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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form-10-K (“Form 10-K”). This Form 10-K, including the following sections, contains forward-looking statements within the meaning of the federal securities laws. These statements are subject to risks and uncertainties that could cause actual results and events to differ materially from those expressed or implied by such forward-looking statements. For a detailed discussion of these risks and uncertainties, see the “Risk Factors” section in Item 1A of this Form 10-K. We caution the reader not to place undue reliance on these forward-looking statements, which reflect management’s analysis only as of the date of this Form 10-K. We undertake no obligation to update forward-looking statements, which reflect events or circumstances occurring after the date of this Form 10-K.

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Overview

We are a commercial-stage biopharmaceutical company with a mission to increase patient access to cost-effective medicines that can have a major impact on their lives and to deliver significant savings to the health care system. We have become a leader in the biosimilar market by leveraging our team’s collective expertise in key areas such as process science, analytical characterization, protein production, clinical-regulatory development and commercialization. We began selling UDENYCA® (pegfilgrastim-cbqv), a biosimilar to Neulasta, a long-acting granulocyte-colony stimulating factor, in the United States in January 2019.

On February 1, 2021, we entered into an Exclusive License and Commercialization Agreement (the “Collaboration Agreement”) with Shanghai Junshi Biosciences, Co., Ltd. (“Junshi Biosciences”), for the co-development and commercialization of toripalimab, Junshi Biosciences’ anti-PD-1 antibody, in the United States and Canada. Under the Collaboration Agreement, we will also be granted options to Junshi Biosciences’ TIGIT-targeted antibody and next generation engineered IL-2 cytokine for evaluation as potential combination therapies with toripalimab, as well as certain negotiation rights to two early-stage checkpoint inhibitor antibodies (the “Collaboration”). The Collaboration expands our late-stage pipeline into the rapidly growing checkpoint inhibitor market, which is expected to exceed $25.0 billion in the United States by 2025, and provides us a PD-1 backbone for potential long-term growth with next-generation immuno-oncology combinations. Closing of the Collaboration Agreement is subject to clearance under the HSR Act.

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Our pre-commercial pipeline includes the following product candidates:

Oncology Pipeline

● A bevacizumab (Avastin) biosimilar candidate in collaboration with Innovent.

Immunology Pipeline

● CHS-1420 (our adalimumab (Humira) biosimilar candidate).

Opthalmology Pipeline

● A ranibizumab (Lucentis) biosimilar candidate in collaboration with Bioeq;

On January 3, 2019, we initiated the U.S. sales of UDENYCA®, our first commercial product. While we have been profitable for the years ended December 31, 2020 and 2019, we anticipate that we may experience lower profitability and annual losses in the near term as a result of incurring expenses associated with upfront and milestone payments under our collaboration with Junshi Biosciences, if cleared under the HSR Act. Our net income was $132.2 million and $89.8 million for the year ended December 31, 2020 and 2019, respectively, and our net loss was $209.4 million for the year ended December 31, 2018. As of December 31, 2020, we had an accumulated deficit of $762.8 million.

In February 2016, we issued and sold $100.0 million aggregate principal amount of our 8.2% Convertible Senior Notes due in March 2022 (the “2022 Convertible Notes”). These 2022 Convertible Notes require quarterly interest distributions at a fixed coupon rate of 8.2% until maturity, redemption or conversion, which will be no later than March 31, 2022. If we fail to satisfy certain registration or reporting requirements, then additional interest will accrue on the 2022 Convertible Notes at a rate of up to 0.50% per annum in the aggregate. The holders of the 2022 Convertible Notes are Healthcare Royalty Partners III, L.P. and three of its related entities, which hold $75.0 million in aggregate principal amount, and three related party investors, KKR Biosimilar L.P., which holds $20.0 million, MX II Associates LLC, which holds $4.0 million, and KMG Capital Partners, LLC, which holds $1.0 million. The 2022 Convertible Notes are convertible into shares of common stock at an initial conversion rate of 44.7387 shares of common stock per $1,000 principal amount of the 2022 Convertible Notes (equivalent to a conversion price of approximately $22.35 per share of common stock, representing a 60% premium over the average last reported sale price of our common stock over the 15 trading days preceding the date the 2022 Convertible Notes were issued), subject to adjustment in certain events. Upon conversion of the 2022 Convertible Notes by a holder, the holder will receive shares of our common stock, together, if applicable, with cash in lieu of any fractional share. After March 31, 2020, the full amount of the 2022 Convertible Notes not previously converted are redeemable for cash at our option if the last reported sale price per share of our common stock exceeds 160% of the conversion price on 20 or more trading days during the 30 consecutive trading days preceding the

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date on which we send notice of such redemption to the holders of the 2022 Convertible Notes. At maturity or redemption, if not earlier converted, we will pay 109% of the principal amount of the 2022 Convertible Notes, together with accrued and unpaid interest, in cash. In April 2020, we amended the 2022 Convertible Notes purchase agreement in connection with the issuance and sale of our 2026 Convertible Notes (as defined below).

In October 2016, we entered into a sales agreement with Cowen and Company, LLC (“Cowen”), under which we offered and sold our common stock, having aggregate gross proceeds of up to $100.0 million, from time to time through Cowen as our sales agent (the “ATM Offering Program”). In the first quarter of 2019, we sold 761,130 shares of common stock at a weighted average price of $11.17 per share under the ATM Offering Program for aggregate net proceeds of $8.2 million. Following such sales, the ATM Offering Program terminated as all shares authorized thereunder had been sold.

On January 7, 2019 (the “Term Loan Closing Date”), we entered into a credit agreement (the “Term Loan”) with affiliates of Healthcare Royalty Partners (together, the “Lender”). The Term Loan consists of a six-year term loan facility for an aggregate principal amount of $75.0 million (the “Borrowings”). Our obligations under the loan documents are guaranteed by our material domestic U.S. subsidiaries.

The Borrowings under the Term Loan bear interest through maturity at 7.00% per annum plus LIBOR (customarily defined). Pursuant to the terms of the Term Loan, the interest rate was reduced to 6.75% per annum plus LIBOR as of January 1, 2020 as the consolidated net sales (customarily defined) for UDENYCA® for the fiscal year ending December 31, 2019, were in excess of $250.0 million. Interest is payable quarterly in arrears.

We are required to pay principal on the Borrowings in equal quarterly installments beginning on the four year anniversary of the Term Loan Closing Date (or, if consolidated net sales of UDENYCA® in the fiscal year ending December 31, 2021 are less than $375.0 million, beginning on the three year anniversary of the Term Loan Closing Date), with the outstanding balance to be repaid on January 7, 2025, the maturity date.

We are also required to make mandatory prepayments of the Borrowings under the Term Loan, subject to specified exceptions, with the proceeds of asset sales, extraordinary receipts, debt issuances and specified other events including the occurrence of a change in control.

If all or any of the Borrowings are prepaid or required to be prepaid under the Term Loan, then we shall pay, in addition to such prepayment, a prepayment premium equal to (i) with respect to any prepayment paid or required to be paid on or prior to the three year anniversary of the Term Loan Closing Date, 5.00% of the Borrowings prepaid or required to be prepaid, plus all required interest payments that would have been due on the Borrowings prepaid or required to be prepaid through and including the three year anniversary of the Term Loan Closing Date, (ii) with respect to any prepayment paid or required to be paid after the three year anniversary of the Term Loan Closing Date but on or prior to the four year anniversary of the Term Loan Closing Date, 5.00% of the Borrowings prepaid or required to be prepaid, (iii) with respect to any prepayment paid or required to be paid after the four year anniversary of the Term Loan Closing Date but on or prior to the five year anniversary of the Term Loan Closing Date, 2.50% of the Borrowings prepaid or required to be prepaid, and (iv) with respect to any prepayment paid or required to be prepaid thereafter, 1.25% of the Borrowings prepaid or required to be prepaid.

In connection with the Term Loan, we paid a fee to the Lender of approximately $1.1 million at closing in the form of an original issue discount. Upon the prepayment or maturity of the Borrowings (or upon the date such prepayment or repayment is required to be paid), we are required to pay an additional exit fee in an amount equal to 4.00% of the total principal amount of the Borrowings.

The obligations under the Term Loan are secured by a lien on substantially all of our and our Guarantors’ tangible and intangible property, including intellectual property. The Term Loan contains certain affirmative covenants, negative covenants and events of default, including, covenants and restrictions that among other things, restrict our ability and our subsidiaries to, incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, in asset sales, and declare dividends or redeem or repurchase capital stock. Additionally, the consolidated net sales for UDENYCA® must not be lower than $70.0 million for the fiscal year ending December 31, 2019, (b) $125.0 million for the fiscal year ending December 31, 2020, and (c) $150.0 million for each fiscal year thereafter. A failure to comply with these covenants could permit the Lender under the Term Loan to declare the Borrowings, together with accrued interest and fees, to be immediately due and payable. In April 2020, we amended the Term Loan in connection with the issuance and sale of our 2026 Convertible Notes (as defined below).

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In April 2020, we issued and sold $230.0 million aggregate principal amount of 1.5% convertible senior subordinated notes due in 2026 (the “2026 Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with one or more of the initial purchasers or their respective affiliates and/or other financial institutions (the “Option Counterparties”). The cap price of the capped call transactions will initially be $25.9263 per share, which represents a premium of approximately 75.0% over the last reported sale price of our common stock of $14.815 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions. The 2026 Convertible Notes are general unsecured obligations and will be subordinated to our designated senior indebtedness. The 2026 Convertible Notes accrue interest at a rate of 1.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2020, and will mature on April 15, 2026, unless earlier repurchased or converted. At any time before the close of business on the second scheduled trading day immediately before the maturity date, holders may convert their 2026 Convertible Notes at their option into shares of our common stock, together, if applicable, with cash in lieu of any fractional share, at the then-applicable conversion rate. The initial conversion rate is 51.9224 shares of common stock per $1,000 principal amount of 2026 Convertible Notes, which represents an initial conversion price of approximately $19.26 per share of common stock. The initial conversion price represents a premium of approximately 30.0% over the last reported sale of $14.815 per share of our common stock on the Nasdaq Global Market on April 14, 2020. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. If a “make-whole fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, we will, in certain circumstances, increase the conversion rate for a specified period of time for holders who convert their 2026 Convertible Notes in connection with that make-whole fundamental change. The 2026 Convertible Notes are not redeemable at our election before maturity. If a “fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, then, subject to a limited exception, holders may require us to repurchase their 2026 Convertible Notes for cash. The repurchase price will be equal to the principal amount of the 2026 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. The net proceeds from the offering were $222.2 million, net of the initial purchasers’ fees and the offering expenses. We used approximately $18.2 million of the net proceeds to fund the cost of entering into the capped call transactions.

COVID-19 Update

As a result of the COVID-19 outbreak, we have experienced and may continue to experience disruptions that could severely impact our business, clinical trials and preclinical studies. See “Risk Factors ”. These and other factors arising from the COVID-19 pandemic could result in us not being able to maintain UDENYCA®’s market position or increase its penetration against all Neulasta’s dosage forms, and could result in our inability to meet development milestones for our product candidates, each of which would harm our business, financial condition, results of operations and growth. We expect the COVID-19 pandemic to have some adverse impact on our sales growth on a year-over-year basis.

While the long-term economic impact and the duration of the COVID-19 pandemic may be difficult to assess or predict, the widespread pandemic has resulted in, and may continue to result in, significant disruption of global financial markets, which could reduce our ability to access capital and could negatively affect our liquidity and the liquidity and stability of markets for our common stock and our convertible notes. In addition, a recession, further market correction or depression resulting from the spread of COVID-19 could materially affect our business and the value of our notes and our common stock.

Financial Operations Overview

Revenue

Our first FDA approved product, UDENYCA®, was approved in November 2018, and we initiated U.S. sales of UDENYCA® on January 3, 2019. We recorded net product revenue of $475.8 million and $356.1 million for the years ended December 31, 2020 and 2019, respectively.

Cost of Goods Sold

Cost of goods sold consists primarily of third-party manufacturing, distribution, and overhead costs associated with UDENYCA®. A portion of the costs of producing UDENYCA® sold to date was expensed as research and development prior to the FDA approval of UDENYCA®and therefore it is not reflected in the cost of goods sold.

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On May 2, 2019, we settled a trade secret action brought by Amgen Inc. and Amgen USA Inc. (collectively “Amgen”). As a result, the cost of goods sold reflects a mid-single digit royalty on net product revenue, which began on July 1, 2019. The royalty cost will continue for five years per the terms of the settlement agreement.

Research and Development Expense

Research and development expense represents costs incurred to conduct research, such as the discovery and development of our product candidates. We recognize all research and development costs as they are incurred. We currently track research and development costs incurred on a product candidate basis only for external research and development expenses. Our external research and development expense consists primarily of:

● costs associated with manufacturing process development activities; and

Internal costs are associated with activities performed by our research and development organization and generally benefit multiple programs. These costs are not separately allocated by product candidate. Unallocated, internal research and development costs consist primarily of:

The largest component of our total operating expense has historically been our investment in research and development activities, including the clinical development and manufacturing process development of our product candidates. We received regulatory approval for UDENYCA®and as a result, all of our manufacturing costs for this product are capitalized as inventory and subsequently expensed as costs of goods sold when the inventory is sold. We expect our research and development expense in 2021 to be substantially higher than in 2020 due to the incurrence of the $150.0 million upfront payment as well as additional potential milestone payments to Junshi Biosciences and other additional increased development costs.

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We consider regulatory approval of product candidates to be uncertain, and any products manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. We expense manufacturing costs as incurred for product candidates prior to regulatory approval as research and development expense. If, and when, regulatory approval of a product candidate is obtained, we will begin capitalizing manufacturing costs related to the approved product into inventory.

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The following table summarizes our research and development expense incurred during the respective periods:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Phase of ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Development as of ​ Year ended December 31,

​ ​ ​ ​ (in thousands)

External costs incurred by product candidate: ​ ​ ​

Upfront and milestone based license fees ​ 7,500 ​ 11,075 ​ —

Other research and development expenses (1) ​ 9,635 ​ 3,654 ​ 7,139

(1) Amount consists of costs for other pipeline candidates.

Selling, General and Administrative Expense

Selling, general and administrative expense consists primarily of personnel costs, allocated facilities costs and other expense for outside professional services, including legal, insurance, human resources, outside marketing, advertising, audit and accounting services, as well as costs associated with establishing commercial capabilities in support of the commercialization of UDENYCA®. Personnel costs consist of salaries, benefits and stock-based compensation. Our selling, general and administrative expense in 2020 was lower than expected as certain sales and marketing activities were decreased due to the COVID-19 pandemic. We expect our selling, general and administrative expense in 2021 to be higher than in 2020 as a result of anticipated increased commercial activities to support UDENYCA® sales and as a result of initiating our ophthalmology and immuno-oncology commercial activities.

Interest Expense

Interest expense consists primarily of interest incurred on our outstanding indebtedness and non-cash interest related to the amortization of debt discount and debt issuance costs associated with our various debt agreements outstanding during the years ended December 31, 2020, 2019 and 2018.

Other Income, Net

Other income, net for the years ended December 31, 2020, 2019 and 2018, consists of gains and losses resulting from the remeasurement of our contingent consideration, interest earned from our investments in marketable securities and foreign exchange gains and losses resulting from currency fluctuations. We will continue to record adjustments to the estimated fair value of our contingent consideration related to the Compound Transaction Payment until the contingency settles or expires.

Significant Transactions

1.5% Convertible Senior Subordinated Notes due 2026

In April 2020, we issued and sold $230.0 million aggregate principal amount of 1.5% convertible senior subordinated notes due 2026 (the “2026 Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. The 2026 Convertible Notes are general unsecured obligations and will be subordinated to our designated senior indebtedness. The 2026 Convertible Notes accrue interest at a rate of 1.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2020, and will mature on April 15, 2026, unless earlier repurchased or converted.

At any time before the close of business on the second scheduled trading day immediately before the maturity date, noteholders may convert their 2026 Convertible Notes at their option into shares of our common stock, together, if applicable, with cash in lieu of any

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fractional share, at the then-applicable conversion rate. The initial conversion rate is 51.9224 shares of common stock per $1,000 principal amount of the 2026 Convertible Notes, which represents an initial conversion price of approximately $19.26 per share of common stock. The initial conversion price represents a premium of approximately 30.0% over the last reported sale of $14.815 per share of our common stock on the Nasdaq Global Market on April 14, 2020. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. If a “make-whole fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, we will, in certain circumstances, increase the conversion rate for a specified period of time for noteholders who convert their 2026 Convertible Notes in connection with that make-whole fundamental change. The 2026 Convertible Notes are not redeemable at our election before maturity. If a “fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, then, subject to a limited exception, noteholders may require us to repurchase their 2026 Convertible Notes for cash. The repurchase price will be equal to the principal amount of the 2026 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date.

In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with one or more of the Option Counterparties. The cap price of the capped call transactions will initially be $25.9263 per share, which represents a premium of approximately 75.0% over the last reported sale price of our common stock of $14.815 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions.

The net proceeds from the offering were $222.2 million, net of the initial purchasers’ discounts and commissions and the offering expenses. We used approximately $18.2 million of the net proceeds to fund the cost of entering into the capped call transactions.

The 2026 Convertible Notes are accounted for in accordance with ASC 470-20, Debt with Conversion and Other Options (“ASC 470-20”) and ASC 815-40, Contracts in Entity’s Own Equity (“ASC 815-40”). Under ASC 815-40, to qualify for equity classification (or nonbifurcation, if embedded) the instrument (or embedded feature) must be both (1) indexed to the issuer’s stock and (2) meet the requirements of the equity classification guidance. We determined that the 2026 Convertible Notes do contain embedded features indexed to our own stock, but do not meet the requirements for bifurcation, and therefore do not need to be separately accounted for as an equity component. Since the embedded conversion feature meets the equity scope exception from derivative accounting, and also since the embedded conversion option does not need to be separately accounted for as an equity component under ASC 470-20, the proceeds received from the issuance of the convertible debt were recorded as a liability on the consolidated balance sheet. We evaluated the capped call transactions under ASC 815-10 and determined that it should be accounted as a separate transaction from the 2026 Convertible Notes and that the capped calls should be classified as equity instruments. Therefore, the capped call premium paid in the amount of $18.2 million was recorded as a reduction to additional paid-in capital. The capped calls will not be subsequently re-measured as long as the conditions for equity classification continue to be met.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue generated and expense incurred during the reporting periods. As appropriate, we periodically evaluate our critical accounting policies and estimates. Our estimates are based on our historical experience and on various other factors that we believe to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Accounting estimates and judgements are inherently uncertain and the actual results could differ from these estimates.

Net Product Revenue

We account for sales of UDENYCA® under Topic 606 Revenue from Contracts with Customers. We sell UDENYCA® to wholesalers and distributors, (collectively, “Customers”). Our Customers resell UDENYCA® to hospitals and clinics (collectively, “Healthcare Providers”) under set contracts with us. In addition to distribution agreements with Customers and contracts with Healthcare Providers, we enter into arrangements with group purchasing organizations (“GPOs”) that provide for government-mandated or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of UDENYCA®. We also enter into rebate arrangements with payers, which consist primarily of commercial insurance companies, to cover the reimbursement of UDENYCA® to Healthcare Providers. We provide co-payment

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assistance to patients who have commercial insurance and meet certain eligibility requirements. Revenue from product sales is recognized when a Customer controls the product, which occurs upon delivery of UDENYCA® to and acceptance by that Customer.

Product Sales Discounts and Allowances

Revenue from product sales is recorded at the net sales price (“transaction price”), which includes estimates of variable consideration for which reserves are established and that result from discounts, chargebacks, rebates, co-pay assistance, returns and other allowances that are offered within contracts between us and our Customers, Healthcare Providers, payers and GPOs relating to the sales of UDENYCA®. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions in trade receivables (if the amounts are payable to the customer) or current liabilities (if the amounts are payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as historical experience, current contractual and statutory requirements, specifically known market events and trends, industry data and forecasted customer buying and payment patterns. Overall, these reserves reflect the best estimates of the amount of consideration to which we are entitled based on the term of our contracts. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The actual amount of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, the estimates will be adjusted, which will affect net product revenue in the period that such variances become known.

Chargebacks: Chargebacks are discounts that occur when Healthcare Providers purchase directly from a Customer. Healthcare Providers, which belong to Public Health Service institutions, non-profit clinics, government entities, GPOs, and health maintenance organizations, generally purchase the product at a discounted price. The Customer, in turn, charges back to us the difference between the price initially paid by the Customer and the discounted price paid by the Healthcare Providers to the Customer. The allowance for chargebacks is based on an estimate of sales to contracted Customers.

Discounts for Prompt Payment: We provide prompt payment discounts to our Customers, which are recorded as a reduction in revenue in the same period that the related product revenue is recognized.

Rebates: Allowances for rebates include mandated discounts under the Medicaid Drug Rebate Program, other government programs and commercial contracts. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with public sector benefit providers, such as Medicaid. Certain rebate amounts commensurate with share utilization of UDENYCA® related to other pegfilgrastim products. The allowance for rebates is based on statutory or contractual discount rates and expected utilization. Our estimates for the expected utilization of rebates are based on customer and payer data received from the pharmacies and distributors and historical utilization rates. Rebates are generally invoiced by the payer and paid in arrears, such that the accrual balance consists of an estimate of the amount expected to be incurred for the current quarter’s shipments to our Customers, plus an accrual balance for known prior quarters’ unpaid rebates. If actual future rebates vary from estimates, we may need to adjust our accruals, which would affect net product revenue in the period of adjustment.

Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that we expect to receive associated with product that has been recognized as revenue.

Product Returns: We offer our Customers a limited product return right, which is principally based upon whether the product is damaged or defective, or the product’s expiration date. Product return allowance is estimated and recorded at the time of sale.

Other Allowances: We pay fees to Customers for account management, data management and other administrative services. To the extent that the services received are distinct from the sale of products to the customer, these payments are classified in selling, general and administrative expense in our consolidated statements of operations, otherwise they are included as a reduction in product revenue.

Inventory

Prior to the regulatory approval of our product candidates, we incurred expenses for the manufacture of drug product that could potentially be available to support the commercial launch of our products. We began to capitalize inventory costs associated with

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UDENYCA® after receiving regulatory approval for UDENYCA® in November 2018 when it was determined that the inventory had a probable future economic benefit.

Our inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method. Inventory costs include third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process, and indirect overhead costs. We primarily use actual costs to determine the cost basis for inventory. The determination of whether inventory costs will be realizable requires our review of the expiration dates of our product UDENYCA® compared to our forecasted sales. If actual market conditions are less favorable than projected by us, write-downs of inventory may be required which would be recorded as cost of sales in our consolidated statement of operations.

Income Taxes

We file U.S. federal and state income tax with varying statutes of limitations. The tax years from 2011 forward remain open to examination due to the carryover of unused net operating losses and tax credits. To date, we have not been audited by the Internal Revenue Service or any state income tax authority.

We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. We assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.

As of December 31, 2020, our total net deferred tax assets, net of gross deferred tax liabilities, were $200.9 million. Due to the weight of the negative evidence, which is primarily our history of losses, outweighing other positive evidence, the federal net deferred tax assets and state net deferred tax assets have been fully offset by a valuation allowance. The deferred tax assets were primarily comprised of net operating losses, tax credit carryforwards, stock-based compensation expenses and sales related accruals. Utilization of the net operating loss and tax credit carryforwards may be subject to an annual limitation due to historical or future ownership changes under Section 382 and 383 of the Internal Revenue Code of 1986, as amended, and similar state provisions.

Recent Accounting Pronouncements

For a description of the impact of recent accounting pronouncements, see “Note 2. Basis of Presentation and Summary of Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

Results of Operations

Comparison of Years Ended December 31, 2020, 2019 and 2018

Revenue

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ (in thousands) ​ (in thousands)

Revenue: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

Net product revenue for the year ended December 31, 2020 was $475.8 million compared to $356.1 million for the year ended December 31, 2019, an increase of $119.8 million. The increase was primarily due to an increase in the number of units of UDENYCA® sold, which was partially offset by an increase in discounts and allowances incurred during the year ended December 31, 2020.

During the second quarter of 2020, we identified that certain of our commercial payer invoices were erroneously overstated and we received a refund of $7.5 million from these payers related to fiscal year 2019 which resulted in an increase in net product revenue by the same amount for 2020.

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We expect our net product revenue to decline during 2021, as a result of COVID-19 impact and new market entrants.

Net product revenue for the year ended December 31, 2019 was $356.1 million due to the U.S. sales of UDENYCA®, which commenced in January 2019. There were no product sales during the year ended December 31, 2018.

Cost of Goods Sold

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ (in thousands) ​ (in thousands)

Gross margin ​ 92 % 95 % — % (3) % 95 %

​

The cost of goods sold was $37.7 million for the year ended December 31, 2020 compared to $17.1 million for the year ended December 31, 2019. Cost of goods sold consists primarily of third-party manufacturing, distribution, overhead costs associated with the sale of UDENYCA® and a mid-single digit royalty cost on net product revenue to Amgen, which began on July 1, 2019 and will continue for five years. A portion of the manufacturing costs for inventory were incurred prior to the regulatory approval of UDENYCA® and, therefore, were expensed as research and development costs when incurred. The costs associated with this inventory were approximately $3.3 million and $24.9 million at December 31, 2020 and December 31, 2019, respectively, with estimated associated sales value of approximately $44.8 million and $367.5 million, respectively, based on our current average net selling price for the three months ended December 31, 2020. The cost basis of product sold that was expensed prior to approval, was approximately $21.1 million and $17.0 million for the year ended December 31, 2020 and 2019, respectively. Had such inventories been valued at acquisition cost, it would have resulted in a corresponding increase in cost of goods sold and a corresponding decrease in gross margin during such period. We expect to utilize the inventory expensed prior to approval of UDENYCA® by the first quarter of 2021. Subsequent to using our entire zero cost inventory, we estimate cost of goods sold as a percentage of net product revenue will be in the range of a high single digit to low double digit percentage, including the mid-single digit royalty cost on net product revenue.

Cost of goods sold for the year ended December 31, 2019 included a write-down of manufacturing costs of $1.3 million due to the cancellation of certain manufacturing reservations and $0.4 million due to the write-off of excess and obsolete inventory.

We expect our gross margin to decrease during 2021 as a result of decreasing net revenue per unit sold.

Research and Development Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ (in thousands) ​ (in thousands)

​

Research and development expense for the year ended December 31, 2020 was $142.8 million compared to $94.2 million for the same period in 2019, an increase of $48.6 million. The increase in research and development expense was primarily due to:

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The increase in research and development expense for the year ended December 31, 2020 was partially offset by:

We expect our research and development expense in 2021 to be substantially higher than in 2020 due to the incurrence of $150.0 million upfront payment as well as additional potential milestone payments to Junshi Biosciences and other additional increased development costs.

​

Research and development expense for the year ended December 31, 2019 was $94.2 million compared to $110.2 million for the same period in 2018, a decrease of $16.1 million. The decrease in research and development expense was primarily due to:

The decrease in research and development expense for the year ended December 31, 2019 was partially offset by the following:

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Selling, General and Administrative Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ (in thousands) ​ (in thousands)

​

Selling, general and administrative expense for the year ended December 31, 2020 was $139.1 million compared to $137.0 million for the same period in 2019, an increase of $2.0 million. The increase was primarily due to the following:

These increases were partially offset by a decrease of $9.0 million in legal costs related to entering into a legal settlement with Amgen in May 2019.

We expect our selling, general and administrative expense in 2021 to be higher than in 2020 as a result of anticipated increased commercial activities to support UDENYCA® sales and as a result of initiating our ophthalmology and immuno-oncology commercial activities.

Selling, general and administrative expense for the year ended December 31, 2019 was $137.0 million compared to $94.2 million for the same period in 2018, an increase of $42.9 million. The increase in selling, general and administrative expense was primarily due to:

Interest Expense

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ (in thousands) ​ (in thousands)

​

Interest expense for the year ended December 31, 2020 was $21.2 million compared to $17.6 million for the same period in 2019, an increase of $3.6 million. The increase in interest expense was primarily due to the interest related to our 2026 Convertible Notes that were issued in April 2020.

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Interest expense for the year ended December 31, 2019 was $17.6 million compared to $9.7 million for the same period in 2018, an increase of $7.9 million. The increase in interest expense was primarily attributable to the Term Loan we entered into in January 2019.

Other income, net

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ (in thousands) ​ (in thousands)

​

Other income, net for the year ended December 31, 2020 was $0.6 million compared to $2.6 million for the year ended December 31, 2019, a decrease of $2.1 million. The decrease in other income, net was primarily due to decrease of $1.3 million in interest income due to lower portfolio yields as a result of decrease in interest rates in 2020 and a decrease of $0.6 million due to fluctuations in foreign exchange rates.

Other income, net was higher in 2018 compared to that of 2019 because the fair value of our contingent liability related to the Compound Transaction Payment associated with our InteKrin acquisition decreased as a result of a decrease in the probability of occurrence from 33% to 10% and an extension in the timing of occurrence to a later date.

Income Tax Provision

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ (in thousands) (in thousands)

​

Income tax provision for the year ended December 31, 2020 was $3.5 million compared to $2.9 million for the same period in 2019, an increase of $0.5 million. Income tax provision primarily relates to state taxes in jurisdictions outside of California, for which we have a limited operating history. Our historical losses are sufficient to fully offset any federal taxable income. The income tax provision differed from the U.S. federal statutory rate of 21% primarily due to the effect of change in the valuation allowance against our federal deferred tax assets, which reduced our net tax expense. We maintain a full valuation allowance against our net deferred tax assets due to our history of losses.

There was no income tax provision for the year ended December 31, 2018 as we maintained a full valuation allowance against our net deferred tax assets due to our history of losses during these periods.

Liquidity and Capital Resources

Due to our significant research and development expenditures, and although we are profitable for the years ended December 31, 2020 and 2019, we previously generated significant operating losses since our inception. We funded our operations primarily through the equity financing, sales of our convertible preferred stock, sales of UDENYCA® units, issuance of debt and payments received under our collaboration and license agreements.

In October 2016, we entered into a sales agreement with Cowen, under which we offered and sold our common stock, having aggregate gross proceeds of up to $100.0 million, from time to time through Cowen as our sales agent in our ATM Offering Program. In January 2019, we issued and sold an aggregate of 761,130 shares of common stock at a weighted average price of $11.17 per share under the ATM Offering Program for aggregate net proceeds of $8.2 million. As of January 19, 2019, our Shelf Registration Statement expired and accordingly the ATM Offering Program was terminated.

On January 7, 2019 (the “Term Loan Closing Date”), we entered into a credit agreement (the “Term Loan”) with affiliates of Healthcare Royalty Partners (together, the “Lender”). The Term Loan consists of a six-year term loan facility for an aggregate principal amount of $75.0 million (the “Borrowings”). Our obligations under the loan documents are guaranteed by our material domestic U.S. subsidiaries. The Borrowings under the Term Loan bear interest through maturity at 7.00% per annum plus LIBOR (customarily defined).

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The consolidated net sales (customarily defined) for UDENYCA® for the fiscal year ending December 31, 2019, exceeded $250.0 million, which resulted in an interest rate reduction to 6.75% per annum plus LIBOR, effective January 1, 2020. Interest is payable quarterly in arrears. We are required to pay principal on the Borrowings in equal quarterly installments beginning on the four year anniversary of the Term Loan Closing Date (or, if consolidated net sales of UDENYCA® in the fiscal year ending December 31, 2021 are less than $375.0 million, beginning on the three year anniversary of the Term Loan Closing Date), with the outstanding balance to be repaid on January 7, 2025, the maturity date. We are also required to make mandatory prepayments of the Borrowings under the Term Loan, subject to specified exceptions, with the proceeds of asset sales, extraordinary receipts, debt issuances and specified other events including the occurrence of a change in control. If all or any of the Borrowings are prepaid or required to be prepaid under the Term Loan, then we shall pay, in addition to such prepayment, a prepayment premium equal to (i) with respect to any prepayment paid or required to be paid on or prior to the three year anniversary of the Term Loan Closing Date, 5.00% of the Borrowings prepaid or required to be prepaid, plus all required interest payments that would have been due on the Borrowings prepaid or required to be prepaid through and including the three year anniversary of the Term Loan Closing Date, (ii) with respect to any prepayment paid or required to be paid after the three year anniversary of the Term Loan Closing Date but on or prior to the four year anniversary of the Term Loan Closing Date, 5.00% of the Borrowings prepaid or required to be prepaid, (iii) with respect to any prepayment paid or required to be paid after the four year anniversary of the Term Loan Closing Date but on or prior to the five year anniversary of the Term Loan Closing Date, 2.50% of the Borrowings prepaid or required to be prepaid, and (iv) with respect to any prepayment paid or required to be prepaid thereafter, 1.25% of the Borrowings prepaid or required to be prepaid. In connection with the Term Loan, we paid a fee to the Lender of approximately $1.1 million at closing in the form of an original issue discount. Upon the prepayment or maturity of the Borrowings (or upon the date such prepayment or repayment is required to be paid), we are required to pay an additional exit fee in an amount equal to 4.00% of the total principal amount of the Borrowings. The obligations under the Term Loan are secured by a lien on substantially all of our and our Guarantors’ tangible and intangible property, including intellectual property. The Term Loan contains certain affirmative covenants, negative covenants and events of default, including, covenants and restrictions that among other things, restrict our ability and our subsidiaries to, incur liens, incur additional indebtedness, make loans and investments, engage in mergers and acquisitions, in asset sales, and declare dividends or redeem or repurchase capital stock. Additionally, the consolidated net sales for UDENYCA® must not be lower than $70.0 million for the fiscal year ending December 31, 2019, (b) $125.0 million for the fiscal year ending December 31, 2020, and (c) $150.0 million for each fiscal year thereafter. A failure to comply with these covenants could permit the Lender under the Term Loan to declare the Borrowings, together with accrued interest and fees, to be immediately due and payable.

In April 2020, we issued and sold $230 million aggregate principal amount of 1.5% convertible senior subordinated notes due 2026 (the “2026 Convertible Notes”) in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act. In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with one or more of the Option Counterparties. The cap price of the capped call transactions will initially be $25.9263 per share, which represents a premium of approximately 75.0% over the last reported sale price of our common stock of $14.815 per share on April 14, 2020, and is subject to certain adjustments under the terms of the capped call transactions. The 2026 Convertible Notes are general unsecured obligations and will be subordinated to our designated senior indebtedness. The 2026 Convertible Notes accrue interest at a rate of 1.5% per annum, payable semi-annually in arrears on April 15 and October 15 of each year, beginning on October 15, 2020, and will mature on April 15, 2026, unless earlier repurchased or converted. At any time before the close of business on the second scheduled trading day immediately before the maturity date, holders may convert their 2026 Convertible Notes at their option into shares of our common stock, together, if applicable, with cash in lieu of any fractional share, at the then-applicable conversion rate. The initial conversion rate is 51.9224 shares of common stock per $1,000 principal amount of 2026 Convertible Notes, which represents an initial conversion price of approximately $19.26 per share of common stock. The initial conversion price represents a premium of approximately 30.0% over the last reported sale of $14.815 per share of our common stock on the Nasdaq Global Market on April 14, 2020. The conversion rate and conversion price will be subject to customary adjustments upon the occurrence of certain events. If a “make-whole fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, we will, in certain circumstances, increase the conversion rate for a specified period of time for holders who convert their 2026 Convertible Notes in connection with that make-whole fundamental change. The 2026 Convertible Notes are not redeemable at our election before maturity. If a “fundamental change” (as defined in the indenture for the 2026 Convertible Notes) occurs, then, subject to a limited exception, holders may require us to repurchase their 2026 Convertible Notes for cash. The repurchase price will be equal to the principal amount of the 2026 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the applicable repurchase date. The net proceeds from the offering were $222.2 million, net of the initial purchasers’ fees and the offering expenses. We used approximately $18.2 million of the net proceeds to fund the cost of entering into the capped call transactions.

In 2020, we purchased investments in marketable securities in accordance with our investment policy in order to obtain interest income on our cash balances.

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As of December 31, 2020, we had an accumulated deficit of $762.8 million and cash and cash equivalents of $541.2 million. We had $132.2 million in net income for the year ended December 31, 2020. We believe that our current available cash, cash equivalents and cash collected from UDENYCA® sales will be sufficient to fund our planned expenditures and meet our obligations for at least the next 12 months following our financial statement issuance date. We may need to raise additional funds in the future; however, there can be no assurance that such efforts will be successful or that, in the event that they are successful, the terms and conditions of such financing will be favorable to us.

Summary Statement of Cash Flows

The following table summarizes our cash flows for the periods presented:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

​ ​ (in thousands)

​

Net cash provided by (used in) operating activities

Cash provided by operating activities was $154.1 million for the year ended December 31, 2020, which was primarily due to the following:

● net income of $132.2 million;

The cash provided by operating activities was partially offset by the following:

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Cash provided by operating activities was $28.4 million for the year ended December 31, 2019, which was primarily due to the following:

● net income of $89.8 million;

The cash provided by operating activities was partially offset by the following:

Cash used in operating activities was $159.3 million for the year ended December 31, 2018, which was primarily due to the following:

● a net loss of $209.4 million;

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The cash used in operating activities was partially offset by the following:

● non-cash charges related to stock-based compensation of $34.8 million;

Net cash used in investing activities

Cash used in investing activities of $14.4 million for the year ended December 31, 2020 was primarily due to purchases of investments in marketable securities of $273.8 million, upfront and milestone-based license fee payments of $7.5 million to Innovent and purchases of property and equipment of $7.2 million partially offset by the proceeds from maturities of investments in marketable securities of $274.0 million.

Cash used in investing activities of $12.7 million for the year ended December 31, 2019 was due to the purchase of short-term investments in marketable securities of $20.2 million, upfront and milestone payments related to our Bioeq license and collaboration arrangement of $11.1 million and purchases of property and equipment of $1.8 million. The cash used in investing activities was partially offset by proceeds from maturities of investments in marketable securities of $20.4 million.

Cash used in investing activities of $1.2 million for the year ended December 31, 2018 was due to the purchase of short-term investments in marketable securities of $42.9 million, the purchase of the non-controlling interest of $0.7 million and purchases of property and equipment of $0.8 million. The cash used in investing activities was partially offset by proceeds from maturities of investments in marketable securities of $43.2 million.

Net cash provided by financing activities

Cash provided by financing activities of $223.9 million for the year ended December 31, 2020 was primarily due to $222.2 million in proceeds from the issuance of 2026 Convertible Notes, net of issuance costs, $17.4 million proceeds from the exercise of stock options and $3.8 million proceeds from purchases under the Employee Stock Purchase Plan (“ESPP”) partially offset by $18.2 million of capped call option purchases related to 2026 Convertible Notes, $0.9 million in tax payments related to net share settlement of bonus payout in RSUs and $0.4 million in principal payments for finance lease obligations.

Cash provided by financing activities of $89.4 million for year ended December 31, 2019 was primarily related to $73.0 million in proceeds from our term loan, net of issuance costs, $8.1 million from the issuance of our common stock from our ATM Offering Program, net of underwriting discounts, commissions and offering costs, $5.6 million from the exercise of stock options and $3.5 million in proceeds related to our ESPP. The proceeds were partially offset by payments of $0.8 million for taxes related to the net shares settlement of bonus payout in RSUs.

Cash provided by financing activities of $105.4 million for year ended December 31, 2018 was primarily due to net proceeds of $102.3 million from the issuance of our common stock from an underwritten public offering in May 2018 and our ATM Offering Program,

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net of underwriting discounts and commissions, $2.0 million from the exercise of stock options, and $1.6 million in proceeds related to our ESPP. The proceeds were partially offset by payments of $0.5 million for offering expenses related to the issuance of common stock.

Funding Requirements

We believe that our current available cash, cash equivalents, and cash collected from UDENYCA® sales will be sufficient to fund our planned expenditures and meet our obligations for the foreseeable future, beyond the 12 months following our financial statement issuance date. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. Further, our operating plan may change, and we may need additional funds to meet operational needs and capital requirements for product development and commercialization sooner than planned. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates and the extent to which we may enter into additional agreements with third parties to participate in their development and commercialization, we are unable to estimate the amounts of increased capital outlays and operating expenditures associated with our current and anticipated research and development activities, and on-going and future licensing and collaboration obligations. Our future funding requirements will depend on many factors, including the following:

● cash proceeds from UDENYCA® sales;

● the costs of manufacturing, distributing and marketing UDENYCA®;

● the number and characteristics of product candidates that we pursue;

● the cost, timing and outcomes of regulatory approvals;

If the proceeds from UDENYCA® sales are insufficient or are not collected in a timely manner and or our operating expenses are higher than the proceeds from UDENYCA® sales, we may need to raise additional capital to fund our operations in the near future. Funding may not be available to us on acceptable terms, or at all. If we are unable to obtain adequate financing when needed, we may have to delay, reduce the scope of or suspend one or more of our clinical trials or research and development programs. We may seek to raise any necessary additional capital through a combination of public or private equity offerings, debt financings, collaborations, strategic alliances, licensing arrangements and other marketing and distribution arrangements. We may seek to enter into strategic partnerships to commercialize our biosimilar candidates in ex-US territories or globally for certain therapeutic areas. To the extent that we raise additional capital through marketing and distribution arrangements or other collaborations, strategic alliances or licensing arrangements with third parties, we may have to relinquish valuable rights to our product candidates, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through debt financing, we may be subject

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to additional covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

Off-Balance Sheet Arrangements

Since our inception, we have not engaged in any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Contractual Obligations

Our future contractual obligations as of December 31, 2020 were as follows:

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Contractual Obligations Total Short Term Long Term

​ ​ (in thousands)

Finance lease obligations (4) ​ ​ 1,537 ​ ​ 626 ​ ​ 911 ​

Contingent payments to InteKrin Stockholders ​ 102 ​ — ​ 102 ​

The Company enters into contracts in the normal course of business with CROs for preclinical studies and clinical trials and CMOs for the manufacture of drug materials. The contracts are cancellable, with varying provisions regarding termination. If a contract with a specific vendor were to be terminated, the Company would only be obligated for products or services that the Company had received as of the effective date of the termination and any applicable cancellation fees.

​

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

As of December 31, 2020, we had cash and cash equivalents of $541.2 million. A portion of our cash equivalents, which are in money market funds, may be subject to interest rate risk and could fall in value if market interest rates increase. However, because our cash equivalents are primarily short-term in duration, we believe that our exposure to interest rate risk is not significant and a 1% movement in market interest rates would not have a significant impact on the total value of our portfolio.

We are exposed to market risk related to changes in foreign exchange rates. We contract with CROs and contract manufacturers globally and thus we face foreign exchange risk as a result of entering into transactions denominated in currencies other than U.S. dollars. Due to the uncertain timing of expected payments in foreign currencies, we do not utilize any forward exchange contracts. All foreign transactions settle on the applicable spot exchange basis at the time such payments are made. An adverse movement in foreign exchange rates could have a material effect on payments made to foreign suppliers and for license agreements. A hypothetical 10% change in foreign exchange rates during any of the periods presented would not have had a material impact on our financial statements. We do not enter into investments for trading or speculative purposes and have not used any derivative financial instruments to manage our interest rate risk exposure.

​

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Item 8. Consolidated Financial Statements and Supplementary Data

COHERUS BIOSCIENCES, INC.

ANNUAL REPORT ON FORM 10-K

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

​

Page

Report of Independent Registered Public Accounting Firm 86

Consolidated Financial Statements ​

Consolidated Balance Sheets 88

Consolidated Statements of Operations ​ 89

Consolidated Statements of Comprehensive Income (Loss) 90

Consolidated Statements of Stockholders’ Equity (Deficit) 91

Consolidated Statements of Cash Flows 92

Notes to Consolidated Financial Statements 93

​

​

​

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Stockholders and the Board of Directors of Coherus BioSciences, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Coherus BioSciences, Inc., (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), stockholders’ equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes(collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

​

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 25, 2021 expressed an unqualified opinion thereon.

​

Basis for Opinion

​

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

​

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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​ ​

​ Estimate of Reserves for Chargebacks and Rebates

​ ​ ​

​ ​ ​

​

​

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2012.

Redwood City, California

February 25, 2021

​

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Coherus BioSciences, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

​ ​ ​ ​ ​ ​ ​

​ ​ December 31,

​ ​ ​ ​ ​ ​ ​

Assets ​ ​ ​

Current assets: ​ ​ ​

Other prepaid and other assets ​ 5,613 ​ 4,964

Operating lease right-of-use assets ​ 9,956 ​ 10,649

Restricted cash, non-current ​ 440 ​ 240

Other assets, non-current ​ 2,147 ​ 362

Liabilities and Stockholders’ Equity ​ ​

Current liabilities: ​ ​

Accrued rebates, fees and reserve ​ 81,529 ​ 51,120

Other current liabilities ​ 3,861 ​ 2,196

Contingent consideration, non-current ​ 102 ​ 102

Lease liabilities, non-current ​ 9,948 ​ 10,256

Other liabilities, non-current ​ 949 ​ —

Commitments and contingencies (Note 8) ​ ​

Stockholders’ equity: ​ ​

Accumulated other comprehensive loss ​ (270) ​ (558)

Total liabilities and stockholders’ equity ​ $ 841,649 ​ $ 408,927

​

See accompanying notes to consolidated financial statements.

​

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Coherus BioSciences, Inc.

Consolidated Statements of Operations

(in thousands, except share and per share data)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Revenue: ​ ​ ​ ​

Operating expenses: ​ ​ ​ ​

Net loss attributable to non-controlling interest ​ ​ — ​ ​ — ​ ​ 70

​ ​ ​ ​

Net income (loss) per share attributable to Coherus: ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​

See accompanying notes to consolidated financial statements.

​

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Coherus BioSciences, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(in thousands)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other comprehensive income (loss): ​ ​ ​ ​

Foreign currency translation adjustments, net of tax ​ 288 ​ (276) ​ 468

Comprehensive loss attributable to non-controlling interest ​ — ​ — ​ 70

​

See accompanying notes to consolidated financial statements.

​

​

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Coherus BioSciences, Inc.

Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands, except share and per share data)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ Total Coherus ​ ​ ​ ​ Total

​ ​ ​ ​ ​ ​ ​ Additional ​ Other ​ ​ ​ ​ Stockholders' ​ Non- ​ Stockholders'

​ Shares ​ Amount Capital Loss Deficit (Deficit) Interest (Deficit)

Stock-based compensation expense — ​ — ​ 34,984 ​ — ​ — ​ 34,984 ​ — ​ 34,984

Cumulative translation adjustment — ​ — ​ — ​ 468 ​ — ​ 468 ​ — ​ 468

Issuance of common stock upon vesting of RSUs 39,765 ​ — ​ — ​ — ​ — ​ — ​ — ​ —

Cumulative translation adjustment — ​ — ​ — ​ (276) ​ — ​ (276) ​ — ​ (276)

Net income attributable to Coherus — ​ — ​ — ​ — ​ 89,833 ​ 89,833 ​ — ​ 89,833

​

See accompanying notes to consolidated financial statements.

​

​

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Coherus BioSciences, Inc.

Consolidated Statements of Cash Flows

(in thousands)

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Years Ended December 31,

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Operating activities ​ ​ ​ ​

Remeasurement of fair-value contingent consideration ​ — ​ 42 ​ (3,230)

Non-cash accretion of discount on marketable securities ​ (155) ​ (165) ​ (301)

Impairment of property and equipment ​ — ​ 110 ​ 3,861

Excess and obsolete inventory ​ — ​ 410 ​ —

Other non-cash adjustments ​ ​ 426 ​ ​ — ​ ​ —

Non-cash operating lease expense ​ 2,081 ​ 1,789 ​ —

Upfront and milestone based license fee payments ​ 7,500 ​ 11,075 ​ —

Changes in operating assets and liabilities: ​ ​ ​ ​

Other prepaid and current assets ​ (235) ​ (2,126) ​ 1,146

Other assets, non-current ​ (1,785) ​ (348) ​ (1)

Accounts payable - related parties ​ — ​ — ​ (233)

Accrued rebates, fees and reserve ​ 30,409 ​ 51,120 ​ —

Lease liabilities ​ (1,439) ​ (2,010) ​ —

Other liabilities, non-current ​ 949 ​ (30) ​ (428)

Investing activities ​ ​ ​

Purchases of property and equipment ​ (7,231) ​ (1,822) ​ (789)

Proceeds from disposal of property and equipment ​ ​ 175 ​ ​ — ​ ​ —

Upfront and milestone based license fee payments ​ (7,500) ​ (11,075) ​ —

Financing activities ​ ​ ​

Proceeds from term loan, net of issuance costs ​ — ​ 72,955 ​ —

Principal payments for finance lease obligations ​ ​ (389) ​ ​ — ​ ​ —

Supplemental disclosure of cash flow information ​ ​ ​

Cash paid for income taxes ​ ​ 3,953 ​ ​ 1,732 ​ ​ —

Supplemental disclosures of non-cash investing and financing activities ​ ​ ​ ​

Non-cash employee bonuses settled in common stock ​ 1,498 ​ 1,350 ​ —

​

See accompanying notes to consolidated financial statements.

​

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Coherus BioSciences, Inc.

Notes to Consolidated Financial Statements

1.Organization and Operations

Description of the Business

Coherus BioSciences, Inc. (the “Company” or “Coherus”) is a commercial-stage biotherapeutics company, focused on the biosimilar and immuno-oncology market primarily in the United States. The Company’s headquarters and laboratories are located in Redwood City, California and in Camarillo, California, respectively. The Company’s product pipeline comprises of four drugs, CHS-1420 (an adalimumab (Humira) biosimilar), a ranibizumab (Lucentis) biosimilar in-licensed for U.S. and Canadian commercial rights from Bioeq AG, a bevacizumab (Avastin) biosimilar in-licensed for U.S. commercial rights from Innovent Biologics (Suzhou) Co., Ltd. and toripalimab, an anti-PD-1 antibody being developed in collaboration with Shanghai Junshi Biosciences Co., Ltd.

The Company commercializes UDENYCA® (pegfilgrastim-cbqv), a biosimilar to Neulasta, a long-acting granulocyte-colony stimulating factor, in the United States.

​

2.Basis of Presentation and Summary of Significant Accounting Policies

Basis of Consolidation

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”). The accompanying consolidated financial statements include the accounts of Coherus and its wholly owned subsidiaries as of December 31, 2020: Coherus Intermediate Corp, InteKrin Therapeutics Inc. (“InteKrin”) and InteKrin’s wholly-owned subsidiary, InteKrin Russia. Unless otherwise specified, references to the Company are references to Coherus and its consolidated subsidiaries. All intercompany transactions and balances have been eliminated upon consolidation.

Liquidity

As of December 31, 2020, the Company had an accumulated deficit of $762.8 million and cash and cash equivalents of $541.2 million. The Company had $132.2 million in net income for the year ended December 31, 2020. The Company believes that its current available cash, cash equivalents and cash collected from UDENYCA® sales will be sufficient to fund its planned expenditures and meet the Company’s obligations for at least 12 months following its financial statement issuance date. The Company may need to raise additional funds in the future; however there can be no assurance that such efforts will be successful or that, in the event that they are successful, the terms and conditions of such financing will be favorable. If the Company is unable to obtain adequate financing when needed, it may have to delay, reduce the scope of or suspend one or more of its clinical trials, or research and development programs.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures reported in the financial statements. Management uses significant judgment when making estimates including, but not limited to: those related to revenue recognition, including determining the nature and timing of satisfaction of performance obligations, and determining the standalone selling price of performance obligations, and variable consideration such as rebates, chargebacks, sales returns and sale allowances, as well as milestones included in collaboration and license arrangements; related to its stock-based compensation, valuation of deferred tax assets, impairment of goodwill and long-lived assets, the valuation of acquired intangible assets, valuation and reserves for inventory, clinical trial accruals, contingent consideration, convertible notes valuation, as well as certain accrued liabilities. Management bases its estimates on historical experience and on other various assumptions that are believed to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities when these values are not readily apparent from other sources. Accounting estimates and judgements are inherently uncertain and the actual results could differ from these estimates.

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During the second quarter of 2020, the Company identified that certain of its commercial payer invoices were erroneously overstated. The Company received a refund of $7.5 million from these payers related to fiscal year 2019 which resulted in an increase in net product revenue of $7.5 million for the year ended December 31, 2020. The refund adjustment resulted in an increase in basic and diluted net income per share of $0.11 and $0.09, respectively, during the year ended December 31, 2020. Accrued commercial payer rebates of $27.9 million and $14.0 million were recorded in accrued rebates, fees and reserve as of December 31, 2020 and December 31, 2019, respectively, in the consolidated balance sheet.

Foreign Currency

The functional currency of InteKrin Russia, which the Company acquired in February 2014, is the Russian Ruble. Accordingly, the financial statements of this subsidiary are translated into U.S. dollars using appropriate exchange rates. Unrealized gains or losses on translation are recognized in accumulated other comprehensive loss in the consolidated balance sheet.

For the years ended December 31, 2020, 2019 and 2018, the foreign exchange gains and losses recorded in other income, net in the consolidated statements of operations were a net loss of $333,000, net gain of $239,000 and a net loss of $571,000, respectively.

Segment Reporting and Revenue by Geographic Region

The Company operates and manages its business as one reportable and operating segment, which is the business of developing and commercializing biosimilar products and, as part of the InteKrin acquisition, small molecules. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for purposes of allocating resources and evaluating financial performance. All revenue is generated in the United States of America and all Long-lived assets are primarily maintained in the United States of America.

Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash are comprised of cash and highly liquid investments with remaining maturities of 90 days or less at the date of purchase. The Company limits cash investments to financial institutions with high credit standings; therefore, management believes that there is no significant exposure to any credit risk in the Company’s cash, cash equivalents and restricted cash.

The following table provides a reconciliation of cash, cash equivalents and restricted cash within the consolidated balance sheets and which, in aggregate, represent the amount reported in the consolidated statements of cash flows (in thousands):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Year Ended December 31,

Restricted cash ​ — ​ — ​ 50

Restricted cash - non-current ​ 440 ​ 240 ​ 785

​

Restricted cash – non-current consists of deposits for a letter of credit that the Company has provided to secure its obligations under certain facility and other leases.

The Company classifies the up-front and milestone payments related to licensing arrangements as cash flows from investing activities in its consolidated statements of cash flows.

Investments in Marketable Securities

Management determines the appropriate classification of investments in marketable securities at the time of purchase based upon management’s intent with regards to such investment and reevaluates such designation as of each balance sheet date. The Company’s investment policy requires that it only invests in highly-rated securities and limit its exposure to any single issuer. All investments in marketable securities are held as “available-for-sale” and are carried at the estimated fair value as determined based upon quoted market prices or pricing models for similar securities.

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​

The Company classifies investments in marketable securities as short-term when they have remaining contractual maturities of one year or less from the balance sheet date. Unrealized gains and losses are reported as a component of accumulated comprehensive income (loss), with the exception of unrealized losses believed to be related to credit losses, which, if any, are recognized through earnings in the period the impairment occurs. Impairment assessments are made at the individual security level each reporting period. When the fair value of an investment is less than its cost at the balance sheet date, a determination is made as to whether the impairment is related to a credit loss and, if it is, the portion of the impairment relating to credit loss is recorded as an allowance through net income. Realized gains and losses and declines in value judged to be other than temporary, if any, on available-for-sale securities are included in other income, net, based on the specific identification method. For the years ended December 31, 2020, 2019 and 2018, interest income from marketable securities was $0.6 million, $1.6 million and $1.4 million, respectively.

Trade Receivables

Trade receivables are recorded net of allowances for chargebacks, chargeback prepayments, cash discounts for prompt payment and credit losses. The Company estimates an allowance for expected credit losses by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The corresponding expense for the credit loss allowance is reflected in selling, general and administrative expenses. The credit loss allowance was immaterial as of December 31, 2020.

Concentration of Credit Risk

The Company’s financial instruments that are exposed to concentration of credit risk consist primarily of cash, cash equivalents and restricted cash. The Company maintains its cash in bank accounts, which at times exceed federally insured limits. The Company attempts to minimize the risks related to cash, cash equivalents and restricted cash by investing in money markets with a broad and diverse range of financial instruments. The investment portfolio is maintained in accordance with the Company’s investment policy, which defines allowable investments, specifies credit quality standards and limits the credit exposure of any single issuer. The Company also maintains restricted cash in money market funds that invest primarily in U.S. Treasury securities. The Company has not recognized any losses from credit risks on such accounts during any of the periods presented. The Company believes it is not exposed to significant credit risk on its cash and money market funds.

The Company is subject to credit risk from trade receivables related to the product sales in the United States. To date, the Company has not experienced significant losses with respect to the collection of trade receivables. The Company believes that its allowance for doubtful accounts was adequate at December 31, 2020.

The Company entered into a strategic commercial supply agreement with KBI Biopharma (“KBI”) for the supply of UDENYCA®. The Company currently has not engaged back-up suppliers or vendors for this single-sourced service. If KBI is not able to manufacture the supply needed in the quantities and timeframe required, the Company may not be able to supply the product in a timely manner.

Fair Value of Financial Instruments

Fair value accounting is applied to all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis.

Inventory

Prior to the regulatory approval of the product candidates, the Company incurred expenses for the manufacture of drug product that could potentially be available to support the commercial launch of its products. The Company began to capitalize inventory costs associated with UDENYCA® after receiving regulatory approval for UDENYCA® in November 2018 when it was determined that the inventory had a probable future economic benefit.

Inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method. Inventory costs include third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process, and indirect overhead costs. The Company primarily uses actual costs to determine the cost basis for inventory. The determination of whether inventory costs will be realizable requires management review of the expiration dates of UDENYCA®

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compared to its forecasted sales. If actual market conditions are less favorable than projected by management, write-downs of inventory may be required, which would be recorded as cost of goods sold in the consolidated statement of operations.

Property and Equipment

Property and equipment is stated at cost less accumulated depreciation and amortization. Maintenance and repairs are charged to expense as incurred, and costs of improvements are capitalized. Depreciation and amortization is recognized using the straight-line method over the following estimated useful lives:

​

​ ​ ​

Computer equipment and software 3 years

Furniture and fixtures 5 years

Machinery and equipment 5 years

Leasehold improvements Shorter of lease term or useful life

​

Impairment of Long Lived Assets and Acquired Intangible Asset

The Company reviews long-lived assets, including property and equipment, and indefinite-lived intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized when the estimated undiscounted future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying value of a long-lived asset exceeds its fair value. There were no impairments recorded during the year ended December 31, 2020. For the years ended December 31, 2019 and 2018, the Company recorded an impairment of property and equipment of $0.1 million and $3.9 million, respectively, in research and development within the statement of operations.

The intangible assets of $2.6million as of December 31, 2020 and 2019 comprise of acquired in-process research and development (“IPR&D”), which represents the fair value assigned to research and development assets that have not reached technological feasibility. The Company reviews amounts capitalized as acquired IPR&D for impairment at least annually, and whenever events or changes in circumstances indicate that the carrying value of the assets might not be recoverable. If the carrying value of the acquired IPR&D exceeds its fair value, then the intangible asset is written-down to its fair value. As of December 31, 2020, there have been no such impairments. Once the product candidate derived from the indefinite-lived intangible asset has been developed and commercialized, the useful life will be determined, and the carrying value of the finite-lived asset will be amortized prospectively over the estimated useful life. Alternatively, if the product candidate is abandoned, the carrying value of the intangible will be charged to research and development expense.

Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and intangible assets acquired. The Company tests goodwill for impairment at least annually or more frequently if events or changes in circumstances indicate that this asset may be impaired. The goodwill test is based on our single operating segment and reporting unit structure.

The Company compares the fair value of its reporting unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company would need to determine the implied fair value of the reporting unit’s goodwill. If the carrying value of the reporting unit’s goodwill exceeds its implied fair value, then the Company would record an impairment loss equal to the difference. No goodwill impairment was identified through December 31, 2020.

Accrued Research and Development Expense

Clinical trial costs are a component of research and development expense. The Company accrues and expenses clinical trial activities performed by third parties based upon actual work completed in accordance with agreements established with clinical research and manufacturing organizations and clinical sites. The Company determines the actual costs through monitoring patient enrollment, discussions with internal personnel and external service providers regarding the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.

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Net Product Revenue

The Company accounts for sales of UDENYCA® under Topic 606 Revenue from Contracts with Customers. The Company sells UDENYCA® to wholesalers and distributors, (collectively, “Customers”). The Customers then resell UDENYCA® to hospitals and clinics (collectively, “Healthcare Providers”) pursuant to contracts with the Company. In addition to distribution agreements with Customers and contracts with Healthcare Providers, the Company enters into arrangements with group purchasing organizations (“GPOs”) that provide for U.S. government-mandated or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of UDENYCA®. The Company also enters into rebate arrangements with payers, which consist primarily of commercial insurance companies and government entities, to cover the reimbursement of UDENYCA® to Healthcare Providers. The Company provides co-payment assistance to patients who have commercial insurance and meet certain eligibility requirements. Revenue from product sales is recognized when a Customer controls the product, which occurs upon delivery of UDENYCA® to and acceptance by that Customer.

Product Sales Discounts and Allowances

Revenue from product sales is recorded at the net sales price (“transaction price”), which includes estimates of variable consideration for which reserves are established and that result from chargebacks, rebates, co-pay assistance, prompt-payment discounts, returns and other allowances that are offered within contracts between the Company and its Customers, Healthcare Providers, payers and GPOs relating to the sales of UDENYCA®. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions in trade receivables (if the amounts are payable to a Customer) or current liabilities (if the amounts are payable to a party other than a Customer). Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-weighted for relevant factors such as historical experience, current contractual and statutory requirements, specifically known market events and trends, industry data and forecasted Customer buying and payment patterns. Overall, these reserves reflect the best estimates of the amount of consideration to which the Company is entitled based on the terms of its contracts. The amount of variable consideration that is included in the transaction price may be constrained, and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The actual amount of consideration ultimately received may differ. If actual results in the future vary from the Company’s estimates, the estimates will be adjusted, which will affect the net product revenue in the period that such variances become known.

Chargebacks: Chargebacks are discounts that occur when Healthcare Providers purchase directly from a Customer. Healthcare Providers, which belong to Public Health Service institutions, non-profit clinics, government entities, GPOs, and health maintenance organizations, generally purchase the product at a discounted price. The Customer, in turn, charges back to the Company the difference between the price initially paid by the Customer and the discounted price paid by the Healthcare Providers to the Customer. The allowance for chargebacks is based on an estimate of sales through to Healthcare Providers from the Customer.

Discounts for Prompt Payment: The Company provides for prompt payment discounts to its Customers, which are recorded as a reduction in revenue in the same period that the related product revenue is recognized.

Rebates: Rebates include mandated discounts under the Medicaid Drug Rebate Program, other government programs and commercial contracts. Rebate amounts owed after the final dispensing of the product to a benefit plan participant are based upon contractual agreements or legal requirements with these public sector benefit providers. Certain rebate amounts commensurate with share utilization of UDENYCA® relative to other pegfilgrastim products. The accrual for rebates is based on statutory or contractual discount rates and expected utilization. The estimates for the expected utilization of rebates are based on Customer and commercially available payer data, as well as data collected from the Healthcare Providers, Customers, GPOs, and historical utilization rates. Rebates invoiced by payers, Healthcare Providers and GPOs are paid in arrears. If actual future rebates vary from estimates, the Company may need to adjust its accruals, which would affect net product revenue in the period of adjustment.

Co-payment Assistance: Patients who have commercial insurance and meet certain eligibility requirements may receive co-payment assistance. The calculation of the accrual for co-pay assistance is based on an estimate of claims and the cost per claim that the Company expects to receive associated with product that has been recognized as revenue.

Product Returns: The Company offers its Customers a limited product return right, which is principally based upon whether the product is damaged or defective, or the product’s expiration date. Product return allowance is estimated and recorded at the time of sale.

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Other Allowances: The Company pays fees to Customers and GPOs for account management, data management and other administrative services. To the extent that the services received are distinct from the sale of products to the customer, these payments are classified in selling, general and administrative expense in the Company’s consolidated statements of operations, otherwise they are included as a reduction in product revenue.

Cost of Goods Sold

Cost of goods sold consists primarily of third-party manufacturing, distribution, and overhead costs associated with UDENYCA®. A portion of the costs of producing UDENYCA® sold to date was expensed as research and development prior to the FDA approval of UDENYCA® and, therefore, it is not reflected in the cost of goods sold.

On May 2, 2019, the Company and Amgen Inc. and Amgen USA Inc. (collectively “Amgen”) settled a trade secret action brought by Amgen. As a result, cost of goods sold reflects a mid-single digit royalty on net product revenue, which began on July 1, 2019. The royalty cost will continue for five years pursuant to the settlement.

Cost of goods sold for the year ended December 31, 2019, included write-off of prepaid manufacturing costs of $1.3 million due to the cancellation of certain manufacturing reservations, and $0.4 million due to the write-off of excess and obsolete inventory. There were no material inventory write-offs recorded during the years ended December 31, 2020 and 2018.

Research and Development Expense

Research and development costs are charged to expense as incurred. Research and development expense includes, among other costs, salaries and other personnel-related costs, consultant fees, preclinical costs, cost to manufacture drug candidates, clinical trial costs and supplies, laboratory supply costs, upfront and milestone payments under the licensing agreements and facility-related costs. Costs incurred under agreements with third parties are charged to expense as incurred in accordance with the specific contractual performance terms of such agreements. Third-party costs include costs associated with manufacturing drug candidates, preclinical and clinical support activities. In certain cases, amounts received as reimbursement for research and development activities from the Company’s collaborators are recognized as a reduction in research and development expense when the Company engages in a research and development project, jointly with another party, with both parties incurring costs while actively participating in project activities and sharing costs and potential benefits of the arrangement. Costs incurred under arrangements where the Company provides research services approximate the amount of revenues recorded. Advance payments for goods or services to be received in the future to be utilized in research and development activities are deferred and capitalized. The capitalized amounts are expensed as the related goods are delivered or the services are rendered.

The Company considers regulatory approval of product candidates to be uncertain, and product manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained. The Company expenses manufacturing costs as incurred to research and development expense for product candidates prior to regulatory approval. If, and when, regulatory approval of a product is obtained, the Company will begin capitalizing manufacturing costs related to the approved product into inventory.

Costs associated with the development, validation and scaling of manufacturing processes at new third party suppliers and regulatory registration of new third-party manufacturing facilities are recognized as research and development expenses. These costs generally comprise of all costs incurred in such activities prior to the process performance qualification (“PPQ”) production commencement stage at new manufacturing facilities. Costs incurred after the PPQ production commencement at new manufacturing facilities are capitalized as inventory as the regulatory approval at that point becomes probable and the net realizable value of the batches produced during this stage of the process is recoverable.

License Agreements

The Company has entered and may continue to enter into license agreements to access and utilize certain technology. To determine whether the licensing transactions should be accounted for as a business combination or as an asset acquisition, the Company makes certain judgments, which include assessing whether the acquired set of activities and assets would meet the definition of a business under the relevant accounting rules.

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If the acquired set of activities and assets does not meet the definition of a business, the transaction is recorded as an acquisition of assets and, therefore, any acquired IPR&D that does not have an alternative future use is charged to expense at the acquisition date. To date none of the Company’s license agreements have been considered to be the acquisition of a business.

Selling, General and Administrative Expense

Selling, general and administrative expenses are primarily comprised of compensation and benefits associated with sales and marketing, finance, human resources, legal, information technology and other administrative personnel, outside marketing, advertising and legal expenses and other general and administrative costs. The Company expenses the cost of advertising, including promotional expenses, as incurred. Advertising expenses were $3.8 million, $4.5 million and $2.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.

Stock-Based Compensation

The Company measures the cost of equity-based service awards based on the grant-date fair value of the award. The compensation cost is recognized as expense on a straight-line basis over the vesting period for options and restricted stock units (“RSU”). The Company accounts for forfeitures as they occur.

On January 1, 2019, the Company adopted the ASU No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payment to employees, with certain exceptions. Prior to the adoption of ASU No. 2018-07, the Company accounted for equity instruments issued to non-employees using the fair value approach. These equity instruments consisted of stock options, which were valued using the Black-Scholes option-pricing model. Stock-based compensation expense was recognized as the equity instruments were earned. The measurement of stock-based compensation was subject to periodic adjustments as the underlying equity instruments vested.

The Company utilizes the Black-Scholes option-pricing model for estimating fair value of its stock options and ESPP granted. Option valuation models, including the Black-Scholes option-pricing model, require the input of highly subjective assumptions, and changes in the assumptions used can materially affect the grant-date fair value of an award. These assumptions include the risk-free rate of interest, expected dividend yield, expected volatility and the expected life of the award. For RSUs, the Company bases the fair value of awards on the closing market value of the common stock at the date of grant.

Income Taxes

The Company uses the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company must then assess the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s lack of earnings history, the net deferred tax assets have been fully offset by a valuation allowance.

The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. The Company does not expect its unrecognized tax benefits to change significantly over the next twelve months.

The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense. The Company had accrued no amounts for interest and penalties related to income tax matters in the Company’s consolidated balance sheet at December 31, 2020 and 2019.

Operating and Finance Leases

​

The Company adopted ASU 2016-02, Leases on January 1, 2019. The Company elected the package of practical expedients upon transition, which allows it to apply the guidance prospectively, without reassessing prior conclusions related to contracts containing leases, lease classification and initial direct costs. Accordingly, the results for the years ended December 31, 2020 and 2019 are presented under Topic 842, and the results for the year ended December 31, 2018 are presented in accordance with the prior lease

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guidance, ASC Topic 840: Leases. The new standard also provides practical expedients for an entity’s ongoing accounting. The Company elected an accounting policy that does not recognize right-of-use assets and lease liabilities related to short-term leases. The Company also elected the practical expedient to not separate lease and non-lease components for its facility and vehicle leases. The Company did not elect to apply the hindsight expedient.

​

The Company determines if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use assets, other current liabilities, and lease liabilities, non-current in the consolidated balance sheets. The Lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options. The Company recognizes operating lease expense for these leases on a straight-line basis over the term of the lease.

​

In 2019, the Company entered into a vehicle lease agreement, pursuant to which it currently leases 42 vehicles. Delivery of the vehicles commenced during the first quarter of 2020. The term of each leased vehicle commences upon the delivery of the vehicle and is for a period of 36 months. The vehicles leased under this arrangement were classified as finance leases. Assets acquired under finance leases are included in property and equipment, net, other current liabilities, and lease liabilities, non-current in the consolidated balance sheets and are depreciated to operating expenses on a straight-line basis over their estimated useful lives.

​

With the exception of initial adoption of the new lease standard, where the Company’s incremental borrowing rate used was the rate on the adoption date (January 1, 2019), the operating and finance lease ROU assets and the lease liabilities are recognized based on the present value of lease payments over the lease term at the lease commencement date. The Company uses its incremental borrowing rate based on the information available at the commencement date in determining the lease liabilities, as the Company's leases generally do not provide an implicit rate.

Net Income (Loss) per Share Attributable to Coherus

Basic net income (loss) per share attributable to Coherus is calculated by dividing the net income (loss) attributable to Coherus by the weighted-average number of shares of common stock outstanding for the period, without consideration for potential dilutive common shares. Diluted net income (loss) per share is computed by dividing the net income (loss) by the weighted average number of common shares outstanding for the period plus any diluted potential common shares outstanding for the period determined using the treasury stock method for options, RSUs and ESPP and using the if-converted method for the convertible notes (see Note 14).

Comprehensive Income (Loss)

Comprehensive income (loss) is composed of two components: net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that under U.S. GAAP are recorded as an element of stockholders’ equity (deficit), but are excluded from net income (loss). The Company’s other comprehensive income (loss) included foreign currency translation adjustments for the years ended December 31, 2020, 2019 and 2018.

Recent Accounting Pronouncements

The following are the recent accounting pronouncements adopted by the Company in 2020:

Effective January 1, 2020, the Company adopted ASU No. 2016-13, Financial Instruments — Credit Losses, (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13),which changed the impairment model for most financial assets and certain other instruments. For trade receivables and other instruments, the Company uses a new forward-looking expected loss model that generally results in the earlier recognition of allowances for losses. The Company is exposed to credit losses primarily through receivables from customers. The Company’s expected loss allowance methodology for the receivables is developed using historical collection experience, current and future economic market conditions, a review of the current aging status and financial condition of the entities. Specific allowance amounts are established to record the appropriate allowance for customers that have a higher probability of default. ASU 2016-13 also eliminates the concept of “other-than-temporary” impairment when evaluating available-for-sale debt securities and instead focuses on determining whether any impairment is a result of a credit loss or other factors. An entity will recognize an allowance for credit losses on available-for-sale debt securities, rather than an other-than-temporary impairment that reduces the cost

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basis of the investment. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other: Simplifying the Test for Goodwill Impairment (ASU 2017-04), which simplifies the current requirements for testing goodwill for impairment by eliminating the second step of the two-step impairment test to measure the amount of an impairment loss. ASU 2017-04 is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and all annual and interim reporting periods thereafter. The Company adopted this accounting standard as of January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (ASU 2018-13), which eliminates certain disclosure requirements for fair value measurements, and requires public entities to disclose certain new information and modifies some disclosure requirements. The new guidance is effective for the Company’s interim and annual reporting periods during the year ending December 31, 2020, and all annual and interim reporting periods thereafter. The Company adopted this accounting standard as of January 1, 2020. The adoption did not have a material impact on the Company’s consolidated financial statements.

The following are the recent accounting pronouncements that the Company has not yet adopted:

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), which reduces the number of accounting models for convertible debt instruments and convertible preferred stock as well as amends the derivatives scope exception for contracts in an entity’s own equity. ASU 2020-06 is effective for the Company on January 1, 2022, with early adoption permitted. The Company is currently evaluating the potential impact that this standard may have on its consolidated financial statements and related disclosures.

The Company has reviewed other recent accounting pronouncements and concluded they are either not applicable to the business or that no material effect is expected on the consolidated financial statements as a result of future adoption.

​

3.Fair Value Measurements

Financial assets and liabilities are recorded at fair value. The carrying amounts of certain of the Company’s financial instruments, including cash and cash equivalents, restricted cash, investments in marketable securities, accounts receivable, accounts payable and other current liabilities approximate their fair value due to their short maturities. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting guidance describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable. These levels of inputs are the following:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial instruments consist of Level 1 assets and Level 3 liabilities. Where quoted prices are available in an active market, securities are classified as Level 1. Level 1 assets consist of highly liquid money market funds that are included in cash and cash equivalents, and restricted cash. There were no unrealized gains and losses in the Company’s investments in these money market funds.

In certain cases where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. Level 3 liabilities consist of the contingent consideration.

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There were notransfers between Level 1, Level 2 and Level 3during the periods presented.

Financial assets and liabilities subject to fair value measurements on a recurring basis and the level of inputs used in such measurements are as follows (in thousands):

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ ​ Fair Value Measurements

​ Total Level 1 Level 2 Level 3

Financial Assets: ​ ​ ​ ​

Restricted cash (money market funds) ​ 440 ​ 440 ​ — ​ —

Financial Liabilities: ​ ​ ​ ​ ​

Contingent consideration ​ $ 102 ​ $ — ​ $ — ​ $ 102

​

​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

​ Fair Value Measurements

​ Total Level 1 Level 2 Level 3

Financial Assets: ​ ​ ​ ​

Restricted cash (money market funds) ​ 240 ​ 240 ​ — ​ —

Financial Liabilities: ​ ​ ​ ​

Contingent consideration ​ $ 102 ​ $ — ​ $ — ​ $ 102

​

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Contingent Consideration

As part of the InteKrin acquisition in February 2014, the Company recognized contingent consideration associated with potential payments to be made to the former InteKrin stockholders upon (i) the first dosing of a human subject in the first Phase 2 Clinical Trial for CHS-131 (“Earn-Out Payment”), which was achieved and settled by the Company in March 2015, and (ii) per a compound transaction agreement as defined in the purchase agreement (the “Compound Transaction Payment”). The size of the Compound Transaction Payment consideration is tiered based on the size of a license or similar agreement with a third party and the timing of such agreement.

The fair value measurement of the Compound Transaction Payment uses a probability-weighted discounted cash flow approach based on significant inputs not observable in the market and thus represents a Level 3 measurement within the fair value hierarchy. The Compound Transaction analysis as of December 31, 2020 applied a 20% risk-adjusted discount rate to measure present value and also captured an additional 8.0% credit spread for counterparty credit risk given the cash payment. The expected cash flow is based on estimates provided by the Company’s management including the timing and probability of occurrence. The value of the consideration is tiered based on the value of a license or similar agreement with a third party and the timing of such agreement. Generally, increases or decreases in the probability of occurrence would result in a directionally similar impact in the fair value measurement of the Compound Transaction Payment and it is estimated that a 1% increase (decrease) in the probability of occurrence would result in an immaterial fair value fluctuation.

For the years ended December 31, 2020, 2019 and 2018, the Company recognized a loss of $0, a loss of $42,000 and a gain of $3.2 million in other income, net in the consolidated statement of operations, respectively, as a result of the change in the fair value of the Compound Transaction Payment.

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The following table sets forth a summary of changes in the estimated fair value of the contingent consideration (in thousands):

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Change in fair value of the contingent consideration liability ​ (3,230)

Change in fair value of the contingent consideration liability ​ ​ 42

Change in fair value of the contingent consideration liability ​ —

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The decrease of $3.2 million in the fair value of the Compound Transaction Payment during the year ended December 31, 2018 was primarily a result of a decrease in the probability of occurrence from 33% to 10% and an extension in the timing of occurrence to a later date.

1.5% Convertible Notes due 2026

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The estimated fair value of the 1.5% Convertible Notes due 2026, which the Company issued in April 2020 (see Note 8) is influenced by interest rates, the Company’s stock price and stock price volatility and is determined by prices observed in market trading. The market for trading of the Convertible Notes due 2026 is not considered to be an active market and therefore the estimate of fair value is based on Level 2 inputs. The estimated fair value of the Convertible Notes due 2026 was approximately $269.1 million (par value $230.0 million) as of December 31, 2020.

8.2% Convertible Notes due 2022

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The estimated fair value of the 8.2% Convertible Senior Notes Due 2022, which the Company issued on February 29, 2016 (see Note 8) is based on an income approach. The estimated fair value was approximately $113.7 million (par value $100.0 million) as of December 31, 2020 and represents a Level 3 valuation. When determining the estimated fair value of the Company’s long-term debt, the Company uses a single factor binomial lattice model which incorporates the terms and conditions of the convertible notes and market based risk measurement that are indirectly observable, such as credit risk. The lattice model produces an estimated fair value based on changes in the price of the underlying common shares price over successive periods of time. An estimated yield based on market data is used to discount straight debt cash flows.

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Term Loan

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The principal amount outstanding under the Company’s Term Loan (see Note 8) of $75 million as of December 31, 2020 is subject to variable interest rate, which is based on a fixed percentage plus three month LIBOR (“LIBOR”), and as such, the Company believes the carrying amount of these obligations approximates fair value.

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4.Inventory

The Company began capitalizing inventory in November 2018 once the FDA approved UDENYCA®. Inventory consisted of the following (in thousands):

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​ December 31, December 31,

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Balance sheet classification (in thousands):

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​ December 31, December 31,

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Inventory expected to be sold in periods more than twelve months from the balance sheet date is classified as inventory, non-current on the consolidated balance sheets. As of December 31, 2020 and 2019, the non-current portion of inventory consisted of raw materials and a portion of work in process.

Prepaid manufacturing of $19.4 million as of December 31, 2020 includes prepayments of $8.9 million to a contract manufacturing organization (“CMO”) for manufacturing services for UDENYCA®, which the Company expects to be converted into inventory within the next twelve months; and prepayments of $10.5 million to various CMOs for other research and development pipeline programs. Prepaid manufacturing of $8.6 million as of December 31, 2019 includes prepayments of $7.2 million to a CMO for manufacturing services for UDENYCA®; and prepayments of $1.4 million to various CMOs for other research and development pipeline programs.