $22.5 at the time of this writing. Some quick estimates of revenues for bNeulasta and bHumira are enough to show that the CHRS can get to $30-$40 a share.

TAM and revenue estimate for Udenyca

A reasonable revenue estimate should factor in 1) lower revenue due to lower prices, 2) original brand's own retention, 3) market share, 4) OnPro (a separate discussion to follow). 

Here are some facts and baseline assumptions:

• Neulasta is a $4.5bn market.
• Mylan prices their biosimilar Neulasta ("Fulphila") @ 33% discount. So does CHRS’s Udentyca.
• Assume Amgen retains 20% of market post all the biosimilar launches.
• Assume about 7 players to evenly split the biosimilar Neulasta market.

So I estimate Udenyca peak revenue to be 4500 * 66% * (1-20%) / 7, or about $340mm. If we assume 8 players instead of 7, that’s still $300mm for Coherus.

This estimate is conservative for a couple reasons. First, I’m saying TAM for biosimilar Neulasta is 4500*.66 = $2970mm. Essentially I’m shrinking Neulasta market size by biosimilar pricing discount, while not taking into account that lower price should lead to greater patient access and greater volume.

Second, I assume market shares are split evenly. This will likely prove to be too conservative for CHRS. Now, maybe big guys like Sandoz would take disproportionate share, but CHRS is far from the weak hand here. Udenyca’s 1Q19 result was maybe the strongest biosimilar launch in history. The hospital market has some stickiness because biosimilars are not complete substitute for each other and the administrative cost of switching is high. I’m also counting competitors such as Cinfa and Accord Healthcare (raise your hand if you ever heard of these guys…) 

More On Udenyca – the Onpro discussion

Udenyca is a prefilled syringe. But some 60% of Neulasta revenue is from “Onpro”, the on-body injector version of Neulasta. That leaves only 40% for the pre-filled syringe market. So should I treat Onpro as a totally separate market, and therefor apply 60% haircut to my Udenyca revenue estimate?

I believe this was a big worry for the investment community, until 1Q19 results and commentaries changed that narrative. I also think that, along with higher than expected gross margins, explain the recent stock run up.

Udenyca brought in $37mm of revenues in its launch quarter (1Q19) – that’s a run rate of almost $150mm. This blew away estimates and would hint that Onpro is not a totally separate market immune to prefilled syringe competition.

The earning call gave more indications that OnPro will not be a barrier. Management said 40% of the biosimilar gains actually came from OnPro. They also confirmed that Coherus will go after the entire market and will have their own on-body device.

So I’m sticking with my $300-$340mm sales estimate for Udenyca because: 1) they are already taking share from Onpro. 2) CHRS plans to go after the entire Neulasta market including Onpro, and confirmed they will have their own on-body device, 3) Onpro itself packs a prefilled syringe and does not seem that hard to make, and 4) OnPro is a single use device, the main benefit being that patient do not have to return next day to get an injection. That seems to me a marginal benefit CHRS can overcome with the right pricing incentives.

Biosimilar Humira

So I think Udenyca gets to peak revenue of $300mm. I will use that exact same number for biosimilar Humira, the next in Coherus’ pipeline.

Humira market is a multiple of Neulasta’s ($20bn versus $4.5bn), so this should be conservative enough. Offsetting that is the possibility of more competitors for bHumira compared to for bNeulasta. Sandoz, Boehringer, Amgen are all FDA approved while a few others including CHRS are still in pipeline. Also, unlike in Udenyca’s case, CHRS will not be one of the earliest to market. 

I think these factors offset, and peg the combined peak revenues for Udenyca and bHumira at $600mm. This should happen around 2025-2027 timeframe.

Valuation

Coherus' market cap of ~$1.5bn look cheap compared to my estimated peak revenue of $600mm. Keep in mind this is a business with gross margins over 90%. Also, I have not assigned any value to other pipeline products such as biosimilars for Enbrel and Eylea.

As a sanity check, below is what I think normalized EBIT might look like once biosimilar Humira hits market. I assume gross profit of 85%, normalized R&D as trials tail off, and higher SG&A due to sales force expansion. Again, projected EBIT of $170mm would make current enterprise value of $1.6bn look cheap. 

As for the upside, I will simply take this $600mm revenue and apply a typical 4-5x revenue multiple for biopharma stocks. That gets us to $2.4bn-$3bn market cap, or around $30-$40 a share depending on your assumptions for cash burn and equity dilution.

Finally, CHRS will approach cash flow breakeven in an year or so. So there won’t be too much dilution that makes stock more expensive than it looks.