Fortress Biotech, Inc. — 2019 Form 10-K Summary
Business context and reporting period
This is the annual report for the fiscal year ended December 31, 2019, not a standalone fourth-quarter report. Fortress is a biopharmaceutical company that develops and commercializes products through controlled subsidiaries and partner companies, with significant minority interests in some ventures. Its commercial revenue primarily comes from Journey Medical’s dermatology products; much of the remaining portfolio is in development. The filing does not provide a clear Q4-only financial summary.
Key financial metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Net revenue | $36.6 million | $26.9 million |
| Product revenue | $34.9 million | $23.4 million |
| Operating loss | $110.8 million | $120.0 million |
| Loss from continuing operations | $101.7 million | $130.8 million |
| Net loss attributable to common stockholders | $40.0 million | $84.1 million |
| Net cash used in operating activities | $95.0 million | $98.8 million |
- Revenue increased 36%, mainly from Journey product sales, which rose 49% to $34.9 million. Targadox contributed $28.1 million; Ximino generated $3.6 million during its first five months on the market.
- Cost of goods sold was $10.5 million. Product gross profit was approximately $24.4 million, or about 70% of product revenue.
- R&D expense was $75.2 million, down 10%; acquired-license R&D expense was $6.1 million, up from $4.1 million. General and administrative expense rose 4% to $55.6 million.
- Net loss improved substantially year over year, partly because 2018 included discontinued National operations and 2019 included an $18.5 million gain from deconsolidating Caelum. The 2019 continuing-operations loss also includes that gain.
- Interest expense and financing fees were $11.8 million. Debt outstanding was $89.7 million before discounts and $84.7 million net of discounts, versus $79.5 million net at year-end 2018.
- At December 31, cash and cash equivalents were $136.9 million and restricted cash was $16.6 million. The company reported $153.4 million of cash, cash equivalents and restricted cash in its cash-flow statement, including subsidiary cash. Of this, $51.1 million was attributed to Fortress, with the balance held by subsidiaries and partner companies. Current assets were $156.3 million and current liabilities $45.6 million.
- Investing activities provided $20.1 million and financing activities provided $146.7 million. Financing included equity issuance by Fortress and subsidiaries; it supported the year-end cash increase despite operating cash outflow.
- Series A preferred stock carries a 9.375% annual cumulative dividend. Fortress reported 1.34 million preferred shares outstanding at year-end; common shares outstanding were 74.0 million.
Material changes versus 2018
- Journey’s product revenue growth, including the August 2019 launch of Ximino, drove most of the increase in consolidated revenue. Related-party collaboration revenue fell to $1.7 million from $3.5 million.
- R&D expense declined, but spending shifted across programs: Mustang’s R&D increased to $29.8 million while Checkpoint’s declined to $16.8 million.
- Fortress sold its remaining National Holdings shares in February 2019. It also deconsolidated Caelum after Alexion acquired a 19.9% interest for $30 million; Fortress retained an approximately 40% interest and recorded the $18.5 million gain.
- Debt increased, including Mustang’s Horizon financing. Fortress and its partner companies also raised capital through public offerings and at-the-market programs, increasing share counts and creating dilution risk.
Outlook, commentary, risks and unusual items
- Management stated that available cash and cash equivalents were expected to fund operations for at least 12 months, while also warning that additional financing would be needed to develop products, fund operating losses and support commercialization. Failure to raise funds could require reduced or delayed development activity.
- Avenue submitted an NDA for IV tramadol in December 2019; the FDA accepted it in February 2020 and set an October 10, 2020 PDUFA date. A potential InvaGen acquisition of Avenue depends on FDA approval and other conditions; Fortress cited an expected net distribution of approximately $48 million plus possible royalties if completed.
- Cyprium planned to begin a rolling NDA submission for CUTX-101 in Q4 2020. These are stated plans, not assurances of regulatory approval or completion.
- Key risks include continuing losses, dependence on external financing and partner-company funding, clinical and regulatory uncertainty, reliance on third-party manufacturers and trial operators, competition, intellectual-property disputes, reimbursement and drug-pricing changes, and possible dilution. Fortress also disclosed guarantees and indemnification exposures, including a potential Avenue-related indemnity capped at $35 million subject to its terms.
- The filing identifies a $18.5 million Caelum deconsolidation gain as a significant nonrecurring item. It also notes that operating leases were recognized on the balance sheet following adoption of the new lease accounting standard. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
- The filing discussed the emerging COVID-19 outbreak as a potential source of operational disruption, fundraising difficulty and contractual force-majeure disputes; the extent of any effect was uncertain at filing.
Most important facts for investors to verify
- Whether operating cash burn and cash held at subsidiaries leave Fortress with sufficient accessible liquidity, and how long current funding supports planned operations.
- Debt terms, maturity extensions, collateral and covenants, including Mustang’s minimum-cash requirements and Fortress’s guarantees of affiliate obligations.
- Whether Journey can sustain dermatology sales and margins amid competition, customer concentration, returns and product-supply risks.
- Progress and outcomes for IV tramadol, CUTX-101 and other major clinical programs, including the conditions and economics of the proposed Avenue-InvaGen transaction.
- The extent of future equity issuance, preferred dividends and potential dilution to common stockholders.