Coherus BioSciences (NASDAQ: CHRS) has been a one-trick pony for the last several years – from a commercial standpoint, anyway.

The drug developer has only launched one drug product, Udenyca (pegfilgrastim), a biosimilar to the oncology drug Neulasta. Although it remains the market leader, there's considerably less elbow room today than 24 months ago. Newcomers are specifically competing on price, which could erode Udenyca net revenue from $476 million in 2020 to roughly $225 million in 2022.

Help is on the way. Coherus BioSciences has earned U.S. Food and Drug Administration (FDA) approval for two new drug products with a third on the way in December 2022. All three will launch by July 2023.

That leaves only one product candidate without a regulatory or commercial timeline: Udenyca OBI.

The business will grow revenue with or without Udenyca OBI in the next few years. However, the product candidate will be crucial in determining the company's trajectory in the next few years – and "rescuing" the Udenyca franchise.

"Maxx, why write a 2,000 word article on Udenyca OBI?" Well, this product could nearly double the company's market cap almost instantly.

The Pegfilgrastim Market, Explained

Pegfilgrastim is an antibody drug known as a granulocyte-colony stimulating factor (GCSF). It helps patients receiving chemotherapy maintain higher levels of immune cells, which are wiped out during chemotherapy.

It can be administered in two formulations:

• A pre-filled syringe (PFS) formulation is used for a single-use injection. It requires patients to return to a doctor office the day after receiving chemotherapy, which is not very convenient.
• An on-body injector (OBI) formulation is used for longer-duration administration. Cartridges filled with pegfilgrastim are loaded into an autoinjector device worn by the patient, delivering the drug over time. It's more convenient than PFS formulations, especially for patients who live further from medical infrastructure or during a global pandemic.

Neulasta and every biosimilar on the market is a PFS formulation. The only OBI formulation belongs to Neulasta Onpro, which ended June 2022 with a 46% share of the total pegfilgrastim market. The OBI market alone represents a $1 billion opportunity – and Neulasta Onpro has it all to itself, free from competition.

The Udenyca Franchise, Explained

Udenyca PFS wasn't the first pegfilgrastim biosimilar to launch, but quickly raced ahead to snag the dominant market share based on units sold. It even outsells Neulasta on that basis.

That dominance has slowly been eroded in the face of competition. Udenyca exited the second quarter of 2022 with only 15% market share; still leading, but down from the high water mark of nearly 20%. The product may only generate $230 million in full-year 2022 revenue, down from $476 million in 2020.

Pricing has been the primary headwind. Competing biosimilars Fulphila (Viatris), Ziextenzo (Sandoz, a subsidiary of Novartis), and Nyvepria (Pfizer) have dropped prices precipitously in a bid to grab market share.

Coherus BioSciences has also reduced prices for Udenyca, but at a slower rate compared to the competition. The idea is to maximize long-term market share – and a lot of that hinges on Udenyca OBI. Or, more precisely, the interplay between Udenyca PFS and Udenyca OBI.

If the on-body formulation earns FDA approval, then Coherus BioSciences will be the only company capable of directly competing with Amgen. That could boost both the pricing power and market share of Udenyca PFS, potentially allowing it to return to revenue growth.

Huh?

To understand how, investors have to consider how the hyper-fragmented U.S. health care system works.

• On one side of the ecosystem, there are over 1,300 drug manufacturers.
• On the other side, there are over 180,000 points of distribution (ex: pharmacies).
• Both sides need each other. They don't always act like it. Manufacturers and distributors don't necessarily share data with one another to inform demand, bottlenecks, inventory levels, and so forth.
• This is where distributors come in. Distributors sit in the middle, collect data from manufacturers and distributors, and attempt to provide efficiency to the ecosystem through scale and purchasing power. Distributors purchase drugs from manufacturers (at the wholesale acquisition cost, or WAC, price) and sell them to pharmacies or medical centers. The price patients pay is determined by insurance coverage and what the hospital CEO had for lunch last Tuesday.
• Oh, and only a handful of distributors ensure the supply of over 92% of all drugs prescribed in the United States. McKesson, AmerisourceBergen, and Cardinal Health are the dominant players.

Distributors are important in biosimilar markets. Whereas each pharmacy may have its own generic version of Zyrtec or Claritin or other widely-used medications, biosimilars are low-volume products. That has led distributors to pick and choose preferred products in the name of efficiency. Why should a distributor purchase the fifth pegfilgrastim biosimilar to launch and then figure out how to sling it across thousands of community medical centers where over 80% of cancer patients are treated?

There isn't much reason – unless the manufacturer offers a much lower WAC. A distributor may purchase lower-priced products to drive down costs for higher-volume products (aka "the market leaders"), especially if doctors are prescribing them to save out-of-pocket costs for patients. This is why newcomers are competing on price. It's their only option.

The same mechanism and incentives could boost Udenyca PFS if Coherus BioSciences can earn regulatory approval for Udenyca OBI.

• Distributors would be able to greatly simplify their purchases and distribution of pegfilgrastim products if a biosimilar brand had both formulations available. At the end of June 2022, Neulasta and Udenyca held 73% market share across all three formulations.
• The OBI formulation would likely create pull through for the existing PFS product. Oncologists would be more likely to prescribe Udenyca products to patients, primarily because it would be easier to switch patients between formulations of an identical drug product. This would help insulate the pricing power of the PFS formulation.
• The efficiency of distribution would begin to play a more important role in the market dynamics, helping to offset the race to the bottom on prices.
• This could squeeze a competitor or two out of the market due to economics. The lowest market share belongs to Nyvepria (Pfizer), and Pfizer has already announced intentions to focus only on the most lucrative biosimilar opportunities.

Essentially, Coherus BioSciences has resisted dropping Udenyca PFS prices too far because it believes Udenyca OBI would change the dynamics of the entire market. Holding the line has come at the expense of market share in the last 12 months, but the company thinks it can regain lost market share and more if it wields both formulations.

Now for the Bad News

I don't see Udenyca OBI launching anytime soon.

Coherus BioSciences has been super secretive about the development, regulatory submission, and commercial strategy of the on-body formulation. The only public information was the October 2021 announcement that Udenyca OBI matched Udenyca PFS in a randomized clinical trial. That paved the way for a regulatory submission in 2022. It may have been submitted already – who knows!

Why the secrecy? Blame abuses of the patent system.

• Coherus BioSciences is almost certain to be sued by Amgen, which wants to prolong the commercial life of Neulasta Onpro. The formulation itself isn't protected by patents, but the on-body delivery device is protected (kinda sorta) by three patents expiring in 2028, 2031, and 2034.
• Coherus BioSciences hasn't stated if or when it will submit a biologics license application supplement (sBLA) for Udenyca OBI. The mere existence of a regulatory filing is only considered public information if a drug developer announces it.
• Amgen could ask the FDA to stop the approval process for Coherus BioSciences, but only if it can prove Udenyca OBI is being considered for approval. It can't, because the information is confidential and hasn't been announced.
• The FDA doesn't coordinate approval processes with the U.S. Patent and Trademark Office (USPTO). Udenyca OBI could earn approval so long as it doesn't run afoul of patent information tracked in the FDA Orange Book. It doesn't, because pegfilgrastim isn't protected by patents.
• Amgen will likely sue Coherus BioSciences once Udenyca OBI is publicly revealed as a commercial threat. However, even earning FDA approval is considered confidential information. Coherus BioSciences may only make an announcement when the product launches, not at approval.

Tricky tricky.

Coherus BioSciences said it carefully considered intellectual property concerns when developing its own on-body delivery device. There are multiple such devices on the market, so Amgen's device (developed by Insulet Corp) isn't necessarily blocking the opportunity.

Nonetheless, a lawsuit is coming. Amgen will likely request an immediate stay to force Udenyca OBI off the market. Whether a judge grants the request is uncertain. A lawsuit will likely be a long, drawn-out process over many years. It can go several ways.

• What usually happens is the originator (Amgen) and the challenger (Coherus) agree on a settlement. That generally establishes a clear date for market entry for the challenger and outlines royalties owed to the originator. This could delay market launch by a meaningful amount of time, although the royalties owed wouldn't be significant. For example, Udenyca currently generates royalties for Amgen.
• The craziest scenario involves Coherus BioSciences forcing the lawsuit to the Supreme Court. There's a growing disgust with abuses in the patent system that protect drug products for decades after patent expiration. The top 12 bestselling drugs in the United States are protected by an average of 71 patents each, according to analysis from I-MAK. Coherus BioSciences could try to become a champion for this cause -- and it could probably find an army of allies -- although action from Congress (not the Supreme Court) would be needed to change the system. The Supreme Court recently ruled against abuses of the patent system specifically by drug developers, although the precedent in that case doesn't seem to apply here. Nonetheless, the squeaky wheel gets the Congressional grease.

Udenyca OBI is an important product for Coherus BioSciences. It could generate at least $225 million in revenue during its first 12 months on the market. It would contribute at least $675 million to the company's market cap. I have no way to forecast through the uncertainty – all I can do is consider a range of possible outcomes – but I do know this: The sooner it launches, the better.

Price Targets for Coherus BioSciences

My models (and therefore price targets) exclude any contribution from Udenyca OBI until 2025 due to the significant uncertainty for regulatory and commercial developments.

The current risk/reward for Coherus BioSciences is considered favorable overall. This is considered an investment-grade Growth (Speculative) position. Current price targets for the company are as follows:

• Current Price (market close August 17): $1.02 billion / $13.08 per share
• Attractive Near: $1.0 billion / $12.87 per share
• Prioritize Below: <$840 million / $10.81 per share
• Caution Above: $1.25 billion / $16.09 per share

The valuation estimates above are based on 77.7 million shares outstanding as of July 31st, 2022.

These prices are based on modeling estimating $425 million in full-year 2023 revenue and a fair market valuation ranging from $1.33 billion to $1.45 billion.

The difference between the price targets and the fair valuation range is due to the probability of success (POS) of each asset, as well as uncertainties in launch trajectories and initial commercial traction. The price targets will be lowered or raised as developments add or reduce risk across the portfolio.

Coherus BioSciences has a high probability of earning incrementally higher price targets over the next few years, due to the relatively certainty of the product pipeline. For example, modeling estimates a fair value of up to $1.78 billion ($22.53 per share with 79 million shares outstanding) based on 2024 revenue.

Ol' Maxxie's Position

Coherus BioSciences has a target allocation of 3% in my personal portfolio. I would consider increasing this to between 5% to 7.5% on favorable regulatory and commercial developments for Udenyca OBI. The investment would also be upgraded to Growth (Quality) – it's right on the line now.

Further Reading

• Neulasta Onpro marketing website to see how the product is marketed to doctors and patients, and what pain points the OBI formulation addresses
• October 2021 press release announcing results of Udenyca OBI clinical trial
• August 2022 press release for Q2 2022 operating results
• August 2022 financial filing (10-Q) for Q2 2022 operating results
• August 2022 company update describing Cimerli's FDA approval and market opportunity

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