The rise of biosimilars, the name given to generic versions of biologic drugs such as monoclonal antibodies and granulocyte colony-stimulating growth factors, hasn't quite lived up to the hype in recent years.

The U.S. Food and Drug Administration (FDA) has approved 24 biosimilars, but many haven't made it to the market yet. Some of the companies that have launched balked at offering payer discounts and rebates, which can sometimes make the copycat drugs more expensive than the innovator drugs they aspire to replace. And doctors sometimes hesitate to switch patients to biosimilars because they technically aren't exact copies of innovator drugs (proteins are more difficult to exactly replicate than small molecule drugs produced with chemistry).

But Coherus BioSciences (NASDAQ:CHRS) hasn't run into those problems with the market launch of its first biosimilar, which is blowing past expectations and enabling the business to invest in its future. How much higher can it soar -- and can it take the company's small-cap stock with it?

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A surprisingly smooth trajectory

Commercializing a new biosimilar isn't easy. Companies have to run clinical trials to prove the biologic drugs are safe and effective, secure manufacturing agreements, earn regulatory approval, and then -- if approval is granted -- embark on the treacherous path of growing sales in a competitive market. The last part comes with all of the obstacles noted above.

While the paperwork part of commercialization efforts tripped up Coherus BioSciences in recent years, the company hasn't encountered any noticeable turbulence since launching Udenyca. The biosimilar is a copycat of Neulasta (pegfilgrastim) from Amgen (NASDAQ:AMGN). It helps patients generate white blood cells after receiving certain treatments, such as chemotherapy, to reduce their risk of infection. 

Udenyca sales have delivered the business to profitability and positive operating cash flow after just nine months on the market. It generated $111 million in revenue in the third quarter, up from $37 million in the first quarter of this year, and turned approximately 46% of that into operating income. The company said it achieved a whopping 19% unit market share at the end of September. 

Metric

First Nine Months 2019

First Nine Months 2018

Change (YOY)

Revenue

$232.2 million

$0

N/A

Total costs and operating expenses

$169.5 million

$143.9 million

18%

Operating income

$62.7 million

($143.9 million)

N/A

Net income

$50.6 million

($146.8 million)

N/A

Operating cash flow

$10.6 million

($111.9 million)

N/A

Data source: SEC filing. YOY = Year over Year.

The newfound financial flexibility will help Coherus BioSciences in its efforts to commercialize the next two biosimilars on its radar. 

The company signed a deal with the Swiss biosimilar developer Bioeq to take over the commercialization of a Lucentis (ranibizumab) biosimilar for treating wet age-related macular degeneration. The company expects to file a biologic license application (BLA) with the FDA before the end of 2019, which could allow for a market launch in early 2021.

Coherus BioSciences is also readying CHS-1420, a biosimilar to Humira (adalimumab), for a BLA submission in 2020. Due to patent considerations and exclusivity deals, the drug isn't expected to launch until mid-2023. Another of the company's drug candidates, a biosimilar for Eylea, could hit the market at about the same time if development goes smoothly.

While the near-term calendar looks sparse, that doesn't mean 2020 will be an uneventful year for investors -- or the stock.

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A new competitor enters the market

The Neulasta market has proven surprisingly susceptible to biosimilar competition, which makes it all the more worrisome for Amgen that a third competitor is on the way. In addition to Fulphila from Mylan and Udenyca from Coherus BioSciences, the FDA recently approved Ziextenzo from Sandoz, a Novartis company. The third entrant is expected to hit the market before the end of 2019.

To be fair, Neulasta is still the king of the market. The innovator drug generated $619 million in U.S. sales in the third quarter of 2019 and $2.2 billion in the first nine months of the year. But the crown is a bit wobbly: Those figures represented year-over-year declines of 31% and 22%, respectively. 

Mylan doesn't disclose sales figures for Fulphila, but it's expected to be on par with Udenyca. Meanwhile, Sandoz has four biosimilars on the market, including one of filgrastim (the short-acting version of pegfilgrastim), which makes it a formidable competitor.

That's not great for Amgen, but what about Coherus BioSciences? Well, there's surely more market share to capture for Udenyca, but investors do need to remain grounded. On the third-quarter 2019 earnings conference call, management noted that it expects fourth-quarter revenue to increase sequentially. The only thing management would say about 2020 is that the company intends to secure "additional unit market share above 20%" throughout next year. 

Considering the business exited September with about 19% unit market share, and that the average selling price of Udenyca (and all drugs in the Neulasta market) fell about 3% in the third quarter and may see similar pressure in the future, it's reasonable to assume quarterly revenue for the biosimilar may not grow much beyond current levels. That would put the annual revenue run rate at about $450 million to $500 million -- with healthy profits to boot -- in 2020.

Is this biosimilar pure-play finally de-risked?

Coherus BioSciences is now comfortably profitable and generating enough cash flow from operations to invest in the development and commercialization of its next biosimilar products. Increasing competition may stall the growth rate of Udenyca, but it seems unlikely to tumble from its profitable cruising altitude. 

Throw in the potential launch of a Lucentis biosimilar in 2021 -- which can take advantage of the company's experience and manufacturing footprint established with Udenyca -- and Wall Street may finally stop batting the stock price around like a ping pong ball. Then again, it may take another concrete success in the market before investors warm up to a pure-play biosimilars stock.