Fortress Biotech, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Unaudited consolidated results include Fortress’s biopharmaceutical subsidiaries and its controlling interest in National Holdings Corporation (National), a brokerage and financial-services business. National’s financial results are included on a one-quarter lag; therefore, reported Q3 National results are for the quarter ended June 30, 2018.
Financial results and key metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $63.7 million | $46.9 million | $183.0 million | $142.3 million |
| Operating loss | $(24.9) million | $(32.6) million | $(85.0) million | $(73.4) million |
| Net loss | $(28.6) million | $(36.3) million | $(102.5) million | $(73.8) million |
| Net loss attributable to common stockholders | $(16.6) million | $(27.1) million | $(59.3) million | $(56.5) million |
| Basic and diluted loss per share | $(0.37) | $(0.67) | $(1.36) | $(1.39) |
- Revenue mix: Nine-month revenue included $165.1 million from National, $17.4 million of product revenue (principally Journey Medical), and $0.5 million of related-party collaboration revenue. National accounted for most consolidated revenue.
- Margins: Consolidated operating-loss margin was approximately 39% in Q3 and 46% for the first nine months. Journey product revenue less reported cost of goods sold implies product gross margin of approximately 73% for both periods; this is not a consolidated margin.
- Cash and liquidity: At September 30, cash and cash equivalents were $95.9 million, short-term certificates of deposit $22.5 million, and restricted cash $17.4 million. Cash, clearing deposits and restricted cash totaled $113.6 million. Current assets were $159.5 million versus current liabilities of $70.8 million.
- Cash flow, nine months: Operating activities used $77.8 million, investing activities provided $5.1 million, and financing activities provided $54.0 million. Combined cash, clearing deposits and restricted cash decreased $18.8 million.
- Debt: Notes payable totaled $85.1 million before discounts and $84.3 million net of discounts, compared with $67.5 million gross and $66.5 million net at year-end 2017. Debt included $21.7 million of 2018 Venture Notes bearing 8% interest and a $9.5 million Opus facility bearing 12% interest and maturing September 2019.
- Equity: Fortress-attributable stockholders’ equity was $37.8 million; total stockholders’ equity, including non-controlling interests, was $84.6 million. Common shares outstanding rose to 56.2 million from 51.0 million at year-end 2017. Accumulated deficit was $371.4 million.
Material changes versus comparable periods
- Net revenue rose 36% in Q3 and 29% year to date. National revenue increased 32% in Q3 and 25% year to date, supported by investment banking, commissions and investment advisory. Journey product revenue increased 138% in Q3 and 109% year to date.
- Operating expenses rose 11% in Q3 and 24% year to date. Nine-month Fortress R&D expense increased 69% to $58.5 million, reflecting higher development activity at Avenue, Checkpoint and Mustang. National operating expenses increased 17% year to date, largely with higher revenue-linked compensation.
- Although the nine-month consolidated net loss widened to $102.5 million, the loss attributable to Fortress common stockholders increased more modestly, to $59.3 million from $56.5 million, reflecting a larger portion of losses attributed to non-controlling interests.
- Operating cash use increased from $60.4 million to $77.8 million year over year. Financing cash inflow was lower than in 2017, when the company reported $129.7 million, versus $54.0 million in 2018.
Outlook, commentary, risks and unusual items
- Management stated current cash and cash equivalents were expected to fund operations for at least 12 months. The company nevertheless expects substantial losses to continue and says additional funding will be needed to develop products, fund operating losses and support potential commercialization. If funding is unavailable on acceptable terms, development and expansion plans may be curtailed.
- Management expects R&D and G&A expenses to increase as development programs and infrastructure expand. No quantified earnings or revenue guidance was provided.
- Pipeline updates included Checkpoint’s ongoing CK-101 Phase 1/2 trial, with a Phase 3 trial planned to start in 2019 after dose selection; Cyprium’s CUTX-101 received FDA Fast Track designation. These are development plans, not assurances of approval or commercial success.
- Q3 included $3.7 million of acquired-license R&D expense, including Checkpoint and Helocyte milestones and Mustang’s St. Jude X-SCID license. The company also recorded a $1.5 million Helocyte milestone expected in connection with completion of a Phase 2 trial.
- The company settled the Dr. Falk Pharma dispute for $3.3 million plus court fees, payable over a year; it paid $2.0 million and approximately $39,500 in court fees during Q3. National also faces pending and threatened litigation and regulatory matters; outcomes and potential losses are not clear.
- The Origo investment was written off, producing a $1.4 million fair-value loss year to date. The nine-month results also included a $7.9 million adverse change in fair value of derivative liabilities, substantially related to National warrants; National’s $13.6 million warrant liability was reclassified to equity after an agreement amendment.
- Key risks include continuing operating losses and financing needs, clinical and regulatory uncertainty, reliance on third parties for development and manufacturing, possible dilution from equity issuance, customer concentration in Journey product sales, and risks inherent in National’s brokerage activities. Management reported disclosure controls effective as of September 30, 2018 and no material quarterly change in internal control over financial reporting.
Most important facts for investors to verify
- Whether cash burn and available financing support management’s stated minimum 12-month runway, considering consolidated cash, restricted cash and subsidiary-level funding needs.
- Debt maturities, interest costs, and terms or constraints on the 2018 Venture Notes, Opus facility and subsidiary convertible notes.
- Progress, timelines and funding requirements for key clinical programs, especially CK-101, IV tramadol, Mustang’s pipeline and the planned manufacturing facility.
- The durability and concentration of Journey product sales and National’s investment banking and market-sensitive revenue.
- Potential dilution from outstanding equity awards, future offerings and subsidiary financings; common shares outstanding were 56.2 million at quarter-end and 56.7 million as of November 7, 2018.
- Status and financial exposure of legal matters, license milestones, related-party arrangements and significant fair-value measurements.