Fortress Biotech, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; unaudited consolidated results include Fortress and controlled subsidiaries, including publicly traded partner companies. Figures are in U.S. dollars; financial statement amounts are generally in millions unless noted.
Business context and reporting period
Fortress acquires and advances biopharmaceutical assets through subsidiaries and partner companies. Its current commercial revenue is primarily from Journey Medical’s dermatology products; most other programs remain in development. The company reports two segments: Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development.
Key financial metrics
| Metric | Q1 2024 | Q1 2023 / prior period |
|---|---|---|
| Net revenue | $13.0 million | $12.4 million |
| Gross profit on product revenue | $6.2 million; approximately 47.7% gross margin | $5.7 million; approximately 47.0% gross margin |
| Research and development expense | $24.8 million | $35.3 million |
| Selling, general and administrative expense | $17.9 million | $25.3 million |
| Loss from operations | $(36.6) million | $(58.9) million |
| Net loss | $(39.0) million | $(55.1) million |
| Net loss attributable to Fortress | $(15.4) million | $(21.5) million |
| Net loss attributable to common stockholders / per share | $(17.7) million / $(1.03) | $(23.5) million / $(3.47) |
| Cash used in operating activities | $(25.4) million | $(43.2) million |
Revenue growth was 5%, driven mainly by higher Qbrexza and Accutane sales; declines in Amzeeq, Zilxi and legacy products partly offset the increases. The lower reported net loss reflected reduced operating expenses, while other expense swung to $2.5 million from $3.7 million of other income, principally because of warrant-liability changes. Q1 2023 included a $6.7 million warrant-liability gain; Q1 2024 included a $0.7 million loss.
At March 31, 2024, consolidated cash and cash equivalents were $83.8 million, plus $2.1 million of restricted cash. Management reported $43.9 million held by Fortress and private subsidiaries; the remainder was held by partner companies and is not necessarily available to the parent. Current assets were $116.5 million and current liabilities $87.7 million. Total liabilities were $168.6 million against total assets of $164.6 million, leaving a consolidated stockholders’ deficit of $3.9 million. Notes payable were $61.4 million net of discount, representing $65.0 million of stated principal: $50.0 million under the Oaktree note and $15.0 million under Journey’s SWK loan. Fortress reported compliance with applicable Oaktree and SWK financial covenants at quarter-end.
Material changes versus the prior comparable period
- Product revenue increased $0.9 million, while total revenue rose $0.6 million as collaboration, related-party and other revenue reported in Q1 2023 did not recur.
- R&D expense declined 30%, mainly reflecting lower Mustang and Checkpoint spending and the absence of Q1 2023’s $4.2 million AJ201 license acquisition charge. Journey’s R&D increased, including a $4.0 million DFD-29 FDA filing fee and a $3.0 million milestone accrual after FDA acceptance of the NDA.
- SG&A declined 29%, including Journey’s sales and marketing cost reductions and cost controls at Fortress and Mustang.
- Operating cash use improved by $17.8 million year over year. Financing provided $27.9 million, including proceeds from Fortress and partner-company equity and warrant transactions; consolidated cash and restricted cash increased $2.5 million during the quarter.
- Fortress issued 3.3 million common shares in a January registered direct offering, raising approximately $10.2 million net, and sold approximately 0.5 million shares through its ATM for $0.9 million net. Common shares outstanding rose from 15.1 million at year-end to 19.4 million at March 31.
Outlook, developments, risks and unusual items
- Management says current cash is sufficient to fund operations for at least 12 months, while also stating additional funding will be needed for development, regulatory work and operating losses. Management expects R&D expense to decrease in 2024 as programs are optimized and assets complete pivotal trials; SG&A is expected to remain flat. These are expectations, not guarantees.
- Checkpoint’s cosibelimab BLA received a December 2023 complete response letter citing third-party manufacturing inspection findings, not clinical data, safety or labeling. A potential resubmission was targeted for mid-2024.
- FDA accepted Journey’s DFD-29 NDA in March 2024, with a PDUFA goal date of November 4, 2024. Avenue’s planned IV tramadol safety study is subject to financing. Management expected dotinurad data in Q3 2024 and Triplex topline data in Q4 2024.
- After quarter-end, Mustang and uBriGene, with CFIUS, agreed on May 13, 2024 to abandon the Worcester facility transaction and related agreements. Separately, Mustang approved an approximately 81% workforce reduction in April and raised approximately $3.3 million net in a May offering. These events may affect Mustang’s operations and development plans.
- Journey’s sales are a key operating-income source and face generic competition, reimbursement and product-supply risks. Fortress also cites ongoing losses, financing needs, potential dilution, debt covenants, dependence on third parties, clinical and regulatory uncertainty, and possible Nasdaq listing issues.
- Fortress has indemnification exposure in the University of Tennessee Research Foundation litigation concerning former subsidiary Caelum. Fortress states it has not accrued a liability, considers the escrow sufficient for anticipated indemnifiable costs and damages, and notes a trial was scheduled for September 2024 if claims survive summary judgment.
- Fortress pays a 9.375% cumulative preferred dividend. Its guarantee of Cyprium preferred stock could require redemption or exchange if a priority review voucher sale does not occur by September 30, 2024; the filing describes cash or Fortress preferred stock exchange at Fortress’s discretion.
Important facts for investors to verify
- Whether Fortress’s parent-level liquidity and access to partner-company cash are sufficient to meet obligations and fund planned programs, given recurring operating cash outflows.
- Whether Journey’s product revenue growth and cost reductions can continue, and how generic competition, reimbursement and supply conditions may affect margins.
- Progress and timing of the cosibelimab BLA resubmission, the DFD-29 FDA decision, and other stated clinical milestones.
- The consequences of the Mustang-CFIUS agreement, workforce reduction and subsequent financing for Mustang’s programs and manufacturing arrangements.
- Debt terms, covenant compliance, future financing requirements, dilution from shares and warrants, and the potential cash or equity impact of preferred dividends and guarantees.
- Developments in the Caelum litigation and any resulting indemnification obligation.