Fortress Biotech, Inc. annual report, FY2012

Business context and reporting period

Issuer identification: The supplied filing is Coronado Biosciences, Inc.’s Form 10-K for the fiscal year ended December 31, 2012; it is not identified as a Fortress Biotech filing. Coronado was a clinical-stage biopharmaceutical company developing TSO (CNDO-201) for autoimmune diseases and CNDO-109 for cancer. It had no product revenue and continued to report as a development-stage enterprise.

Financial performance and position

Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless noted. The company reported no revenue, so revenue-based margins are not meaningful.

FY 2012 operating cash use was partly offset by $40.512 million of financing cash inflows; cash increased $17.039 million. At year-end, cash and cash equivalents were $40.199 million, total assets $40.992 million, current liabilities $5.132 million, total liabilities $18.959 million, and stockholders’ equity $22.033 million. Accumulated deficit was $84.184 million.

Debt included a $15 million Hercules term loan, with $14.185 million recorded as current and long-term note payable net of discount. The loan bears interest at a minimum 9.25%, matures March 1, 2016, and is secured by substantially all assets other than intellectual property. Its contractual principal and interest payments were reported at $18.221 million. The company reported no marketable securities.

For Q4 2012, operating expenses were $8.299 million, net loss was $8.664 million, and basic and diluted loss per share was $0.36. In Q4 2011, the corresponding amounts were $5.232 million, $6.719 million, and $0.52.

Material changes versus comparable periods

• FY 2012 net loss narrowed from FY 2011, largely because 2011 included $20.706 million of acquired in-process R&D expense for the Asphelia TSO assets. The 2012 charge was $1.043 million for TSO manufacturing rights.
• R&D expense rose 104% to $17.468 million, driven mainly by TSO development, including its Phase 2 program, clinical supplies, and milestone costs. G&A expense rose 51% to $8.665 million as activity and public-company costs increased.
• Operating cash use more than doubled to $23.194 million. The reported improvement in annual net loss did not translate into lower cash burn.
• Financing included a June 2012 common-stock offering that generated approximately $26.4 million net and an August 2012 Hercules loan that generated $14.7 million net. The company had 24.401 million common shares outstanding at year-end, versus 18.604 million a year earlier.
• The company reported $10.5 million of additional net ATM proceeds from 1,426,250 shares issued between January 1 and March 8, 2013; this is subsequent-period financing, not FY 2012 proceeds.

Outlook, commentary, risks and unusual items

• Management estimated year-end cash would fund operations through Q1 2014 under its then-current plan, but said substantial additional financing would be needed. It cautioned that spending could exceed estimates and that financing might not be available on acceptable terms.
• Management expected TSO R&D spending to increase. The U.S. TRUST-I Phase 2 Crohn’s trial, begun in August 2012, targeted about 220 patients, with initial results expected in the second half of 2013. Falk’s European TRUST-II study reported no safety concerns and a positive efficacy trend in a blinded interim review; a further interim analysis was anticipated in 2H 2013. These were preliminary trial updates, not established efficacy findings.
• CNDO-109 received FDA orphan-drug designation for AML, and a U.S. Phase 1/2 trial began in November 2012. Its development, safety, manufacturing, and efficacy remained uncertain.
• TSO supply was dependent on Ovamed and a single production site in Germany. Coronado planned to build out a Woburn, Massachusetts facility for later-stage TSO supply; timing, cost, GMP compliance, and successful production were key execution risks. CNDO-109 also depended on third-party manufacturers, with no commercial manufacturing arrangement reported.
• The Hercules loan includes restrictive covenants and collateralizes substantially all assets other than intellectual property; default could accelerate repayment and permit foreclosure on collateral. Equity raises could dilute shareholders.
• Unusual items included $1.043 million of TSO manufacturing-rights in-process R&D expense and year-end executive transition costs and compensation-related charges. The filing reported no material pending litigation. Management and the auditor reported effective internal controls over financial reporting; the auditor issued an unqualified opinion on the financial statements.

Important facts for investors to verify

• Whether the TSO Phase 2 trials met enrollment, timing, safety, and efficacy objectives, and whether reported interim trends were confirmed in final analyses.
• Whether the Woburn facility was completed, passed regulatory inspection, and could reliably supply clinical and potential commercial TSO.
• Cash runway assumptions, subsequent cash burn, further ATM issuance and dilution, and the availability and terms of financing beyond the stated Q1 2014 runway.
• Hercules loan amortization, interest costs, covenant compliance, and the collateral and default provisions.
• Future TSO and CNDO-109 milestone, royalty, manufacturing, and collaboration obligations, including the status of the remaining Falk payment and Ovamed arrangements.