Fortress Biotech, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Financial statements are unaudited. Amounts below are in U.S. dollars; financial figures are in millions unless stated otherwise.
Business context
Fortress is a biopharmaceutical company that acquires, develops and commercializes products through itself, subsidiaries and partner companies. Its established product revenue is primarily generated by Journey Medical’s dermatology portfolio; much of the broader pipeline remains in development. The company reports Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development segments.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $34.8 | $16.5 | $64.6 | $59.3 |
| Product revenue, net | $15.3 | $16.0 | $44.4 | $55.1 |
| Operating loss | $(13.8) | $(50.7) | $(122.7) | $(148.9) |
| Consolidated net loss | $(10.7) | $(53.1) | $(125.2) | $(156.5) |
| Net loss attributable to Fortress common stockholders | $(7.1) | $(24.5) | $(57.4) | $(65.7) |
| Basic and diluted loss per common share | $(0.94) | $(4.11) | $(7.94) | $(11.15) |
- Cash and cash equivalents were $72.3 at September 30, 2023, down from $178.3 at December 31, 2022; restricted cash was $2.4. Operating cash use was $93.3 for the first nine months, versus $131.6 in 2022.
- Current assets were $97.8 and current liabilities $97.4. Total liabilities were $163.8; total notes payable, net of discount, were $45.8. The $50.0 Oaktree note bears 11% interest and matures in August 2025. Fortress reported compliance with its Oaktree covenants at quarter-end.
- Total stockholders’ deficit was $13.2, including negative non-controlling interests of $29.9. The Series A preferred dividend was $2.0 per quarter; $6.0 was paid over the nine-month period.
- Management said cash, including $8.9 net proceeds from a November 2023 Fortress offering, was expected to fund operations for at least 12 months from the filing. The company nevertheless expects continued operating losses and says additional financing will be needed to advance development and fund operations.
Material changes and unusual items
- Q3 revenue rose 110% year over year, principally because Journey recorded a $19.0 non-refundable upfront payment from Maruho for expanded Asian Qbrexza rights. Without that item, product revenue declined 5% in Q3. For the nine months, net revenue increased 8.8%, while product revenue fell 19%.
- Journey’s lower Targadox, Ximino and Exelderm sales contributed to the year-to-date product revenue decline; Targadox faced generic competition. Journey discontinued Ximino sales on September 29, 2023 and recorded a $3.1 non-cash impairment of its Ximino intangible asset.
- Operating expenses declined year over year: Q3 R&D fell 32% and SG&A fell 28%; nine-month R&D fell 12% and SG&A fell 16%. Management attributed much of the reductions to lower Mustang program spending and Journey’s cost-cutting measures, including salesforce and marketing reductions.
- Other income included a $4.5 Q3 gain and $10.7 nine-month gain from changes in fair value of warrant liabilities. These non-cash gains contributed to the reported improvement in net loss. The nine-month period also included a $2.8 loss on extinguishment of Mustang debt.
- Fortress’s total cash and restricted cash declined by $106.2 during the first nine months. Partner companies used cash to repay debt and a line of credit; financing was partly offset by partner-company securities sales and Fortress’s February public offering.
Outlook, developments and risks
- No quantitative consolidated revenue or earnings guidance is provided. Management expects substantial losses to continue, and warns that unavailable or unacceptable financing could curtail development plans and infrastructure spending.
- Journey completed positive Phase 3 trials for DFD-29 for rosacea and expected to submit an NDA in the second half of 2023. Checkpoint’s cosibelimab BLA had a January 3, 2024 PDUFA goal date. These are development milestones, not assurance of approval or commercial success.
- Cyprium received notice that Sentynl elected to assume CUTX-101 development; transfer closing was anticipated in November 2023. The transfer calls for a $4.5 payment to Cyprium, with potential additional milestones and royalties. Fortress also disclosed approximately $7.6 of Cyprium preferred subscriptions that could require cash payment or Fortress preferred-stock issuance if a priority review voucher sale does not occur by September 18, 2024.
- The Maruho transaction provides upfront cash but changes future economics: Journey’s Japan royalties on Rapifort sales cease for sales after October 1, 2023, while other milestone rights remain. The filing does not quantify the expected net effect on future revenue.
- Mustang sold manufacturing-related assets to uBriGene for $6.0 and recorded a $1.4 gain. A further $5.0 is contingent on fundraising and lease-transfer conditions. CFIUS requested withdrawal and refiling of the transaction notice in November; landlord consent to the lease transfer was also outstanding. Mustang remains responsible for the facility pending transfer and committed to spend at least $8.0 on uBriGene manufacturing services over two years.
- After quarter-end, Fortress effected a 1-for-15 reverse stock split, effective October 10, 2023, and Nasdaq later confirmed compliance with the minimum bid-price requirement. A November Fortress offering generated approximately $8.9 net proceeds. These subsequent events are not reflected in the September 30 balance sheet.
- Key risks include ongoing losses and financing needs; reliance on Journey product revenue and exposure to generics, reimbursement and supply risks; clinical and regulatory uncertainty; third-party manufacturing dependence; debt covenants; dilution from equity and warrant financings; and potential obligations as guarantor or indemnitor. A disclosed University of Tennessee Research Foundation lawsuit against former subsidiary Caelum remained pending; Fortress reported that escrow was expected to cover anticipated indemnifiable costs and damages, and a trial was scheduled for March 2024 for any claims surviving summary judgment.
Important facts for investors to verify
- Whether the $19.0 Maruho upfront payment masks continued weakness in recurring product sales, and how the end of Japan royalties affects subsequent Journey revenue.
- Actual cash burn, available cash by entity, and the timing and terms of any additional financing, including dilution and debt-covenant implications.
- Progress and regulatory outcomes for cosibelimab, DFD-29 and CUTX-101, including the timing and terms of Sentynl’s transfer and any resulting payments.
- Whether CFIUS and the landlord approve the Mustang facility lease transfer, and whether the contingent sale payment and manufacturing arrangements proceed as planned.
- The potential timing and amount of any Fortress obligation related to Cyprium preferred stock if the specified priority review voucher sale does not occur.
- How much reported loss improvement reflects lower operating spending versus non-cash warrant remeasurement and changes in non-controlling interests.