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Understanding Fortress Biotech
Contributed Opinion

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Daniel Carlson Daniel Carlson of Tailwinds Research takes a close look at what he calls a "great value opportunity," with a focus on subsidiary Avenue Therapeutics.

With a plethora of balls in the air, Fortress Biotech Inc. (FBIO:NASDAQ) is a very difficult company to value. The financials, being a combination of the multiple companies in which Fortress has a minority ownership yet a control position through ownership structure and control of the board, are virtually impossible to decipher unless you're a forensic accountant. A conglomeration of 28 drugs in development under 10 different subsidiaries, three of which are public, come together in one balance sheet and income statement simply doesn't lend itself to easy review.

The result of this compilation of financials is almost to be expected; most analysts don't spend the time to get to know Fortress Biotech. I've seen it from personal experience: Smart financiers take one look at the financials and decide that this is a cash-burning business that needs financing. Then they turn their attention elsewhere.

This fairly common reaction has created a wonderful opportunity for those investors willing to take the time to peel back this onion. Simply put, by consolidating subsidiaries' earnings in their financials, Fortress gives off the appearance of a weak company. This however, couldn't be further from the truth.

In reality, Fortress is a company with several years' cash on the books and a game plan in place to be cash-flow positive in 2020. Meanwhile, they have a development team in place that is bringing in new opportunities rapidly, and an experienced management team that has a track record of developing blockbuster drugs.

Fortress, in our opinion, has all the pieces in place to grow into becoming a major player in healthcare over the next few years. In November, the company ranked in the top 10 of Deloitte's 2019 Technology Fast 500. It's a great growth company. But, at the same time, FBIO trades at a fractional value to what a sum-of-the-parts liquidation would generate for investors. Fortress is a great value opportunity.

Often, sum-of-the-parts stories trade below fair market value until they hit critical mass and enough analysts do the work to see the value. This creates an opportunity for those of us who will take the time to explore the story and put the puzzle together. That's just what we are going to do with Fortress; we are going to take this story apart piece by piece to understand each component that makes up FBIO and assign a value to each part.

In this, our first piece on FBIO, we will look at subsidiary Avenue Therapeutics Inc. (ATXI:NASDAQ)

Why are we starting with Avenue? There are a couple of reasons why Avenue is the best, first place to go when digging into Fortress.

First off, this is a one-product company, and that product is likely to be FDA approved by the end of the year, which makes it relatively easy to assess the assets.

Second, Avenue is under contract to be acquired (post-drug approval) for cash by Cipla Ltd. (CIPLA:NSE), an Indian generic drug manufacturer. Since it's being acquired for cash, we can easily put a dollar value on the shares of Avenue that are owned by Fortress, assuming the acquisition closes.

Finally, Avenue is a big piece of the Fortress story and, likely, the first piece to be monetized, so a good place to start.

There are, of course, some caveats to the terms and value at which Avenue is being acquired, but we'll dig into those later. For now, let's start by looking at Avenue's drug, which is an intravenous (IV) version of Tramadol.

Tramadol is a drug that has been approved and used in pain relief since 1963. In the U.S. it is available in a pill form only. Tramadol is used primarily to treat mild to severe pain, both acute and chronic and has about 1/10th the potency of morphine. As a drug that has been around for over fifty years, it is a very well-known therapeutic. Doctors are certainly familiar with it and many have a history of prescribing the drug.

Avenue is in the process of applying for FDA approval on an IV tramadol. By delivering the drug intravenously, they expect to see adoption by hospitals for post-operative pain, an area dominated by conventional intravenous opioids. The market for post-operative pain relief is a very large one, currently dominated by morphine and other opiates like fentanyl. It is estimated that there are 200 million use cases in the U.S. per annum.

IV tramadol stands to potentially gain a large piece of this market. This is because, while tramadol is classified as an opiate, it is much less addictive than those other drugs. According to Harvard Health Publishing, "Compared with other controlled substances, tramadol is at the safer end of the spectrum. Heroin, for example, is a Schedule I drug (high abuse potential and no acceptable medical use). OxyContin is a Schedule II drug (it also has high abuse potential, but has an accepted medical use). Classified as a Schedule IV drug, tramadol is considered useful as a pain reliever with a low potential for abuse."

In addition to the 200 million cases cited above, there are 45 million uses of other pain killers intravenously in the U.S. as well. These are typically intravenous NSAIDS, similar to Advil, or even intravenous acetaminophen, like Tylenol, neither of which is as effective as tramadol.

Thus, if approved, the market for IV tramadol is potentially 245 million uses per annum. This for a well-known drug that has similar efficacy with those already on the market and a much better safety profile. Obviously, the potential for significant market share to be gained is quite realistic.

In order to achieve this market share, IV tramadol obviously needs to be approved by the FDA. This is something we believe is highly likely to occur. In 2019, the company released positive results from its second phase 3 study on tramadol, and on Dec. 11, Avenue announced they had filed a new drug approval (NDA) for approval:

"The NDA for IV tramadol is based on positive results from two pivotal Phase 3 clinical efficacy and safety trials in patients following bunionectomy and abdominoplasty surgeries, as well as an open-label safety study with a total of more than 500 patients who received the IV tramadol 50 mg dosing regimen. In addition, the NDA includes an epidemiology study on abuse of tramadol in the U.S. and in certain European countries where IV tramadol is available. The study finds that reports of abuse with tramadol are infrequent, both in absolute number and relative to other prescription opioids, and that abuse of tramadol via injection is uncommon relative to oral tramadol in countries where it is available."

Based on the findings in their studies, and based on the data presented from other countries in which IV tramadol is used (the FDA routinely accepts data such as this), it appears that IV tramadol is highly likely to get approval. It should also, due to the lower levels of abuse, receive a clean label for marketing.

Therefore, it's our opinion that IV tramadol will be approved by the end of 2020, and the wording around FDA approval will be positive enough that Avenue will be acquired, as per its contract with Cipla, before the end of the year.

This is where things start to get interesting for FBIO shareholders. The terms of the acquisition are for the remaining shares of Avenue that aren't currently owned by Cipla to be purchased for $180 million in cash. This will result in an estimated takeover price of $13.92 per share, which will generate a roughly $45 million check to Fortress.

On top of this, Cipla has agreed to offer contingent value rights (CVRs) to the shareholders of Avenue. If you're not familiar with CVRs (and I wasn't before), they are basically future payouts to the current shareholders of Avenue based upon the sales and or income generated by IV tramadol over the next 16 years. Here's the exact wording behind it:

"Each CVR represents the right of its holder to receive a contingent cash payment pursuant to the CVR Agreement upon the achievement of certain milestones. If, during the period commencing on the day following the closing of the Merger Transaction until December 31, 2028, IV Tramadol generates at least $325 million or more in Net Sales (as defined in the CVR Agreement) in a calendar year, each Holder shall entitled to receive their pro rata share of (i) if the product generated less than $400 million in Net Sales during such calendar year, 10% of Gross Profit (as defined in the CVR Agreement), (ii) if the product generated between $400 million and $500 million in Net Sales during such calendar year, 12.5% of Gross Profit, or (iii) if the product generated more than $500 million in Net Sales during such calendar year, 15% of Gross Profit. Additionally, at any time beginning on January 1, 2029 that IV Tramadol has generated at least $1.5 billion in aggregate Net Sales, then with respect to each calendar year in which IV Tramadol generates $100 million or more in Net Sales, each Holder shall be entitled to receive their pro rata share of an amount equal to 20% of the Gross Profit generated by IV Tramadol. These additional payments will terminate on the earlier of December 31, 2036 and the date (which may be extended by up to 6 months) that any person has received approval from the FDA for an Abbreviated New Drug Application or an FDA AP-rated 505(b)(2) NDA using IV Tramadol."

What that language all means is that current shareholders of Avenue will get a future stream of cash payments if IV tramadol becomes a successful drug—success being defined as generating at least $325 million per annum in sales.

Is it likely they get to that sales number? Remember there are 245 million use cases of IV pain relievers in the US. IV tramadol is probably going to have a $15 or more cost per usage. In order to get to $325 million in sales, they simply need close to 10% market share. At 25% market share, this starts to rapidly approach a billion dollars in sales per annum.

Cipla, in my opinion, is banking on this being a billion-dollar drug. They have already spent $35 million acquiring a third of Avenue and have invested millions more in bringing IV tramadol in front of the FDA. They are contractually obligated to acquire the balance for $180 million after a clean approval. Suffice to say, Cipla believes this is going to be a blockbuster drug and they have invested significantly based on that assumption.

Assuming that Cipla is correct and IV tramadol does, indeed, become a billion-dollar drug, what is the value of these CVRs? To calculate this, I put together a sales model that trended toward the $1 billion-mark by year 8. I assumed that the gross margins on the drug were 80%, which is fairly standard for a patent-protected product.

This means that gross profits on IV tramadol, in my model, approach $800 million by 2028. Per annum! Since the CVR owners get 20% of that number, there are checks being written to the current shareholders of close to $160 million per year come 2028 and lasting until 2036. These checks start earlier but that's the full run-rate I modeled.

The net present value (NPV) of these future cash streams is close to a billion dollars. Since Fortress owns 32% of the (non-Cipla) outstanding shares of Avenue, the NPV of this future revenue stream to Fortress comes to over $300 million dollars. Factor in the buyout price, and the current NPV of Fortress' Avenue shares is around $350 million.

Obviously, these numbers can be played with. The sales may never approach a billion dollars. Or, they could conceivably get 50% market share and sales would be double my model. I also used a 5% discount rate, which is low, but so are interest rates. Bumping that number up can easily lower the NPV.

Here's the bottom line on all this. Assuming IV tramadol gets approved and acquired by Cipla, Fortress is going to get $45 million in cash this year and a potential future revenue stream that has a net present value in the hundreds of millions of dollars. Meanwhile, the current market cap of FBIO, with the stock at $2.80 per share, is around $200 million dollars, based on 71 million shares outstanding. Thus, the net present value of Fortress' portion of Avenue, at $350 million (assuming of course a successful approval and acquisition), is worth around $5 per share, or around 70% greater than the current share price of Fortress!

Having spent time with management of Fortress, learning more about their business model, and getting to know the track record of their CEO, I find their strategy to be compelling. FBIO is building a portfolio of companies and healthcare products that they source inexpensively and, through their value add, create compelling upside to the products. The story behind Avenue is a great example of how Fortress operates.

In IV tramadol they acquired a proven, well-known product that had zero patent protection, and have built a strategy around getting FDA approval, patent protection and taking it to market. They bought it on the cheap and created value, took it public through an initial public offering (IPO), then sold it to a deep pocketed partner. Avenue Therapeutics is example A of how CEO Lindsay Rosenwald intends to build Fortress into a multibillion-dollar company.

Going forward, we will look at the other companies in Fortress' stable. The value of these companies—the sum of the parts so to speak—greatly exceeds the current market cap of FBIO. We hope to make this evident over time. For now, suffice to say that, based on Avenue alone, Fortress is an undervalued and misunderstood entity.

Daniel Carlson is the founder and managing member of Tailwinds Research Group and its parent company DFC Advisory Services, which is a licensed registered investment advisor (CRD # 297209). Tailwinds is a microcap focused research company that provides research on and consults to over 20 emerging growth companies in the technology and life sciences arenas. DFC Advisory Services is an RIA that manages money dedicated to investing in the companies covered by Tailwinds. For more information on these two companies and their track record, please see Prior to founding these two entities, Dan spent many years working with small public companies, having been CFO of two public companies and helping finance many others. A 1989 graduate from Tufts University with a degree in Economics, Dan’s formative years in business were spent as an equity trader, first on the Pacific Coast Stock Exchange then on the buyside at several multi-billion dollar firms.

This article was submitted by Tailwinds Research. For more information on Tailwinds Research or on Fortress Biotech, please visit

Tailwinds owns stock in Fortress Bio. For a complete list of disclaimers and disclosures, please click here.


1) Daniel Carlson: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Fortress Bio. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies referred to in this article: Fortress Bio. Additional disclosures and disclaimers are above. I determined which companies would be included in this article based on my research and understanding of the sector.
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