Fortress Biotech, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 28, 2022. This is an annual report, not a standalone fourth-quarter filing. The consolidated results include Fortress and controlled subsidiaries, including publicly traded partner companies; non-controlling interests are significant.
Business context
Fortress acquires, develops and commercializes biopharmaceutical products through subsidiaries, joint ventures and partner companies. Its current commercial revenue is concentrated in Journey Medical’s dermatology products; much of the broader pipeline remains in development. Journey completed an IPO in November 2021, and AstraZeneca acquired Caelum in October 2021.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $68.8 million | $45.6 million |
| Product revenue | $63.1 million | $44.5 million |
| Research and development expense, including acquired licenses | $128.9 million | $64.1 million |
| Selling, general and administrative expense | $86.8 million | $61.2 million |
| Loss from operations | $188.5 million | $94.3 million |
| Net loss | $164.8 million | $103.0 million |
| Net loss attributable to common stockholders | $64.7 million ($0.79 per share) | $46.5 million ($0.65 per share) |
| Net cash used in operating activities | $116.5 million | $83.7 million |
- Revenue rose 51%, principally from Journey’s expanded product portfolio and $5.4 million of Cyprium collaboration revenue. Journey product revenue increased 42% to $63.1 million.
- Product cost of goods sold was $32.1 million versus $14.6 million; product gross profit was approximately $31.1 million, or 49% of product revenue. The increase in costs included a $6.5 million fair-value step-up on acquired Qbrexza inventory.
- R&D and SG&A increased substantially, contributing to the larger operating loss. The reported net loss was partly offset by a $39.3 million gain in fair value of investments, primarily related to Caelum.
- Cash and cash equivalents were $305.7 million at year-end, plus $2.2 million restricted cash. Cash was distributed across Fortress and subsidiaries, including $54.7 million at Checkpoint, $109.6 million at Mustang and $49.1 million at Journey; these amounts are not all freely available to Fortress.
- Net cash provided by investing activities was $40.5 million, including $56.9 million proceeds from the Caelum sale. Net cash provided by financing activities was $149.0 million, including partner-company financings.
- Notes payable, net of discount, were $42.9 million at year-end. The Oaktree senior secured note bears 11% interest and matures in August 2025; Fortress made a $10.5 million principal prepayment and fee following the Caelum transaction. Journey also had $0.8 million outstanding on its working-capital line. The balance sheet additionally reports lease liabilities and partner-company license-installment obligations.
- Management said available cash was expected to fund operations for at least 12 months from filing, while also stating that additional financing will be needed to advance development and regulatory programs. No quantified revenue or earnings guidance is provided.
Material changes and notable developments
- Revenue increased by $23.2 million year over year, while operating loss approximately doubled. The net loss attributable to common stockholders increased 39%.
- Journey launched Accutane and acquired Qbrexza during 2021; its November IPO generated $30.6 million net proceeds. In January 2022, Journey acquired Amzeeq and Zilxi for $20 million upfront plus a further $5 million due after one year and potential contingent payments.
- Caelum’s sale generated approximately $56.9 million net proceeds for Fortress. Fortress may receive a portion of up to $350 million in additional transaction milestones; the filing states Fortress’s share of those potential future milestone proceeds is approximately $148.6 million.
- Cyprium began a rolling FDA NDA submission for CUTX-101 in December 2021 and expected to complete it in mid-2022. Checkpoint reported positive topline cosibelimab results in January 2022 and planned a BLA submission in late 2022. These are company plans, not guaranteed outcomes.
- Fortress issued approximately 3.1 million common shares through its ATM in 2021 for net proceeds of $9.1 million. Partner companies also raised capital through equity offerings and ATMs.
Outlook, risks and unusual items
- Funding and losses: Fortress has a history of operating losses, expects substantial future spending and may need further equity, debt, partnership or asset-sale financing. Additional equity issuance can dilute holders.
- Commercial concentration and competition: Management expects Journey’s dermatology products to remain the main operating-income source. Generic competition, patent challenges, reimbursement and formulary decisions, product demand and manufacturing or supply interruptions could materially affect results. Qbrexza and Amzeeq patent litigation is ongoing; the company cannot predict the outcomes.
- Pipeline and execution: Drug development, clinical trial outcomes, regulatory approval, manufacturing capacity and third-party collaborators are uncertain. Many candidates are early stage. Mustang’s MB-207 IND was placed on hold pending CMC clearance in January 2022.
- Debt restrictions: Oaktree’s secured facility includes minimum liquidity and revenue covenants and restrictions on certain transactions. Fortress reported compliance at December 31, 2021; a future breach could permit acceleration and enforcement against collateral.
- Cybersecurity loss and control weakness: A 2021 business-email compromise caused approximately $9.5 million of Journey payments to be misdirected. Fortress funded Journey for the loss, which was recorded as a $9.5 million operating expense. Management said the related material weakness in cash-disbursement controls was remediated by year-end; the independent auditor did not audit internal-control effectiveness.
- Contingencies and market conditions: Risks also include product-liability exposure, intellectual-property disputes, regulatory and drug-pricing changes, COVID-19 effects, and possible disruption to trials in regions affected by Russia’s invasion of Ukraine. The filing notes that the impact of these risks is uncertain.
- Preferred stock: Fortress’s Series A preferred stock carries a cumulative 9.375% annual dividend, payable monthly. Common-stock dividends are not planned in the near term.
Important facts for investors to verify
- Review the audited financial statements and cash-flow details to distinguish Fortress-parent liquidity from cash held by subsidiaries and partner companies.
- Track operating cash burn, financing needs, Oaktree covenant headroom and the impact of the 11% secured debt.
- Assess Journey’s product-level sales, gross margins, acquisition costs, reimbursement trends and Qbrexza/Amzeeq patent litigation outcomes.
- Confirm progress and funding for key regulatory and clinical milestones, including CUTX-101’s NDA, cosibelimab’s planned BLA and the MB-207 CMC hold.
- Monitor dilution from Fortress and partner-company equity issuance, and whether the cybersecurity remediation remains effective.