Fortress Biotech, Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 18, 2019. The 10-K reports full-year results and unaudited quarterly data, including Q4. Fortress is a biopharmaceutical company that acquires and develops drug candidates through subsidiaries and partner companies; its commercial product revenue is primarily from Journey Medical’s dermatology business.
Financial performance and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Net revenue | $26.9 million | $17.2 million |
| Product revenue | $23.4 million | $15.5 million |
| Operating loss | $(120.0) million | $(89.8) million |
| Loss from continuing operations | $(130.8) million | $(97.5) million |
| Net loss | $(141.9) million | $(99.8) million |
| Net loss attributable to common stockholders | $(84.1) million | $(66.9) million |
| Basic and diluted loss per common share | $(1.94) | $(1.61) |
| Cash used in operating activities | $(98.8) million | $(81.3) million |
| Cash provided by investing activities | $18.8 million | $(40.2) million |
| Cash provided by financing activities | $50.6 million | $150.4 million |
- Revenue rose 56%, driven by Journey product sales, up $7.9 million, and related-party collaboration revenue, up $1.8 million. Targadox generated $21.2 million, the largest product contribution.
- Journey reported $23.4 million in net revenue and $3.8 million in net income. Its product gross margin, calculated from reported product revenue and cost of goods sold, was approximately 74%.
- R&D expense increased 72% to $83.3 million; G&A rose 5% to $53.4 million. Interest expense and financing fees increased 35% to $10.3 million.
- At year-end, cash and cash equivalents were $65.5 million, short-term certificates of deposit were $17.6 million, and restricted cash was $16.1 million. Total cash, cash equivalents and restricted cash was $81.6 million, down from $111.0 million. Restricted cash includes $14.9 million collateralizing the IDB note; consolidated partner-company cash may not all be available to Fortress.
- Current assets were $111.2 million and current liabilities $55.6 million. Total debt, net of discounts, was $79.5 million, versus $62.5 million in 2017. Total assets were $141.0 million and stockholders’ equity $19.7 million. Accumulated deficit was $396.3 million.
Q4 and changes versus the prior year
- Q4 2018 revenue was $9.0 million, versus $7.5 million in Q4 2017. Q4 loss attributable to common stockholders was $24.9 million, versus $10.4 million; loss per share was $0.55 versus $0.25.
- Full-year revenue growth did not offset higher development spending: R&D increased by $35.0 million, led by Checkpoint, Mustang and Avenue programs. The full-year net loss widened 42% to $141.9 million.
- National was classified as discontinued operations. Fortress sold part of its stake in 2018 and completed the sale of its remaining shares in February 2019 for $13.1 million; total consideration for its 56.1% stake was approximately $22.9 million.
- Common shares outstanding increased from 51.0 million to 57.8 million during 2018. Fortress raised $7.3 million through its ATM and issued $21.7 million in 2018 Venture Notes; partner-company offerings and ATMs also provided financing.
Outlook, developments and material risks
- Management stated that available cash and cash equivalents were expected to fund operations for at least 12 months, while also saying additional financing would be required to advance programs, fund losses and support commercialization. Management expects substantial losses to continue and gave no profitability forecast.
- Management anticipated at least one or two additional Journey prescription-drug launches in 2019. Avenue expected mid-2019 topline data from its second pivotal Phase 3 IV tramadol trial. Checkpoint planned a Phase 3 CK-101 trial in 2019, subject to dose/formulation work and ongoing development.
- In January 2019, Alexion invested $30 million in Caelum for a 19.9% interest, with up to $30 million in additional development funding, an option to acquire the remaining equity for $150 million or $200 million depending on BLA timing, and up to $325 million in potential earn-outs. These payments and acquisition terms are conditional; Fortress expected to cease consolidating Caelum in 2019.
- In February 2019, InvaGen completed the first stage of its Avenue transaction, investing $35 million for 33.3% of Avenue. A further acquisition was contemplated under the agreement, with contingent consideration; completion was not assured. Fortress also disclosed an indemnification obligation of up to $35 million relating to the transaction, subject to the agreement’s terms.
- Fortress settled the Dr. Falk Pharma dispute, paying $3.3 million and approximately $39,500 in court fees in 2018; an additional $300,000 was due in 2019. It also disclosed guarantees of certain affiliate debt and significant related-party arrangements.
- Key risks include continued operating losses and financing needs; debt service and refinancing risk; clinical, regulatory, manufacturing and intellectual-property uncertainty; dependence on partners and third parties; product competition and reimbursement; potential dilution; and conflicts arising from shared directors, executives and related-party dealings. Dermatology revenue is concentrated: two customers represented 48.5% and 10.6% of gross product revenue, and one customer represented 79.1% of year-end accounts receivable.
- Series A preferred stock carries a cumulative 9.375% annual dividend; $2.3 million was paid in 2018. Fortress reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls.
Investor facts to verify
- Reconcile reported cash runway with burn rate, restricted funds, subsidiary-level cash access and debt maturities; confirm funding needs and financing terms.
- Track milestone and trial outcomes for IV tramadol, CK-101, CAEL-101, CUTX-101, Triplex and Mustang’s gene- and cell-therapy programs; distinguish company expectations from completed results.
- Check the status and economics of the remaining Avenue transaction and Caelum option, including any conditions, dilution, indemnity exposure and proceeds attributable to Fortress.
- Review customer concentration, product returns and rebate reserves, especially Journey’s Targadox exposure and the $3.1 million estimated product-return allowance.
- Assess debt covenants, related-party financing and services, affiliate guarantees, the $300,000 settlement payment, and the preferred-stock dividend burden.