Fortress Biotech, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Financial statements are unaudited and consolidated results include majority-controlled subsidiaries and partner companies, with significant losses allocated to non-controlling interests. Dollar amounts below are in millions unless noted.
Business context
Fortress acquires, develops and commercializes biopharmaceutical products through subsidiaries and partner companies. Its current commercial revenue is principally generated by Journey Medical’s dermatology products; much of the remaining business is research and development. The company reports Dermatology Product Sales and Pharmaceutical and Biotechnology Product Development segments.
Financial results and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net revenue | $18.9 | $17.8 | $42.8 | $29.4 |
| Product revenue, net | $18.2 | $15.3 | $39.0 | $26.0 |
| Operating loss | $(50.9) | $(42.9) | $(98.2) | $(72.9) |
| Consolidated net loss | $(53.9) | $(24.4) | $(103.4) | $(50.5) |
| Net loss attributable to Fortress common stockholders | $(21.4) | $(3.5) | $(37.1) | $(12.4) |
| Loss per share attributable to common stockholders | $(0.24) | $(0.04) | $(0.42) | $(0.15) |
- Q2 product gross margin was approximately 58.1%, compared with 51.0% a year earlier; first-half product gross margin was approximately 59.4%, versus 56.2%. These are calculated as product revenue less product cost of goods sold, divided by product revenue.
- Research and development expense was $33.1 million in Q2 and $69.9 million for the first half; selling, general and administrative expense was $29.0 million and $55.3 million, respectively. First-half R&D and SG&A rose 63% and 50% year over year.
- Cash and cash equivalents were $248.8 million at June 30, down from $305.7 million at year-end 2021; restricted cash was $2.2 million. Cash, cash equivalents and restricted cash totaled $251.0 million.
- Operating cash use was $88.3 million in the first half, versus $56.1 million in the prior-year period. Investing cash use was $21.6 million, including the $20.0 million VYNE product acquisition; financing provided $53.0 million. The resulting decrease in cash and restricted cash was $57.0 million.
- Notes payable, net, were $85.6 million, compared with $42.9 million at year-end. Disclosed facilities include the $50.0 million Oaktree note, $15.0 million Journey term loan and $31.1 million Mustang Runway note, before debt discount. Total liabilities were $216.3 million and total stockholders’ equity was $147.7 million.
Changes versus the prior comparable period
- First-half net revenue increased 45%, chiefly due to higher Journey product sales, including Qbrexza and Accutane, and the addition of Amzeeq and Zilxi. The $2.6 million of first-half other revenue included a net $2.5 million Qbrexza-related milestone.
- Growth in product revenue was partly offset by lower collaboration revenue from Cyprium’s Sentynl agreement: $1.2 million in the first half versus $3.2 million in 2021. Revenue recognition reflects progress on development work funded by Sentynl.
- Operating losses widened as R&D and SG&A increased, including cosibelimab manufacturing and clinical work, Mustang program spending, DFD-29 trials, and Journey’s expanded sales and marketing activity.
- Other income/expense shifted from income of $22.4 million in the first half of 2021 to expense of $5.2 million in 2022. The prior period included a $30.9 million fair-value gain on the Caelum investment; there was no comparable 2022 gain after Caelum’s acquisition.
- First-half 2021 included $11.1 million of acquired-license R&D expense, versus effectively none in 2022. This reduced the year-over-year comparison of reported R&D growth but did not offset the increase in ongoing development spending.
Outlook, developments and risks
- Management stated that existing cash and cash equivalents were expected to fund operations for at least the next 12 months. It also said additional financing will be needed to fully develop candidates, fund losses, and support regulatory, manufacturing and commercial plans; unavailable or unacceptable financing could curtail plans. Cash is held across Fortress and subsidiaries, so consolidated cash should not be assumed to be freely available at the parent level.
- No specific revenue or earnings guidance was provided. Management expects substantial operating losses to continue for the foreseeable future. It reported minimal impact from COVID-19 on development timelines, revenue and liquidity to date, while continuing to monitor effects.
- Journey’s DFD-29 Phase 3 program began dosing in March; topline data were anticipated in the first half of 2023 and an NDA filing in the second half of 2023. Padagis settlements set specified earliest generic launch dates of August 15, 2030 for Qbrexza, July 1, 2031 for Amzeeq and April 1, 2027 for Zilxi.
- Checkpoint reported interim cosibelimab results in locally advanced cutaneous squamous cell carcinoma: independently reviewed confirmed response rate of 54.8% among 31 patients at the March 2022 cutoff. Checkpoint intended to discuss adding this indication to a BLA targeted for year-end 2022. These are interim results and not an approval.
- Cyprium’s CUTX-101 rolling NDA submission was ongoing, but a dispute with its contract manufacturer could delay completion. A temporary restraining order issued August 8, 2022 required advance notice of certain actions pending an injunction application.
- Other stated development expectations included first patients in Mustang’s MB-107 and MB-207 pivotal Phase 2 trials in 2023; MB-207 remained on hold pending FDA CMC clearance. In August 2022, Helocyte announced a grant that could provide over $20 million for a Triplex Phase 2 study; the filing describes this as a potential award.
- Principal risks include continued losses and funding needs; clinical, regulatory and manufacturing setbacks; dependence on third parties; generic competition and reimbursement pressure; patent disputes; debt covenants and repayment; and potential dilution from equity financing. The company reported compliance with applicable Oaktree and partner loan covenants at June 30, 2022.
- Fortress disclosed a 2021 cybersecurity incident at Journey involving approximately $9.5 million in misdirected wire transfers. Fortress provided Journey $9.5 million to support its accounts-payable operations; investigation and possible further costs were ongoing.
Important facts for investors to verify
- Cash availability and burn by entity, especially whether parent-level funds can support subsidiaries and planned development spending.
- Progress toward operating milestones, including DFD-29 data and filing, cosibelimab’s BLA plans, and resolution of the CUTX-101 manufacturer dispute.
- Journey product sales, gross margins, reimbursement and generic-entry exposure, including the actual effect and enforceability of the Padagis settlements.
- Debt balances, interest costs, covenant headroom, and the conditions attached to additional Mustang borrowing capacity.
- Funding assumptions behind management’s 12-month liquidity statement, and the potential dilution or restrictions from future financing.
- Potential remaining costs or recoveries from Journey’s cybersecurity incident and any material developments in contingencies or litigation.