Fortress Biotech, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited consolidated results include Fortress and majority-controlled subsidiaries and partner companies; non-controlling interests account for a substantial share of consolidated results. Fortress acquires, develops and commercializes biopharmaceutical products and candidates. Journey Medical’s dermatology products are its principal current commercial revenue source.
Financial performance and position
Amounts below are in millions of dollars, except percentages and per-share data.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $16.5 | $21.1 | $59.3 | $50.5 |
| Operating loss | $(50.7) | $(49.9) | $(148.9) | $(126.5) |
| Net loss | $(53.1) | $(45.9) | $(156.5) | $(96.3) |
| Net loss attributable to Fortress common stockholders | $(22.5) | $(20.8) | $(59.6) | $(33.1) |
| Basic and diluted loss per common share attributable to common stockholders | $(0.25) | $(0.26) | $(0.68) | $(0.41) |
- Revenue mix and product margin: Product revenue was $16.0 million in Q3 and $55.1 million year to date. Product gross margin, calculated as product revenue less product cost of goods sold, was approximately 55.0% in Q3 versus 43.1% a year earlier, and 58.1% year to date versus 50.5%. These are calculated measures, not separately reported GAAP margins.
- Operating costs: Nine-month R&D expense increased 42% to $99.7 million and SG&A increased 44% to $85.5 million. Stock-based compensation was $17.5 million year to date, compared with $12.4 million.
- Cash flow and liquidity: Operating activities used $131.6 million in the first nine months; investing activities used $22.5 million and financing activities provided $56.7 million. Cash and cash equivalents were $208.4 million at September 30, down from $305.7 million at year-end 2021; cash plus restricted cash was $210.6 million. Management stated cash was sufficient to fund operations for at least the next 12 months, while also expecting to need additional financing for development and other needs.
- Balance sheet and debt: Current assets were $258.0 million and current liabilities $106.3 million; total assets were $323.6 million and total liabilities $222.2 million. Notes payable, net of discount, totaled $91.2 million, versus $42.9 million at year-end 2021. The underlying principal included $50.0 million under the Oaktree Note, $20.0 million under Journey’s East West Bank term loan and $31.1 million under Mustang’s Runway facility. The company and relevant partners reported compliance with applicable loan covenants at quarter-end.
Material changes versus the prior comparable period
- Q3 net revenue declined 22%, principally due to lower Targadox sales amid generic competition and lower collaboration revenue from Cyprium’s Sentynl agreement. For the first nine months, revenue rose 17.5%, supported by Qbrexza and Accutane sales and the addition of Amzeeq and Zilxi; this was partly offset by Targadox competition and earlier supply shortages for Ximino and Exelderm, which the filing says were resolved in Q3.
- Year-to-date net loss increased by $60.2 million. A key comparison is the absence of the prior-year $39.3 million gain from the fair-value change in the Caelum investment; 2021 also included a $9.5 million wire-transfer fraud loss that did not recur in 2022. Higher R&D and SG&A spending also contributed to the larger 2022 loss.
- Journey acquired Amzeeq and Zilxi in January 2022 for $20.0 million upfront, plus a $5.0 million payment due one year after closing and potential sales-based milestones. Fortress issued approximately 3.7 million common shares through its ATM for $5.9 million gross proceeds during the nine-month period.
Outlook, commentary and risks
- Management outlook: Fortress expects substantial losses to continue and says additional funding may be needed through equity or debt financing, strategic relationships, asset or partner-company sales, grants or other arrangements. No consolidated financial revenue or earnings guidance is provided.
- Development updates: Checkpoint planned to submit a cosibelimab BLA in January 2023 covering metastatic and locally advanced cutaneous squamous cell carcinoma. Journey reported DFD-29 Phase 3 enrollment at 75% as of November 2022, with topline data anticipated in the first half of 2023 and an NDA filing expected in the second half. The company also reported expected 2023 first-patient enrollment for Mustang’s MB-107 and MB-207 pivotal trials, and anticipated Dotinurad Phase 1 topline data in the first half of 2023. These are forward-looking expectations, not assured outcomes.
- Clinical, manufacturing and commercial risks: Most pipeline candidates require further clinical and regulatory work and may not be approved. The filing describes a dispute with CUTX-101’s contract manufacturer; Cyprium obtained a temporary restraining order and preliminary injunction while pursuing remedies. Journey’s sales face generic competition, reimbursement pressures and manufacturing dependence; generic competition and supply issues contributed to revenue declines in certain products.
- Financing and listing risk: The filing warns that further capital may be unavailable or dilutive, and that debt covenants and rising interest rates could constrain operations or increase costs. On October 31, 2022, Nasdaq notified Fortress that its common stock had traded below $1.00 for 30 consecutive business days. The company had until May 1, 2023 to regain compliance under the initial grace period; delisting could impair liquidity and access to capital.
- Other unusual items: Year-to-date other revenue included a net $2.5 million Qbrexza Japan milestone payment after a $10.0 million receipt was offset by a $7.5 million payment to Dermira. A National Institutes of Health grant generated $0.7 million of income in Q3. Management reported disclosure controls were effective as of September 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported cash is available to Fortress itself versus subsidiaries and partner companies, and whether the stated 12-month runway remains supportable given operating cash use.
- Debt repayment schedules, interest-rate exposure, covenant headroom and the availability of the undrawn portions of partner-company debt facilities.
- Journey product-level sales trends, generic competition, reimbursement and supply conditions, and whether recent revenue growth is recurring or reflects milestone and launch effects.
- Actual regulatory and clinical progress against the filing’s anticipated timelines, including the cosibelimab BLA, CUTX-101 NDA and DFD-29 Phase 3 program.
- Fortress’s plan and ability to regain Nasdaq’s minimum bid-price compliance, as well as potential dilution from future equity issuance.