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Item 7. Management’s Discussion and Analysis

2022-02-23 compared with 2021-02-25 · 351 added, 410 removed, 76 unchanged (91% of the section changed)

3 unchanged sentences

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.

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.

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.

Our pre-commercial pipeline includes the following product candidates:

Oncology Pipeline

● Toripalimab, an anti-PD-1 antibody being developed in collaboration with Junshi Biosciences.

● 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

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).

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.

This MD&A section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020.

Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management's Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 25, 2021.

We are a commercial-stage biopharmaceutical company focused on the research, development and commercialization of innovative immunotherapies to treat cancer.

Our strategy is to build a leading immuno-oncology franchise funded with cash generated through net sales of our diversified portfolio of FDA-approved therapeutics.

Our commercial portfolio includes two FDA-approved biologics.

Our first product, UDENYCA, a biosimilar to Neulasta, a long-acting granulocyte-colony stimulating factor, was launched commercially in the United States in January 2019.

In December 2021, the FDA-approved YUSIMRY, formerly CHS-1420, our Humira biosimilar product, which we plan to launch in the United States on or after July 1, 2023, per the terms of an agreement with Humira manufacturer, AbbVie.

In addition to our two FDA-approved biologics, we also have two additional product candidates in the late stage of review with the FDA, toripalimab and CIMERLI, a Lucentis biosimilar candidate.

The PDUFA action date for the toripalimab BLA is April 30, 2022, and if approved, we are planning to launch toripalimab in the United States following approval.

In 2021, our partner Bioeq, submitted to the FDA a BLA for CIMERLI.

The FDA has accepted the application for filing and set a target action date of August 2022.

If approved, we expect CIMERLI commercial launch following approval, depending on importation timing with the United States Customs.

We are also conducting a pharmacokinetic study to facilitate a potential Section 351(k) BLA seeking FDA approval for CHS-305, an Avastin biosimilar candidate.

We have built an experienced and robust oncology market access, key account management and medical affairs capability in the United States, supporting the successful commercialization of UDENYCA.

We expect to leverage these capabilities as we build and launch our immuno-oncology franchise.

2027 Term Loans

In January 2022, we entered into a Loan Agreement that provides for a senior secured term loan facility of up to $400.0 million (inclusive of a $100.0 million uncommitted additional facility amount) to be funded in four committed tranches:

(i) a Tranche A Loan in an aggregate principal amount of $100.0 million that was funded on January 5, 2022;

(ii) a Tranche B Loan in an aggregate principal amount of $100.0 million to be funded no later than April 1, 2022, subject to the delivery of evidence of repayment, repurchase or redemption of indebtedness outstanding under our 8.2% Convertible Notes due March 2022 and certain customary deliverables;

(iii) a Tranche C Loan in an aggregate principal amount of $50.0 million to be funded at the our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate toripalimab in the United States;

and (iv) a Tranche D Loan in an aggregate principal amount of $50.0 million to be funded at our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate CHS-201 (ranibizumab biosimilar) in the United States.

We have the right to request an uncommitted additional facility amount of up to $100.0 million.

The 2027 Term Loans mature in 2027.

In January 2022, we used funds from the Tranche A Loan to voluntarily prepay all amounts outstanding under the 2025 Term Loan.

(See “Note 14.

Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for additional details).

We expect to use proceeds from the Tranche B Loan to fully redeem the outstanding 2022 Convertible Notes due in March 2022.

Junshi Biosciences – TIGIT Option Exercises

In January 2022, we initiated the process for the exercise of our option to license JS006, a TIGIT-targeted antibody, in the United States and Canada from Junshi Biosciences, expanding our 2021 immuno-oncology collaboration agreement.

We will lead further development of JS006 and will be responsible for the associated development costs as set forth in the Collaboration Agreement.

Antibodies blocking TIGIT (T cell immunoglobulin and ITIM domain) have shown potential for enhanced anti-tumor activity in combination with PD-1/PD-L1 inhibitors.

In preclinical studies, JS006 demonstrated strong binding affinity and inhibition of the TIGIT pathway.

A dose escalation, dose expansion clinical trial (clinicaltrials.gov identifier# NCT05061628) evaluating the safety, tolerability and pharmacokinetic

properties of JS006 as monotherapy and in combination with PD-1 inhibitor toripalimab in patients with advanced solid tumors is ongoing in China.

The FDA has cleared an IND allowing clinical trials of JS006 in the United States, and we plan to advance toripalimab in combination with JS006 in a clinical trial in North America later in 2022.

JS006 has emerged as a promising novel immuno-oncology agent that can potentially be used in combination with PD-L1 agents to improve upon the durable clinical antitumor activity of current PD-L1 regimens.

Moreover, a JS006 and PD-L1 combination could be practice changing in numerous tumor settings by providing a chemotherapy free option, thereby improving upon the safety profile of current regimens.

Our current hypothesis is that the TIGIT class of agents could be effective in the same tumor types and settings where PD-L1 therapies have proven efficacy, but with a potentially better safety profile than chemotherapy containing PD-L1 regimens or a broader patient population, and as such, the market potential for this class of agents is likely to be as large, or larger, than that of PD-L1 therapies.

Products and Product Candidates

Our portfolio includes the following products and product candidates:

● Toripalimab is being developed for its ability to block PD-1 interactions with its ligands, PD-L1 and PD-L2 by binding to the FG loop on the PD-1, and for enhanced PD-1 receptor internalization (endocytosis function).

We believe blocking PD-1 interactions with PD-L1 and PD-L2 can help to promote the immune system’s ability to attack and kill tumor cells.

More than thirty company-sponsored toripalimab clinical studies covering more than fifteen indications have been conducted globally by our partner Junshi Biosciences, including in China, the United States, Southeast Asia, and European countries.

Together with Junshi Biosciences, in the third quarter of 2021 we completed the submission of the toripalimab BLA to the FDA seeking approval for the use of toripalimab in combination with gemcitabine and cisplatin for first-line treatment of adults with metastatic or recurrent locally advanced NPC, and for use as a monotherapy in the second- or later-line treatment of patients with recurrent unresectable or metastatic NPC that have progressed on or after a platinum-containing chemotherapy and the FDA granted the BLA Priority Review with a target action date of April 30, 2022.

We believe there is a high unmet need in NPC based on the current FDA-approved treatment alternatives and the lack of any approved immmunotherapies.

The FDA has granted Breakthrough Therapy designation to toripalimab for the treatment of patients with recurrent or metastatic NPC with disease progression on or after platinum-containing chemotherapy and for toripalimab in combination with chemotherapy (gemcitabine and cisplatin) for the first line treatment of recurrent or metastatic NPC.

The FDA has also granted toripalimab Fast Track designation for the treatment of mucosal melanoma and orphan drug designations for treatment of NPC, mucosal melanoma soft tissue sarcoma, and esophageal cancer.

In addition to NPC, we plan to submit supplemental BLAs to the FDA for toripalimab within the next two years for the treatment of rare and highly prevalent cancers.

● JS006 is an investigational recombinant humanized IgG4κ monoclonal antibody designed to act specifically against human TIGIT.

A number of preclinical and clinical studies have demonstrated that activation of the TIGIT pathway could be a crucial underlying mechanism for tumor immune evasion and resistance to PD-1 blockade therapy.

Combination of TIGIT and PD-1/PD-L1 antibodies showed a synergistic potential to enhance antitumor response, to overcome anti-PD-1 resistance and possibly broaden the cancer patient population that can benefit from immunotherapy.

A dose escalation, dose expansion clinical trial (clinicaltrials.gov identifier# NCT05061628) evaluating the safety, tolerability and pharmacokinetic properties of JS006 as monotherapy and in combination with PD-1 inhibitor toripalimab in patients with advanced solid tumors is ongoing in China.

The FDA has cleared an IND allowing clinical trials of JS006 in the United States, and we plan to advance toripalimab in combination with JS006 in a clinical trial in North America later in 2022.

● UDENYCA is a biosimilar to Neulasta, a long-acting granulocyte colony stimulating factor (G-CSF).

We launched UDENYCA commercially in the United States in January 2019 following approval by the FDA in November 2018.

In 2021 we recorded net sales of UDENYCA of $326.6 million.

We are also developing an additional presentation of UDENYCA:

a proprietary OBI, in

addition to the currently marketed pre-filled syringe presentation.

In October 2021, we announced positive results from a randomized, open-label, crossover study assessing the pharmacokinetic and pharmacodynamic bioequivalence of UDENYCA administered via OBI compared to UDENYCA PFS.

We are planning a 2022 submission to the FDA of a prior approval supplement to seek marketing authorization for the UDENYCA OBI.

● CHS-305, a bevacizumab (Avastin) biosimilar candidate.

In January 2020, we entered into a license agreement with Innovent for the development and commercialization of a biosimilar version of bevacizumab (Avastin) in any dosage form and presentations in the United States and Canada.

We are conducting a three-way PK study using Avastin drug products from the United States, Avastin drug products from China and Innovent’s biosimilar to bevacizumab, as well additional analytical similarity exercises.

We, together with our partner Innovent, are assessing the commercial feasibility of CHS-305.

● YUSIMRY (adalimumab-aqvh), is a biosimilar of Humira, a monoclonal antibody that can bind to TNF.

YUSIMRY provides certain therapeutic benefits for treatment of patients with certain inflammatory diseases characterized by increased production of TNF in the body, including rheumatoid arthritis, juvenile idiopathic arthritis, psoriatic arthritis, ankylosing spondylitis, Crohn’s disease, psoriasis and ulcerative colitis.

In December 2021, the FDA approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, per the terms of an agreement with Humira manufacturer, AbbVie Inc.

Ophthalmology

● CIMERLI , formerly known as CHS-201, a ranibizumab (Lucentis) biosimilar candidate .

In November 2019, we entered into a license agreement with Bioeq for the commercialization of CHS-201, a biosimilar version of ranibizumab (Lucentis) in certain dosage forms in both a vial and PFS presentation.

Under this agreement, Bioeq granted to us an exclusive royalty-bearing license to commercialize CHS-201 in the field of ophthalmology (and any other approved labelled indication) in the United States.

● Bioeq submitted a Section 351(k) BLA for CIMERLI to the FDA in the third quarter of 2021.

The FDA has accepted the CIMERLI BLA for review and assigned an August 2022 target action date.

License Agreement with Junshi Biosciences

On February 1, 2021, we entered into an Exclusive License and Commercialization Agreement with Junshi Biosciences for the co-development and commercialization of toripalimab, Junshi Biosciences’ anti-PD-1 antibody in the United States and Canada.

Under the terms of the Collaboration Agreement, we paid $150.0 million upfront for exclusive rights to toripalimab in the United States and Canada, options in these territories to Junshi Biosciences’ anti-TIGIT antibody JS006 and next-generation engineered IL-2 cytokine, and certain negotiation rights to two undisclosed preclinical immuno-oncology drug candidates.

We will have the right to conduct all commercial activities of toripalimab in the United States and Canada.

We will be obligated to pay Junshi Biosciences a 20% royalty on net sales of toripalimab and up to an aggregate $380.0 million in one-time payments for the achievement of various regulatory and sales milestones.

In January 2022, we took steps that we expect will result in the payment to Junshi Biosciences of an additional $35.0 million upon the closing of the exercise of our option to license JS006, a TIGIT-targeted antibody, in the United States and Canada.

We will lead further development of JS006 and will be responsible for the associated development costs as set forth in the Collaboration Agreement.

If we exercise our remaining option for the IL-2 cytokine, we will be obligated to pay an additional option exercise fee of $35.0 million.

Additionally, for each exercised option, we will be obligated to pay Junshi Biosciences an 18% royalty on net sales and up to an aggregate $255.0 million for the achievement of various milestones, including up to $170.0 million for attainment of certain sales thresholds.

Under the Collaboration Agreement, we retain the right to collaborate in the development of toripalimab and the other licensed compounds and will pay for a portion of these co-development activities up to a maximum of $25.0 million per licensed compound per year.

Additionally, we are responsible for certain associated regulatory and technology transfer costs for toripalimab and other licensed compounds and will reimburse Junshi Biosciences for such costs.

We recognized research and development expense of $39.4 million in the consolidated statement of operations for year ended December 31, 2021, and had $1.9 million recorded in accrued and other current

liabilities on the consolidated balance sheet as of December 31, 2021 related to the co-development, regulatory and technology transfer costs.

We accounted for the licensing transaction as an asset acquisition under the relevant accounting rules.

We recorded research and development expense of $145.0 million during the first quarter of 2021, related to an upfront payment for exclusive rights to toripalimab in the United States and Canada.

We had entered into a Right of First Negotiation agreement with Junshi Biosciences and paid a fee of $5.0 million which was expensed as research and development expense in the fourth quarter of 2020.

The Right of First Negotiation fee was fully credited against the total upfront license fee obligation under the Collaboration Agreement.

As of December 31, 2021, we did not have any outstanding milestone or royalty payment obligations to Junshi Biosciences.

The $35.0 million payment for the option to license JS006 will be reflected in our first quarter 2022 financial statements.

The additional milestone payments, option fees and royalties are contingent upon future events and, therefore, will be recorded when it is probable that a milestone will be achieved, option fees will be incurred or when royalties are due.

In connection with the Collaboration Agreement, we entered into a Stock Purchase Agreement with Junshi Biosciences agreeing, subject to customary conditions, to acquire certain equity interests in the Company.

Pursuant to the Stock Purchase Agreement, on April 16, 2021, we issued 2,491,988 unregistered shares of our common stock to Junshi Biosciences, at a price per share of $20.0643, for an aggregate value of approximately $50.0 million cash.

Under the terms of the Stock Purchase Agreement, Junshi Biosciences is not permitted to sell, transfer, make any short sale of, or grant any option for the sale of the common stock for the two years period following its effective date.

The Collaboration Agreement and the Stock Purchase Agreement were negotiated concurrently and were therefore evaluated as a single agreement.

We used the “Finnerty” and “Asian put” valuation models and determined the fair value for the discount for lack of marketability to be $9.0 million at the date the shares were issued.

The fair value of the DLOM was attributable to the Collaboration Agreement and was included as an offset against the research and development expense in the consolidated statement of operations for the year ended December 31, 2021.

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.

As a result of the COVID-19 pandemic, we have experienced and may continue to experience disruptions that could severely impact our business, clinical trials and preclinical studies.

See “Risk Factors – Risks Related to COVID-19.” 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 or regulatory milestones for our product candidates, each of which would harm our business, financial condition, results of operations and growth.

Until the COVID-19 pandemic is controlled, we expect it may continue to adversely impact our sales growth.

In addition, the spread of more contagious and/or deadly variants, such as the Delta or omicron variants, could cause the COVID-19 pandemic to last longer than expected and could result in the reinstatement of restrictive orders that could disrupt our business.

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.

In addition, a recession, 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

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.

Our first FDA-approved product, UDENYCA, was approved in November 2018, and we initiated United States sales of UDENYCA on January 3, 2019.

In December 2021, the FDA-approved YUSIMRY, which we plan to launch in the United States on or after July 1, 2023, per the terms of an agreement with Humira manufacturer, AbbVie.

Net revenues from sales of UDENYCA were $326.6 million and $475.8 million in 2021 and 2020, 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.

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.

Cost of goods sold consists primarily of third-party manufacturing, distribution, and certain overhead costs.

Prior to the second quarter of 2021, a portion of the costs of producing UDENYCA sold was expensed as research and development before the FDA approval

of UDENYCA and therefore is not reflected in cost of goods sold.

All the inventory expensed prior to approval of UDENYCA was fully utilized by March 31, 2021;

thus, the costs of producing UDENYCA are fully reflected in cost of goods sold beginning April 1, 2021.

On May 2, 2019, we 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 July 1, 2019 and continues for five years from then.

For the years ended 2021 and 2020, cost of goods sold included write-offs for inventory that did not meet our acceptance criteria, net of credits received from the manufacturers, of $5.1 million and $2.2 million, respectively.

Research and Development Expense

3 unchanged sentences

Our external research and development expense consists primarily of:

● expense incurred under agreements with consultants, third-party contract research organizations (“CROs”), and investigative sites where a substantial portion of our preclinical studies and all of our clinical trials are conducted;

● costs of acquiring originator comparator materials and manufacturing preclinical study and clinical trial supplies and other materials from contract manufacturing organizations (“CMOs”), and related costs associated with release and stability testing;

● expense incurred under agreements with consultants, third-party CROs, and investigative sites where a substantial portion of our preclinical studies and all of our clinical trials are conducted;

● costs of acquiring originator comparator materials and manufacturing preclinical study and clinical trial supplies and other materials from CMOs, and related costs associated with release and stability testing;

● costs associated with manufacturing process development activities;

● certain upfront and milestone payments related to licensing and collaboration agreements.

● upfront and milestone payments related to licensing and collaboration agreements.

Internal costs are associated with activities performed by our research and development organization and generally benefit multiple programs.

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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.

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.

Products manufactured prior to regulatory approval may not be sold unless regulatory approval is obtained.

For all the periods presented, we expensed manufacturing costs as incurred as research and development expense for products that had not been approved.

We began to capitalize inventory costs associated with UDENYCA after receiving regulatory approval in November 2018.

The process of conducting the necessary clinical research to obtain regulatory approval is costly and time consuming.

Furthermore, in the past, we have entered into collaborations with third parties to participate in the development and commercialization of our product candidates, and we may enter into additional collaborations in the future.

In situations in which third parties have substantial influence over the development activities for product candidates, the estimated completion dates are not fully under our control.

For example, our partners in licensed territories may exert considerable influence on the regulatory filing process globally.

Therefore, we cannot forecast with any degree of certainty the duration and completion costs of these or other current or future clinical trials of our product candidates.

We may never succeed in achieving regulatory approval for any of our pipeline product candidates.

In addition, we may enter into other collaboration arrangements for our other product candidates, which could affect our development plans or capital requirements.

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

Development as of

Development Status as of

Year ended December 31,

December 31, 2020

(in thousands)

December 31, 2021

External costs incurred by product candidate:

Discontinued (3)

Discontinued (4)

Bevacizumab (Avastin) biosimilar product candidate licensed from Innovent

Upfront and milestone based license fees

Pivotal Clinical Trials (5)

Pivotal Clinical Trials (6)

Junshi Biosciences upfront payment and right of first negotiation fee

Innovent upfront and milestone based license fee payments

Other research and development expenses (7)

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Total research and development expenses

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

(1) Costs related primarily to the development of additional presentations of UDENYCA.

(2) YUSIMRY, formerly CHS-1420, was approved by the FDA in December 2021.

(3) We announced discontinuation of the development of CHS-2020 in February 2021.

(4) We are currently seeking strategic alternatives for CHS-131 and development was discontinued in 2021.

(5) A 3-way pharmacokinetics clinical trial must be successfully completed before BLA and prior approval supplement (“PAS”) filings can be submitted for approval.

(6) The FDA has granted Priority Review for the toripalimab BLA, as well as Breakthrough Therapy Designation for toripalimab for the treatment of NPC, and set a PDUFA action date for April 30, 2022.

Toripalimab is being evaluated in late-stage clinical trials for the treatment of a broad range of tumor types including cancers of the lung, nasopharynx, esophagus, stomach, bladder, breast, liver, kidney and skin.

Within the next several years, if toripalimab is approved, we anticipate submitting BLA supplements for multiple additional indications, including for rare and more prevalent cancers.

(7) Amount consists of costs for other pipeline candidates, including CIMERLI.

Selling, General and Administrative Expense

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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.

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

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.

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 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.

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

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 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.

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.

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

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.

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

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(in thousands)

Net product 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.

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.

The decrease in net revenue was primarily due to a decrease in the number of UDENYCA units sold and a decline in net realized price due to increased competition and COVID-19 impacts.

Our net revenue and market penetration may continue to be adversely impacted by the COVID-19 pandemic and is subject to pricing trends and competitive dynamics in the overall pegfilgrastim market.

We expect our net revenue to decrease during 2022, as a result of increased competition for UDENYCA, with the potential for such decreases to be slightly offset by new product launches, if FDA approval is obtained.

Cost of Goods Sold

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(in thousands)

Cost of goods sold

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.

The increase in cost of goods sold was primarily because a portion of the costs of producing UDENYCA sold through the first quarter of 2021 was expensed as research and development prior to the FDA approval of UDENYCA and, therefore, was not reflected in the cost of goods sold.

During the first quarter of 2021, the UDENYCA inventory with no inventory value was fully utilized, and since then cost of goods sold fully reflects per unit acquisition cost of UDENYCA.

The cost basis of product sold that was expensed prior to approval, was $3.3 million and $21.1 million in 2021 and 2020, respectively.

Had such inventories been valued at acquisition cost, it would have resulted in corresponding increases in cost of goods sold and corresponding decreases in gross margin.

In addition, cost of goods sold included write-offs for inventory that did not meet our acceptance criteria, net of credits received from the manufacturers, of $5.1 million and $2.2 million in 2021 and 2020, respectively.

The increase in cost of goods sold was partially offset by a reduction in the number of units of UDENYCA sold in 2021 compared to 2020, which also resulted in lower royalty costs of $7.3 million.

We expect our gross margin to decrease during 2022 as a result of declining net realized price per unit sold and higher average annual costs per unit sold due primarily to the transition in the first quarter of 2021 from inventory with manufacturing costs that were partly recognized as research and development expenses prior to the regulatory approval of UDENYCA.

Research and Development Expense

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(in thousands)

Research and development

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:

● an increase of $16.0 million in costs for CHS-1420 related to the preparation of our BLA submission and activities related to inspection readiness;

● an increase of $14.2 million in costs for CHS-2020 as we initiated the manufacturing scale-up to produce drug substance and drug product for clinical trial supply;

● an increase of $7.7 million in personnel, consulting and other related costs as a result of hiring personnel in research and development to advance our programs;

● an increase of $6.0 million related to right of first negotiation fees cost in connection with potential future strategic licensing transactions;

● an increase of $5.0 million related to the on-body device development for UDENYCA®;

● an increase of $3.5 million in costs incurred to support opening an IND application with the FDA and continued development of bevacizumab (Avastin ) biosimilar product candidate licensed from Innovent in 2020;

● an increase of $3.0 million in facilities, supplies and materials and other infrastructure to support our research and development programs.

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

● a decrease of $3.6 million in upfront and milestone-based license fee primarily attributable to $11.1 million of upfront and milestone payments to Bioeq in 2019 partially offset by $7.5 million of upfront and milestone payments to Innovent in 2020;

● a de crease of $3.3 million in CHS-131 related costs incurred in 2019 in connection with opening an IND application with the FDA and the initiation of a clinical program .

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:

● a decrease of $33.9 million in UDENYCA® manufacturing costs as we began capitalizing these costs as inventory after receiving FDA approval for UDENYCA® in November 2018, which was partially offset by an increase in development expense associated with an on-body device for UDENYCA®;

● a decrease of $4.5 million in facilities, supplies and materials and other infrastructure primarily due to the impairment loss of $3.9 million in the third quarter of 2018 for a machine and equipment used within research and development;

● a decrease of $3.9 million for CHS-0214 development costs due to close-out activities for our Phase 3 open-label extension study, which was completed in the first quarter 2018;

● a decrease of $2.4 million in stock-based compensation expense primarily due to company-wide options granted in April 2015 with a higher exercise price that have been fully expensed and the capitalization of certain stock-based compensation expense as inventory after receiving FDA approval for UDENYCA® in November 2018.

The decrease was partially offset by additional stock options and awards granted in 2019.

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

● an increase of $15.6 million in costs primarily attributable to $11.1 million of upfront and milestone payments to Bioeq and increases related to the development of our other biosimilar product candidates as we continued to advance our pipeline;

● an increase of $6.4 million in personnel, consulting and other related costs as a result of hiring personnel in research and development to advance our programs;

● an increase of $3.6 million in costs related to CHS-131 in connection with opening an initial new drug (“IND”) application with the FDA and conducting a clinical trial;

● an increase of $3.0 million in costs for CHS-1420 related to the preparation of our BLA.

● higher license fees in 2021, including $145.0 million in expense pursuant to the Collaboration Agreement with Junshi Biosciences which was partially offset by a $9.0 million credit related to the fair value of the DLOM on the common shares

purchased under the Stock Purchase Agreement, as compared to 2020 which included $7.5 million paid to Innovent in upfront and milestone-based license fees and $5.0 million paid to Junshi Biosciences as a Right of First Negotiation fee;

● an increase of $43.4 million of co-development, regulatory, and technology transfer costs for toripalimab, of which $39.4 million were reimbursements directly to Junshi Biosciences pursuant to the Collaboration Agreement with Junshi Biosciences;

● an increase of $25.0 million related to the development of additional presentations of UDENYCA;

● an increase of $23.3 million related to YUSIMRY mainly due to costs associated with FDA pre-approval inspections and scaling up process performance qualification production runs;

● an increase of $5.5 million in costs incurred for the continued development of bevacizumab (Avastin) biosimilar product candidate licensed from Innovent in 2020;

● an increase of $4.9 million in stock-based compensation expense primarily related to the grant of fully vested stock options to certain employees and consultants upon the execution of the Collaboration Agreement with Junshi Biosciences and additional equity awards granted in 2021;

● an increase of $3.4 million in personnel and consulting costs to advance our research and development programs.

The increase was partially offset by:

● a decrease of $8.0 million in costs related to CHS-2020 due to the discontinuation of its development in the first quarter of 2021;

● a decrease of $1.1 million in costs related to CHS-131 due to the discontinuation of its development in 2021.

We expect our research and development expense in 2022 to be lower than in 2021 because 2021 included an exceptional license expense in the form of the $136.0 million expense related to the upfront license payment to Junshi Biosciences, which were partially offset by the $35.0 million payment expected to be made in 2022 for the option to license JS006, potential milestone payments related to our product candidates and other incremental development costs.

Selling, General and Administrative Expense

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(in thousands)

Selling, general and administrative

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:

● a net increase of $12.8 million for personnel, consulting, professional services, marketing, advertising and other related expenses due to an increase in sales force personnel and related commercial functions to support the continued growth in UDENYCA ® sales, which was partially offset by a decrease of $3.8 million in travel expenses as a result of shelter-in-place response to COVID-19 ;

● an increase of $2.1 million in facilities, supplies and materials and other infrastructure related expenses to support our growing commercial infrastructure for UDENYCA ® .

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.

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:

● an increase of $35.6 million for personnel, consulting and other related expenses due to an increase in sales force personnel and related commercial functions in connection with the ongoing commercialization of UDENYCA®;

● an increase of $3.6 million for marketing, advertising, recruiting and other professional services to support the ongoing commercialization of UDENYCA®, which was partially offset by a decrease in legal costs as a result of entering into a legal settlement with Amgen in May 2019;

● an increase of $2.5 million in facility and other general and administrative expenses to support our growing commercial infrastructure for UDENYCA®;

● an increase of $1.1 million in stock-based compensation expense due to an increase in commercial-related headcount and additional stock options and awards granted in 2019.

The increase was partially offset by a decrease resulting from the company-wide options granted in April 2015 with a higher exercise price that have been fully expensed.

The increase in selling, general and administrative expense was primarily due to the following:

● a net increase of $18.3 million for personnel, consulting, professional services, marketing, advertising and other related expenses due to an increase in sales force personnel and related commercial functions to support our product sales;

● an increase of $7.8 million in stock-based compensation expense mainly related to the grant of fully vested stock options to certain employees and consultants upon the execution of the Collaboration Agreement with Junshi Biosciences and additional equity awards granted in 2021;

● an increase of $3.2 million in facilities, supplies and materials and other infrastructure related expenses to support our commercial infrastructure for our products ;

● an increase of $1.2 million in 2021 travel expenses as a result of curtailed travel in 2020 due to the shelter-in-place response to COVID-19.

We expect our selling, general and administrative expense in 2022 to be higher than in 2021 as a result of anticipated increased commercial activities to support UDENYCA sales and potential initiation of our ophthalmology and immuno-oncology commercial activities if any additional product candidates are approved.

Interest Expense

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(in thousands)

Interest expense

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.

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

Year Ended December 31,

(in thousands)

Other income, net

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.

The increase in interest expense was primarily due to the interest expense related to our 2026 Convertible Notes that were issued in April 2020.

Income Tax Provision

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(in thousands)

Income tax provision

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.

There was no income tax provision for the year ended December 31, 2021 due to our tax loss for 2021 and the tax effect of the valuation allowance against the deferred tax assets.

Income tax expense of $3.5 million for the year ended December 31, 2020, primarily related to state taxes in jurisdictions outside of California, for which we have a limited operating history.

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).

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.

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.

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.

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 2026 Convertible Notes are general unsecured obligations and will be subordinated to our designated senior indebtedness.

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.

The 2026 Convertible Notes are not redeemable at our election before maturity.

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.

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,

Certain relevant measures of our liquidity and capital resources are summarized as follows:

(in thousands)

Net cash provided by (used in) operating activities

Net cash used in investing activities

Net cash provided by financing activities

Effect of exchange rate changes in cash, cash equivalents and restricted cash

Net increase in cash, cash equivalents and restricted cash

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;

● an increase in accrued rebates, fees and reserve of $30.4 million as a result of continued growth in UDENYCA ® sales ;

● upfront and milestone-based license fee payments of $7.5 million to Innovent are being reclassified to investing activities to provide better alignment between the cash flows and the underlying nature of the transactions;

● non-cash charges related to stock-based compensation of $38.2 million and depreciation and amortization of property and equipment of $2.9 million, non-cash interest expense from amortization of debt issuance discounts of $3.5 million, non-cash operating lease expense of $2.1 million, other non-cash adjustments of $0.4 million ;

● an increase in accrued compensation of $6.2 million primarily due to increase in headcount and vacation accrual for 2020, partially offset by the settlement of 2019 bonus payout;

● an increase in accrued and other liabilities of $5.5 million primarily related to contract manufacturing accruals;

● An increase in other non-current liabilities of $0.9 million primarily due to deferral of certain payroll tax liabilities under the CARES act.

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

● an increase in inventory of $36.2 million primarily due to continued growth in UDENYCA ® sales and to maintain adequate supplies in order to meet future demand for UDENYCA ® ;

● an increase in trade receivables of $15.2 million primarily due to the timing of payment from our customers;

● an increase in prepaid manufacturing and other assets, non-current of $12.6 million to secure drug production runs scheduled for 2020 and 2021;

● a decrease in accounts payable of $9.8 million primarily due to the timing of receiving and processing invoices from our vendors.

● a decrease in lease liabilities of $1.4 million due to the lease payments for 2020.

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;

● an increase in accrued rebates, fees and reserve of $51.1 million as a result of UDENYCA® sales;

● non-cash charges related to stock-based compensation of $33.6 million, depreciation and amortization of property and equipment of $3.3 million, non-cash interest expense from amortization of debt issuance discounts of $2.3 million, non-cash operating lease expense of $1.8 million and excess and obsolete inventory of $0.4 million;

● upfront and milestone payments related to license and collaboration arrangements of $11.1 million are being reclassified as investing activities to provide better alignment between the cash flows and the underlying nature of those transactions;

● an increase in accrued and other liabilities of $10.4 million primarily due to our accruals for our UDENYCA® manufacturing and royalty expenses;

● an increase in accrued compensation of $10.0 million primarily due to increased compensation and bonus accrual attributable to increase in headcount and as a result of attainment of certain corporate goals during 2019;

● an increase in accounts payable of $9.9 million due to the timing of receiving and processing invoices.

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

● an increase in trade receivables of $142.0 million due to initiating sales of UDENYCA® on January 3, 2019;

● an increase in inventory of $48.2 million as we began capitalizing inventory in November 2018 upon receiving FDA approval for UDENYCA®;

● an increase in other prepaid and current assets of $2.1 million primarily due to prepaid commercial activities to support UDENYCA® and the timing of vendor invoices;

● a decrease in lease liabilities of $2.0 million due to the lease payments for the twelve months of 2019 and amortization;

● an increase in prepaid manufacturing services of $0.7 million to secure drug production runs scheduled for 2020;

● an increase in other assets, non-current of $0.3 million primarily due to the security deposit as a result of amending our operating lease agreement in September 2019.

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;

● a non-cash gain of $3.2 million related to the fair value remeasurement of our contingent consideration obligation and $0.3 million related to the accretion of short-term investments;

● an increase in inventory of $5.5 million as we began capitalizing inventory in November 2018 upon receiving FDA approval for UDENYCA®;

● a decrease in accounts payable, accounts payable-related parties, accrued liabilities and other liabilities of $0.9 million primarily due to the payments to our CROs and CMOs as a result of the progression of our clinical trial programs that are winding down, and the timing of certain vendor payments.

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

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

● impairment of fixed asset equipment of $3.9 million, depreciation and amortization of property and equipment of $3.2 million and non-cash interest related to the amortization of debt discount and debt issuance cost of $1.5 million;

● an increase in accrued compensation of $8.5 million primarily due to the timing of bonus settlement as 2017 bonuses were paid in RSUs in December 2017;

● a decrease in prepaid manufacturing, other prepaid and other assets of $8.2 million as we utilized the prepayment for our pre-commercial manufacturing of UDENYCA®.

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,

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.

Financial assets

Total Cash, cash equivalents and marketable securities

Debt obligations:

2025 Term Loan

2022 Convertible Notes

2026 Convertible Notes

Total debt obligations

(1) Subject to a refinancing per the terms of the 2027 Term Loans entered into in January 2022, discussed further below and also see “Note 14.

Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

Although we were profitable in 2020 and 2019, due to our research and development expenditures and decline in revenue in 2021, we have generated significant operating losses in all other years since our inception, including the year ended December 31, 2021.

We have funded our operations primarily through sales of our common stock, issuance and incurrence of convertible and term debt and sales of UDENYCA.

As of December 31, 2021, we had an accumulated deficit of $1.0 billion and cash, cash equivalents, and marketable securities of $417.2 million.

We believe that our available cash, cash equivalents, marketable securities and cash collected from UDENYCA sales will be sufficient to fund our planned expenditures and meet our obligations for at least the twelve months following our financial statement issuance date.

In making this estimate, we considered the following significant events that occurred or were expected to occur after December 31, 2021 and are discussed further below and elsewhere in t his Annual Report on Form 10-K :

● payment of the $81.9 million payoff amount to the lenders of the 2025 Term Loan in January 2022;

● the receipt of the net proceeds of $92.7 million from the Tranche A Loan of the 2027 Term Loans received by us in January 2022;

● the expected receipt of the net proceeds of the Tranche B Loan of the 2027 Term Loans which is expected to be funded no later than April 1, 2022, subject to the delivery of certain customary deliverables;

● repayment, repurchase or redemption in cash, in full, of our 2022 Convertible Notes as well as all associated costs and expenses;

● the expected payment to Junshi Biosciences of $35.0 million for the fee to exercise the license option for the TIGIT Program in the first quarter of 2022.

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.

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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.

We may need to raise additional funds in the future;

however, there can be no assurance that such efforts will be successful or that, if they are successful, the terms and conditions of such financing will be favorable.

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®;

● cash proceeds from product sales;

● the costs of manufacturing, distributing and marketing our products;

● the cost of manufacturing clinical supplies and any products that we may develop;

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● the extent to which we acquire or invest in businesses, products or technologies;

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

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:

As of December 31, 2020

Contractual Obligations

(in thousands)

Long-term debt obligations - 2026 Convertible notes (1)

Long-term debt obligations - 2022 Convertible notes (1)

Long-term debt obligations - Term loan (1)

● the costs of the impact from the COVID-19 pandemic.

For further discussion of risks related to our financial condition and capital requirements, please see “Risk Factors— Risks Related to Our Financial Condition and Capital Requirements.”

Financing arrangements

2025 Term Loan

As of December 31, 2021 the carrying amount of our $75.0 million aggregate principal amount credit agreement (the “2025 Term Loan”) with affiliates of Healthcare Royalty Partners was $75.5 million.

In January 2022, the Company used proceeds from a separate borrowing, Tranche A Loan of the 2027 Term Loans, to voluntarily prepay all amounts outstanding under the 2025 Term Loan, pursuant to which a payoff amount including all costs and fees of $81.9 million was outstanding.

Debt Obligations” and “Note 14.

Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

2022 Convertible Notes

As of December 31, 2021, the carrying amount of our $100.0 million aggregate principal amount convertible senior notes due 2022 was $108.5 million, inclusive of a 9% premium due at maturity or redemption, if not earlier converted.

In the first quarter of 2022, we expect to refinance the 2022 Convertible Notes with proceeds from a separate borrowing, Tranche B Loan of the 2027 Term Loans, which is to be funded no later than April 1, 2022, subject to the delivery certain customary deliverables.

Debt Obligations” and “Note 14.

Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

The 2022 Convertible Notes accrue interest at 8.2% per annum payable quarterly in arrears on March 31, June 30, September 30 and December 31 of each year, and will mature on March 31, 2022, unless earlier redeemed, repurchased or converted at the option of holders.

The conversion rate, which is subject to customary adjustments upon the occurrence of certain events, is 44.7387 shares of common stock per $1,000 principal amount of 2022 Convertible Notes, or approximately $22.35 per share.

This initial conversion price represents a premium of approximately 74% over the closing price of $12.83 per share of our common stock on the Nasdaq Global Market on February 11, 2022.

The 2022 Convertible Notes are redeemable in whole, and not in part, at our option, if the last reported sale price per share of common stock exceeds 160% of the conversion price on 20 or more trading days during the 30 consecutive trading days preceding the date on which the Company sends notice of such redemption to the holders of the 2022 Convertible Notes.

2026 Convertible Notes

As of December 31, 2021, the carrying amount of our $230.0 million aggregate principal amount convertible senior subordinated notes due 2026 was $224.3 million.

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, and will mature on April 15, 2026, unless earlier repurchased or converted at the option of holders.

The conversion rate, which is subject to customary adjustments upon the occurrence of certain events, is 51.92 shares of common stock per $1,000 principal amount of 2026 Convertible Notes, or approximately $19.26 per share.

This initial conversion price represents a premium of approximately 50% over the closing price of $12.83 per share of our common stock on the Nasdaq Global Market on February 11, 2022.

The 2026 Convertible Notes are not redeemable at our election before maturity.

In connection with the pricing of the 2026 Convertible Notes, we entered into privately negotiated capped call transactions with certain of the initial purchasers of the 2026 Convertible Notes and other financial institutions.

The cap price of the capped call transactions, which is subject to certain adjustments under the terms of the capped call transactions, is the initial amount of $25.93 per share, which represents a premium of approximately 102% over the last reported sale price of our common stock of $12.83 per share on February 11, 2022.

Debt Obligations” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K for additional details.

2027 Term Loans (Subsequent Event)

In January 2022, we entered into the 2027 Term Loans which provide for a senior secured term loan facility of up to $400.0 million (inclusive of a $100.0 million uncommitted additional facility amount) to be funded in four committed tranches:

(i) a Tranche A Loan in an aggregate principal amount of $100.0 million that was funded on January 5, 2022;

(ii) a Tranche B Loan in an aggregate principal amount of $100.0 million to be funded no later than April 1, 2022, subject to the delivery of evidence of repayment, repurchase or redemption of indebtedness outstanding under our 2022 Convertible Notes and certain customary deliverables;

(iii) a Tranche C Loan in an aggregate principal amount of $50.0 million to be funded at our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate CHS-007 (toripalimab) in the United States;

and (iv) a Tranche D Loan

in an aggregate principal amount of $50.0 million to be funded at our option between April 1, 2022 and March 17, 2023, subject to certain conditions including the first FDA approval of a BLA for our product candidate CHS-201 (ranibizumab biosimilar) in the United States.

After Tranche A was funded on January 5, 2022, we gained the right to request an uncommitted additional facility amount of up to $100.0 million that would be subject to new terms and conditions.

The 2027 Term Loans mature on either (i) January 5, 2027;

or (ii) October 15, 2025, if the outstanding aggregate principal amount of our 2026 Convertible Notes is greater than $50.0 million on October 1, 2025.

The 2027 Term Loans bear interest at 8.25% plus three-month LIBOR per annum with a LIBOR floor of 1.00%.

In the event of the cessation of LIBOR, the benchmark governing the interest rate will be replaced with a rate based on the secured overnight financing rate published by the Federal Reserve Bank of New York as described in the 2027 Term Loans agreement.

Interest is payable quarterly in arrears.

Repayment of outstanding principal of the 2027 Term Loans will be made in five equal quarterly payments of principal commencing after January 5, 2026.

In January 2022, we paid to the Lenders of the 2027 Term Loans $6.0 million for a funding fee equal to 2.00% of the Lenders’ total committed amount to fund the Tranche A Loan, Tranche B Loan, Tranche C Loan and Tranche D Loan.

Pursuant to the 2027 Term Loans agreement, and subject to certain restrictions, proceeds of the 2027 Term Loans were and will be used to fund our general corporate and working capital requirements except for the following:

in January 2022, proceeds of the Tranche A Loan were used to repay in full all amounts outstanding under the 2025 Term Loan, as well as all associated costs and expenses pursuant to which a payoff amount of $81.9 million was outstanding;

and proceeds of the Tranche B Loan will be used at our option to repay, repurchase or redeem in cash, in full, our 2022 Convertible Notes as well as all associated costs and expenses.

See “Note 14.

Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

Contingent Milestones

We have obligations to make future payments to third parties that become due and payable upon the achievement of certain development, regulatory and commercial milestones (such as clinical trial achievements, the filing of a BLA, approval by the FDA or product launch).

These milestone payments and other similar fees are contingent upon future events and therefore are only recorded when it becomes probable that a milestone will be achieved or other applicable criteria will be met.

Because the achievement of these milestones had not reached the threshold for recognition as of December 31, 2021, such contingencies were not recorded in our financial statements.

The following presents a summary of our active partnerships and collaborations that have contingent regulatory and sales milestones:

Potential Aggregate Milestone Amounts

Junshi Biosciences

$380.0 million (1)

JS006 anti-TIGIT antibody

$255.0 million (2)

CHS-201, a ranibizumab (Lucentis) biosimilar

€12.5 million (3)

Biosimilar version of bevacizumab (Avastin)

$37.5 million

(1) The FDA has set a target action date for April 30, 2022 for the toripalimab BLA for the treatment of nasopharyngeal carcinoma.

If such regulatory approval is achieved, we will be required to pay Junshi Biosciences a milestone payment of $25.0 million.

(2) Subject to the closing on the exercise of our option, u pon the initiation of a qualifying clinical trial that contains the optioned TIGIT molecule, we will be required to pay Junshi Biosciences a milestone payment of $20.0 million.

The amount shown above does not include the expected payment in the first quarter of 2022 of the TIGIT option exercise fee of $35.0 million.

See “Note 14.

Subsequent Events” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

(3) The FDA has set a target action date of August 2022 for the CHS-201 BLA.

If such regulatory approval is achieved, and subject to satisfaction of additional certain manufacturing and supply criteria prior to December 31, 2022, we will be required to pay Bioeq a milestone payment of €2.5 million.

Other Commitments

Non-cancelable purchase commitments

Operating lease obligations (3)

Finance lease obligations (4)

Contingent payments to InteKrin Stockholders

Total contractual liabilities

(1) The long-term debt obligation is comprised of future minimum payments related to the Convertible Notes and Term Loan.

(2) These amounts are comprised of non-cancelable purchase commitments to our CMOs.

(3) These amounts are comprised of future minimum rent payment on our facility leases.

(4) These amounts are comprised of future minimum rent payment on our vehicle leases.

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.

We enter into contracts in the normal course of business with CROs for preclinical research studies and clinical trials, research supplies and other services and products for operating purposes.

We have also entered into agreements with several CMOs for the manufacture and clinical drug supply of our commercial and products candidates.

Our total non-cancelable contractual obligations arising from these agreements as of December 31, 2021 was $53.9 million, with $27.1 million of these obligations due within twelve months.

We lease office and laboratory facilities through arrangements treated as operating leases, and we lease vehicles through finance leases.

Our total non-cancelable contractual obligations arising from these agreements as of December 31, 2021 was $12.1 million, with $4.2 million of these obligations due within twelve months.

Contingent payment to InteKrin Stockholders

As part of the InteKrin acquisition in February 2014, we recognized contingent consideration associated with potential payments, which would be payable to the former InteKrin stockholders if we enter into a compound transaction agreement as defined in the InteKrin purchase agreement.

In February 2020, we announced that we are seeking strategic alternatives to finance this program externally.

As of December 31, 2021, the fair value of the contingent consideration was $0.1 million and was recorded in other liabilities, non-current on our consolidated balance sheets.

Summary Statement of Cash Flows

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

Year Ended December 31,

(in thousands)

Net cash (used in) provided by operating activities

Net cash used in investing activities

Net cash provided by financing activities

Net (decrease) increase in cash, cash equivalents and restricted cash

Net cash (used in) provided by operating activities

Cash used in operating activities of $37.4 million in 2021 was primarily due to the following:

● net loss of $287.1 million;

● an increase in UDENYCA inventory of $6.3 million, which excludes write-offs for inventory that did not meet our acceptance criteria, net of credits received from the manufacturers, of $5.1 million;

● a decrease in accrued rebates, fees and reserve of $2.5 million as a result of lower UDENYCA sales ;

● a net increase in prepaid manufacturing services and other prepaid, current and non-current assets of $1.5 million.

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

● the license fee payment to Junshi Biosciences of $145.0 million pursuant to the Collaboration Agreement, partially offset by a $9.0 million adjustment related to the fair value of the DLOM on our common stock purchased by Junshi Biosciences , which was reclassified to investing activities;

● non-cash charges related to stock-based compensation of $51.4 million, the net write-off of inventory that did not meet our acceptance criteria of $5.1 million, non-cash interest expense from amortization of debt discount and issuance costs of $4.3 million, depreciation and amortization of property and equipment of $3.5 million, write-off of prepaid manufacturing services of $3.2 million related to the termination of CHS-2020 development, non-cash operating lease expense of $2.2 million, and non-cash accretion of discount on marketable securities of $1.1 million ;

● a decrease in trade receivables of $34.1 million primarily due to the timing of payments from our customers and lower revenue in 2021;

● an increase in accrued and other current and non-current liabilities of $17.9 million primarily related to contract manufacturing accrued expenses.

Cash provided by operating activities of $154.1 million in 2020 was primarily due to the following:

● net income of $132.2 million;

● an increase in accrued rebates, fees and reserve of $30.4 million as a result of continued growth in UDENYCA sales ;

● upfront and milestone-based license fee payments of $7.5 million to Innovent were reclassified to investing activities to provide better alignment between the cash flows and the underlying nature of the transactions;

● non-cash charges related to stock-based compensation of $38.2 million, non-cash interest expense from amortization of debt discount and issuance costs of $3.5 million, depreciation and amortization of property and equipment of $2.9 million, the net write-off of inventory that did not meet our acceptance criteria of $2.2 million, and non-cash operating lease expense of $2.1 million;

● an increase in accrued compensation of $6.2 million primarily due to increase in headcount and vacation accrual for 2020, partially offset by the settlement of 2019 bonus payout;

● an increase in accrued and other current and non-current liabilities of $5.0 million primarily related to contract manufacturing accruals and the deferral of certain payroll tax liabilities under the CARES act.

The cash provided by operating activities in 2020 was partially offset by the following:

● an increase in inventory of $38.4 million primarily due to continued growth in UDENYCA sales and to maintain adequate supplies in order to meet future demand for UDENYCA;

● an increase in trade receivables of $15.2 million primarily due to the timing of payment from our customers;

● an increase in prepaid manufacturing services and other prepaid, current and non-current assets of $12.9 million to secure drug production runs scheduled for 2020 and 2021;

● a decrease in accounts payable of $9.8 million primarily due to the timing of receiving and processing invoices from our vendors.

Net cash used in investing activities

Cash used in investing activities of $138.4 million in 2021 was primarily due to purchases of investments in marketable securities of $182.5 million, upfront license fee of $145.0 million to Junshi Biosciences pursuant to the Collaboration Agreement, partially offset by a $9.0 million adjustment related to the fair value of the DLOM on our common stock purchased by Junshi Biosciences, and purchases of property and equipment of $1.3 million.

These uses of cash were partially offset by the proceeds from sales and maturities of investments in marketable securities of $181.4 million.

Cash used in investing activities of $14.4 million in 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.

Net cash provided by financing activities

Cash provided by financing activities of $51.9 million in 2021 was primarily due to $50.0 million of gross proceeds from issuance of our common stock to Junshi Biosciences partially offset by $9.0 million related to the fair value of the DLOM on the common stock purchased by Junshi Biosciences, $10.4 million proceeds from the exercise of stock options and $3.0 million proceeds from purchases under the ESPP , partially offset by $1.8 million in tax payments related to net share settlement of RSUs.

Cash provided by financing activities of $223.9 million in 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 ESPP, partially offset by $18.2 million of capped call option purchases related to the 2026 Convertible Notes.

Critical Accounting Estimates

The preparation of our consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S.

GAAP”) 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.

Organization and Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K describes the significant accounting policies and methods used in the preparation of our consolidated financial statements.

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.

Product Sales Discounts and Allowances

We recognize revenue when a customer obtains control of the product, which generally occurs upon delivery to and acceptance by the customer.

The amount recognized in net revenue reflects the consideration which we expect to receive in exchange for product sold, which includes adjustments to gross sales amounts for estimated chargebacks, rebates, discounts for prompt payment, co-payment assistance, product returns and other allowances.

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.

The most significant and judgmental gross to net revenue adjustments are for chargebacks and rebates we provide to customers, hospitals, clinics, and payers under commercial and government programs.

Amounts payable are provided for under various programs and vary by payer and individual payer plans.

In developing our estimates of chargebacks and rebates, we use our historical claims experience and also consider payer mix, statutory discount rates and expected utilization, contractual terms, market events and trends, customer and commercially available payer data, as well as data collected from the healthcare providers, channel inventory data obtained from our customers and other relevant information.

In 2021, 2020 and 2019, total sales deductions to gross product sales were 67%, 59% and 49%, respectively.

Adjustments to provisions for rebates and chargebacks related to sales made in prior periods were less than 3% of the actual payments and customer credits issued in each of the years 2021 and 2020.

A change of 10.0% in our total provisions for product sales discounts and allowances as of December 31, 2021, would have resulted in a change of our pre-tax earnings in 2021 by approximately $11.0 million.

A summary of the activities and ending reserve balances for each significant category of discounts and allowances, can be found in “Note 2.

Revenue” in the “Notes to Consolidated Financial Statements” in Part II, Item 8 of this Form 10-K.

Our inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method.

The determination of excess or obsolete inventory requires judgment including consideration of many factors, such as estimates

of future product demand, current and future market conditions, product expiration information and potential product obsolescence, among others.

Although we believe that the assumptions we use in estimating potential inventory write-downs are reasonable, if actual market conditions are less favorable than projected by us, write-downs of inventory, charges related to firm purchase commitments, or both may be required which would be recorded as cost of goods sold in our consolidated statement of operations.

Adverse developments affecting our assumptions of the level and timing of demand for our products include those that are outside of our control such as the actions taken by competitors and customers, the direct or indirect effects of the COVID-19 pandemic, and other factors.

In 2021, 2020 and 2019, cost of goods sold included write-offs for inventory of $5.1 million, $2.2 million and $0.4 million, respectively, that did not meet the Company’s acceptance criteria, net of credits received from manufacturers.

In 2019, cost of goods sold included write-off of prepaid manufacturing costs of $1.3 million due to the cancellation of certain manufacturing reservations.

There were no write-offs for excess and obsolete inventory during these periods.

As of December 31, 2021, a 10.0% reduction in the carrying value of inventory we expect to sell in 2022 would be approximately $3.8 million.

Recent Accounting Pronouncements

For a description of the impact of recent accounting pronouncements, see “Note 1.

Organization and Significant Accounting Policies” in the “Notes to Consolidated Financial Statements” contained in Part II, Item 8 of this Annual Report on Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis