Fortress Biotech, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited consolidated results, compared with Q1 2021. Fortress is a biopharmaceutical company whose consolidated operations include controlled subsidiaries and partner companies. Its commercial revenue is primarily generated through Journey Medical’s dermatology products.
Financial performance and position
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Net revenue | $23.9 million | $11.6 million |
| Product revenue, net | $20.8 million | $10.7 million |
| Operating loss | $47.3 million | $30.0 million |
| Consolidated net loss | $49.5 million | $26.1 million |
| Net loss attributable to Fortress common stockholders | $15.8 million; $0.18 per share | $8.8 million; $0.11 per share |
| Net cash used in operations | $46.9 million | $21.7 million |
| Cash and cash equivalents at March 31 | $287.5 million | $305.7 million at Dec. 31, 2021 |
| Total assets / total liabilities at March 31 | $407.9 million / $214.4 million | $396.5 million / $170.6 million at Dec. 31, 2021 |
Product cost of goods sold was $8.2 million, producing an approximate product gross margin of 60.6%, versus 63.5% in Q1 2021. Operating expenses were $71.2 million, including $36.7 million of research and development and $26.3 million of selling, general and administrative expense. The filing reports an overall basic and diluted net loss of $0.57 per share, including losses attributable to non-controlling interests.
Cash, cash equivalents and restricted cash totaled $289.7 million at quarter-end, down $18.2 million during the quarter. Current assets were $341.2 million and current liabilities were $103.1 million. Notes payable were $85.1 million net of debt discounts; stated principal balances were $96.1 million across the Oaktree, East West Bank and Runway facilities. The company paid $2.0 million in Series A preferred dividends.
Material changes versus Q1 2021
- Revenue increased 106%, mainly reflecting Qbrexza, Accutane and newly acquired Amzeeq sales, plus a $2.5 million net Qbrexza Japan approval milestone.
- R&D expense rose 83%, chiefly due to increased cosibelimab manufacturing and clinical program spending at Checkpoint, and higher Mustang development costs.
- SG&A increased 50%, primarily from Journey’s expanded product portfolio, sales and marketing activity, and outsourced sales force.
- Consolidated net loss widened 90%. Q1 2021 included $5.9 million of income from a change in the fair value of the Caelum investment; no comparable gain occurred in Q1 2022.
- Operating cash use increased by $25.2 million. Investing cash use included $20.0 million for Journey’s acquisition of VYNE products.
- At quarter-end, long-term notes payable had increased from $42.9 million at December 31, 2021, primarily following partner-company borrowings.
Outlook, commentary and key risks
- Management said existing cash and cash equivalents were expected to fund operations for at least the next 12 months. It also expects continued substantial losses and says additional financing will be needed to advance programs, fund operating losses and support commercialization. Financing may involve equity or debt, strategic arrangements, grants or asset sales.
- Pipeline expectations included completing the CUTX-101 rolling NDA submission in mid-2022; starting the MB-107 pivotal Phase 2 trial in the second half of 2022; and, after an FDA hold pending chemistry, manufacturing and controls work, targeting MB-207 trial enrollment in Q1 2023. DFD-29 Phase 3 topline data were anticipated in Q1 2023, with an NDA filing expected in the second half of 2023. These are forward-looking expectations, not guaranteed outcomes.
- In January 2022, Journey acquired Amzeeq and Zilxi and a proprietary technology platform from VYNE for $20.0 million upfront, with a further $5.0 million payment due in January 2023 and potential sales-based milestone payments.
- Fortress reported compliance with applicable Oaktree, East West Bank and Runway covenants as of March 31, 2022. Oaktree includes minimum-liquidity and Journey-revenue tests; the partner-company facilities include additional covenants and collateral provisions.
- Patent challenges pose commercial risks: Qbrexza litigation with Perrigo had a September 2022 trial scheduled and a stay running to March 2023; Teva litigation was also initiated. Amzeeq litigation had a July 2023 trial scheduled and a stay running to December 2023. The filing says outcomes cannot be predicted.
- Other significant risks include clinical and regulatory setbacks, manufacturing and third-party dependence, generic competition and reimbursement pressure, continuing financing needs, and potential dilution. The FDA placed Mustang’s MB-207 IND on hold pending CMC clearance.
- The filing identifies a 2021 cybersecurity incident at Journey in which approximately $9.5 million in wire transfers were misdirected to fraudulent accounts. Fortress provided Journey $9.5 million to support accounts payable operations; investigation and remediation could result in additional expense or loss.
- Management reported minimal COVID-19 impact to date on development timelines, revenue and liquidity, while continuing to monitor potential effects. The company also disclosed risks to clinical trials from Russia’s invasion of Ukraine, including potential disruption at Checkpoint trial sites.
Important facts for investors to verify
- Whether cash available at Fortress and its consolidated partner companies is accessible for the parent’s needs, and whether the stated 12-month funding outlook remains valid given operating cash use.
- Journey product sales, product-level margins and the durability of revenue growth, including the contribution from acquired products and the one-time Japan milestone.
- Progress and timing for key clinical and regulatory programs, particularly CUTX-101’s NDA, the MB-207 CMC work and the DFD-29 Phase 3 program.
- Developments in Qbrexza and Amzeeq generic patent litigation, and any effect on exclusivity, sales or cash flows.
- Debt principal, interest, covenant headroom and the conditions for accessing undrawn partner-company loan tranches, as well as future financing and dilution requirements.