Fortress Biotech, Inc. — Q2 2019 Form 10-Q
Business context and reporting period
Fortress Biotech is a biopharmaceutical company that develops and commercializes products through subsidiaries, joint ventures and partner companies. This unaudited filing covers the quarter and six months ended June 30, 2019. Unless stated otherwise, financial amounts below are in millions of dollars.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net revenue | $9.25 | $6.82 | $15.73 | $12.72 |
| Operating loss | $(25.29) | $(25.40) | $(57.90) | $(59.57) |
| Net loss | $(27.48) | $(35.72) | $(43.74) | $(73.93) |
| Net loss attributable to common stockholders | $(13.10) | $(21.61) | $(11.71) | $(42.63) |
| Net loss per common share | $(0.24) | $(0.50) | $(0.23) | $(0.99) |
- Q2 product revenue was $8.20 million; related-party collaboration revenue was $1.05 million. Six-month amounts were $14.32 million and $1.40 million, respectively. Targadox was the largest product revenue source.
- Product gross profit was approximately $5.81 million in Q2 (about 71% gross margin) and $10.05 million for the first half (about 70%), based on product revenue less product cost of goods sold.
- Six-month cash used in operating activities was $53.65 million, versus $51.93 million in 2018. Investing activities provided $23.54 million; financing activities provided $114.01 million. Cash, cash equivalents and restricted cash rose $83.90 million during the period.
- At June 30, cash and cash equivalents were $149.41 million, short-term investments $5.00 million, and restricted cash $16.07 million. Current assets were $163.51 million and current liabilities $36.40 million.
- Debt was $83.70 million net of discounts ($90.24 million before discounts). Operating lease liabilities were a separate $26.14 million. Interest expense and financing fees were $5.58 million for the first half.
- Total stockholders’ equity was $89.82 million; accumulated deficit was $407.98 million. Common shares outstanding at quarter-end were 68.14 million; the filing reports 69.04 million outstanding as of August 6, 2019.
Material changes versus prior comparable periods
- Q2 revenue grew 36% year over year, reflecting higher dermatology product sales and increased collaboration revenue from Checkpoint’s TGTX arrangement. First-half revenue grew 24%.
- Q2 operating loss was broadly unchanged. First-half operating loss improved by $1.67 million, while R&D expense declined 2% to $41.78 million and general and administrative expense increased 1% to $26.92 million.
- First-half net loss improved by $30.20 million, including an $18.52 million gain on Caelum’s deconsolidation and the absence of National discontinued-operation losses reported in 2018. Common-stockholder loss also reflects the allocation of losses to non-controlling interests; it should not be treated as equivalent to consolidated net loss.
- Cash increased substantially, supported by financing: Fortress’s ATM offering and offerings by partner companies, plus Mustang’s Horizon debt financing. Fortress issued approximately 7.39 million shares through its ATM in the first half; partner-company equity raises also brought cash into consolidated subsidiaries.
Outlook, commentary and risks
- Management said existing cash and cash equivalents were expected to fund operations for at least the next 12 months, while also stating that additional funding would be needed to advance development, regulatory filings and commercialization. If acceptable financing is unavailable, development and infrastructure plans may be curtailed. The company expects substantial losses to continue; no financial earnings guidance was provided.
- Avenue planned to submit an NDA for IV tramadol by year-end 2019 after reporting positive results from its second pivotal Phase 3 trial. Mustang reported development progress across its gene and cell therapy programs, including a planned MB-102 trial later in 2019. These are forward-looking plans, not assured outcomes.
- In January 2019, Alexion acquired a 19.9% interest in Caelum for $30 million and received a contingent option to acquire the remainder subject to terms and milestones. Fortress deconsolidated Caelum and recorded the $18.52 million gain noted above.
- 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 product sales. Fortress also disclosed potential indemnification obligations to InvaGen of up to $35 million, ending upon the merger transaction.
- One dermatology customer represented approximately 84% of gross product revenue for Q2 and 86% for the first half under the 3PL title model; one customer represented approximately 77% of gross accounts receivable at quarter-end. This concentration creates customer and collection risk.
- Key risks include continuing operating losses and cash burn, dependence on external financing and subsidiary funding, debt maturities and covenant compliance, clinical and regulatory uncertainty, reliance on collaborators and third-party manufacturers, and potential dilution. Subsequent to quarter-end, certain note maturities were extended in August 2019; the Opus facility was extended in part, and Fortress prepaid $0.5 million of Opus debt with common shares.
- The filing reports no legal proceedings and no defaults upon senior securities. Management concluded disclosure controls were effective as of June 30, 2019 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Reconcile cash runway assumptions with the $53.65 million first-half operating cash outflow and expected development spending.
- Review debt terms, maturity extensions, Mustang’s liquidity covenant, and the availability and conditions of additional financing.
- Track progress and costs for IV tramadol’s NDA and Mustang’s clinical programs; confirm subsequent regulatory and trial outcomes.
- Assess reliance on the concentrated dermatology customer and related accounts receivable, and the sustainability of product revenue and margins.
- Evaluate potential dilution from equity offerings and outstanding awards, and the conditions and value of the Avenue and Caelum transactions, including Fortress’s indemnification exposure.