Fortress Biotech, Inc. quarterly report, Q1 FY2021

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Fortress Biotech, Inc. — Q1 2021 Form 10-Q

Reporting period: Three months ended March 31, 2021; unaudited consolidated results. Fortress develops and commercializes medicines through subsidiaries, joint ventures and other partner companies. Journey Medical’s dermatology products were the main source of product revenue. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.

Financial performance

  • Revenue: $11.6 million, down 10% from $12.9 million in Q1 2020. Product revenue was $10.7 million, down 10%; collaboration revenue was $0.8 million, primarily from Cyprium’s Sentynl agreement; related-party revenue was $0.1 million versus $1.0 million.
  • Profit and margins: Operating loss was $30.0 million versus $21.5 million. Consolidated net loss was $26.1 million versus $24.1 million. Net loss attributable to Fortress common stockholders was $8.8 million, or $0.11 per share, compared with $12.4 million, or $0.19 per share. Product gross profit was approximately $6.8 million, a 63.5% margin, versus $8.1 million and 68.1% in the prior-year quarter.
  • Costs: R&D rose 35% to $20.0 million, chiefly from higher Checkpoint, Mustang and other partner-company development spending. SG&A rose 13% to $17.5 million. Product cost of goods sold was $3.9 million, up 3%.
  • Cash flow: Operating cash use was $21.7 million, similar to $21.9 million in Q1 2020. Investing cash use was $0.5 million. Financing provided $78.7 million, mainly from partner-company ATM offerings and Journey’s preferred-share financing. Cash and cash equivalents were $289.9 million at quarter-end; cash, cash equivalents and restricted cash totaled $291.5 million.
  • Liquidity and debt: Current assets were $318.0 million and current liabilities $53.8 million. The company said available cash was expected to fund operations for at least 12 months, while noting that additional financing would be needed for development and other plans. Fortress had $60.0 million face value of Oaktree debt at 11% interest, due August 2025; its balance-sheet carrying amount, net of discount, was $52.0 million. Partner-company notes payable totaled approximately $11.1 million, in addition to lease liabilities.

Material changes versus Q1 2020

  • Net revenue fell by $1.3 million, reflecting lower Journey product revenue and reduced Checkpoint-related revenue from TGTX; the prior-year related-party revenue included a $0.9 million clinical-trial milestone. Cyprium’s new agreement contributed $0.8 million in Q1 2021.
  • Operating loss widened by $8.5 million as R&D and SG&A increases exceeded the reduction in interest expense. The $5.9 million increase in the fair value of Fortress’s Caelum investment helped reduce the net loss compared with what operating performance alone would imply.
  • Financing cash inflows increased substantially, including $71.4 million net proceeds from partner-company ATM offerings. Fortress common shares outstanding increased to 97.3 million from 94.9 million at December 31, 2020.
  • Caelum’s recorded investment value increased to $23.5 million from $17.6 million, producing the quarter’s $5.9 million non-cash fair-value gain.

Outlook, developments and risks

  • Development plans: Fortress expected to begin rolling FDA NDA submission for CUTX-101 in the second half of 2021. Mustang expected to enroll the first patient in its pivotal MB-107 trial in Q2 2021, with topline data targeted for the second half of 2022, and expected to file an MB-207 trial IND in Q2 2021. Checkpoint’s cosibelimab registration-enabling study in metastatic cutaneous squamous cell carcinoma was fully enrolled, with topline results targeted by year-end 2021; a first-line NSCLC Phase 3 trial was planned for mid-2021. These are management expectations, not assured outcomes.
  • Sentynl agreement: Cyprium received $8.0 million upfront for CUTX-101 development. It may receive $12.0 million in regulatory milestones, up to $255.0 million in sales milestones, and royalties. Fortress recognized $0.8 million revenue in the quarter; future regulatory milestones were not deemed probable at March 31.
  • Qbrexza acquisition: Journey’s purchase from Dermira closed after quarter-end; following HSR acceptance on May 13, 2021, Journey paid the $12.5 million upfront fee. Dermira may receive up to $144 million in milestones, plus royalties. Perrigo’s generic challenge is in litigation; the 30-month stay was scheduled to expire March 9, 2023, with trial scheduled for September 2022.
  • Avenue and IV tramadol: The FDA had not decided on Avenue’s resubmitted NDA by the filing date. Since FDA approval was not obtained by April 30, 2021, InvaGen was no longer obligated to complete the proposed merger but retained an option through October 31, 2021 and could terminate the agreement. Avenue had $1.8 million cash at March 31 and disclosed substantial doubt about its ability to continue as a going concern: cash was expected to last only through Q2 2021 if the drug was not approved, while approval would trigger $5.0 million in milestone payments it could not then fund. Chapter 11 was identified as a possible outcome.
  • Other material risks: Fortress reported a securities class action related to Avenue’s IV tramadol NDA and potential claims by InvaGen. Fortress’s indemnification obligation to InvaGen may reach $35.0 million and may not be recoverable if the Avenue merger does not occur. Key business risks include continued operating losses, the need for further funding, reliance on third parties, generic competition and reimbursement pressure. Management said it did not expect a material COVID-19 impact on development timelines, revenue or liquidity, but continued to assess effects.
  • Unusual items and controls: The Caelum fair-value gain was a significant non-cash item. The filing reported effective disclosure controls and no material quarterly change in internal control over financial reporting. Fortress stated it had no off-balance-sheet arrangements.

Important facts for investors to verify

  • How much of reported cash is available to Fortress itself versus held by consolidated partner companies, and whether the stated 12-month runway remains supportable as development spending continues.
  • Whether Journey’s Qbrexza acquisition generates sales sufficient to support the upfront payment, future milestone and royalty obligations, and how the Perrigo patent litigation progresses.
  • The FDA outcome for IV tramadol, Avenue’s near-term financing and going-concern position, and whether InvaGen exercises its merger option or pursues claims.
  • Whether Cyprium achieves CUTX-101 development and regulatory milestones, and whether the related contingent payments and royalties materialize.
  • The sustainability of product revenue and margins amid generic competition, payer and coupon pressures, and the reliance on Journey’s dermatology portfolio.
  • The terms and consequences of additional financing, including dilution, debt covenants, and partner-company capital needs.