Harrow, Inc. (HROW) Q4 2020 Earnings Call Transcript

Good afternoon. And welcome to the Harrow Health’s Q4 2020 Earnings Conference Call. My name is John, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Jamie Webb, Director of Communications and Investor Relations for Harrow Health. Jamie, please go ahead.

Thank you, John. Good afternoon. And welcome to Harrow Health’s fourth quarter 2020 earnings conference call. Before we begin today, let me remind you that the company’s remarks may include forward-looking statements within the meaning of federal securities laws. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Harrow Health’s control, including risks and uncertainties described from time-to-time in its SEC filings, such as the risks and uncertainties related to the company’s ability to make its compounded formulations and technologies commercially available and FDA approval of certain drug candidates in a timely manner or at all. For a list and description of those risks and uncertainties, please see the Risk Factors section of the company’s most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. Harrow Health’s results may differ materially from those projected. Harrow disclaims any intention or obligation to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of today. Additionally, Harrow will refer to non-GAAP financial metrics, specifically adjusted EBITDA and/or adjusted earnings. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company’s letter to stockholders available on the website. By now you should have received a copy of the earnings press release. If you have not received a copy, please go to the Investor Relations page of the company’s website, www.harrowinc.com. Joining me on today’s call are Harrow’s Chief Executive Officer, Mark L. Baum; Harrow’s Chief Financial Officer, Andrew Boll. With that, I’d like to turn the call over to Mark Baum to go over some prepared remarks prior to the Q&A session. Mark?

Thanks, Jamie, and thanks for joining our call today. I would encourage everyone listening to review our fourth quarter 2020 earnings release and letter to stockholders, which was posted on the Investor Relations section of our website just after the close of trading today. Before we begin the Q&A portion of today’s call, I’d like to quickly touch on a few items to provide some additional color on our business since we last spoke in November. The Harrow team showed financial and operating resilience for the fourth quarter of 2020, reflecting a continuation of the momentum we saw in the record-setting third quarter of 2020. On both a year-over-year and sequential quarter basis, key financial metrics continued to improve despite interim challenges we faced during the fourth quarter related to the COVID-19 resurgence and unpredictable weather. We also saw significant progress in terms of major milestones, customer growth, product development, and the expansion of our revenue sources. We were pleased to report that total revenues for the fourth quarter were $14.6 million, an increase of 16% compared with the $12.6 million reported in the prior-year period, and slightly up from revenue of $14.4 million in the third quarter of 2020. Gross margins have remained relatively consistent at 73% for the fourth quarter of 2020, compared with 72% in the fourth quarter of 2019 and 74% in the third quarter of 2020. Adjusted EBITDA for the fourth quarter of 2020 rose to a new record level of $4 million, compared with $2.1 million reported in the prior-year period, representing a 33.3% increase over the third quarter of 2020. In the fourth quarter of 2020, segment contribution from ImprimisRx for the quarter was $5 million, including non-cash expenses related to depreciation, amortization, and stock-based compensation of $434,000, compared to $2.2 million in the prior-year period and $4.7 million in the third quarter of 2020. This important metric demonstrates the earnings power of the ImprimisRx business, separately from other Harrow businesses, assets, and liabilities. As I reflect on the full year 2020, I am proud of how our team stayed true to our mission and continued to execute our strategy, even in the face of the challenges and uncertainties brought on by the COVID-19 pandemic. Early in the pandemic, Harrow Health took steps to manage its balance sheet and expense levels. We also worked aggressively to maintain our competitive advantages by strengthening our product and service offerings, further improving the ImprimisRx prescriber and patient experience, advancing several key new product development opportunities, and beginning the process of expanding ImprimisRx beyond pharmaceutical compounding. Those measures paid off, resulting in a rapid return to pre-COVID-19 performance levels and building a pipeline of new value drivers for our customers and stockholders alike. During 2020, we began to exclusively focus on growing our eyecare businesses as we seek to become eyecare-focused healthcare only. Since beginning our commercial operations in 2014, we have built our eyecare business by selling innovative pharmaceutical compounded products only to institutional customers such as doctors, hospitals, and ambulatory surgery centers. Today, we are positioned to expand beyond pharmaceutical compounding. In the future, while we continue to organically grow our pharmaceutical compounding business, the next major phase of Harrow's development will leverage our market position and add high value in terms of revenue per unit and gross margins, FDA approved products, and late-stage ophthalmic drug candidates to our platform. Our first strategy proof point was the transaction we completed with EyePoint Pharmaceuticals to market Dexycu. But we are working diligently to further expand Harrow’s value by acquiring additional high-value products and technologies, and by deploying new eyecare services, which will drive the next major phase of our growth at Harrow. This year, we’ll also see the launch of Visionology, our direct-to-consumer eyecare subsidiary that we’ve been diligently developing over the past three years. To give some context, before I had ever heard of COVID, I had a strong conviction that with the help of new telemedicine technology, other software tools and mobile diagnostics, the provision of eyecare goods and services would move closer to the consumer, the end user, the patient. With the help of Drew Livingston, the Co-Founder and former CEO of Doxy.me, which is the world’s largest SaaS-based telemedicine business, together we have been able to build Visionology and what we have trademarked as Eyecare-as-a-Service, which, with the help of a network of local eyecare professionals, many of whom are customers now, we will deliver a simple and seamless user experience to help patients manage their chronic eye diseases. Our goal is to drive value, transparency, and access to eyecare through Visionology, which is launching regionally during the second quarter. I look forward to updating you on our progress and rolling out this exciting new business. Now let’s take your questions. I will pause to have our operator poll for questions.

Thank you. Your first question is coming from Brooks O’Neil. Brooks, your line is live.

Oh! Good afternoon, everyone. That is Brooks O’Neil. But I’m not too offended by the operator. So we’ll just get by that. So let’s start off by talking just a little bit about the COVID resurgence impact in Q4, the bad weather, sort of what you guys are seeing now here in Q1, and obviously, everyone’s focused on what the impact of reopening might be on your business?

Well, thanks for the question, Brooks. I promise I’ll never call you Brooke. That isn’t unless you ask me to, in which case I will. But let’s talk about COVID resurgence. Look, we’re about 10 days away from the anniversary of when there were stay-at-home orders, mandatory stay-at-home orders. So it’s been a full year of COVID-19 being in our lives in a major way, and certainly in our lives at Harrow, because we’re in the eye surgery business. As of today, there are many markets that are still impacted, particularly markets like California. Many offices around the country, even in states that are open, are not operating at full capacity. Still, what I think is promising about what we’ve been able to accomplish is that, despite the impact of COVID-19, we’ve been able to get the train back on the tracks, grow our business, increase our customer base, and engage in creative transactions with EyePoint Pharmaceuticals. We’re really excited. I think to a very certain extent, as more and more people get vaccinated and feel comfortable getting back into the doctor’s office, we’re expecting to see this backlog of cataract surgeries from the last 12 months start to come through, and we believe we will be a beneficiary of that. So, to a certain extent, we see ourselves as a reopening play and we expect to see benefits as these surgeons come back online at 100%. But without question, there has been an impact, and the weather certainly doesn’t help, but thankfully storms pass, the snow melts, and we’re really excited about the balance of the year.

Great. I am personally very excited about the shift to an eyecare-focused strategy, which makes a lot of sense to me. However, I want to make sure I understand your perspective on Melt and Eton, especially regarding how you view them as assets that align with your strategic direction. I am curious about your plans for managing those assets going forward.

Sure. I tried to lay this out in our stockholder letter, which I would encourage everyone to read. We divested Eton and Surface and Melt because we had really great pharmaceutical assets that we wanted to develop, leveraging external capital, and we needed management teams in each instance to focus exclusively on those developments. The upshot for us is that we have a really nice set of assets in terms of equity in those businesses. Eton has gone in a different direction under the leadership of Sean Brynjelsen. He has made that company flourish. Are they in the eyecare business? No. Are we excited about what Sean is building? Absolutely. Are we even more excited that we own 3.5 million shares of that stock? Most certainly. Is it a critical eyecare asset? No, it’s not. But we will decide down the line what to do with our ownership interest. I’m really happy that Eton is in terrific shape with great leadership. The same is true for Surface and Melt, and Melt, by the way, their initial indication for their Melt-100 program is indeed for ophthalmic surgery. So, it is connected to what we’re doing in the eyecare world. I hope that answers your question. We see great things with Eton, exciting prospects coming from Surface, and similar positive expectations for Melt. We’re happy to be shareholders of all three of those businesses, as well as royalty owners in programs being developed by Surface and Melt.

Okay. I’ll just ask one more, Mark. Thank you for taking my question. So, again, I’m excited about the outlook for Visionology, and yet you haven’t fully decided how you might seek to monetize your investment in that platform. But just tell us your current thoughts. Do you think you’ll spin that out as a separate company? Will it stay a part of Imprimis? How are you thinking about that right now?

Yeah. So, we developed the Visionology platform because from the moment we started Harrow, operationally, myself, Andrew, and our entire team are 100% customer and patient centric. We are completely obsessed with delivering an amazing experience for our customers. When I say customers, I mean patients—those who use our products. Our focus is on delivering a great user experience for those people, and we’ve historically done this through institutional customers: hospitals, doctors, and ambulatory surgery centers. It is a natural progression for us to get closer to the end user, the patient; we’re doing that by partnering with local doctors to enhance the eyecare experience. For the consumer, eyecare hasn’t really changed that much over the past 50 years, and we believe it’s going to transform when we roll this business out. In terms of financing, we have the resources right now to do the work to make this what we believe will be a really valuable business. We plan to make investments at the Harrow level and figure out our customer acquisition costs to better understand the expected long-term value of each new patient relationship we create. Once we have this data, we’ll gain clarity on how to finance the business. We believe we will be first to market with a platform like this, and there’s currently no one in the eyecare arena competing directly with us. Therefore, we hope to launch an exciting platform that will remain a subsidiary of Harrow for now.

Okay. Perfect. Thanks a lot, and congratulations on continued progress.

Thank you, Brooks.

Okay. Your next question is coming from Andrew D’Silva from B. Riley. Andrew, your line is live.

Yeah. Thanks for taking my questions and congratulations on a strong quarter. So, we’ll start off with ImprimisRx on that side of the business today. Could you just touch on how initiatives to bring in additional approved branded drugs are going? And can you give insight into how the conversion from Tri-Moxi to Dexycu is charting? Is that resonating the way we discussed or what you thought previously?

Sure. Andy, thanks for the questions. We have been working on and currently have four active initiatives to bring in either approved products or near-approved products under the Harrow umbrella that we can commercialize through one of our channels. There is another service-oriented program in the works, making a total of five initiatives, all at various stages of engagement. Some are near completion, while others are further behind. However, we believe that we will finalize some of these deals, even though I can’t guarantee that we’ll get any over the line. There’s a strong likelihood that we’ll get one or more of these done. Over time, it’s about the bigger picture: the idea that our platform and our beneficiaries, our business, as well as our shareholders will gain from bringing on these high-value FDA approved products. We are very focused there and we will accomplish something. Regarding the Dexycu partnership with EyePoint, in terms of conversions from our Tri-Moxi customers to Dexycu, it takes longer to convert customers, and the sales cycle is a bit longer. However, I’m pleased with our progress, particularly in the fourth quarter, which was our first couple of months to genuinely push this product. Despite the challenges of the COVID-19 environment, we fared well, and EyePoint recognized that we materially impacted sales in the fourth quarter. I expect this trend will continue, leading to more conversions from our customers. They may not only be Tri-Moxi customers but others that may want to take advantage of Dexycu.

Yeah. Great to hear that. Great insight. I’ll continue with ImprimisRx regarding the regulatory side. I believe there was recently guidance tied to the bulk list and the Memorandum of Understanding as well. Any impact on core products, markets, or how we should think about revenue as 2021 unfolds?

Yeah. So the MoU that was recently published indicates that our home state of New Jersey intends to sign it, according to reliable sources. Therefore, we do not believe there will be any impact from the MoU on the business. Concerning FDA guidance and regulatory actions on various ingredients, we also believe there will be no impact on our offerings, and we’ll be able to continue servicing both our current and future customers. This isn’t the first time the FDA has come out with challenges against certain ingredients. That’s part of their job. Our job is always compliance, and we have great alternative formulations that we believe will be well-received by our customers.

Okay. Useful. Thank you. And just one last question related to Visionology. I believe that has a fairly similar business model. Can you express where you are in setting up the infrastructure, physician network, platform, etc.? Moreover, how should we think about the products being distributed through Visionology? Will it be largely the same offering that ImprimisRx has, will it be a narrower lift, or will it include other proprietary branded offerings that ImprimisRx currently doesn’t offer?

Yeah. So, Visionology will focus entirely on helping patients manage chronic eye disease, meaning it isn’t in the surgical market at all. We plan to assist patients suffering from glaucoma, dry eye disease, and intend to offer formulations and services aiding with conditions such as presbyopia and allergies. We will utilize some of our existing technology and drug formulation assets, but we will also introduce new formulations that haven’t been seen in the market. Importantly, Visionology won’t be limited to prescription medications; it’s fundamentally a service. We will partner with local doctors and eyecare professionals to provide this service and leverage the technology we’ve developed. This initiative will exceed the standard online prescription process, providing unequaled value to consumers and not simply another telemedicine visit with a prescription.

All right. Thanks for the color and best of luck.

Thank you so much, Andy.

I would like to turn the conference call back over to Mark Baum for any closing remarks.

Thank you for joining our call today. In conclusion, I want to thank the employees of the Harrow family for their constant hard work, dedication, and loyalty throughout this challenging year marked by a global health crisis. Because of the teamwork of all our employees, we have achieved significant milestones and we are optimistic about our future as we enter this important stage of our growth and development. Our pipeline of potential transformative transactions is robust, and I believe our efforts will create new opportunities and expand our range of ophthalmic products, which will contribute to our ongoing success. For any investor-related inquiries, please reach out to Jamie Webb at [email protected]. This concludes our call. Thank you.

Thank you, ladies and gentlemen. This does conclude today’s conference call. You may now disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.