Coherus Biosciences Inc (NASDAQ:CHRS) just announced that it has kicked off a public offering that will se it unload $125 million worth of its common stock, alongside an additional grant to the underwriters allowing for a 30-day option to purchase up to an additional $18.75 million of shares of common stock at the public offering price, less the underwriting discount, solely to cover over-allotments.
As we might have predicted, the company is down on the announcement.
These sorts of public offering announcements, especially as they relate to the smaller end of the biotechnology space, generally result in the company doing the announcing (in this instance, Coherus Biosciences Inc (NASDAQ:CHRS)) taking a hit. Why? Because of the dilution this type of transaction causes. When a company issues equity to raise capital, the additional shares flood the outstanding base, and reduce the proportional value of the current holders’ allocation.
It’s not always a bad thing, however, and as such, can often be an opportunity to get in at a discount ahead of a recovery. Put simply, biotechnology companies nee cash to grow. They get this cash by issuing equity, which causes dilution, which causes a dip in market cap. If the company puts the capital to good use, however, it will generally fund growth above and beyond that which shareholders lost as a result of the raise; in other words, dilution mitigation.
We think that’s what we have here.
The company is looking to raise the funds so at to, and to quote, for building the sales and marketing infrastructure for CHS-1701, inventory build, manufacturing and related activities to support the potential launch of CHS-1701. There are a couple of other use cases stated, but 1701 is priority. For those new to this company, 1701 is a biosimilar to a drug called pegfilgrastim, which is already approved and marketed by biotech giant Amgen, Inc. (NASDAQ:AMGN) as Neulasta.
Neulasta is a form of the recombinant human granulocyte colony-stimulating factor (GCSF) analog filgrastim, and is used (in its currently approved indication) as a stimulator if white blood cell production in cancer patients. More specifically, it’s used to stimulate bone marrow to produce more neutrophils to fight infection in patients undergoing chemotherapy. The drug generates around $4.5 billion revenues for Amgen annually, but its patent is expiring, and a number of companies are attempting to bring their own versions to market so as to redirect some of these revenues towards their own balance sheets. Coherus Biosciences Inc (NASDAQ:CHRS) is one such company.
It currently has a BLA with the FDA and an MAA with the EMA. The decision day on the BLA is June 9, but we will likely see some sort of legal challenge (more accurately, we are already seeing some pushback) from Amgen ahead of this date to try and challenge Coherus’ right to market the drug as a comparable asset.
That’s what the company needs this cash for. First, to beat out any legal pushbacks from Amgen, and to make sure it can actually get this drug on the shelves once (if) the FDA gives it a regulatory nod. Second, to make sure it has the capital required to stage an effective commercialization strategy when the drug hits the shelves.
Sure, the dilution will impact the value of certain shareholders’ stakes right now. It’s never great to get diluted, but when you are a small cap biotechnology investor, it’s something you just have to8 accept as part of the risk side of the equation. The reward comes if the company you are investing in can start to generate revenues on a lead asset before the dilution gets to much to handle for the investor.
The bottom lie for us here is that this company has plenty of upside potential as and when it gets one of its assets to commercialization. The data that underpins the asset we have been discussing is very strong, and we don’t se any reason why the FDA would decline it based on the numbers alone. Sure, there’s a legal challenge risk, but if Coherus Biosciences Inc (NASDAQ:CHRS) can overcome these (and we suspect a portion of the $125 million raise will go towards doing just that) then the value-add should negate this risk entirely.
One to keep an eye on, and a discount entry on the pullback as things stand.
Note: This article is written by Mark Collins and originally published at Market Exclusive.