Coherus BioSciences Inc
For the period ended Dec 31, 2023. Filed Mar 15, 2024.
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FY2023 · Filed Mar 15, 2024
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Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Coherus BioSciences, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Coherus BioSciences, Inc., (the Company) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, stockholders' equity (deficit), and cash flows for each of the three years in the period ended December 31, 2023, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 15, 2024 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond tothose risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| | Estimate of Reserves for Chargebacks and Rebates ……………………………………………………………………………… |
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| Description of the Matter | As described in Note 1 to the consolidated financial statements, the Company recognizes revenues from product sales at the net sales price, which includes estimates of reserves for chargebacks and rebates it provides to hospitals, clinics, and payers under commercial and government programs. These reserves are recorded in the period when sales occur and are based on the amounts to be claimed on the related sales which may not be known at the point of sale. Chargebacks and rebates are estimated based on expected channel and payer mix, and contracted discount rates, adjusted for current period assumptions. Estimated chargebacks are recorded as a reduction of trade receivables on the consolidated balance sheet and totaled $74.0 million at December 31, 2023. Estimated rebates are presented within accrued rebates, fees and reserves and other liabilities, non-current on the consolidated balance sheet and totaled $121.1 million at December 31, 2023. Auditing the estimates for chargebacks and rebates was complex due to the judgmental nature of the assumptions used. In particular for product that remains in the distribution channel at December 31, 2023, management is required to estimate the portion of product that is expected to be subject to a chargeback and rebate as well as the applicable discount rate. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of internal controls over the Company's estimates of chargebacks and rebates, which are accounted for as reductions to revenue. This included controls over management’s review of significant assumptions used in the estimates such as expected channel and payer mix and contractual discount rate. To test the Company's estimated reserves for chargebacks and rebates, our audit procedures included, among others, testing the accuracy and completeness of the underlying data used in the Company’s analyses and evaluating the significant assumptions stated above. Specifically, for estimated chargebacks and rebates, we obtained third-party channel inventory reports and reviewed the remaining inventory in the distribution channel, tested historical channel and payer mix data, and compared applicable contractual chargeback or rebate percentages applied against executed chargeback and rebate agreements. We also assessed the completeness and accuracy of current and historical channel and payer mix and discount rate data used in management’s estimates and performed sensitivity analyses to determine the effect of changes in assumptions, where appropriate. |
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| | Excess and Obsolete Inventory Reserve |
| Description of the Matter | As of December 31, 2023, the Company had $130.1 million of inventory which included $13.0 million of raw materials, $82.6 million of work in progress and $34.5 million of finished goods. As disclosed in Note 1 to the Company’s consolidated financial statements, inventories are stated at the lower of cost or estimated net realizable value. The Company assesses its inventory levels along with its purchase commitments each reporting period and writes down inventory that is either expected to be at risk of expiration prior to sale or has a cost basis in excess of its expected net realizable value. Auditing management's estimates for excess inventory involved subjective auditor judgment because the estimates rely on a number of factors that are affected by market and economic conditions outside the Company's control. In particular, the excess inventory calculations are sensitive to significant assumptions, including the expected demand for the Company’s products, the effect on demand of competitive products and the Company's purchase commitments. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the Company's excess and obsolete inventory reserve process including management’s review of the significant assumptions described above and controls over the completeness and accuracy of the information used to develop the estimate. Our substantive audit procedures included, among others, evaluating methodologies used and data utilized in the analysis for inventory expected to be at risk for expiration or excess, or has a cost basis in excess of its expected net realizable value. We evaluated purchase commitments or alternative uses, compared forecasted demand and expected net realizable value to historical trends, compared actual inventory levels to forecasted demand requirements and expected net realizable value, and evaluated the sensitivity of sales forecast assumptions on the amount of inventory reserves recorded. |
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| | Business Combination |
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| Description of the Matter | During the year ended December 31, 2023, the Company completed its acquisition of Surface Oncology, Inc. (“Surface”) for consideration of $64.6 million in net assets, as disclosed in Note 6 to the consolidated financial statements. The transaction was accounted for as a business combination.Auditing the Company’s accounting for its acquisition of Surface was complex due to the significant estimation required by management to determine the fair value of certain identified finite and indefinite-lived intangible assets, principally consisting of out-license intangible assets of $13.5 million and in-process research and development intangible assets of $26.2 million, respectively. The significant estimation uncertainty was primarily due to the sensitivity of the respective fair values to underlying assumptions about the future performance of the acquired business. The significant assumptions used to estimate the fair value of these intangible assets included certain assumptions including estimated future cash flows from revenues of acquired assets, the timing and projection of costs and expenses and the related profit margins, and discount rates. These significant assumptions are forward looking and could be affected by future economic and market conditions. |
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| How We Addressed the Matter in Our Audit | We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s accounting for the acquisition. This included testing controls over the estimation process supporting the recognition and measurement of the out-license assets and in-process research and development, including the valuation models and underlying assumptions used to develop such estimates. To test the estimated fair value of the in-process research and development and out-license assets, we performed audit procedures that included, among others, evaluating the Company's selection of the valuation methodology, evaluating the methods and significant assumptions used by the Company, and evaluating the completeness and accuracy of the underlying data supporting the significant assumptions and estimates. For example, we compared the significant assumptions to current industry, market and economic trends and to the Company's forecasts. We involved our valuation specialists to assist with our evaluation of the methodology used by the Company and significant assumptions included in the fair value estimates. Our valuation specialists’ procedures included, among others, developing a range of independent estimates for the discount rates used in the valuation models and comparing those to the discount rates selected by management. |
/s/Ernst & Young LLP
We have served as the Company’s auditor since 2012.
San Mateo, California
March 15, 2024
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