Fortress Biotech, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited and consolidated results include Fortress and controlled partner companies. Dollar amounts below are in millions unless noted.
Business context
Fortress acquires, develops and commercializes pharmaceutical and biotechnology products through subsidiaries, joint ventures and partner companies. Its main reported activities are dermatology product sales and pharmaceutical and biotechnology development. Journey Medical’s marketed products generated most product revenue; the broader portfolio remains substantially dependent on development-stage candidates and external financing.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 / prior date |
|---|---|---|
| Net revenue | $6.48 | $5.90 |
| Product revenue | $6.13 | $5.51 |
| Related-party revenue | $0.35 | $0.39 |
| Cost of product sales | $1.88 | $1.47 |
| Product gross profit and margin | $4.24; approximately 69% | $4.04; approximately 73% |
| Research and development, including acquired licenses | $23.72 | $25.06 |
| General and administrative | $13.48 | $13.55 |
| Operating loss | $(32.61) | $(34.17) |
| Net loss from continuing operations | $(16.26) | $(36.14) |
| Net loss attributable to common stockholders | Income of $1.39; diluted EPS $0.02 | Loss of $21.02; diluted EPS $(0.49) |
| Cash used in operating activities | $(25.33) | $(27.84) |
| Cash and cash equivalents at period end | $116.44 | $65.51 at Dec. 31, 2018 |
| Total notes payable, net of discount | $82.88 | $79.50 at Dec. 31, 2018 |
Cash, cash equivalents and restricted cash totaled $132.52 at March 31; short-term certificates of deposit added $5.04. Restricted cash was $16.07. Current assets were $136.55 versus current liabilities of $48.96, or working capital of approximately $87.59. Total assets were $200.54, total liabilities $149.83 and total stockholders’ equity $50.71. The filing’s liquidity discussion includes consolidated partner-company resources, which may not all be freely available to Fortress.
Product gross margin is calculated from reported product revenue less product cost of goods sold; it excludes sales and marketing, research and development, and other costs. The positive common-stockholder result does not mean the consolidated business was profitable: consolidated net loss was $16.26, while $17.65 of net loss was attributed to non-controlling interests.
Material changes and significant transactions
- Revenue increased 10% year over year, primarily from Journey’s dermatology products. Product revenue rose 11%; related-party revenue declined 11%.
- Operating expenses fell 2%. R&D declined 7%, while acquired-license expense rose to $0.45 from $0.10. General and administrative expense was nearly flat. Mustang’s R&D increased, while Checkpoint’s decreased.
- Other income included an $18.38 gain on deconsolidating Caelum after Alexion acquired a 19.9% interest and received an option to acquire the remaining company. Fortress recorded a $11.06 fair-value investment in Caelum. This accounting gain was a major reason the consolidated loss narrowed; it was not equivalent to cash proceeds received by Fortress.
- Fortress received $13.09 from sale of its remaining National Holdings shares. National was reported as discontinued operations; the comparable 2018 period included a $2.08 discontinued-operations loss.
- Financing provided $52.11 net cash, including $31.50 from a partner-company share sale, $15.00 from Mustang’s Horizon debt financing, and $6.14 net proceeds from Fortress’s ATM stock offering. Common shares outstanding increased from 57.85 million at year-end to 63.13 million at quarter-end.
- Effective January 1, 2019, lease accounting added a right-of-use asset and lease liabilities to the balance sheet. At March 31, lease liabilities were $26.47 and the right-of-use asset was $22.62.
Outlook, commentary and risks
- Management said cash and cash equivalents were sufficient to fund operations for at least the next 12 months. It also expects substantial ongoing losses and says additional financing will be needed to develop candidates, pursue regulatory filings and approvals, and support operations. If funding is unavailable on acceptable terms, development and infrastructure plans may be curtailed. No formal revenue or earnings guidance was provided.
- For IV tramadol, Avenue expected topline results from its second Phase 3 study by the end of Q2 2019 and planned an NDA submission by year-end if the study met its primary endpoints. These are forward-looking expectations, not reported outcomes.
- Alexion’s Caelum agreement provided for $30 million initially and potential additional development funding; potential payments could reach $500 million if Alexion exercised its acquisition option. Avenue’s InvaGen transaction included a contingent acquisition following specified conditions, notably FDA approval of IV tramadol.
- Fortress disclosed a potential indemnification obligation of up to $35 million to InvaGen for specified representation-and-warranty losses under the Avenue agreement. The obligation ends upon the contingent merger; if that merger does not occur, Fortress may have no means to recover amounts paid.
- Debt, ongoing cash burn, dependence on future capital raises, clinical and regulatory uncertainty, third-party manufacturing and collaboration dependence, product competition, potential dilution, and partner-company funding needs are material risks. Mustang’s Horizon facility carried interest of 9% plus any one-month LIBOR above 2.5%, had collateral and liquidity covenants, and included a further $5 million subject to milestones.
- Subsequent to quarter-end, Fortress reported additional ATM share sales, and Mustang completed a public offering. These transactions affect financing and dilution after March 31; the filing’s descriptions of the ATM issuer and shelf registration should be checked against the underlying exhibits.
- The controls discussion says management evaluated disclosure controls as of September 30, 2018, despite this being a Q1 2019 filing. The filing states no material quarterly change in internal control over financial reporting; investors may wish to verify the stated evaluation date.
Important facts for investors to verify
- Cash availability by entity, including restricted cash and funds held at publicly traded or other partner companies, and the basis for management’s 12-month liquidity assessment.
- Clinical milestones and regulatory progress for IV tramadol and other key candidates, including actual outcomes versus the stated expected timelines.
- The terms, conditions and potential proceeds of the Avenue-InvaGen and Caelum-Alexion contingent transactions, including the Fortress indemnity exposure.
- Debt balances, maturities, covenants and ability to service obligations, as well as dilution from ATM sales, partner financings and outstanding equity awards.
- The Caelum deconsolidation accounting and the distinction between the reported gain, Fortress’s recorded investment value and cash received by the company.