Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Statements in the following discussion and throughout this report that are not historical in nature are “forward-looking statements.” You can identify forward-looking statements by the use of words such as “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described under Item 1A “Risk Factors.” We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes. Please see “Forward-Looking Statements” at the beginning of this Form 10-K. As used throughout this filing, (including in the risk factors described in Item 1A), the words “we”, “us” and “our” may refer to Fortress Biotech, Inc. individually, to one or more of its subsidiaries and/or partner companies, or to all such entities as a group, as dictated by context.
The following discussion of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information appearing elsewhere in this Form 10-K. We undertake no obligation to update any forward-looking statements in the discussion of our financial condition and results of operations to reflect events or circumstances after the date of this report or to reflect actual outcomes
Fortress Biotech, Inc. (“Fortress” or the “Company”) is a biopharmaceutical company dedicated to acquiring, developing and commercializing pharmaceutical and biotechnology products and product candidates, which we do through Fortress itself and through partner companies and subsidiaries. Fortress has a talented and experienced business development team, comprising scientists, doctors and finance professionals, who work in concert with our extensive network of key opinion leaders to identify and evaluate promising products and product candidates for potential acquisition by new or existing partner companies. We have executed arrangements with some of the world’s foremost universities, research institutes and pharmaceutical companies, including City of Hope National Medical Center, Fred Hutchinson Cancer Center, St. Jude Children’s Research Hospital (“St. Jude”), Dana-Farber Cancer Institute, Nationwide Children’s Hospital, Cincinnati Children’s Hospital Medical Center, Columbia University, the University of Pennsylvania, Mayo Foundation for Medical Education and Research (“Mayo Clinic”), AstraZeneca plc and Dr. Reddy’s Laboratories, Ltd.
Following the exclusive license or other acquisition of the intellectual property underpinning a product or product candidate, Fortress leverages its business, scientific, regulatory, legal and financial expertise to help the partners achieve their goals. Partner companies then assess a broad range of strategic arrangements to accelerate and provide additional funding to support research and development, including joint ventures, partnerships, out-licensings, sales transactions, and public and private financings. To date, four partner companies are publicly-traded, and two have consummated strategic partnerships with industry leaders AstraZeneca plc as successor-in-interest to Alexion Pharmaceuticals, Inc. (“AstraZeneca”) and Sentynl Therapeutics, Inc. (“Sentynl”), respectively. On October 5, 2021, AstraZeneca purchased 100% of our partner Caelum for approximately $150 million upfront and up to $350 million in contingent regulatory and sales milestone payments.
Our subsidiary and partner companies that are pursuing development and/or commercialization of biopharmaceutical products and product candidates are Aevitas Therapeutics, Inc. (“Aevitas”), Avenue Therapeutics, Inc. (Nasdaq: ATXI, “Avenue”), Baergic Bio, Inc. (“Baergic”, a subsidiary of Avenue), Cellvation, Inc. (“Cellvation”), Checkpoint Therapeutics, Inc. (Nasdaq: CKPT, “Checkpoint”), Cyprium Therapeutics, Inc. (“Cyprium”), Helocyte, Inc. (“Helocyte”), Journey Medical Corporation (Nasdaq: DERM, “Journey” or “JMC”), Mustang Bio, Inc. (Nasdaq: MBIO, “Mustang”), Oncogenuity, Inc. (“Oncogenuity”) and Urica Therapeutics, Inc. (“Urica”, formerly UR-1 Therapeutics, Inc.).
Recent Events
Marketed Dermatology Products
● In 2022, Journey’s commercial portfolio generated net revenue of $71.0 million, compared to net revenue of $63.1 million in 2021.
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● At December 31, 2022, Journey currently had 74 field sales representatives dedicated to marketing and promoting their dermatology product portfolio.
● In January 2022, Journey received notice from its exclusive out-licensing partner in Japan, Maruho Ltd. (“Maruho”), that Japan’s Ministry of Health, Labor and Welfare approved Rapifort® Wipes 2.5% (glycopyrronium tosylate hydrate) for the treatment of primary axillary hyperhidrosis. This approval triggered a milestone payment of $10.0 million to Journey, $7.5 million of which was paid to Dermira pursuant to the terms of the Asset Purchase Agreement between Journey and Dermira for Qbrexza, resulting in net proceeds of $2.5 million paid to Journey.
● In January 2022, JMC acquired Amzeeq (minocycline) topical foam, 4%, and Zilxi (minocycline) topical foam, 1.5%, two U.S Food and Drug Administration (“FDA”) approved Topical Minocycline Products and Molecule Stabilizing Technology (MST)™ from Vyne Therapeutics, Inc., which expanded Journey’s product portfolio of actively marketed branded dermatology products to eight.
● In May 2022, Journey received notice from Maruho that its commercial launch of Rapifort was initiated and Journey began receiving royalty payments from Maruho of 10% of net sales of Rapifort in Japan in the second quarter of 2022.
● In May 2022, Journey announced that it had entered into three separate settlement agreements (the “Settlement Agreements”) with Padagis for patent infringement lawsuits that Journey filed to enforce the patents covering Qbrexza®, Amzeeq®, and Zilxi®. Pursuant to the terms of the Settlement Agreements, Padagis is prohibited from launching generic versions of Qbrexza®, Amzeeq® and Zilxi® until August 15, 2030, July 1, 2031, and April 1, 2027, respectively. Each of the aforementioned lawsuits were dismissed on May 19, 2022. Additionally, in December 2022, Journey settled the Qbrexza patent infringement lawsuit that Journey filed against Teva Pharmaceuticals.
Late Stage Product Candidates
DFD-29 (modified early release oral minocycline for the treatment of rosacea)
● Journey completed enrollment in its DFD-29 Phase 3 clinical program for the treatment of papulopustular rosacea. Topline data from the two DFD-29 Phase 3 clinical studies are expected to be announced in the first half of 2023. Journey plans to submit the New Drug Application (“NDA”) for DFD-29 in the second half of 2023 and FDA approval is anticipated in the second half of 2024.
● In the Phase 2 clinical trials, DFD-29 (40mg) demonstrated nearly double the efficacy when compared against Oraycea® (European equivalent of Oracea®) on both co-primary endpoints. For the first co-primary endpoint, Investigator’s Global Assessment (“IGA”) treatment success, Oraycea had a 33.33% IGA treatment success rate, while DFD-29 achieved a 66.04% IGA treatment success rate. For the second co-primary endpoint, the change in total inflammatory lesion count, Oraycea had a 10.5 reduction in inflammatory lesions, while DFD-29 achieved a 19.2 reduction in inflammatory lesions.
● In March 2023, Journey announced completion of treatment in the Phase 1 clinical trial assessing the impact of DFD-29 on the microbial flora of healthy adults. No significant safety issues were noted during the study.
CUTX-101 (Copper Histidinate injection for Menkes Disease)
● In 2021, our subsidiary Cyprium signed a Development and Asset Purchase Agreement with Sentynl, a subsidiary of Zydus Lifesciences Ltd., for CUTX-101 for the treatment of Menkes disease. Under the terms of the agreement, Cyprium received $8 million upfront to fund the development of CUTX-101 and could receive up to $12 million in regulatory milestone payments related to the NDA submission and approval process and is eligible to receive sales milestones totaling up to $255.0 million in the aggregate, plus royalties. Royalties start from mid-single digits, scaling up to 25% on sales exceeding $100 million annually. All of the foregoing milestone and royalty payments are subject to 50% diminution in the event Sentynl decides, at its option, to assume development control of CUTX-101 during the 45-day period beginning on September 30, 2023. Cyprium will in any event retain 100% ownership over any FDA priority review voucher that may be issued at NDA approval for CUTX-101. Cyprium is responsible for the development of CUTX-101 (subject to the aforementioned righ by Sentynl to assume development), and Sentynl will be responsible for commercialization of CUTX-101, as well as progressing newborn screening activities.
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● In December 2021, Cyprium initiated the rolling submission of an NDA to the FDA for CUTX-101. The rolling submission of the NDA for CUTX-101 is ongoing and is expected to be completed in 2023.
● Cyprium is currently in a dispute with its contract manufacturing organization (the “CMO”), regarding the CMO’s attempt to terminate a Master Services Agreement (together with related work orders, the “MSA”) between Cyprium and the CMO. Cyprium believes the CMO’s grounds for purporting to terminate the MSA are without merit and is currently availing itself of all appropriate legal remedies in efforts to ensure that the CMO abides by its obligations under the MSA and/or to pursue monetary damages claims against the CMO. To that end, Cyprium obtained a temporary restraining order in August 2022 and a preliminary injunction in September 2022 from a court in New York State. The injunction enjoined the CMO from terminating the MSA and prohibited the CMO from further attempts to terminate the MSA during the pendency of dispute resolution procedures.
● CUTX-101 was sourced by Fortress and is currently in development at our partner company, Cyprium.
CAEL-101 (Light Chain Fibril-reactive Monoclonal Antibody for AL Amyloidosis)
● CAEL-101 was sourced by Fortress in 2017 and was developed by Caelum until it was acquired by AstraZeneca o n October 5, 2021. AstraZeneca acquired Caelum for an upfront payment of approximately $150 million paid to Caelum shareholders, of which approximately $56.9 million was paid to Fortress, net of the ten percent, 24-month escrow holdback amount and other miscellaneous transaction expenses. The agreement also provides for additional potential payments to Caelum shareholders totaling up to $350 million, payable upon the achievement of regulatory and commercial milestones. Fortress is eligible to receive 42.4% of all proceeds of the transaction, totaling up to approximately $212 million.
● There are two ongoing Phase 3 studies of CAEL-101 for AL amyloidosis. (ClinicalTrials.gov identifiers: NCT04512235 and NCT04504825 ).
● AstraZeneca has indicated an expected Biologics License Application (“BLA”) submission in 2024.
● CAEL-101 was sourced by Fortress and was developed by Caelum (founded by Fortress) until its acquisition by AstraZeneca in October 2021 .
Cosibelimab (Anti-PD-L1 mAb for CSCC and NSCLC)
● Our partner company, Checkpoint submitted a BLA to the FDA for cosibelimab as a treatment for patients with metastatic or locally advanced cutaneous squamous cell carcinoma (“cSCC”) in January 2023 and the BLA was accepted in March 2023 with a Prescription Drug User Fee Act (“PDUFA”) date of January 3, 2024. With a compelling safety profile and its unique mechanism of action, we believe cosibelimab has the potential to be a market disruptive product in the $30 billion and growing PD-(L)1 class.
● In January 2022, Checkpoint announced topline results from its registration-enabling cohort of a multi-regional, Phase 1 clinical trial in patients with metastatic cSCC. The cohort met its primary endpoint, with cosibelimab demonstrating a confirmed objective response rate of 47.4% (95% CI: 36.0, 59.1) based on independent central review of 78 patients enrolled in the metastatic cSCC cohort using Response Evaluation Criteria in Solid Tumors version 1.1 criteria.
● In May 2022, Checkpoint announced that it received Pediatric Investigation Plan (“PIP”) product-specific waivers from the European Medicines Agency (“EMA”) and the U.K. Medicines & Healthcare products Regulatory Agency (“MHRA”) for cosibelimab in cSCC. The waivers remove the requirement to conduct pediatric clinical studies to support cosibelimab marketing authorization applications in Europe.
● In June 2022, Cjeckpoint announced interim results from it’s registration-enabling cohort of its multi-regional, Phase 1 clinical trial of cosibelimab in metastatic cSCC were presented at the 2022 American Society of Clinical Oncology Annual Meeting. Data highlights presented include confirmed objective response rate (“ORR”) by independent central review in the modified intent-to-treat population of 48.7% (95% CI, 37.0-60.4) and 13.2% of patients achieved a complete response in target lesions. Cosibelimab was generally well tolerated with no unexpected safety signals.
● Also in June 2022, Checkpoint announced interim results from it’s registration-enabling cohort of its multi-regional, Phase 1 clinical trial of cosibelimab in patients with locally advanced cSCC that are not candidates for curative surgery or radiation. As of the March 2022 data cutoff, the confirmed ORR by independent central review in 31 patients was 54.8% (95% CI: 36.0, 72.7).
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● In July 2022, Checkpoint successfully completed two pre-BLA meetings with the FDA (chemistry, manufacturing and controls (“CMC”) and clinical/non-clinical). Based upon favorable interactions with the agency, the January 2023 BLA submission included both the metastatic and locally advanced cutaneous squamous cell carcinoma indications.
● Cosibelimab was sourced by Fortress and is currently in development at Checkpoint.
MB-107 and MB-207 (Ex vivo Lentiviral Therapies for X-linked Severe Combined Immunodeficiency (“XSCID”))
● The timeline for initiating the MB-107 pivotal non-randomized multicenter Phase 2 trial under Mustang IND has been extended due to unanticipated issues related to the materials used in manufacturing. These issues were communicated to the FDA, and Mustang received a written response on August 26, 2022. The FDA response provided additional direction, enabling us to effectively continue to work with our outside suppliers. We are working towards enrolling the first patient in this trial in 2023.
● In order to lift the clinical hold on the MB-207 pivotal non-randomized multicenter Phase 2 trial under Mustang IND and receive an FDA safe-to-procced for the IND, we believe the most critical activities will be to (1) perform process validation manufacturing runs using healthy donor material and (2) ensure qualification of all assays related to the product release. Following completion of these activities and the earliest release of the clinical hold by FDA, we expect to enroll the first patient in the planned Phase 2 clinical trial in 2023.
● The MB-107 multicenter Phase 1/2 clinical trial under St. Jude IND remains open to accrual.
● As a result of the study stopping rules, the MB-207 single-center Phase 1/2 clinical trial under NIH IND was suspended in 2022 due to the presence of clonal expansion in the myeloid lineage in 10% of the treated patients, although to date there have been no observations of insertional mutagenesis or malignancies. All patients continue to be followed and remain clinically stable with no significant hematological abnormalities. Upon review of these data, the FDA agreed that the risk-benefit ratio of both MB-107 and MB-207 remains favorable to support moving forward with Mustang-sponsored pivotal multicenter Phase 2 clinical trials once Mustang has appropriately addressed other items flagged by the Agency, as noted above.
● MB-107 and MB-207 were sourced by Fortress and are currently in development at our partner company, Mustang.
Triplex (Cytomegalovirus (“CMV”) vaccine)
● In August 2022, we announced that Triplex received a grant from the National Institute of Allergy and Infectious Diseases of the National Institutes of Health that could provide over $20 million in non-dilutive funding. This competitive award will fund a multi-center, placebo-controlled, randomized Phase 2 study of Triplex for control of CMV in patients undergoing liver transplantation. The company believes this data set could ultimately be used to support approval of Triplex in this setting.
● In February 2023, we announced that data from a Phase 1 pilot study published in the American Journal of Hematology demonstrated the feasibility, safety, immunological response and potential efficacy associated with vaccination of a hematopoietic cell transplant (“HCT”) donor with CMV vaccine Triplex to enhance protective CMV-specific T cells in immunosuppressed recipients of allogeneic HCT. This data was also presented at the 2023 Tandem Meetings: Transplantation & Cellular Therapy Meetings of ASTCT and CIBMTR, in February 2023, in Orlando, Florida. A Phase 2 clinical trial is planned to evaluate the the vaccination of HCT donors to enhance protective CMV-specific T cell immunity in HCT recipients.
● Triplex is currently the subject of four grant-funded trials in various clinical settings including: adults undergoing stem cell transplant; adults co-infected with CMV and HIV; and in combination with a CAR T cell therapy for adults with non-Hodgkin lymphoma (“NHL”).
● Triplex was sourced by Fortress and is currently in development at our partner company, Helocyte.
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IV Tramadol
● In September 2022, our partner company Avenue received the official meeting minutes from the FDA regarding a meeting conducted in August 2022, for IV Tramadol. At the meeting, Avenue presented a study design for a single safety clinical trial that Avenue believes could address the concerns regarding risks related to opioid stacking. The FDA stated that the proposed study design appears reasonable and agreed on various study design aspects with the expectation that additional feedback would be provided to Avenue upon review of a more detailed study protocol. Avenue incorporated the FDA’s suggestions from the meeting minutes and submitted a detailed study protocol that could form the basis for the submission of a complete response to the second Complete Response Letter for IV Tramadol.
● In March 2023, we announced Avenue’s participation in a Type C meeting with the FDA to discuss the proposed study protocol to asses the risk of respiratory depression related to opioid stacking on IV Tramadol relative to an approved opioid analgesic.
● IV Tramadol was sourced by Fortress and is currently in development at Avenue.
Early Stage Product Candidates
Dotinurad (Urate Transporter (URAT1) Inhibitor)
● In May 2022, our subsidiary company Urica initiated a Phase 1 clinical trial to evaluate dotinurad in healthy volunteers in the United States. Dotinurad is in development for the treatment of gout. We anticipate topline data from the Phase 1 trial in the first half of 2023.
● Dotinurad (URECE® tablet) was approved in Japan in 2020 as a once-daily oral therapy for gout and hyperuricemia. Dotinurad was efficacious and well-tolerated in more than 500 Japanese patients treated for up to 58 weeks in Phase 3 clinical trials. The clinical program supporting approval included over 1,000 patients.
● In October 2022, Urica strengthened its leadership team by appointed Jay D. Kranzler, M.D., Ph.D. as Chairman and Chief Executive Officer, and Vibeke Strand, M.D., MACR, FACP, Adjunct Clinical Professor, Division of Immunology/Rheumatology, Stanford University, to Urica’s Board of Directors.
● In December 2022, Urica expanded its exclusive license agreement with Fuji Yakuhin Co. Ltd. (“Fuji”) for the development of dotinurad to include the Middle East and North Africa (“MENA”) and Turkey territories. The agreement builds upon the exclusive license agreement between Urica and Fuji previously announced in May of 2021 to develop dotinurad in the United States, United Kingdom, European Union and Canada.
● Dotinurad was sourced by Fortress and is currently in development at our partner company, Urica.
MB-101 (IL13Rα2-targeted CAR T cell therapy)
● In 2023, Mustang plans to file an IND for the combination of MB-101 CAR T therapy and MB-108 oncolytic virus therapy for the treatment of glioblastoma and anaplastic astrocytoma . This combination will be referred to as MB-109.
● MB-101 was sourced by Fortress and is currently in development at Mustang.
MB-105 (PSCA-targeted CAR T cell therapy)
● In February 2022, Phase 1 data on MB-105, a PSCA-targeted CAR T administered systemically to patients with PSCA-positive metastatic castration-resistant prostate cancer (mCRPC), were presented by City of Hope at the 2022 American Society of Clinical Oncology Genitourinary Cancers Symposium.
● MB-105 was sourced by Fortress and is currently in development at Mustang.
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MB-102 (CD123 CAR T Cell Program for BPDCN, AML and high-risk MDS)
● In December 2022, Mustang announced that the safety review team (SRT), after thoroughly reviewing the safety data from Dose Level 1 (100 x 10 6 CAR T cells), unanimously recommended dose escalation to Dose Level 2 (300 x 10 6 CAR T cells). Mustang anticipates initiation of the Dose Level 2 cohort in 2023.
● MB-102 was sourced by Fortress and is currently in development at our partner company, Mustang.
MB-106 (CD20-targeted CAR T cell therapy)
● In April 2022, we announced that interim Phase 1/2 data on MB-106, a CD20-targeted, autologous CAR T cell therapy for patients with relapsed or refractory B-NHL and CLL, were presented at the 2022 Tandem Meetings I Transplantation & Cellular Therapy Meetings of the American Society of Transplantation and Cellular Therapy and Center for International Blood & Marrow Transplant Research. Data demonstrated high efficacy and a very favorable safety profile in all patients (n=25). Five dose levels were used during the study, and complete responses were observed at all dose levels. Durable responses were observed in a wide range of hematologic malignancies including follicular lymphoma (“FL”), CLL, diffuse large B-cell lymphoma (“DLBCL”) and Waldenstrom macroglobulinemia (“WM”). An ORR of 96% and a complete response (“CR”) rate of 72% were observed in all patients across all dose levels.
● Also in April 2022, MB-106 data focused on CLL were presented at the 4th International Workshop on CAR-T and Immunotherapies.
● In June 2022, we announced that MB-106 data were presented in an oral session at the European Hematology Association 2022 Hybrid Congress. Dr. Mazyar Shadman of Fred Hutch presented updated interim data from the ongoing Phase 1/2 clinical trial for B-NHL and CLL. Data presented include a 94% ORR and 78% CR rate in patients with FL. Overall, for the 26 patients treated on the trial, there was a 96% ORR and 73% CR, including complete responses in both DLBCL patients, both WM patients, and both patients previously treated with CD19-targeted CAR-T therapy (1 DLBCL patient and 1 FL patient).
● Also in June 2022, we announced that the FDA granted Orphan Drug Designation to MB-106 for the treatment of WM, a rare type of B-NHL. Our partner company Mustang Bio, Inc. (“Mustang”), which is developing MB-106, plans to treat additional WM patients in the Mustang Bio-sponsored Phase 1 portion of its multicenter trial to potentially support an accelerated Phase 2 strategy for this indication.
● In October 2022, we announced that the first patient was treated in Mustang’s multicenter, open-label, non-randomized Phase 1/2 clinical trial evaluating the safety and efficacy of MB-106.
● Also in October 2022, we announced that results from the WM cohort and other interim data from the ongoing Phase 1/2 clinical trial of MB-106 at Fred Hutch were presented at the 11th International Workshop for Waldenstrom's Macroglobulinemia that took place in Madrid, Spain. Mustang plans to treat additional WM patients in the Mustang Bio-sponsored Phase 1 portion of its multicenter trial to potentially support an accelerated Phase 2 strategy for WM.
● Additionally, in October 2022, we shared interim data from 28 patients treated in the initial, ongoing Phase 1/2 investigator-sponsored clinical trial at Fred Hutch. These data continue to support MB-106 as a viable CAR T cell therapy for B-NHLs and CLL. An overall response rate of 96% and CR rate of 75% were observed in a wide range of hematologic malignancies including follicular lymphoma, CLL, diffuse large B-cell lymphoma and WM. Twelve patients have experienced CR for more than 12 months (10 ongoing), including four patients with CR for more than two years and the longest patient with CR at 33 months. Six patients with initial partial response (“PR”) at 28 days post-treatment improved to CR, presumably due to the demonstrated persistence of CAR T cells in these patients, and all remain in ongoing CR. All three patients previously treated with CD19 CAR T cell therapy responded to treatment with MB-106. A favorable safety profile for MB-106 as an outpatient therapy remains with no cytokine release syndrome or immune effector cell-associated neurotoxicity syndrome ≥ Grade 3.
● In December 2022 we announced that six patients had been enrolled in Mustang’s multicenter Phase 1/2 clinical trial and five patients had been infused at the starting dose levels of their respective protocol arms. We have since treated the first WM in the indolent lymphoma arm of the trial, and we expect to provide first safety and efficacy data from that arm in the second quarter of 2023, with a more substantial data set from all three arms in the fourth quarter of 2023. Finally, we anticipate that the indication for the first pivotal Phase 2 trial will be relapsed/refractory WM, with the first patient treated on that trial in the first quarter of 2024.
● MB-106 was sourced by Fortress and is currently in development at Mustang.
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MB-108 (HSV-1 Oncolytic Virus C134)
● The Phase 1 trial of MB-108 at the University of Alabama at Birmingham (“UAB”) has been on clinical hold since September 2022 due to toxicity, and UAB expects FDA clearance in 2023 in order to resume enrolling patients at a lower dose level.
● In 2023, Mustang plans to file an IND for the combination of MB-101 CAR T therapy and MB-108 oncolytic virus therapy for the treatment of glioblastoma and anaplastic astrocytoma . This combination will be referred to as MB-109.
● MB-108 was sourced by Fortress and is currently in development at our partner company, Mustang.
MB-109 (MB-101 (IL13Rα2-targeted CAR T Cell Therapy) + MB-108 oncolytic virus)
● In April 2022, we announced interim data from two ongoing investigator-sponsored Phase 1 clinical trials evaluating two clinical candidates, MB ‐ 101 (IL13Rα2 ‐ targeted CAR T cell therapy licensed from City of Hope) and MB-108 (herpes simplex virus type 1 oncolytic virus licensed from Nationwide Children’s Hospital) for the treatment of recurrent glioblastoma (“rGBM”). The data were from a late-breaking poster presented at the American Association for Cancer Research Annual Meeting 2022. Preclinical data also presented support the safety of administering these two therapies sequentially to optimize treatment in a regimen designated as MB-109. The combination leverages MB-108 to make cold tumors “hot,” thereby improving the efficacy of MB-101 CAR T cell therapy. Mustang expects to file an IND in 2023 to initiate an MB-109 Phase 1 clinical trial.
● MB-101 and MB-108 were sourced by Fortress and they are currently in development at Mustang Bio.
In vivo CAR T Platform Technology
● We continue to collaborate with the Mayo Clinic to progress our exclusively licensed novel in vivo CAR T technology platform that may be able to transform the administration of CAR T therapies and has the potential to be used as an off-the-shelf therapy.
● We anticipate the publication of proof-of-concept research in a murine tumor model in 2023.
● The novel CAR T technology was sourced by Fortress and is currently in development at Mustang.
MB-110 Ex Vivo Lentiviral Gene Therapy for RAG1 Severe Combined Immunodeficiency (“RAG1-SCID”)
● In July 2022, we announced that the first patient successfully received LV-RAG1 ex vivo lentiviral gene therapy to treat recombinase-activating gene-1 (“RAG1”) severe combined immunodeficiency (“RAG1-SCID”) in an ongoing Phase 1/2 multicenter clinical trial taking place in Europe. LV-RAG1 is exclusively licensed by Mustang Bio for the development of MB-110, a first-in-class ex vivo lentiviral gene therapy for the treatment of RAG1-SCID.
● The ex vivo lentiviral gene therapy was sourced by Fortress and is currently in development at Mustang Bio.
BAER-101 (novel α2/3–subtype-selective GABA A positive allosteric modulator (“PAM”))
● In November 2022, Baergic became a majority-owned subsidiary of Avenue through the consummation of the Share Contribution Agreement between Fortress and Avenue.
● Baergic intends to explore BAER-101 in a number of CNS disorders where patients are not adequately treated.
● BAER-101 was sourced by Fortress and is currently in development at Baergic.
General Corporate
● In March 2022, Mustang completed a $75 million debt financing with Runway Growth Capital. $30 million was funded upon closing with the additional $45 million available upon Mustang achieving certain milestones.
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● In July 2022, we announced that David Jin, who has served as Vice President of Corporate Development since May 2020, was also appointed as Chief Financial Officer effective August 16, 2022.
● In September 2022, Avenue effected a 1-for-15 reverse stock split to bring the company in compliance with the minimum bid price listing requirements of The Nasdaq Capital Market.
● In October 2022, Avenue closed a $12 million underwritten public offering of units consisting of one share of Avenue common stock and one warrant to purchase a share of Avenue common stock. Avenue received net proceeds of approximately $10.4 million at closing after deducting underwriting discounts and commissions and other expenses of the offering.
● Fortress’ Board of Directors declared the regular monthly dividend of $0.1953125 per share on the Company’s Series A Preferred Stock for each month in 2022. Dividends were paid in cash. Going forward, future notifications related to dividends for the Series A Preferred Stock will be disclosed on the Fortress website in the Investors section on the FBIOP Announcements page under Resources, https://www.fortressbiotech.com/investors/resources/fbiop-announcements . In addition, investors will also be able to find Form 8937s related to FBIOP on the same page.
● On October 31, 2022, Fortress received a letter from the Listing Qualifications Staff of Nasdaq indicating that the bid price of the Company’s common stock had closed below $1.00 per share for 30 consecutive business days and, as a result, Fortress is not in compliance with Nasdaq minimum bid price requirement. Nasdaq’s notice has no immediate effect on the listing of the common stock on Nasdaq, although a failure to maintain our listing on Nasdaq could have a material adverse effect on the Company (see risk factors described in Item 1A.). The Company intends to closely monitor the closing bid price of the Common Stock and consider all available options to remedy the bid price deficiency, but no decision regarding any action has yet been made.
● In November 2022, Avenue announced the completion of the acquisition of Baergic from Fortress, pursuant to a Share Contribution Agreement.
● In December 2022, Checkpoint effected a 1-for-10 reverse stock split of its common stock in order to improve the marketability and liquidity of Checkpoint’s common stock and to remain in compliance with all of Nasdaq’s continued listing requirements, including the minimum bid price rules.
● Also in December 2022, Checkpoint completed a registered direct offering priced At-the-Market under Nasdaq rules for total gross proceeds of approximately $7.5 million.
● Additionally in December 2022, Fortress appointed Dr. Lucy Lu, M.D. to its Board of Directors.
Subsequent Events
● In January 2023, Avenue completed a registered direct offering of Avenue common stock and concurrent private placement of warrants to purchase Avenue common stock priced At-the-Market under Nasdaq rules for total gross proceeds of approximately $3.3 million.
● Also in January 2023, Checkpoint submitted a BLA to the FDA for cosibelimab as a treatment for patients with metastatic or locally advanced cutaneous squamous cell carcinoma. In March 2023, Checkpoint announced the BLA was accepted, with a PDUFA goal date of January 3, 2024.
● In February 2023, Fortress completed a registered direct offering priced At-the-Market under Nasdaq rules for total gross proceeds of approximately $13.9 million, and a concurrent private placement with investors in the registered direct offering for the pro rata rights to acquire, in the aggregate, securities exercisable into common stock in certain future operating subsidiaries that consummate a specified corporate development transaction within the next five years.
● Also in February 2023, Checkpoint completed a registered direct offering of Checkpoint common stock priced At-the-Market under Nasdaq rules and a concurrent private placement of two series of warrants to purchase Checkpoint common stock, for total gross proceeds of approximately $7.5 million.
● In March 2023, Avenue announced its exclusive license agreement with AnnJi Pharmaceutical Co., Ltd. for intellectual property related to AJ201, a clinical asset currently in a Phase 1b/2a study in the U.S. for the treatment of spinal and bulbar muscular atrophy, also known as Kennedy’s disease.
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Critical Accounting Policies and Use of Estimates
Our consolidated financial statements include certain amounts that are based on management’s best estimates and judgments. Our significant estimates include, but are not limited to, provisions for product returns, coupons, rebates, chargebacks, discounts, allowances and distribution fees paid by Journey to certain wholesalers, inventory realization, useful lives assigned to long-lived assets and amortizable intangible assets, fair value of stock options and warrants, stock-based compensation, common stock issued to acquire licenses, investments, accrued expenses, provisions for income taxes and contingencies. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.
While our significant accounting policies are described in the notes to our consolidated financial statements included elsewhere in this Report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results.
Revenue Recognition
Our gross product revenues are subject to a variety of deductions, which generally are estimated and recorded in the same period that the revenues are recognized. Such variable consideration represents chargebacks, coupons, discounts, other sales allowances, governmental rebate programs and sales returns. These deductions represent estimates of the related obligations and, as such, knowledge and judgment are required when estimating the impact of these revenue deductions on gross sales for a reporting period. Historically, adjustments to these estimates to reflect actual results or updated expectations have not been material to our overall business. Coupons, however, can have a significant impact on year-over-year individual product revenue growth trends. If any of our ratios, factors, assessments, experiences, or judgments are not indicative or accurate estimates of our future experience, our results could be materially affected. The potential of our estimates to vary differs by program, product, type of customer and geographic location. In addition, estimates associated with U.S. Medicare and Medicaid governmental rebate programs are at risk for material adjustment because of the extensive time delay.
Fair Value Measurement
The Company follows accounting guidance on fair value measurements for financial assets and liabilities measured at fair value on a recurring basis. Under the accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.
The accounting guidance requires fair value measurements be classified and disclosed in one of the following three categories:
Level 1 : Quoted prices in active markets for identical assets or liabilities.
Level 2 : Observable inputs other than Level 1 prices for similar assets or liabilities that are directly or indirectly observable in the marketplace.
Level 3 : Unobservable inputs which are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.
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The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires management to make judgments and consider factors specific to the asset or liability.
Certain of our financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as accounts payable, accrued expenses and other current liabilities.
Issuance of Debt and Equity
Fortress and its partner companies and subsidiaries issue complex financial instruments which include equity and/or debt features. We analyze each instrument under ASC 480, Distinguishing Liabilities from Equity, ASC 815, Derivatives and Hedging and, ASC 470, Debt , in order to establish whether such instruments include any embedded derivatives.
We accounted for the Oaktree Note with detachable warrants in accordance with ASC 470, Debt . We assessed the classification of the common stock purchase warrants issued in connection with such transaction and determined that such instruments met the criteria for equity classification. The note proceeds were allocated between the Oaktree Note and the warrants on a relative fair value basis.
We recorded the related issue costs and value ascribed to the warrants as a debt discount of the Oaktree Note. The discount is being amortized utilizing the effective interest method over the term of the Oaktree Note, which is approximately 16.08% at December 31, 2022.
Accrued Research and Development Expense
We record accruals for estimated costs of research, preclinical, clinical and manufacturing development within accrued expenses which are significant components of research and development expenses. A substantial portion of our ongoing research and development activities is conducted by third-party service providers. We accrue the costs incurred under agreements with these third parties based on estimates of actual work completed in accordance with the respective agreements. We determine the estimated costs through discussions with internal personnel and external service providers as to the progress, or stage of completion or actual timeline (start-date and end-date) of the services and the agreed-upon fees to be paid for such services. Payments made to third parties under these arrangements in advance of the performance of the related services are recorded as prepaid expenses until the services are rendered.
If the actual timing of the performance of services or the level of effort varies from the estimate, we adjust accrued expenses or prepaid expenses accordingly, which impact research and development expenses. Although we do not expect our estimates to be materially different from amounts actually incurred, our understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in reporting amounts that are too high or too low in any particular period.
Stock-Based Compensation
We expense stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date fair value of the awards and forfeitures, which are recorded upon occurrence. We estimate the fair value of stock option grants using the Black-Scholes option pricing model. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.
We will continue to use judgment in evaluating the expected volatility, expected terms and interest rates utilized for our stock-based compensation expense calculations on a prospective basis. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. We expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase.
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Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements.
Smaller Reporting Company Status
We are a “smaller reporting company,” meaning that either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) the market value of our shares held by non-affiliates is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our shares held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our shares held by non-affiliates is less than $700 million. As a smaller reporting company, we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K , have reduced disclosure obligations regarding executive compensation, and smaller reporting companies are permitted to delay adoption of certain recent accounting pronouncements discussed in Note 2 to our consolidated financial statements located in “ Part IV, Item 15., Exhibits and Financial Statement Schedules ” in this Annual Report on Form 10-K.
Results of Operations
General
For the year ended December 31, 2022 we generated $75.7 million of net revenue, of which $71.0 million relates to the sale of Journey branded and generic products, $2.7 million relates to Journey’s milestone payment and royalties from Maruho Co., Ltd. (“Maruho”) related to the manufacturing and marketing approval and sales of Rapifort® Wipes 2.5% in Japan, $1.9 million relates to Cyprium’s collaboration revenue with Sentynl, and $0.2 million of revenue relates to Checkpoint’s collaborative agreements with TGTX, a related party. For the year ended December 31, 2021 we generated $68.8 million of net revenue, of which $63.1 million relates to the sale of Journey branded and generic products, $5.4 million relates to Cyprium’s collaboration revenue with Sentynl and $0.3 million relates to Checkpoint’s collaborative agreements with TGTX. At December 31, 2022, we had an accumulated deficit of $625.9 million primarily as a result of research and development expenses, purchases of in-process research and development and selling, general and administrative expenses. While we may in the future generate revenue from a variety of sources, including license fees, milestone payments, research and development payments in connection with strategic partnerships and/or product sales, our current non-marketed product candidates are at various stages of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues.
We had $30.8 million and $32.1 million of costs of goods sold in connection with the sale of JMC branded and generic products for the years ended December 31, 2022 and 2021, respectively.
Research and Development Expenses
Research and development costs primarily consist of personnel related expenses, including salaries, benefits, travel, and other related expenses, stock-based compensation, payments made to third parties for licenses and milestones, costs related to in-licensed products and technology, payments made to third party contract research organizations for preclinical and clinical studies, investigative sites for clinical trials, consultants, the cost of acquiring and manufacturing clinical trial materials, costs associated with regulatory filings and patents, laboratory costs and other supplies.
Also included in research and development is the total purchase price for licenses acquired during the period.
For the years ended December 31, 2022 and 2021, research and development expenses were approximately $134.2 million and $113.2 million, respectively. Additionally, during the years ended December 31, 2022 and 2021, we incurred approximately $0.7 million and $15.6 million, respectively, in costs related to the acquisition of licenses.
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The table below provides a summary of research and development costs associated with the development of our licenses by entity, for the years ended December 31, 2022 and 2021:
Year Ended
December 31,
% of total
($ in thousands)
2022
2021
2022
2021
Research & Development
Fortress
$
2,360
$
2,593
2
%
2
%
Partner Companies:
Avenue
2,381
1,255
2
%
1
%
Checkpoint
47,940
41,855
36
%
37
%
JMC
10,943
2,739
8
%
2
%
Mustang
62,030
49,631
46
%
44
%
Other 1
8,545
15,167
6
%
14
%
Total Research & Development Expense
$
134,199
$
113,240
100
%
100
%
Note 1: Includes the following subsidiaries: Aevitas, Baergic (through November 7, 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.
Noncash, stock-based compensation expense included in research and development for the years ended December 31, 2022 and 2021, was $4.4 million and $4.3 million, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist principally of personnel related costs, costs required to support the marketing and sales of our commercialized products, professional fees for legal, consulting, audit and tax services, rent and other general operating expenses not otherwise included in research and development expenses. For the years ended December 31, 2022 and 2021, selling, general and administrative expenses were $113.7 million and $86.8 million, respectively. Stock based compensation expense included in selling, general and administrative expenses in 2022 and 2021 was $18.5 million and $15.2 million, respectively.
The table below provides a summary by entity of selling, general and administrative expenses for the years ended December 31, 2022 and 2021, respectively:
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Year Ended
December 31,
% of Total
($ in thousands)
2022
2021
2022
2021
Selling, General & Administrative
Fortress
$
26,919
$
26,062
24
%
30
%
Partner Companies:
Avenue
5,013
2,484
4
%
3
%
Checkpoint
7,782
7,006
6
%
8
%
JMC 1
59,503
39,895
53
%
46
%
Mustang
10,740
8,866
10
%
10
%
Other 2
3,699
2,530
3
%
3
%
Total Selling, General & Administrative Expense
$
113,656
$
86,843
100
%
100
%
Note 1: Includes field sales force costs for the year ended December 31, 2022 and 2021 of $23.5 million and $16.0 million, respectively. During the course of 2022, JMC expanded their field sales force to support their increased product portfolio.
Note 2: Includes the following subsidiaries: Aevitas, Baergic (through November 7, 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.
Comparison of Years Ended December 31, 2022 and 2021
Year Ended December 31,
Change
($ in thousands)
2022
2021
$
%
Revenue
Product revenue, net
$
70,995
$
63,134
$
7,861
12
%
Collaboration revenue
1,882
5,389
(3,507)
(65)
%
Revenue – related party
192
268
(76)
(28)
%
Other revenue
2,674
—
2,674
100
%
Net revenue
75,743
68,791
6,952
10.1
%
Operating expenses
Cost of goods sold – product revenue
30,775
32,084
(1,309)
(4)
%
Research and development
134,199
113,240
20,959
19
%
Research and development – licenses acquired
677
15,625
(14,948)
(96)
%
Selling, general and administrative
113,656
86,843
26,813
31
%
Wire transfer fraud loss
—
9,540
(9,540)
(100)
%
Total operating expenses
279,307
257,332
21,975
9
%
Loss from operations
(203,564)
(188,541)
(15,023)
8
%
Other income (expense)
Interest income
1,398
649
749
115
%
Interest expense and financing fee
(13,642)
(15,308)
1,666
(11)
%
Foreign exchange loss
(89)
—
(89)
100
%
Change in fair value of investments
—
39,294
(39,294)
(100)
%
Change in fair value of warrant liabilities
1,129
(447)
1,576
(353)
%
Grant income
1,304
—
1,304
100
%
Total other income (expense)
(9,900)
24,188
(34,088)
(141)
%
Loss before income tax expense
(213,464)
(164,353)
(49,111)
30
%
Income tax expense
449
473
(24)
(5)
%
Net loss
(213,913)
(164,826)
(49,087)
30
%
Less: net loss attributable to non-controlling interest
127,338
100,123
27,215
27
%
Net loss attributable to common stockholders
$
(86,575)
$
(64,703)
$
(21,872)
34
%
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For the year ended December 31, 2022, the net increase in revenue of $7.0 million or 10% is due to Journey’s expanded product portfolio, which resulted in a net product revenue increase of $7.9 million, and the increase in other revenue of $2.7 million resulting from the $2.5 million milestone payment from Maruho triggered by Maruho’s receipt of manufacturing and marketing approval in Japan of Rapifort® Wipes 2.5% and $0.2 million in royalties, also from Maruho. Collaboration revenue related to Cyprium’s agreement with Sentynl decreased $3.5 million due to the extension of Cyprium’s NDA submission timeline, offset by a decrease in revenue from a related party of $0.1 million related to Checkpoint’s collaboration agreement with TG Therapeutics for patent cost reimbursement. Journey’s increased net product revenues are a result of the growth of Journey’s marketed products acquired in 2021, Qbrexza and Accutane, as well as incremental growth from Amzeeq and Zilxi, acquired in January 2022, offset by a decrease in net sales of Journey’s legacy products primarily as a result of generic competition and also contract manufacturer product shortages in 2022 that were resolved by the third quarter of 2022.
Cost of goods sold decreased by $1.3 million or 4% in 2022 due to decreased inventory step-up charges of approximately $5.9 million resulting from reduced costs related to the Amzeeq and Zilxi product acquisitions in January 2022 as compared to the charges related to the Qbrexza acquisition in the second quarter of 2021. In addition, royalty expenses decreased by $1.7 million, or 12%, mainly due to the decrease in Targadox sales from period-to-period. These reductions were offset in part by higher product costs of $1.8 million, driven by: increased product sales volume from period-to-period, increased license amortization and Prescription Drug User Fee Act fees of $1.86 million and $0.6 million respectively, related to our acquired intangible assets from the acquisition of Amzeeq and Zilxi, and increased costs of approximately $1.7 million related to freight, destruction, product validation and stability testing costs. Additionally, incremental costs of $0.4 million related to the establishment of expired product and other inventory reserves were charged against operations through cost of goods sold for the year ended December 31, 2022.
Research and development expenses increased $21.0 million, or 19%, from the year ended December 31, 2021 to the year ended December 31, 2022. The following table shows research and development spending for Fortress and each partner company:
Year Ended December 31,
Change
($ in thousands)
2022
2021
$
%
Research & Development
Stock-based compensation
Fortress
$
1,592
$
1,152
$
440
38
%
Partner Companies:
Avenue
297
172
125
73
%
Checkpoint
888
684
204
30
%
JMC
73
—
73
100
Mustang
1,583
2,278
(695)
(30)
%
Other 1
10
21
(11)
(55)
%
Sub-total stock-based compensation expense
4,443
4,307
136
158
%
Other Research & Development
Fortress
768
1,441
(673)
(47)
%
Partner Companies:
Avenue
2,084
1,083
1,001
92
%
Checkpoint
47,052
41,171
5,881
14
%
JMC
10,870
2,739
8,131
297
%
Mustang
60,447
47,353
13,094
28
%
Other 1
8,535
15,146
(6,611)
(44)
%
Total Research & Development Expense
$
134,199
$
113,240
$
20,959
19
%
Note 1: Includes the following subsidiaries: Aevitas, Baergic (through November 7, 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.
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The increase in stock-based compensation at Fortress, Avenue and Checkpoint is due to new equity grants to key employees and consultants in 2022, while the decrease in Mustang’s stock-based compensation is due to the effect of fully vested equity grants to key employees and consultants.
The increase in research and development spending is due in part to Mustang’s increase in employee compensation costs of $4.3 million as research and development headcount supporting clinical program development, increased laboratory supply costs of $2.7 million, increased lentiviral vector manufacturing costs of $1.7 million to support Mustang-sponsored clinical trials, and $2.6 million in increased sponsored research and clinical trial costs. Journey’s increased research and development costs are due to clinical trial expenses to develop DFD-29, for which their Phase 3 clinical trials are 100% enrolled as of January 2023. Checkpoint’s increase in research and development spending is attributable to an $8.3 million increase in manufacturing costs of product candidates, $3.0 million increase in headcount costs, and $1.7 million increased regulatory costs, offset by a decrease in milestone payments of $6.4 million related to the 2021 non-refundable milestone payment that was triggered by the first patient dosed in a Phase 3 clinical study of cosibelimab, and a $1.8 million decrease in clinical costs due to the closing of the CONTERNO study, initiated in December 2021, due to the ongoing conflict in Ukraine and the disruption of clinical trial sites in the region. Avenue’s increase in research and development spend in 2022 is primarily attributable to costs related to the FDA Advisory Committee Meeting for IV Tramadol in early 2022. The decrease in “Other” is attributable to a decrease of $3.2 million in costs incurred by Cyprium for its rolling NDA submission for CUTX-101, a decrease of $1.2 million of costs incurred by Urica for the dotinurad clinical program, and reduced costs at Oncogenuity and Aevitas related to sponsored reseach.
We expect research and development costs to remain flat or decrease modestly in 2023.
The decrease in research and development – licenses acquired of $14.9 million, or 96%, from the year ended December 31, 2021 as compared to the year ended December 31, 2022 is due primarily to $13.8 million expense recorded in 2021 for Journey’s license, collaboration, and assignment agreement with Dr. Reddy’s Laboratories, Ltd. for a potential rosacea treatment, referred to as the DFD-29 Agreement, as well as a related derivative warrant liability, and Mustang’s $1.6 million of expense recorded in 2021 related to milestone payments on existing licenses and a $0.4 million upfront payment required by the Leiden University Medical Centre license, as compared to current research and development – licenses acquired expense of $0.7 million for the year ended December 31, 2022, comprised of $0.4 million in milestone payments on existing licenses at Mustang and a $0.3 million payment by Urica to expand the geographic regions covered by the existing license with Fuji for the development of dotinurad.
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Selling, general and administrative expenses increased $26.8 million, or 31%, from the year ended December 31, 2021 to the year ended December 31, 2022. The following table shows selling, general and administrative spending for Fortress and by each partner company:
Year Ended December 31,
Change
($ in thousands)
2022
2021
$
%
Selling, General & Administrative
Stock-based compensation
Fortress
$
11,060
$
8,897
$
2,163
24
%
Partner Companies:
Avenue
352
270
82
30
%
Checkpoint
2,036
2,453
(417)
(17)
%
JMC
4,352
2,466
1,886
77
%
Mustang
700
1,030
(330)
(32)
%
Other 2
44
63
(19)
(20)
%
Sub-total stock-based compensation expense
18,544
15,179
3,365
22
%
Other Selling, General & Administrative
Fortress
15,859
17,165
(1,306)
(8)
%
Partner Companies:
Avenue
4,661
2,214
2,447
111
%
Checkpoint
5,746
4,553
1,193
26
%
JMC 1
55,151
37,429
17,722
47
%
Mustang
10,040
7,836
2,204
28
%
Other 2
3,655
2,467
1,188
48
%
Total Selling, General & Administrative Expense
$
113,656
$
86,843
$
26,813
31
%
Note 1: Includes field sales force costs for the year ended December 31, 2022 and 2021 of $23.5 million and $16.0 million, respectively. During the course of 2022, JMC expanded their field sales force to accommodate their increased product portfolio.
Note 2: Includes the following subsidiaries: Aevitas, Baergic (though November 7, 2022), Cellvation, Cyprium, Helocyte, Oncogenuity and Urica.
The increase in stock-based compensation at Fortress, Avenue and Journey is due to new equity grants to key employees and consultants in 2022.
For the year ended December 31, 2022, the increase in selling, general and administrative expenses of $26.8 million or 31% is primarily attributable to increased expenses at Journey related to their increased salesforce as well as increased marketing expense related to Journey’s expanded product portfolio, increased headcount and other supporting services related to being a public company, and increased legal costs associated with patent litigation. Mustang’s increase is due to increased headcount costs, increased corporate and patent-related legal costs, as well as an increase in professional and consulting fees. The increase in selling, general and administrative costs at Checkpoint are attributable to increased legal and accounting fees.
We expect selling, general and administrative expenses to remain flat or decrease modestly in 2023.
For the year ended December 31, 2021, wire fraud related costs totaled approximately $9.5 million. These costs were attributable to funds erroneously wired to fraudulent accounts as a result of a sophisticated business email compromise fraud scheme. Any recovered proceeds will be recorded when considered probable.
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Total other income (expense) changed $34.1 million, or 141%, from income of $24.2 million for the year ended December 31, 2021 to expense of $9.9 million for the year ended December 31, 2022, primarily due to the $39.3 million gain on the fair value of Caelum recognized in 2021, offset by the increase in change in fair value of warrant liabilities associated with warrants related to financings at Avenue and Checkpoint of $1.6 million, a decrease of $1.7 million in interest expense and financing fees due to non-recurring costs in 2021 related to Journey’s convertible preferred share offering, and lower interest expense for the year ended December 31, 2022 associated with the Company’s credit facility with Oaktree, as well as $1.3 million in grant income recognized by Mustang in the year ended December 31, 2022.
Net loss attributable to non-controlling interests increased $27.2 million, or 27% from the year ended December 31, 2021 to the year ended December 31, 2022. This increase reflects the partner companies’ share of net loss. Net loss attributable to common stockholders increased $21.9 million or 27%, from a net loss of $64.7 million for the year ended December 31, 2021 to a net loss of $86.6 million for the year ended December 31, 2022.
Liquidity and Capital Resources
Components of cash flows from publicly-traded partner companies are comprised of:
For the Year Ended December 31, 2022
($ in thousands)
Fortress 1
Avenue
Checkpoint
JMC
Mustang
Total
Statement of cash flows data:
Total cash (used in)/provided by:
Operating activities
$
(35,651)
$
(7,596)
$
(57,554)
$
(13,534)
$
(65,066)
$
(179,401)
Investing activities
24
—
—
(20,000)
(2,952)
(22,928)
Financing activities
(621)
10,541
14,887
16,456
34,056
75,319
Net increase in cash and cash equivalents and restricted cash
$
(36,248)
$
2,945
$
(42,667)
$
(17,078)
$
(33,962)
$
(127,010)
For the Year Ended December 31, 2021
($ in thousands)
Fortress 1
Avenue
Checkpoint
JMC
Mustang
Total
Statement of cash flows data:
Total cash (used in)/provided by:
Operating activities
$
(30,636)
$
(3,750)
$
(26,306)
$
(2,181)
$
(53,667)
$
(116,540)
Investing activities
55,880
—
—
(10,000)
(5,366)
40,514
Financing activities
(19,519)
4,381
40,269
53,016
70,847
148,994
Net increase in cash and cash equivalents and restricted cash
$
5,725
$
631
$
13,963
$
40,835
$
11,814
$
72,968
Note 1: Includes Fortress and non-public subsidiaries.
Year Ended December 31,
($ in thousands)
2022
2021
Change
Statement of cash flows data:
Total cash (used in)/provided by:
Operating activities
$
(179,401)
$
(116,540)
$
(62,861)
Investing activities
(22,928)
40,514
(63,442)
Financing activities
75,319
148,994
(73,675)
Net increase in cash and cash equivalents and restricted cash
$
(127,010)
$
72,968
$
(199,978)
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Operating Activities
Net cash used in operating activities increased $62.9 million from the year ended December 31, 2021 to the year ended December 31, 2022. The increase is primarily due to the increase in net loss of $49.1 million for the year ended December 31, 2022 as compared to the year ended December 31, 2021, with the increases in cash used by accounts payable and accrued expenses of $34.2 million, accounts receivable of $6.1 million, deferred revenue of $4.5 million as compared to the year ended December 31, 2021 offset by the decrease in the fair value of the investment in Caelum for the year ended December 31, 2021 of $39.3 million.
Investing Activities
Net cash provided by investing activities for the year ended December 31, 2021 of $40.5 million decreased $63.4 million to net cash used by investing activities of $22.9 million for the year ended December 31, 2022. The change is primarily due to cash provided by the proceeds from the sale of Caelum of $56.9 million received in 2021 related to AstraZeneca’s exercise of their purchase option, offset by Journey’s purchase of the Vyne product licenses of $20.0 million and Mustang’s property and equipment purchases of $2.7 million for the year ended December 31, 2022.
Financing Activities
Net cash provided by financing activities was $75.3 million for the year ended December 31, 2022, compared to $149.0 million of net cash provided by financing activities for the year ended December 31, 2021, a decrease of $73.7 million. The decrease is primarily due to the decrease of $94.4 million in proceeds from partner companies’ at-the-market offerings, and the decrease of $17.0 million in proceeds from a partner company’s sale of convertible preferred stock. Offsetting these decreases was the increase in proceeds from partner companies’ long-term debt of $47.1 million, as well as the $10.5 million repayment of Fortress’ Oaktree Note.
Sources of Liquidity
Stock Offerings and At-The-Market Share Issuances
We fund our operations through cash on hand, the sale of debt, third-party financings, and the sale of partner companies. At December 31, 2022, we had cash and cash equivalents of $178.3 million of which $51.8 million relates to Fortress and the private partner companies, primarily funded by Fortress, $12.1 million relates to Checkpoint, $75.7 million relates to Mustang, $32.0 million relates to JMC and $6.7 million relates to Avenue. Restricted cash related to an undertaking posted by Cyprium to secure potential damages in an injunctive proceeding and our office leases is $2.7 million.
In July 2021, the Company filed a shelf registration statement on Form S-3 (File No. 333-258145), which was declared effective in July 2021 (the “2021 S-3”). As of December 31, 2022, no securities had been drawn down under the 2021 S-3.
In May 2020, the Company a filed shelf registration statement on Form S-3 (File No. 333-238327), which was declared effective in May 2020 (the “2020 S-3”). For the year ended December 31, 2022, the Company issued approximately 4.1 million shares of common stock at an average price of $1.50 per share for gross proceeds of $6.2 million. In connection with these sales, the Company paid aggregate fees of $0.2 million. Approximately $11.1 million of securities remain available for sale under the 2020 S-3 at December 31, 2022.
Subsequent to 2022, in February 2023, the Company completed a registered direct offering of common stock priced At-the-Market under Nasdaq rules pursuant to which it issued and sold 16,642,894 shares of its common stock at a purchase price of $0.835 per share and secured approximately $13.3 million in net proceeds after deducting estimated offering expenses. This included a concurrent private placement with investors in the registered direct offering for the pro rata rights to acquire securities exercisable into common stock in certain future operating subsidiaries that consummate a specified corporate development transaction within the next five years.
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The amount of securities we are able to sell pursuant to the registration statement on Form S-3 is limited. See “Risk Factors.”
In December 2022, Journey filed a shelf registration statement on Form S-3 (File No. 333-269079 ), which was declared effective in January 2023 (the “Journey 2022 S-3”). This shelf registration statement covers the offering, issuance and sale by Journey of up to an aggregate of $150.0 million of Journey’s common stock, preferred stock, debt securities, warrants, and units. At December 31, 2022, $150.0 million remains available under the Journey 2022 S-3.
In November 2020, Checkpoint filed a shelf registration statement on Form S-3 (File No. 333-251005) which was declared effective in December 2020 (the “Checkpoint 2020 S-3”). During the year ended December 31, 2022, Checkpoint issued a total of 532,816 shares of common stock under the Checkpoint 2020 S-3 for aggregate total gross proceeds of approximately $10.1 million at an average selling price of $18.99 per share.
In December 2022, Checkpoint closed on a registered direct offering with a single institutional investor for the issuance and sale of 950,000 shares of its common stock and 784,105 pre-funded warrants. Each pre-funded warrant was exercisable for one share of Checkpoint’s common stock. The common stock and the pre-funded warrants were sold together with Series A warrants to purchase up to 1,734,105 shares of common stock and Series B warrants to purchase up to 1,734,105 shares of common stock, at a purchase price of $4.325 per share of common stock and associated common stock warrants, and $4.33249 per pre-funded warrant and associated common stock warrants. The pre-funded warrants were funded in full at closing except for a nominal exercise price of $0.0001 and became exercisable on the closing date of the offering and will terminate when such pre-funded warrants are exercised in full. The Series A warrants became exercisable immediately upon issuance and will expire five years following the issuance date and have an exercise price of $4.075 per share and the Series B warrants became exercisable immediately upon issuance and will expire eighteen months following the issuance date and have an exercise price of $4.075 per share. Checkpoint also issued placement agent warrants to purchase up to 104,046 shares of Checkpoint common stock with an exercise price of $5.406 per share. Net proceeds from the registered direct offering were $6.7 million after deducting commissions and other transaction costs. The shares and warrants were sold under the Checkpoint 2020 S-3.
In February 2023, Checkpoint closed on a registered direct offering (“February 2023 Direct Offering”) with a single institutional investor for the issuance and sale of 1,180,000 shares of its common stock and 248,572 pre-funded warrants. Each pre-funded warrant is exercisable for one share of common stock. The common stock and the pre-funded warrants were sold together with Series A warrants to purchase up to 1,428,572 shares of common stock and Series B warrants to purchase up to 1,428,572 shares of common stock, at a purchase price of $5.25 per share of common stock and associated common stock warrants, and $4.2499 per pre-funded warrant and associated common stock warrants. Net proceeds from the February 2023 Direct Offering were $6.7 million after deducting commissions and other transaction costs.
In April 2021, Mustang filed a shelf registration statement on Form S-3 (File No. 333-255476) which was declared effective in May 2021 (the “Mustang 2021 S-3”). Under the Mustang 2021 S-3, Mustang may sell up to a total of $200.0 million of its securities. As of December 31, 2022, there have been no sales of securities under the Mustang 2021 S-3. In October 2020, Mustang filed a shelf registration statement on Form S-3 (File No. 333-249657) which was declared effective in December 2020 (the “Mustang 2020 S-3”). Under the Mustang 2020 S-3, Mustang may sell up to a total of $100.0 million of its securities. During the year ended December 31, 2022, Mustang issued approximately 7.9 million shares of common stock at an average selling price of $0.84 per share under the Mustang 2020 S-3 for aggregate total gross proceeds of approximately $6.6 million. At December 31, 2022, approximately $8.0 million of the Mustang 2020 S-3 remains available for sales of securities.
In October 2022, Avenue announced the closing of an underwritten public offering of 3,636,365 common and pre-funded units. Each common unit consists of one share of common stock and one warrant to purchase one share of common stock, and each pre-funded unit consists of one pre-funded warrant to purchase one share of common stock and one warrant to purchase one share of common stock. Each share of common stock (or pre-funded warrant) was sold together with one warrant at a combined purchase price of $3.30 per common unit (or $3.2999 per pre-funded unit after reducing $0.0001 attributable to the exercise price of the pre-funded warrants). Avenue also simultaneously closed on the sale of an additional 545,454 warrants to purchase common stock, which were sold pursuant to a partial exercise of the underwriter’s over-allotment option. Avenue received net proceeds of approximately $10.3 million at closing after deducting underwriting discounts and commissions and other expenses of the offering.
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In January 2023, Avenue entered into an agreement with a single institutional investor for the sale of 1,940,299 shares of common stock and pre-funded warrants. In a concurrent private placement, Avenue also agreed to issue to the same investor a total of 1,940,299 warrants to purchase up to one share of common stock each at an exercise price of $1.55 per share and a purchase price of $0.125. The purchase price of each share is $1.55. The purchase price of each pre-funded warrant is $1.549 with an exercise price of $0.001. Avenue received approximately $2.6 million in net proceeds.
Debt
In December 2022, Urica commenced an offering of 8% Cumulative Convertible Class B Preferred Stock (“Urica Preferred Offering”) in an aggregate maximum amount of $5.0 million. Urica issued an aggregate of 101,334 Class B Preferred shares at a price of $25.00 per share, for gross proceeds of $2.5 million. Following the payment of placement agent fees and other expenses of $0.3 million, Urica received $2.2 million in net proceeds.
In March 2022, Mustang announced completion of a $75 million long-term debt facility with Runway. Of the $75 million, $30 million was funded upon closing, and the additional $45 million available through the facility may be funded upon Mustang’s achieving certain predetermined milestones. Proceeds from the facility will be used to support the ongoing clinical development of key investigational product candidates within Mustang’s pipeline and for general working capital purposes.
We will require additional financing to fully develop and prepare regulatory filings and obtain regulatory approvals for our existing and new product candidates, fund operating losses, and, if deemed appropriate, establish or secure through third parties manufacturing for our potential products, and sales and marketing capabilities. We have funded our operations to date primarily through the sale of equity and debt securities. We believe that our current cash and cash equivalents is sufficient to fund operations for at least the next twelve months. Our failure to raise capital as and when needed would have a material adverse impact on our financial condition and our ability to pursue our business strategies. We may seek funds through equity or debt financings, joint venture or similar development collaborations, the sale of partner companies, royalty financings, or through other sources of financing.
In addition to the foregoing, based on the Company’s current assessment, the Company does not expect any material impact on its long-term development timeline and its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world.
Contractual Obligations
We enter into contracts in the normal course of business with licensors, CROs, contract manufacturing organizations (CMOs) and other third parties for the procurement of various products and services, including without limitation biopharmaceutical development, biologic assay development, commercialization, clinical and preclinical development, clinical trials management, pharmacovigilance and manufacturing and supply. These contracts typically do not contain minimum purchase commitments (although they may) and are generally terminable by us upon written notice. Payments due upon termination or cancelation/delay consist of payments for services provided or expenses incurred, including non-cancelable obligations of our service providers, up to the date of cancellation; in certain cases, our contractual arrangements with CROs and CMOs include cancelation and/or delay fees and penalties.
During the year ended December 31, 2022, Mustang entered into a new lease for office space commencing on July 1, 2022. The lease has a term of 7 years and 7 months, with rent obligations beginning on November 1, 2022. Base rent is $49,000 per month and increases to $56,000 per month during the term of the lease. The first 24 months of rent payments are abated, and the lease includes a $0.3 million tenant improvement allowance.
Recently Issued Accounting Pronouncements
See Note 2 of Notes to the Consolidated Financial Statements for a discussion of recent accounting standards and pronouncements.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is set forth in the consolidated financial statements and notes thereto beginning at page F-1 of this Annual Report on Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
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