Fortress Biotech, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 15, 2021. Unaudited consolidated results include Fortress and controlled partner companies, with losses allocated to non-controlling interests. Unless noted otherwise, amounts below are in U.S. dollars.
Business context
Fortress acquires, develops and commercializes pharmaceutical products and candidates through subsidiaries and partner companies. Its principal current commercial revenue stream is Journey Medical’s dermatology products. The company operates in dermatology product sales and pharmaceutical and biotechnology product development.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $21.1 million | $9.5 million | $50.5 million | $31.9 million |
| Operating loss | $49.9 million | $23.0 million | $126.5 million | $70.0 million |
| Net loss | $45.9 million | $30.0 million | $96.3 million | $82.5 million |
| Net loss attributable to Fortress common stockholders | $20.8 million | $15.5 million | $33.1 million | $41.2 million |
| Operating cash flow | Not separately presented for the quarter | $(77.8) million | $(63.2) million |
- Revenue mix: Product revenue was $19.6 million for Q3 and $45.6 million year to date, primarily from Journey. Collaboration revenue from Cyprium’s Sentynl agreement was $1.4 million and $4.6 million, respectively.
- Product gross margin: Product revenue less product cost of goods sold was approximately 43.1% in Q3 2021 versus 64.2% in Q3 2020, and 50.5% for the first nine months of 2021 versus 66.5% in 2020. Qbrexza inventory fair-value step-up and increased royalties weighed on product costs.
- Other income: Fair-value gains on the Caelum investment were $8.4 million in Q3 and $39.3 million year to date. These non-cash gains materially affected reported net loss.
- Cash and liquidity: Cash and cash equivalents were $252.7 million at September 30, 2021, plus $1.6 million restricted cash. Current assets were $301.2 million and current liabilities $103.2 million. Management stated available cash was expected to fund operations for at least 12 months, while noting additional financing would be needed for development and other plans.
- Cash flows, nine months: Operating activities used $77.8 million; investing activities used $12.8 million; financing activities provided $110.1 million. Cash and restricted cash increased $19.4 million.
- Debt and obligations: Oaktree notes had $60.5 million principal outstanding and $53.0 million carrying value after discount, bear 11% interest and mature in August 2025. A $10.5 million prepayment, triggered by the Caelum transaction, was paid October 12, 2021. Partner-company license installments had $8.0 million net carrying value; Journey convertible preferred shares were recorded as an $18.1 million liability.
Material changes versus prior periods
- Q3 revenue increased 123%; nine-month revenue increased 59%, mainly reflecting expanded Journey product sales, including Accutane and Qbrexza launches, growth in legacy products, and new Cyprium collaboration revenue.
- Operating expenses rose substantially: Q3 by 118% and year to date by 74%. Higher R&D reflected increased Checkpoint cosibelimab and Mustang development spending; higher SG&A primarily reflected Journey sales and marketing expansion.
- Q3 net loss attributable to Fortress common stockholders widened to $20.8 million from $15.5 million. For the nine-month period, it narrowed to $33.1 million from $41.2 million, despite a larger consolidated net loss; non-controlling interests absorbed a substantial portion of consolidated losses.
- Cash from financing was lower year over year, although partner-company at-the-market proceeds increased. Fortress common-stock ATM proceeds were $2.8 million in the first nine months, versus $44.8 million in 2020; partner companies raised funds through their own offerings and ATMs.
Outlook, developments and key risks
- No numerical corporate guidance was provided. Management expects continued substantial operating losses and expects to seek additional financing, partnerships, asset sales or other funding for development and operations.
- Caelum sale: AstraZeneca completed its acquisition of Caelum in October 2021. Fortress reported an expected $56.9 million share of the $150 million upfront proceeds, net of escrow and expenses, and may receive a portion of up to $350 million in contingent milestones.
- Pipeline: Fortress said Cyprium intended to begin a rolling FDA NDA submission for CUTX-101 in Q4 2021 and reported positive efficacy and safety analyses in October. Checkpoint expected cosibelimab top-line results around year-end 2021 and planned a Phase 3 NSCLC trial. These are forward-looking statements, not assurances of outcomes.
- Avenue / IV tramadol: FDA issued a second Complete Response Letter, and Avenue’s appeal remained under review with an Advisory Committee input anticipated. Fortress terminated the InvaGen transaction agreement on November 1, 2021. Avenue had $0.6 million cash at quarter-end, disclosed substantial doubt about its ability to continue as a going concern, and faced possible restructuring or Chapter 11. Avenue subsequently disclosed a November public offering.
- Journey cyber fraud and controls: A business-email compromise redirected approximately $9.5 million in payments. Fortress funded Journey for that amount. The incident resulted in a material weakness in cash-disbursement controls; management concluded disclosure controls were ineffective as of September 30, but stated the weakness had been remediated by the filing date. Potential insurance recoveries were not recognized as probable.
- Qbrexza patent litigation: Journey assumed litigation against Perrigo over generic entry. A 30-month stay was scheduled to expire March 9, 2023, with trial scheduled for September 19, 2022; outcome and timing were uncertain.
- Other risks: Drug-development and regulatory uncertainty, reliance on third-party manufacturers and trial operators, generic competition and reimbursement pressure, need for capital and potential dilution, Oaktree covenant restrictions, and potential indemnification obligations remain significant. Fortress disclosed a possible Avenue-related indemnification exposure capped at $35 million, subject to the agreement’s terms.
Investor verification priorities
- Confirm the actual cash proceeds received from the Caelum closing, escrow release timing, and conditions for any milestone payments.
- Track cash burn and financing needs across Fortress and partner companies, and distinguish Fortress cash from subsidiary cash and restricted cash.
- Review the Journey IPO’s final proceeds and the conversion or settlement terms of Journey’s preferred financing and Fortress promissory note.
- Monitor Avenue’s FDA review, liquidity, Nasdaq listing status, and any continuing claims or indemnification exposure following termination of the InvaGen agreement.
- Assess Qbrexza litigation and generic-entry timing, and the effect of product returns, rebates, royalties and inventory step-up on Journey’s margins.
- Verify remediation and ongoing effectiveness of controls following the $9.5 million fraud, including any recovery or insurance proceeds.