Journey Medical Corporation — FY2021 Form 10-K
Reporting period: Year ended December 31, 2021; filed March 28, 2022. This is an annual report, not a standalone fourth-quarter report. Journey is a U.S. commercial-stage dermatology pharmaceutical company and a majority-owned subsidiary of Fortress Biotech.
Business context and financial performance
Journey marketed five branded products and three authorized generics at year-end, with revenue generated in the U.S. It completed its IPO in November 2021, raising approximately $30.6 million net. The IPO also converted its preferred stock and Fortress-related debt/payables into common shares.
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net product revenue | $63.1 million | $44.5 million |
| Gross profit / gross margin | $31.1 million / 49.2% | $29.9 million / 67.2% |
| Operating income (loss) | $(34.9) million | $7.9 million |
| Net income (loss) | $(44.0) million | $5.3 million |
| Operating cash flow | $(2.2) million | $5.1 million |
| Cash and cash equivalents, year-end | $49.1 million | $8.2 million |
Gross margin is calculated from reported net revenue and cost of goods sold. Year-end current assets were $84.5 million and current liabilities $51.6 million. Total liabilities were $55.2 million; stockholders’ equity was $42.0 million. Debt-like obligations included $8.1 million of license installment payments and $0.8 million outstanding on the revolving credit line. The $5.2 million Fortress note outstanding at 2020 year-end was converted in connection with the IPO.
Changes versus the prior year
- Revenue rose 42%, principally from Accutane, launched in 2021, and Qbrexza, acquired in May 2021. FY2021 revenue included $10.1 million from Accutane and $17.1 million from Qbrexza.
- Targadox revenue declined 27% to $22.4 million; Ximino declined 13% to $8.2 million, with management citing generic competition and a shift in salesforce promotion toward Accutane. Exelderm revenue rose 20% to $5.4 million.
- Cost of goods sold increased to $32.1 million, or 50.8% of revenue, from $14.6 million, or 32.8%. The increase included a $6.5 million acquired-inventory fair-value step-up for Qbrexza and higher related royalties.
- Operating expenses increased to $98.0 million from $36.7 million. Major items included $13.8 million of acquired in-process R&D/license expense for DFD-29, $9.5 million of wire-fraud loss, higher commercial and public-company costs, and $2.4 million of IPO-triggered performance-based stock compensation.
- Financing cash flow was $53.0 million, mainly reflecting IPO and preferred-offering proceeds and Fortress support; investing cash flow was $(10.0) million, principally the DFD-29 license payment.
Outlook, material events and risks
- Management said existing cash and the East West Bank facility were expected to fund operations for at least 12 months from the financial-statement issuance date. It also expects expenses to rise as it develops products, expands commercialization and incurs public-company costs. No specific revenue or earnings guidance was provided.
- DFD-29: Journey agreed to fund Phase 3 development, estimated at approximately $24 million under the then-current plan. The filing described planned trials and, in subsequent-event disclosure, reported first-patient dosing on March 17, 2022. The company cited positive Phase 2 results; success, timing and FDA approval remain uncertain.
- After year-end, Journey agreed to acquire VYNE’s AMZEEQ and ZILXI products and related technology for $20 million upfront plus $5 million after one year, with additional sales-based milestones. It drew $15 million under an amended East West Bank term loan to help fund the acquisition. The filing elsewhere states that $20 million was borrowed against the term loan; the amount is inconsistent in the provided filing text and should be checked against the loan disclosures.
- The January 2022 bank amendment expanded the revolving line to $10 million and added up to $20 million in term loans, maturing in 2026, with floating rates and financial covenants, including minimum-liquidity provisions.
- Japan approval for a Qbrexza-equivalent product triggered a reported net $2.5 million milestone after a $7.5 million payment to Dermira. The filing reports this as a subsequent event.
- Generic-entry and patent risks are material. Qbrexza litigation against Perrigo and Amzeeq litigation against Padagis were pending; the filing also reports a later Qbrexza suit against Teva. Outcomes and timing were uncertain. Accutane, Targadox and Exelderm lack patent protection or are not eligible for it; Targadox faced AB-rated generic competition.
- A September 2021 business-email compromise redirected approximately $9.5 million in vendor payments. Fortress provided $9.5 million of support, converted into shares at the IPO. Journey recorded the fraud loss and reported that the incident was under investigation. Management identified a material weakness in cash-disbursement controls, said remediation steps were taken, and believed the weakness had been remediated by the filing date. Management concluded disclosure controls were ineffective at September 30, 2021; the filing did not include an internal-control audit attestation.
- Fortress held 58.39% of Journey after the IPO and retains voting control through Class A common stock. Other key risks include dependence on third-party manufacturers and service providers, reimbursement and pricing pressure, product acceptance, and clinical and regulatory uncertainty. Journey reported no material COVID-19 impact to date, while warning that future effects remained possible.
Investor verification priorities
- Reconcile the reported amount borrowed under the amended East West Bank term loan and confirm current debt, rates, covenants and liquidity headroom.
- Assess the fraud investigation, recovery prospects, related-party share conversion and evidence supporting management’s claim that the material weakness was remediated.
- Track product-level sales, gross-to-net deductions, generic competition and the effect of Qbrexza royalties and the acquired-inventory step-up on margins.
- Verify DFD-29 Phase 3 enrollment, costs, data timing and regulatory plans, and evaluate the uncertain outcomes of Qbrexza and Amzeeq patent litigation.
- Review VYNE acquisition consideration, milestone terms and financing impact, together with Fortress’s voting control and related-party arrangements.