Fortress Biotech, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results include Fortress and controlled partner companies, including entities in which Fortress owns less than 50% but has voting control. Dollar amounts below are in millions unless otherwise noted.
Business context
Fortress acquires, develops and commercializes pharmaceutical and biotechnology products through subsidiaries, joint ventures and minority-owned partner companies. Its principal current revenue source is Journey Medical’s dermatology portfolio; most other programs remain in development.
Financial results and liquidity
| Metric | Q2 2021 | Q2 2020 | H1 2021 | H1 2020 |
|---|---|---|---|---|
| Net revenue | $17.8 | $9.5 | $29.4 | $22.4 |
| Operating loss | $(42.9) | $(25.4) | $(72.9) | $(46.9) |
| Net loss | $(24.4) | $(28.5) | $(50.5) | $(52.5) |
| Net loss attributable to common stockholders | $(3.5) | $(13.3) | $(12.4) | $(25.7) |
| Loss per common share attributable to common stockholders | $(0.04) | $(0.19) | $(0.15) | $(0.39) |
- Product revenue was $15.3 million in Q2 and $26.0 million in H1; collaboration revenue from Cyprium’s Sentynl agreement was $2.4 million and $3.2 million, respectively.
- Cash and cash equivalents were $275.0 million at June 30, 2021, with another $1.6 million restricted. Current assets were $320.3 million and current liabilities $70.6 million.
- H1 operating cash use was $56.1 million, investing cash use $5.3 million and financing cash inflow $103.1 million; cash and restricted cash increased $41.6 million. Financing included partner-company ATM proceeds, notably Mustang and Checkpoint, and Journey preferred financing.
- Long-term Oaktree notes had $60.0 million principal outstanding, reported net of discount at $52.3 million; the notes bear 11% interest and mature August 2025. Partner-company license installment obligations totaled $10.3 million carrying value, and Journey convertible preferred shares were recorded as a $12.5 million liability net of discount.
- Product gross margin, calculated from reported product revenue and product cost of goods sold, was approximately 51% in Q2 and 56% in H1 2021, compared with 67% and 68% in the corresponding 2020 periods.
Material changes versus prior periods
- Revenue rose 89% in Q2 and 32% in H1 year over year, mainly from Journey’s expanded product portfolio, including Accutane and Qbrexza, and new Cyprium collaboration revenue.
- Operating expenses increased 74% in Q2 and 48% in H1. R&D and acquired-license expense rose, including a $10.0 million DFD-29 license expense; SG&A and product costs also increased.
- Qbrexza inventory acquired by Journey included a $5.7 million fair-value step-up expected to flow through cost of sales during 2021; $1.2 million was expensed in Q2. Management’s estimate depends on sales volume.
- Reported net loss improved despite higher operating losses, largely because of non-cash gains on the Caelum investment: $25.0 million in Q2 and $30.9 million in H1. The investment’s reported fair value was $48.5 million at June 30, versus $17.6 million at December 31, 2020.
- H1 operating cash use increased by $16.8 million year over year, principally reflecting inventory acquired for Qbrexza and higher receivables.
Outlook, commentary and key risks
- Management said available cash and cash equivalents were sufficient to fund operations for at least the next 12 months, while also expecting substantial future losses and stating that further financing will be needed to advance development and commercialization. No numerical earnings or revenue guidance was provided.
- Fortress plans to continue development across its partner-company pipeline. The filing anticipated a rolling CUTX-101 NDA submission in H2 2021 and top-line cosibelimab study results by year-end 2021; these are forward-looking statements, not guaranteed outcomes.
- Avenue received a second FDA Complete Response Letter for IV tramadol in June 2021. Its July formal dispute request was pending at filing; FDA concerns included delayed and unpredictable pain relief and insufficient support for combination use. Avenue had $1.1 million cash and disclosed substantial doubt about its ability to continue as a going concern within one year; without approval, it expected cash to fund operations only into Q3 2021. The proposed InvaGen merger was no longer mandatory and remained uncertain.
- Journey’s Qbrexza acquisition carries up to $144 million in contingent milestones and royalties. Perrigo is challenging related patents; a 30-month stay was expected to run through March 9, 2023, with trial scheduled for September 2022.
- Journey’s DFD-29 agreement requires an $8.0 million upfront payment, with further development and sales milestones and royalties; Journey also expects to fund Phase III trials estimated at approximately $24 million. Potential milestone revenue for Cyprium’s CUTX-101 agreement was not deemed probable at June 30.
- Other significant risks include continuing operating losses and financing needs; debt covenants and 11% Oaktree interest; potential equity dilution; generic competition and reimbursement pressure on Journey products; dependence on third parties; clinical and regulatory setbacks; and a potential Fortress indemnification obligation to InvaGen of up to $35 million. The Qbrexza generic patent dispute remains unresolved. The securities class action disclosed in the filing was dismissed without prejudice.
- The filing stated that management did not expect a material COVID-19 impact on development timelines, revenue or liquidity, while continuing to monitor effects on operations.
Important facts for investors to verify
- How much of reported cash is readily available to Fortress itself versus held by subsidiaries or partner companies, and whether the stated 12-month runway remains supportable.
- Whether Avenue’s FDA dispute, funding needs and InvaGen transaction status materially changed after the reporting date.
- Whether Journey can fund DFD-29 development, complete required payments and manage the Qbrexza inventory step-up and patent litigation.
- How much of earnings improvement reflects non-cash Caelum fair-value gains rather than recurring operations, and the assumptions underlying that valuation and any option transaction.
- Future financing needs, debt covenant compliance, potential dilution and the impact of additional partner-company equity or preferred financing.