Fortress Biotech, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual report, not a stand-alone Q4 report. Fortress is a biopharmaceutical company that develops and commercializes products through majority-owned subsidiaries and partner companies. Its current commercial revenue is primarily from Journey Medical’s dermatology products; most of its broader pipeline remains in development.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net revenue | $45.6 million | $36.6 million | Up 24%; product revenue rose 28% to $44.5 million, while related-party revenue declined 37% to $1.1 million. |
| Cost of product sales | $14.6 million | $10.5 million | Up 39%; implied product gross margin was about 67%, versus about 70% in 2019. |
| Research and development, including acquired licenses | $64.1 million | $81.3 million | Down 21%; spending shifted across programs, increasing at Mustang and decreasing at Avenue and Checkpoint. |
| Selling, general and administrative | $61.2 million | $55.6 million | Up 10%, including higher Fortress headcount and Journey sales and marketing costs. |
| Operating loss | $94.3 million | $110.8 million | Improved 15%, despite higher SG&A and cost of sales. |
| Net loss | $103.0 million | $101.7 million | Loss widened slightly; 2020 included higher interest expense and lacked the prior-year Caelum deconsolidation gain. |
| Net loss attributable to common stockholders | $46.5 million | $40.0 million | Loss widened 16%; reported loss per common share was $0.65 versus $0.73. |
| Operating cash flow | $(83.7) million | $(95.0) million | Cash used decreased by $11.3 million. |
| Cash and cash equivalents | $233.4 million | $136.9 million | Consolidated amount includes partner-company cash; Fortress itself held $78.8 million. |
| Debt | $51.7 million corporate notes, net of discount; plus $12.7 million partner-company notes | $84.7 million corporate notes, net of discount; plus partner-company notes | Oaktree refinancing replaced several prior borrowings. Oaktree principal is $60 million. |
Balance sheet: Current assets were $261.6 million and current liabilities were $48.0 million. Total assets were $328.8 million; total liabilities were $131.8 million; total stockholders’ equity was $197.0 million. The company reported an accumulated deficit of $482.8 million.
Financing and dilution: Financing activities provided $172.4 million in 2020. Fortress raised $47.5 million gross through its common-stock ATM, issuing approximately 17.4 million shares, and raised $39.1 million gross through preferred-stock offerings. Partner companies also raised capital. Common shares outstanding increased from 74.0 million to 94.9 million during the year.
Material developments and comparison with 2019
- Journey’s product revenue growth drove the increase in consolidated revenue; management cited portfolio expansion and sales growth. Product revenue was concentrated in dermatology, including Ximino, Targadox and Exelderm.
- R&D expense declined, mainly reflecting lower Avenue clinical and NDA costs and lower Checkpoint manufacturing and trial costs; Mustang and certain smaller programs increased spending.
- The August 2020 $60 million Oaktree secured loan refinanced earlier debt. It bears 11% annual interest, requires quarterly interest-only payments and matures August 27, 2025. The agreement includes financial covenants, including minimum liquidity and a Journey revenue test; Fortress reported compliance at year-end.
- Other expense/income shifted from $9.2 million of income in 2019 to $8.6 million of expense in 2020. The 2019 comparison included an $18.5 million gain on Caelum deconsolidation; 2020 included a $6.4 million noncash gain from an increase in the fair value of the Caelum investment.
- Journey acquired rights to an isotretinoin product and an anti-itch product, with planned 2021 launches. The filing identifies future payments, royalties and potential sales milestones associated with these assets.
Outlook, pipeline, risks and contingencies
- Management stated that available cash was expected to fund operations for at least 12 months from the filing. The company nevertheless expects substantial losses and continued funding needs; its pipeline and expansion plans depend on additional financing, partnerships, asset sales or other capital sources.
- Pipeline developments included positive top-line CUTX-101 results and FDA Breakthrough Therapy Designation; initiation of two Phase 3 CAEL-101 studies; and interim cosibelimab results in metastatic cutaneous squamous cell carcinoma showing a 51.4% objective response rate. These are development-stage results, not approved-product revenue.
- IV Tramadol received an FDA Complete Response Letter in October 2020. Avenue resubmitted its NDA in February 2021; the FDA set an April 12, 2021 goal date. The outcome and commercial label remained uncertain at filing.
- InvaGen disputed whether it was required to complete the second stage of its Avenue transaction, citing alleged material adverse effects and concerns about the proposed label. The merger’s timing and completion were uncertain; Avenue faced restrictions on financing and strategic alternatives while the agreement remained in effect. Fortress’s potential indemnification exposure under a related agreement is capped at $35 million.
- A purported securities class action filed in November 2020 alleges misleading statements concerning Avenue’s IV Tramadol NDA. The company said it intended to contest the claims; the case was at an early stage.
- Key risks include recurring operating losses, dependence on Journey product sales, generic competition, need for additional capital and possible dilution, clinical and regulatory failure or delay, reliance on third-party manufacturers and trial operators, intellectual-property disputes, and debt covenants. COVID-19 could disrupt trials, manufacturing, staffing and regulatory reviews.
- Fortress reported effective disclosure controls and management-assessed effective internal control over financial reporting as of December 31, 2020. The independent auditor issued an unqualified opinion on the financial statements; it did not audit internal control effectiveness.
Most important facts for investors to verify
- How much of the $233.4 million consolidated cash balance was accessible to Fortress versus held by subsidiaries and partner companies, and the resulting parent-level cash runway.
- Progress on operating cash burn, Journey sales and product gross margin, and whether commercial revenue can grow enough to reduce reliance on financing.
- Oaktree’s covenant headroom, 11% interest burden, repayment terms and collateral; also verify partner-company debt and any restrictions on transferring cash to Fortress.
- Updates on IV Tramadol FDA review and the InvaGen transaction dispute, including any resulting financing constraints, claims or indemnification exposure.
- Whether CUTX-101, CAEL-101, cosibelimab and other pipeline programs meet clinical and regulatory milestones, and what partner economics, milestones and royalties may ultimately flow to Fortress.
- Further common or preferred share issuance, including partner-company financing and any potential dilution tied to preferred securities or other arrangements.
- Developments in the securities class action and any material changes to the stated COVID-19, manufacturing, generic-competition or intellectual-property risks.