Fortress Biotech, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results include Fortress and majority-controlled partner companies; reported losses are shared with non-controlling interests. Fortress acquires, develops and commercializes biopharmaceutical products through subsidiaries and partner companies.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net revenue | $9.5 million | $9.8 million | $31.9 million | $25.5 million |
| Operating loss | $23.0 million | $22.5 million | $70.0 million | $80.4 million |
| Net loss | $30.0 million | $25.0 million | $82.5 million | $68.7 million |
| Net loss attributable to common stockholders | $15.5 million | $12.8 million | $41.2 million | $24.5 million |
| Net loss per common share attributable to common stockholders | $0.20 | $0.22 | $0.59 | $0.46 |
| Net cash used in operating activities | Not separately presented for the quarter | $63.2 million | $69.9 million |
All financial amounts are in U.S. dollars. Product revenue was $9.4 million in Q3 and $30.8 million year to date, primarily from Journey Medical’s dermatology products. Related-party revenue was $28,000 and $1.0 million, respectively. Product gross margin was approximately 64% in Q3 (product revenue less cost of goods sold), versus approximately 72% in Q3 2019.
- Cash and liquidity: Cash and cash equivalents were $218.4 million at September 30, 2020, versus $136.9 million at December 31, 2019; restricted cash was $1.6 million. Current assets were $237.7 million and current liabilities $37.3 million. The company said its cash and cash equivalents were sufficient to fund operations for at least 12 months, while also stating additional financing will be needed to fully fund development and other plans.
- Cash flows: Operating activities used $63.2 million; investing activities used $5.6 million; financing activities provided $135.4 million. Cash and restricted cash increased $66.6 million during the nine months.
- Debt: The company borrowed $60.0 million under a new Oaktree senior secured facility, bearing fixed interest of 11% and maturing August 2025. It used proceeds to refinance several prior borrowings. Reported notes payable were $60.0 million gross and $51.4 million net of debt discount. The facility includes minimum-liquidity and minimum-revenue covenants, collateral over substantially all company assets subject to exceptions, and warrants to purchase up to 1.75 million common shares.
- Equity and dilution: Fortress raised approximately $39.1 million gross from 2020 Series A preferred offerings and issued about 16.4 million common shares through its at-the-market program for $44.8 million gross proceeds in the nine months. Common shares outstanding were 93.7 million as of November 5, 2020. Preferred stock carries a 9.375% cumulative dividend.
Changes versus comparable periods
- Q3 net revenue declined 3%, with product revenue broadly flat; management cited a temporary Ximino supply shortage and lower Checkpoint collaboration revenue.
- Nine-month net revenue increased 25%, driven by Journey product-line expansion and sales growth; related-party collaboration revenue declined.
- Nine-month R&D expense declined 22%, mainly following completion of Avenue studies and lower Checkpoint manufacturing and clinical costs. Mustang and other partner-company R&D spending increased.
- Nine-month G&A expense increased 10%, reflecting Journey sales and marketing expansion and higher Fortress personnel and professional costs. Cost of goods sold increased 48% alongside product growth and higher related costs.
- Nine-month operating loss improved 13%, but common-stockholder net loss increased 69%. Higher interest and financing expense and the absence of the prior-year $18.5 million Caelum deconsolidation gain contributed to the deterioration.
Outlook, developments and principal risks
- No specific consolidated financial forecast or revenue guidance is provided. Management expects substantial losses to continue and says further funding may be needed; unavailable or unacceptable financing could curtail development and infrastructure plans.
- Avenue / IV tramadol: The FDA issued a Complete Response Letter on October 12, 2020, citing terminal sterilization validation deficiencies and safety concerns for the intended patient population. Avenue planned an FDA meeting in Q4 2020. InvaGen asserted that COVID-19 constituted a material adverse effect that could affect its obligation to complete the second-stage acquisition; Avenue disputes that assertion. The transaction and potential proceeds depend on regulatory and contractual conditions.
- Pipeline progress: Caelum began two Phase 3 studies of CAEL-101 for AL amyloidosis, expected to enroll approximately 370 patients. Cyprium reported positive CUTX-101 survival results and planned to begin a rolling NDA submission by Q1 2021. Mustang reported FDA designations for MB-107/MB-207; its MB-107 registrational trial was on hold pending CMC clearance, then expected in Q1 2021. These are management-reported plans and milestones, not assured outcomes.
- COVID-19: Management did not expect a material impact on development timelines, revenue or liquidity based on its assessment at filing, but said it continued monitoring the effects. The filing describes potential clinical-trial, supply, staffing and regulatory disruptions.
- Other risks and unusual items: The business has a $477.5 million accumulated deficit and a history of operating losses and negative operating cash flow. Development, regulatory approval, manufacturing, partner financing, product supply, dilution, debt covenants and the value of partner-company holdings remain material risks. The filing reports no legal proceedings, but discloses the Avenue-InvaGen dispute and a potential Fortress indemnification obligation of up to $35 million under the Avenue agreement.
Important facts for investors to verify
- Whether the claimed 12-month cash runway remains supportable after ongoing operating cash use, debt service, preferred dividends and development spending.
- The precise availability and restrictions on consolidated cash, including cash held by controlled partner companies, and compliance with Oaktree’s liquidity and revenue covenants.
- Progress in resolving the IV tramadol FDA deficiencies and the outcome of Avenue’s dispute with InvaGen, including the potential effect on the contingent transaction and indemnification exposure.
- Whether pipeline trial, regulatory and financing milestones are achieved on the timelines described, and how much additional capital they require.
- The future effect of equity and preferred-stock issuance, Oaktree warrants and the preferred dividend on common-stockholder dilution and cash resources.