I had a mistake here. Udenyca value should be more than I figured below because its pass-through status does not expire in 2 years as I assumed, but in 3 years.
Original Post:
I want to follow up on my last post about Coherus ("CHRS"). In the end I wrote:
The bigger uncertainty is how Udenyca will perform after it reaches peak revenue. Starting April 2019, Udenyca benefits from its “pass-through status”, a designation that allows 340b hospitals that use Udenyca to get reimbursed at ASP+6%, compared to the ASP-22.5% if they use original Neulasta. This obviously favors Udenyca and likely contributed to its sales spike starting April.
The problem is this pass-through status expires after 2 years, and then Udenyca would get reimbursed at ASP-22.5% as well.
This would make Udenyca less profitable for 340b hospitals. So Coherus will likely have to cut prices to let hospitals maintain their unit economics. Going from ASP + 6% to ASP-22.5% is almost a 30% cut to hospitals, and Coherus may have to eat that difference to maintain its market share. (Note this is 30% of Neulasta’s ASP, which by then should be fairly close to Udenyca’s ASP).
This is just for 340b hospitals, not non-340b hospital or clinics. But it’s probably safe to say a price cut in one customer segment will spill over to others. For modeling, I would 1) assume some peak revenue by 2020-2021, then 2) step that down by the almost 30% cut in reimbursement, keep revenue at the reduced level for a few years, and 3) use some decline rate afterwards in perpetuity.
I want to follow up on my last post about Coherus ("CHRS"). In the end I wrote:
"I do have some reservations about Coherus beyond Monday’s event. They are 1) Sandoz’s version of bNeulasta likely coming later this year. 2) what happens to Udenyca’s revenue after it peaks."After thinking about it more, I’m not too concerned about Sandoz’s upcoming biosimilar. Sandoz will get its share and I already built that into my Udenyca peak sales estimate - by dividing the bNeulasta TAM between 7-8 players. Also, Udenyca’s superb launch performance should give Coherus some advantage, as the biosimilar market for hospitals has some stickiness.
The bigger uncertainty is how Udenyca will perform after it reaches peak revenue. Starting April 2019, Udenyca benefits from its “pass-through status”, a designation that allows 340b hospitals that use Udenyca to get reimbursed at ASP+6%, compared to the ASP-22.5% if they use original Neulasta. This obviously favors Udenyca and likely contributed to its sales spike starting April.
The problem is this pass-through status expires after 2 years, and then Udenyca would get reimbursed at ASP-22.5% as well.
This would make Udenyca less profitable for 340b hospitals. So Coherus will likely have to cut prices to let hospitals maintain their unit economics. Going from ASP + 6% to ASP-22.5% is almost a 30% cut to hospitals, and Coherus may have to eat that difference to maintain its market share. (Note this is 30% of Neulasta’s ASP, which by then should be fairly close to Udenyca’s ASP).
This is just for 340b hospitals, not non-340b hospital or clinics. But it’s probably safe to say a price cut in one customer segment will spill over to others. For modeling, I would 1) assume some peak revenue by 2020-2021, then 2) step that down by the almost 30% cut in reimbursement, keep revenue at the reduced level for a few years, and 3) use some decline rate afterwards in perpetuity.
So revenue cadence might look something like this (erring toward conservatism)
Using a 10% discount rate and 85% gross margin, the present value of Udenyca gross profit is well over $2bn. But to put a value on Udenyca, we have to consider the expenses as well.
So what is it worth, and to whom?
From Coherus’ perspective as a standalone company, most of the expenses for Udenyca will be SG&A, as there are little R&D expenses left. Using $140mm SG&A expense and 10% discount rate, I get to about $530mm of present value for Udenyca. Once they have other drugs in the market (bHumira for example), we can attribute less SG&A to Udenyca due to cost synergy, so the value for Udenyca would be much higher.
What is Udenyca worth in the marketplace though? Potential acquirers who already have the sales and marketing infrastructure can buy Udenyca and capture the bulk of gross profit. As we stated earlier, the present value of that cash flow stream would be over $2bn. This means Udenyca could be worth well over 5x peak revenue, even taking into account the expiration of pass through status and the price drop that will likely come with it.
CHRS’ market cap of $1.4bn compares favorably to this potential. That's not even considering pipeline value and platform value. So I will hold my core position, and trade around the incremental shares I added last week.
- 2019. Already at $320mm runrate by 2Q19! But if Sandoz enters later this year growth will decelerate (but should still grow)
- 2020. Revenue of $350mm. This is too conservative given annualized revenue of $320mm in the second quarter of launch. But we’ll just use this for illustration purpose.
- 2021. Start out at $350mm run rate. But pass through status expires in April 2021 and Coherus could a 30% price cut, thus revenue goes down to $245mm run rate. Blended revenue for the year is about $300mm.
- 2022 – 2026. Revenue of $245mm
- 2027 and onward. Revenue declines 5% a year.
So what is it worth, and to whom?
From Coherus’ perspective as a standalone company, most of the expenses for Udenyca will be SG&A, as there are little R&D expenses left. Using $140mm SG&A expense and 10% discount rate, I get to about $530mm of present value for Udenyca. Once they have other drugs in the market (bHumira for example), we can attribute less SG&A to Udenyca due to cost synergy, so the value for Udenyca would be much higher.
What is Udenyca worth in the marketplace though? Potential acquirers who already have the sales and marketing infrastructure can buy Udenyca and capture the bulk of gross profit. As we stated earlier, the present value of that cash flow stream would be over $2bn. This means Udenyca could be worth well over 5x peak revenue, even taking into account the expiration of pass through status and the price drop that will likely come with it.
CHRS’ market cap of $1.4bn compares favorably to this potential. That's not even considering pipeline value and platform value. So I will hold my core position, and trade around the incremental shares I added last week.
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