Fortress Bio’s Unique Business Model Ideally Suited to Thrive in Biotech’s Bear Market
Dr. Lindsay Rosenwald created Fortress Biotech (FBIO), pursuing an opportunity to fill a gap in drug development while driving investor returns. After decades of successfully creating and selling numerous biopharma companies, he came out of retirement with an idea for a new life sciences business model. The model would take the best attributes of a royalty business, private equity, and traditional biopharma to focus primarily on clinical development and commercialization, without the risk of extensive research and preclinical development. He combined this into Fortress Bio.
“There are 14,000 clinical-stage therapies around the world with roughly $350 billion spent globally on research and development each year,” said Rosenwald. “Yet, the biopharmaceutical market remains fragmented and inefficient. An unmet demand remains for both patients and capital to develop these quality drug candidates. With the ongoing market downturn, that gap continues to grow affecting the potential for innovative treatments to reach patients.”
This is where Fortress Bio thrives. The company acquires product candidates with human proof-of-concept in areas of high unmet medical need and reduced development risk.
“Fortress Bio’s’ intrinsic value increases as programs advance in the clinic and new therapies are acquired, resulting in multiple near- and medium-term catalysts. Our model is designed to decrease risk and expense while generating a regular flow of potentially value-creating events for our shareholders,” said Rosenwald. “We’re incredibly selective with our acquisitions. We’ve obtained nine assets during the past two years since the bear market started and see new opportunities driven by market conditions on a daily basis.”
Fortress Bio’s unique business model
Fortress’ model is focused on collaborating with a proprietary network of leading physicians and scientists to identify undervalued, promising therapies with proof-of-concept data. Fortress currently has 10 subsidiaries, also known as partner companies, with a combined eight marketed products and over 20 programs in development, and research and development expenses funded primarily at the subsidiary level. In 2022, ~$135 million was spent on R&D across the portfolio of companies with Fortress itself having only spent ~$11 million. Fortress has also established 25 acquisition companies with expert opinion leaders in multiple disease areas over the past year. These expert opinion leaders work with our business development team to identify, evaluate, and acquire potential best-in-class therapies to form the bases of these new companies. Ultimately, Fortress’ business model creates a snowball effect that generates shareholder returns through the following channels: asset monetizations, growth in equity holdings in its subsidiary companies, and dividend and royalty revenue. Fortress receives an annual equity dividend from most of the partner companies equal to 2.5% of the partner’s capitalization and a 4.5% royalty on net product sales once those products are approved and marketed. This greatly incentivizes Fortress to continue to add value to the partner companies through its business development activities, as well as ongoing operational and strategic support.
The model in action
In January 2017, Fortress created Caelum Biosciences after it in-licensed CAEL-101, a monoclonal antibody being evaluated as a potential treatment for a rare hematologic disorder called amyloid light chain amyloidosis in a Phase 1a/1b study, from a leading university.
After announcing positive Phase 1a/1b results, Fortress entered into a collaboration with Alexion Pharmaceuticals to develop CAEL-101 in January 2019. Alexion acquired a minority equity interest in Caelum and an exclusive option to acquire the remaining Caelum equity based on a future clinical data readout at a pre-determined valuation. Over the next two and a half years, Alexion continued to fund the development of CAEL-101 into Phase 3 trials.
In October 2021, AstraZeneca (which acquired Alexion in June 2021) exercised its option to purchase the remainder of Caelum, triggering an upfront $150M payment to Caelum shareholders, including ~$64M to Fortress. Caelum shareholders are eligible to receive additional regulatory and commercial milestone payments totaling up to $350M, including up to $147M to Fortress. CAEL-101 is currently enrolling across two global Phase 3 studies that could support a BLA submission and approval. As an example of the market inefficiency prevalent in the market, Fortress’ total investment was less than $1M and anticipates receiving up to $212M total in milestones.
“CAEL-101 epitomizes our unique model,” says Rosenwald. “Our business development team identified an asset with excellent early human efficacy data that had not yet been published or publicly presented. Caelum efficiently moved CAEL-101 through Phase 2, and then we were able to execute an excellent deal for Fortress and Caelum shareholders with significant upfront payments and future milestone proceeds.”
In 2021, Fortress Bio’s partner company Cyprium Therapeutics announced a development and asset purchase agreement with Sentynl Therapeutics for CUTX-101 to treat Menkes disease, which prevents infants from properly absorbing copper and typically results in high mortality in early childhood.
Cyprium is eligible to receive up to $20M in milestones through NDA approval from Sentynl, as well as potential sales milestones and royalties. Cyprium will retain 100% ownership of an FDA priority review voucher if one is issued at NDA approval for CUTX-101. Recently, these vouchers have sold for $100-110M each.
Fortress has more potential value inflection points than many similar-sized companies including:
- The FDA accepted a BLA for Checkpoint Therapeutics’ anti-PD-L1 antibody candidate, cosibelimab, to treat metastatic or locally advanced cutaneous squamous cell carcinoma in March 2023, with a PDUFA goal date of January 3, 2024. Cosibelimab has the potential to be a best-in-class drug that could compete in the ~$32B+ PD-(L)1 market.
- Urica Therapeutics is expected to report topline Phase 1 data for dotinurad, which is in development for the treatment of gout, this year. Urica expects to be in pivotal clinical trials in early 2024. Dotinurad is a potentially best-in-class urate transporter (URAT1) inhibitor for gout and possibly other hyperuricemic indications, including chronic kidney disease and heart failure. Dotinurad can lower blood uric acid levels by selectively inhibiting URAT1 and uric acid reabsorption in the kidneys. Dotinurad was approved and launched in Japan in 2020 as an oral therapy for gout and hyperuricemia and may have blockbuster potential in its licensed markets, including the U.S., E.U., Middle East and North Africa and Turkey territories.
- Journey Medical’s DFD-29, being developed to treat papulopustular rosacea, completed Phase 3 clinical trial enrollment in January 2023. Topline data is expected in the first half of 2023, and an NDA filing is subsequently expected in the second half of 2023. Upon approval, peak annual net sales exceeding $100 million are anticipated.
“Using information arbitrage, Fortress Bio expands its diverse drug candidate portfolio across multiple disease areas, which decreases risk and increases the likelihood of success. We search for and find assets where others fail to look,” added Rosenwald. “We are confident that Fortress’ model is a smart, efficient way to advance meaningful treatments for patients while rewarding investors and shareholders.”