Fortress Biotech, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Unaudited consolidated results include Fortress and controlled subsidiaries; amounts below are in millions unless stated otherwise. Fortress is a biopharmaceutical company that develops and commercializes products through subsidiaries and partner companies. Its reported revenue is primarily from Journey Medical’s dermatology products.
Financial highlights
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net revenue | $9.8 | $5.2 | $25.5 | $17.9 |
| Operating loss | $(22.5) | $(28.2) | $(80.4) | $(87.8) |
| Net loss | $(25.0) | $(28.6) | $(68.7) | $(102.5) |
| Net loss attributable to common stockholders | $(12.8) | $(16.6) | $(24.5) | $(59.3) |
| Loss per common share, basic and diluted | $(0.22) | $(0.37) | $(0.46) | $(1.36) |
- Revenue rose 89% in Q3 and 43% for the nine-month period. Product revenue was $9.5 million in Q3 and $23.8 million year to date; related-party revenue, primarily from TGTX collaboration, was $0.3 million and $1.7 million, respectively.
- Product gross profit, calculated as product revenue less product cost of goods sold, was approximately $6.8 million in Q3 and $16.8 million for nine months, or about 71.5% and 70.7% of product revenue, respectively. Cost of goods sold increased with product sales and portfolio expansion.
- Q3 R&D expense was $14.6 million, down 9%; acquired-license R&D was $0.7 million, down from $3.7 million. General and administrative expense increased 18% to $14.3 million, including higher Journey sales and marketing spending and Mustang staffing and professional fees.
- Nine-month R&D expense was $56.4 million, down 4%; G&A was $41.3 million, up 6%. Operating losses narrowed, while nine-month net loss attributable to common stockholders also reflected the absence of National discontinued-operations losses reported in 2018.
- Nine-month other income included an $18.5 million gain on deconsolidation of Caelum. This transaction-related gain materially contributed to the improvement in reported net loss and is not recurring operating revenue.
Cash, liquidity and debt
- At September 30, 2019, cash and cash equivalents were $134.9 million, short-term certificates of deposit were $5.0 million, and restricted cash totaled $16.1 million. The cash flow statement reports $151.0 million of cash, cash equivalents and restricted cash combined.
- Current assets were $166.3 million and current liabilities $46.9 million. Total assets were $221.6 million; total liabilities were $146.6 million and total stockholders’ equity $75.0 million.
- For the first nine months, operating cash use was $69.9 million, investing activities provided $19.8 million, and financing activities provided $119.6 million. Cash and restricted cash increased $69.4 million. Financing included partner-company equity offerings and ATM sales, Fortress ATM proceeds, and Mustang’s Horizon notes.
- Total notes payable, net of discounts, were $84.0 million, compared with $79.5 million at year-end 2018. The balance includes Mustang Horizon notes and other subsidiary and Fortress borrowings; stated debt maturities and terms vary. Operating lease liabilities were $25.9 million following adoption of the lease accounting standard.
- Management stated that available cash and cash equivalents were expected to fund operations for at least 12 months. It also expects continued substantial losses and says additional funding will be needed for development and other plans; unavailable or unacceptable financing could require curtailment.
Material developments, outlook and risks
- Journey acquired Ximino in July 2019 for total consideration of $9.4 million: $2.4 million upfront and $7.0 million in four annual payments beginning in 2021, plus sales-based royalties. The filing recorded a $7.1 million intangible asset after discounting future payments.
- Mustang entered into a Horizon venture-debt facility of up to $20 million; $15 million was funded initially and additional funding is milestone-dependent. The notes bear interest at 9% plus a LIBOR-related component, are secured by most Mustang assets other than specified exclusions, and include minimum-cash covenants. The reported minimum monthly cash requirement ranged from approximately $8 million to $13 million; Mustang reported $9.4 million at September 30.
- Fortress extended maturities on its 2017 Subordinated Notes and 2018 Venture Notes. The Opus related-party facility maturity was also extended; it bears 12% interest. Fortress issued shares to prepay $0.5 million of Opus debt.
- Fortress deconsolidated Caelum after Alexion purchased a 19.9% interest for $30 million; Fortress retained approximately 40%. Alexion has a contingent option to acquire the remaining equity, subject to the agreement’s terms and potential milestones.
- Avenue’s agreement with InvaGen provides for a potential $180 million merger payment, subject to conditions including FDA approval of IV Tramadol, and contingent value rights tied to future sales. Avenue planned to submit an NDA by the end of 2019. Fortress disclosed potential indemnification exposure of up to $35 million under the related agreement if the merger does not occur, subject to its terms.
- Management cited development progress across partner programs, including FDA RMAT designation for Mustang’s MB-107, trial activity for MB-105 and other candidates, and continued enrollment for Checkpoint’s cosibelimab. These programs remain subject to clinical, regulatory, funding and commercialization risks.
- Principal risks include continuing operating losses and financing needs, reliance on partners and third-party manufacturers and clinical organizations, clinical-trial and approval uncertainty, competition, intellectual-property disputes, reimbursement and drug-pricing changes, debt covenants and dilution from equity financing. The filing reported no legal proceedings and no off-balance-sheet arrangements. Management said disclosure controls were effective and there were no material quarterly changes in internal control over financial reporting.
Important facts for investors to verify
- Cash runway assumptions and the availability, restrictions and location of cash across Fortress and its subsidiaries; separately assess operating cash burn and the Mustang minimum-liquidity covenant.
- Debt balances, maturity extensions, interest costs, collateral and covenant compliance, including the terms and remaining availability of Mustang’s Horizon facility.
- Revenue concentration and sustainability: Journey products drove most product revenue, and a third-party logistics customer represented a significant portion of gross product revenue under the 3PL title model.
- Progress and outcomes for the Avenue IV Tramadol NDA and contingent InvaGen transaction, including possible Fortress indemnification exposure.
- How much of the reported year-to-date loss improvement depends on the nonrecurring Caelum deconsolidation gain and the prior-year discontinued-operations comparison.
- Potential dilution and future capital needs, including common and preferred ATM capacity, partner-company financings and the substantial outstanding unvested equity awards.