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Momentum often feeds on itself in financial markets. And it works in both directions given the right circumstances.

Stocks or commodities or financial instruments that rise in price can keep rising beyond levels supported by fundamentals or demand. Similarly, assets that fall in price can continue sliding far lower than seems reasonable. The former often leads to few questions and overconfidence. The latter often leads to polished pitchforks, waning confidence, and questions about everything – including sanity.

But momentum doesn't last forever. Stocks that rise or fall far beyond reasonable levels do eventually get dragged back to reality. The time frames can vary.

This is why an investment thesis and ruthless lack of emotion are crucial to investing success, especially in the volatile domain of living technology. For my high-maintenance girlfriend named Coherus BioSciences, the short-term thesis remains intact. The multi-product strategy positions the business on a path to cash-flow positive and profitable operations.

Is the business or management team perfect? Not even close. Has the immuno-oncology pipeline convincingly demonstrated its value? I don't think so. Is the investment as exciting as it was 12 or 24 months ago? Nope.

But I think my investment in Coherus is relatively simple. It hinges on commercial execution – the core strength of the business.

The Trade

Coherus BioSciences is considered a Growth (Quality) position. I purchased 716.8 shares at $1.395 per share on July 2, 2024.

Scenario Analysis

My modeling is based on valuing assets, contextualizing competitive landscape dynamics, and weighing the probabilities of favorable and unfavorable scenarios. This trade was driven by the following considerations.

The Baby and the Bath Water (opportunity)

The first opportunity I see is that the business is being lumped in with the broader sector, which doesn't make sense in this specific case.

Shares of Coherus BioSciences are down 60% since the beginning of 2024 and 86% since the beginning of 2023. Although many biopharma stocks have a similarly poor performance in that span, most are pre-commercial drug developers. In fact, the liquidity bubble from the coronavirus pandemic led to an unusual number of preclinical drug developers going public.

A total of 54 drug developers held an IPO in 2018, according to data compiled by BioPharma Dive. Among public debuts that year, 23 (42.5%) were in preclinical or phase 1 development, while 31 (57.5%) were in phase 2 or later. That matched the trend from the previous decade.

These numbers temporarily flipped during 2020 and 2021 as companies couldn't resist the temptation of easy money. Among public debuts in this two-year span, 116 (63.5%) were in preclinical or phase 1 development, while just 67 (36.5%) were in phase 2 or later.

In other words, the broad correction in biotech stocks makes sense – these businesses have had their valuations reset to reasonable levels. Many aren't generating revenue, have a less than 10% chance of earning regulatory approval for any individual asset, and will need hundreds of millions of dollars in additional funding to get there, if they succeed at all.

Coherus doesn't have those problems.

Forget revenue. The business generated $98.3 million in gross profit in 2023, which could nearly double to $194 million in 2024 if Loqtorzi and Udenyca Onbody have respectable ramps. Gross profit could grow to roughly $270 million in 2025 – enough to cover cash operating expenses.

Yet, the business is valued at $153 million as of market close on July 5. If the broader biotech sector is the dirty bathwater, then Coherus is the baby. I think the market will recognize its error of omission (or error of inclusion?) in the next two to three quarters.

Right-Sizing is Almost Complete (opportunity)

Management has made a flurry of moves in recent quarters to right-size the business, narrow the focus, and attempt to develop clinical-stage assets.

• Cimerli was divested (at its exact peak in revenue) to reduce the balance of a $250 million term loan to roughly $75 million.
• The remaining balance of the previous term loan was paid in full with a new term loan of $38.7 million and a 5% royalty on future sales of Loqtorzi and Udenyca.
• Layoffs have reduced the company's headcount from 359 at the end of 2022 to roughly 256 at the end of March 2024, a decrease of 29%.
• Yusimry was divested for $40 million cash.
• The Canadian rights to Loqtorzi were sold for $6.25 million (U.S. dollars) in upfront cash and up to $51.5 million (Canadian dollars) in future milestone payments.

Although revenue will be lower without Cimerli's contributions, the ophthalmology asset had a gross margin of 41% in 2023. By comparison, the Udenyca franchise had a gross margin of 73% last year. Loqtorzi should have a gross margin near 65% once it reaches steady-stage production in the United States, which accounts for a 20% royalty payable to Junshi Biosciences and a 5% royalty payable for the new term loan.

Refocusing the business on fewer assets, with better margins, can accelerate the turnaround from both directions – reduced costs from lower overhead and royalties, increased cash generation from higher quality revenue.

Commercial Execution Leads the Way (opportunity)

The core strength of Coherus' management team is commercial execution. That's not too surprising considering the company was started by former Amgen executive Denny Lanfear, who serves as CEO.

• Udenyca was the best drug launch of 2019 when it notched $356 million in revenue. The market was caught off guard by the swift progress, which led the stock to rise from $8.40 per share right before launch to $22 per share less than nine months later.
• Cimerli launched in October 2022 and delivered similarly swift progress. By the end of its first full year on the market, the company's second product captured 38% market share.
• Both Udenyca and Cimerli experienced launch delays. Both Udenyca and Cimerli were the second biosimilars to launch in their respective markets. That's a blatant reminder that being first to market is less important than commercial execution – lining up the sales, marketing, payers, and physician relationships.
• Ironically, the only product that didn't encounter a launch delay (Udenyca PFS, Cimerli, Loqtorzi, and Udenyca Onbody) was Yusimry, which was the company's only flop.

Management's primary insecurity and the company's primary deficiency has always been a lack of diversity. Udenyca was the only revenue-generating product for 19 quarters until Cimerli launched. The flagship oncology brand has also suffered from the most fiercely competitive landscape of any biosimilar.

Although the opportunity ahead is less exciting than it was 24 months ago, I think there's still a solid near-term opportunity hiding in plain sight here.

Loqtorzi is now listed in every National Cancer Center Network (NCCN) system, which should help its slow-and-steady ramp through the end of 2026. Meanwhile, I think Wall Street is simply not paying attention to what Udenyca Onbody is about to deliver (if I use my 2025 model).

• My model assumes the market opportunity for on-body injector (OBI) presentations of pegfilgrastim is nearly $300 million per year. That's very conservative, as Neulasta Onpro generated over $450 million in full-year 2024 revenue, and Udenyca has a higher price than Neulasta.
• There are only two products to choose from: Neulasta Onpro and Udenyca Onbody.
• Neulasta Onpro requires 45 minutes to administer a dose. Udenyca Onbody has a novel device that only takes 5 minutes to administer a dose.
• All Udenyca presentations – pre-filled syringe (PFS), autoinjector (AI) pens, and OBI – share the same insurance coverage and payment codes.
• Insurance coverage for Udenyca has nearly doubled from 2023 to 2024.

The ability to piggyback on existing insurance coverage and payment codes is huge. It means Udenyca Onbody doesn't have to wait for an inflection point. By contrast, Cimerli spent its first several quarters securing meaningful levels of insurance coverage. That explains why the revenue ramp in the first four quarters was $6.9 million, then $6.2 million, then a big leap to $26.7 million, and then another big leap to $40.0 million. To be clear, the new presentation has some speed limits, such as ramping the number of ordering oncologists, but that's true for any launch.

Udenyca Onbody also enjoys the brand recognition of the Udenyca franchise. Oncologists have been using Udenyca as part of their treatment regimens for six years. Cimerli didn't launch with that advantage, and it still finished its first full year on the market with 38% market share.

The way I interpret things, Wall Street is not paying attention to the financial importance of Udenyca Onbody. Coherus needs to execute on the product's commercial launch – the team's core demonstrated strength over the years – and this should be the easiest launch the company's ever had.

Management Has Lost Trust (challenge)

It's ironic. The single-most important thing in living technology, from Coherus BioSciences to Ginkgo Bioworks to Relay Therapeutics, is commercial execution. But the companies that understand this tend to suck at marketing. That can hurt if the trust is ever lost with investors.

Coherus is in the doghouse for good reason, but it has yet to make a passionate argument for the current strategy. Consider that in 2020 the business issued just nine press releases of substance. It's already issued 14 since the beginning of 2024, but most double as reminders of everything going wrong with the business, like divesting assets and paying back term loans.

Maybe the team is a little gun shy after whiffing on its now-infamous full-year 2026 revenue guidance of $1.2 billion – only the second time it's ever issued revenue guidance by the way.

Maybe licensing toripalimab was a mistake. Coherus could've kept chugging away with biosimilars and been more aggressive, such as enabling Yusimry to be interchangeable. Alvotech is executing on Coherus' original business plan. It's valued at $3.6 billion, although I'm not quite sure why or how.

It's always easy to look backwards with the power of hindsight. For now, I only need to look ahead to the fourth-quarter 2024 operating results call in February 2025 at most.

Margin of Safety & Allocation

Coherus BioSciences is considered a Growth (Quality) position. The current modeled fair valuation for the company based on my 2024 model is below:

• Market close July 5: $1.33 per share
• Modeled Fair Valuation: $10.02 per share
• Allocation Range: Up to 15%

Coherus BioSciences reported 114.726 million shares outstanding as of April 30, 2024. The modeled fair valuation above assumes 120.462 million shares outstanding, which is equivalent to 5% dilution.

Further Reading

• July 2024 regulatory filing (8-K) disclosing the sale of Loqtorzi's Canadian rights
• June 2024 research note analyzing the Yusimry divestment