Fortress Biotech, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018; unaudited. Fortress combines a biopharmaceutical development and product-sales business with a controlling interest in National Holdings, a brokerage and financial-services business. Reporting lag: National’s assets and liabilities are reported one quarter behind, and its results included for Q2 2018 are for the quarter ended March 31, 2018.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net revenue | $63.8 million | $50.7 million | $119.3 million | $95.4 million |
| Loss from operations | $(24.6) million | $(23.2) million | $(60.1) million | $(40.8) million |
| Net loss | $(35.7) million | $(22.9) million | $(73.9) million | $(37.5) million |
| Net loss attributable to common stockholders | $(21.6) million | $(17.4) million | $(42.6) million | $(29.3) million |
| Loss per common share | $(0.50) | $(0.43) | $(0.99) | $(0.73) |
- Six-month revenue comprised $106.5 million from National, $12.2 million of product revenue, primarily Journey Medical products, and $0.5 million of related-party collaboration revenue.
- Six-month research and development expense was $42.4 million, up 126%; general and administrative expense was $26.6 million, up 24%. Revenue growth did not prevent a wider operating loss.
- Operating loss was approximately 38.5% of net revenue in Q2 and 50.4% for the six-month period.
- Cash and cash equivalents were $98.6 million at June 30, 2018, versus $113.9 million at December 31, 2017. Short-term certificates of deposit were $35.0 million; restricted cash was $17.4 million. Total current assets were $171.5 million and current liabilities $62.2 million.
- Operating cash outflow was $55.3 million for the six months, versus $35.4 million in 2017. Investing activities used $4.3 million; financing activities provided $44.0 million. Cash, clearing deposits and restricted cash together decreased $15.5 million to $116.8 million.
- Notes payable had a reported carrying amount of $84.0 million, net of discount, compared with $66.5 million at year-end. The debt table lists $85.1 million before discount. The balance includes $21.7 million of 2018 Venture Notes bearing 8% interest and $9.5 million under the Opus facility bearing 12% interest.
Material changes and developments
- Six-month net revenue increased 25%. National revenue rose 21%, reflecting higher commissions, investment banking and advisory activity; product revenue nearly doubled, largely from Journey Medical. Related-party revenue declined.
- R&D spending rose substantially, driven especially by Avenue’s IV tramadol program, Checkpoint development work, and Caelum research. Management anticipated further increases in R&D and general and administrative expenses.
- Other expense included a $7.9 million six-month loss from changes in fair value of derivative liabilities; interest expense increased to $4.2 million from $2.1 million. The filing also reports a $0.8 million decline in the Origo investment’s fair value.
- Fortress raised $21.7 million through 2018 Venture Notes and received $22.7 million net from subsidiary offerings. It also raised approximately $3.9 million net through its at-the-market offering. Common shares outstanding increased to 54.0 million from 51.0 million at year-end.
Outlook, risks and unusual items
- Management stated that available cash and cash equivalents should fund operations for at least the next 12 months, but that additional financing will be needed to fully develop programs, pursue regulatory approvals and potentially build manufacturing and commercial capabilities. If financing is unavailable on acceptable terms, plans may be curtailed.
- The company expects continuing substantial losses. Its accumulated deficit was $354.8 million at June 30, 2018; profitability and significant future product revenue are uncertain.
- Avenue reported that its first pivotal Phase 3 IV tramadol trial met its primary endpoint and planned a second pivotal trial in the second half of 2018. Mustang expected to file an IND for MB-102 in Q4 2018 and targeted a 2019 Phase 1/2 trial. These are forward-looking plans, not assured outcomes.
- On July 12, 2018, after the quarter, Fortress settled the Dr. Falk Pharma dispute, agreeing to pay $3.3 million over one year plus approximately $37,000 in court fees.
- National faces various pending and threatened legal, arbitration and regulatory matters; their outcomes and potential losses were not determinable. National’s broker-dealer capital and withdrawals are subject to regulatory restrictions.
- Key risks include financing needs, clinical and regulatory failure, reliance on collaborators and third-party manufacturers, product commercialization and reimbursement uncertainty, intellectual-property disputes, and potential dilution. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Cash runway assumptions, expected operating burn, and the availability and terms of future financing.
- Debt terms, maturity schedules, covenants and obligations under the Venture Notes and Opus facility; distinguish gross debt from carrying value.
- Clinical-trial progress and regulatory milestones for Avenue, Mustang and other subsidiaries, including whether stated timelines were achieved.
- National’s one-quarter reporting lag and how its brokerage results, market exposure and legal matters affect consolidated results.
- The effect of fair-value changes, the Origo investment and the post-quarter Dr. Falk settlement on future earnings and cash flows.
- Potential dilution from outstanding equity awards, warrants, future offerings and subsidiary-level financing.