Fortress Biotech, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited consolidated results include Fortress and controlled subsidiaries, including publicly traded partner companies. Fortress develops and commercializes medicines through a network of partner companies; reported product sales primarily come from Journey Medical’s dermatology portfolio.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net revenue | $12.9 million | $6.5 million |
| Operating loss | $21.5 million | $32.6 million |
| Consolidated net loss | $24.1 million | $16.3 million |
| Net income (loss) attributable to common stockholders | $(12.4) million | $1.4 million |
| Net cash used in operating activities | $21.9 million | $25.3 million |
- Product revenue was $11.9 million; related-party revenue was $1.0 million. Product revenue increased 95% year over year, and total revenue increased 99%.
- Cost of goods sold was $3.8 million, up from $1.9 million, alongside higher Journey product sales. Research and development expense declined to $14.9 million from $23.3 million; general and administrative expense rose to $15.5 million from $13.5 million.
- Interest expense and financing fees were $3.1 million, versus $2.5 million. The prior-year quarter included an $18.4 million gain on deconsolidation of Caelum; there was no comparable gain in 2020.
- At March 31, cash and cash equivalents were $135.9 million, with an additional $16.6 million of restricted cash. Current assets were $158.8 million and current liabilities $51.7 million. Net notes payable were $85.4 million; operating lease liabilities on the balance sheet totaled $25.4 million.
- Cash and cash equivalents plus restricted cash decreased $0.9 million during the quarter to $152.5 million. Financing activities provided $22.8 million, including net proceeds from preferred-stock and at-the-market offerings.
Changes, outlook and notable items
- Operating loss narrowed year over year, mainly reflecting higher product and collaboration revenue and lower R&D costs. The common-stockholder result shifted from income to loss, principally because Q1 2019 included the Caelum deconsolidation gain.
- Management said existing cash and cash equivalents were expected to fund operations for at least 12 months. The company nevertheless expects substantial ongoing losses and says additional funding will be needed to develop candidates and support operations; funding may come from equity or debt, partnerships, asset sales or other sources. No specific earnings or revenue guidance was provided.
- COVID-19’s long-term impact was uncertain. Management did not then expect a material impact on development timelines or liquidity, but said it was continuing to assess effects. The filing identifies potential trial, supply, regulatory, workplace and financing disruptions; employees were working remotely and travel was restricted.
- Pipeline developments included FDA acceptance of Avenue’s IV tramadol NDA, with an October 10, 2020 target action date; the filing also describes development programs for Mustang’s gene therapies and Checkpoint’s cosibelimab. These programs remain subject to clinical, manufacturing and regulatory risks.
- Fortress issued 2.3 million common shares through its ATM for approximately $6.1 million gross and raised approximately $14.4 million gross from Series A preferred stock. The preferred stock carries a 9.375% cumulative dividend. A repurchase program authorized up to $5 million of preferred stock; 5,000 shares had been repurchased for about $0.1 million by quarter-end.
- Potential contingent value includes Alexion’s option to acquire the remaining Caelum equity, with potential payments described as up to $500 million, and InvaGen’s proposed Avenue acquisition for $180 million subject to conditions including FDA approval. These are contingent, not assured, proceeds. Fortress also disclosed a potential indemnification obligation to InvaGen capped at $35 million, subject to the agreement’s terms.
Investor verification points
- Confirm the runway assumptions and timing, amount and terms of future financing; quarterly operating cash use and ongoing preferred dividends are material.
- Monitor Journey product sales, gross profitability, customer concentration and any effects from competition, supply or reimbursement changes.
- Track clinical and regulatory milestones, including IV tramadol’s FDA review, and assess whether COVID-19 or manufacturing constraints alter timelines.
- Review debt maturities, interest costs, covenants and any subsidiary-level limits on cash transfers, as well as the conditions and potential value of the Avenue and Caelum transactions.
- Consider dilution from equity issuance and the treatment of non-controlling interests when assessing Fortress-attributable results and ownership economics.