Earnings Call Transcript - HROW Q1 2023

Operator, Operator

Good afternoon, and welcome to Harrow's First Quarter 2023 Earnings Conference Call. My name is Joe, and I will be your operator for today's call. As a reminder, this conference is being recorded today. I would now like to turn the call over to Jamie Webb, Director of Communications and Investor Relations for Harrow. Please go ahead.

Jamie Webb, Director of Communications and Investor Relations

Thank you, operator. Good afternoon, and welcome to Harrow's First Quarter 2023 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'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 commercially available its FDA approved products and compounded formulations and technologies, 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'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 as well as core results such as core gross margin, core net income, and core diluted net income per share. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company's earnings release and letter to stockholders, both of which are 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.harrow.com. Joining me on today's call are Harrow's Chief Executive Officer, Mark L. Baum; and Harrow's Chief Financial Officer, Andrew Boll. With that, I'll turn the call over to Mark to go over some prepared remarks prior to the question-and-answer session.

Mark Baum, CEO

Thanks, Jamie, and thanks to everyone for joining us on today's call. Consistent with our usual practice, our first quarter 2023 earnings release, corporate presentation, and letter to stockholders have all been posted to the Investor Relations section of our website. Please consider reviewing these documents for a better understanding of the company's results. In particular, our stockholder letter should be required reading if you want to track where we've been and where we're heading as we execute our most recent 5-year plan. On past quarterly calls, either I or Andrew have read out the financial numbers for the quarter. However, all of these figures are in black and white on not only our Form 10-Q, but they're also summarized in our press release and, of course, they're also available in the stockholder letter, which includes additional commentary. Please forgive me for not covering what you have so many access points to see with your own eyes. With that said, I want to reaffirm 2023 guidance of $135 million to $143 million in net revenues and $44 million to $50 million in adjusted EBITDA. These figures approximate the revenues we believe we can achieve in connection with the first year of the aforementioned 5-year plan, keeping in mind that we started a new 5-year planning cycle this past January. I realize these days that only a select few public company stockholders have an overflowing loyalty to a business or their stockholdings. Of course, it has never been easier to buy or sell a share of stock and thus, a share of the businesses that they own. Please know that my day-to-day focus is on achieving the goals of this 5-year plan. In this regard, I realize that a 5-year plan is made up of a series of 1-year plans. Part of my job is to monitor our progress in real-time. And these occasions, our quarterly calls, are an opportunity to report on our progress on the 5-year plan, not the last quarter plan, the last month plan, or the last week plan. Of course, if something we thought was achievable is no longer likely to happen, count on me to do my best to identify those shortcomings on these calls. So what is that 5-year objective? Well, put simply, I believe at the end of this 5-year planning cycle, Harrow has the opportunity to be one of the largest, if not the largest, pure-play ophthalmic pharmaceutical company in the United States. This is what our 5-year plan calls for. If you, as a stockholder, believe that we, as a management team, can accomplish this, then please accept my thanks in advance for your patience and my appreciation for your trust today and hopefully, for many years to come. Now let's discuss the recent ASCRS meeting from which the Harrow team just returned, where we formally launched FDA-approved IHEEZO, the first branded ocular anesthetic approved for the U.S. ophthalmic market in nearly 14 years. We had the opportunity to talk with eye care professionals from all over the United States to answer questions about IHEEZO, our Fab Five products, and our expanding portfolio of innovative compounded formulations such as Fortisite and those available on atropine.com. As usual, amazing things happen when you speak to your customers. They tell you how well you're doing and what you can do better or differently to serve their needs. Working the booth and speaking to customers is one of my favorite things to do, and it's one of the most productive things I get to do each year. Frankly, talking to customers is how we've built our company over the past 9 years. It's our not-so-secret sauce, helping us to get us to this point in our development. Regarding IHEEZO, I had an opportunity to talk with early adopters about their experience to date. Overall, customers are getting the exact experience from IHEEZO that we had hoped and there is more commentary on IHEEZO in our latest stockholder letter. We also had the opportunity to talk with customers about our Fab Five products. Generally, ophthalmologists were excited to see us again commit to support these important products and to revitalize them under the Harrow name. And of course, we talked with many customers who are excited about ongoing product innovation within our compounded pharmaceutical products or CPP business, especially Fortisite and our proprietary compounded atropine formulations, which are available, as I said earlier, at atropine.com. Related to our ImprimisRx CPP business, I'm happy to share the good news about a recent agreement with a large U.S. healthcare insurer, which includes one of the nation's largest vision care networks. Under this agreement, which kicks off on June 1 of this year, ImprimisRx will provide its next-generation preservative-free and boric acid-free compounded atropine formulations and its innovative Total Tears ophthalmic formulations, such as Klarity-C, to over 9 million members of their vision care network, which includes approximately 36,000 private practice eye care professionals, local optical stores, and national retail stores, including well-known national brand names. We are looking forward to building our relationship with this new partner and making this new agreement a great success for everyone for many years to come. My summary observation from ASCRS is that there is a growing leadership vacuum in the ophthalmic pharmaceuticals market in the United States. That's aside from certain segments of the retina market such as wet AMD or age-related macular degeneration or dry AMD, those markets. I believe Harrow, though, is in a pole position to help fill this void to provide leadership and serve ophthalmologists and optometrists as a market leader dedicated to serving the needs of their practices and their patients. Our team must continue to execute, though, and that is what we intend to do. A few more comments on a few items we are focused on: One, the Harrow family, all of us, are all hands on deck for the continued rollout of IHEEZO. Two, we are now beginning commercial activities for three of the Fab Five products. In other words, those products whose NDAs were recently transferred. Three, we expect the NDA for VIGAMOX to transfer towards the middle to latter part of the summer. Four, we continue to expect that TRIESENCE will be back in stock later this year and that soon thereafter, the NDA for TRIESENCE will transfer to Harrow. Five, in a matter of a few days, actually, next Tuesday at 3:00 p.m. Central to be exact, Melt Pharmaceuticals is scheduled to meet with FDA regarding the proposed Phase III program for its MELT-300 program. Once again, there's more information about the MELT-300 program and that opportunity in our stockholder letter. Sixth, beginning June 1, we're working on pull-through for our new agreement with this large national healthcare insurance provider related to sales and dispensing of our atropine formulations as well as our Total Tears formulations, specifically Klarity-C. And seven, we continue to be on the hunt for accretive deals at attractive prices that will enhance our ability to serve our customers and, in turn, create value for our stockholders. 2023 has started out strong and we intend to continue to dig deeper and capitalize on the momentum that we have created. While there are absolutely no guarantees and a considerable amount of work lies ahead, we truly believe that Harrow is well positioned to meet our 5-year strategic plan objectives to be one of the largest, if not the largest, pure-play ophthalmic pharmaceutical company in the United States, uniquely providing both branded pharmaceutical products and compounded pharmaceutical products that meet the needs of our growing customer base and, of course, millions and millions of their patients. We are now happy to take your questions. I will pause to have our operator poll for questions.

Operator, Operator

At this time, we will take our first question, which will come from Jeffrey Cohen with Ladenburg Thalmann.

Jeffrey Cohen, Analyst

It looked like you had a strong presence at ASCRS. So that's nice to see. So I'll keep it just to a few for now. Talk a little bit about atropine and Klarity-C as far as the money flow. It looked like your commentary was cash pay and also around that, could you expand upon Klarity-C a little bit? Is it being positioned from that specific payor to steer people away from some of the branded dry eye products? One I can think of starting with an X. Or is it being positioned otherwise?

Mark Baum, CEO

Thank you for the question. To clarify, the agreement pertains to compounded formulations produced by our ImprimisRx compounded business, which are not FDA approved and lack a specific label or indication. Klarity-C is a proprietary product with a patented vehicle that contains 0.1% cyclosporin. This compounded formulation has been prescribed by over 6,000 eye care professionals in the United States and has a strong record of helping tens of thousands of patients. It's a cash pay product, and many patients who use Klarity-C have previously been prescribed FDA-approved alternatives that did not meet their needs. Our goal is to provide not just the formulation but also the necessary service to ensure a continuous relationship with these patients, particularly in the dry eye segment where ongoing support is important. Regarding atropine formulations, we have created unique, preservative-free, and boric acid-free options available through a 503B outsourcing facility adhering to high federal standards. Our partner in this initiative is a prominent entity with an extensive vision care network, aimed at facilitating access to these formulations on a cash pay basis. We have consistently offered compounded formulations at or below the co-pays of other alternatives, and this partnership is intended to increase availability while potentially saving patients money as they address their specific needs.

Jeffrey Cohen, Analyst

Got it. Mark, can you explain what the structure of the commercial organization looks like in terms of size and geography? Also, please connect that to the upcoming products: ILEVRO, NEVANAC, and MAXIDEX, as well as IHEEZO. What does that organization look like, and can you discuss their enthusiasm and the territories they cover?

Mark Baum, CEO

Yes. So first and foremost, our number one priority within our commercial organization without question above all other opportunities is IHEEZO. We've talked a lot about it. The product has this unique and permanent J-Code associated with it. I say in the stockholder letter that I had these unique discussions with eye care professionals where originally we had thought that IHEEZO would be useful in not only cataract surgeries but also intravitreal injections. But eye care professionals had other ideas for its use that would be on label and that would potentially be able to be paid for using this J-Code or even through the pass-through payment. As far as our commercial organization goes, I view our commercial organization, not just as feet on the street, external sales reps. At Harrow, we view the commercial organization more globally. It includes our customer service organization. It includes what we call pharmacy sales reps or PSRs. It also includes our sales reps that have these incredible relationships with eye care professionals across the country. Right now, if you aggregate all of those folks, I think the group is around 90 or so in total, and they cover all 50 states. And as I said in prior calls, we sell into every populated county throughout the United States. So it's a sizable organization. It is a mighty organization. These folks do a lot with relatively few resources. And then just philosophically, I would say that what you will not wake up and see us do is go out and raise $50 million to hire 150 reps to put out on the street to try and pitch some new products. That's not the way we have grown our organization. We're going to let market interest and sales opportunities and potential revenue drive the addition of additional costs within the sales organization. Right now, these folks produce a lot of profit for us. And as the market grows and the market interest increases for IHEEZO, for NEVANAC, for ILEVRO, for TRIESENCE when it comes back and so on, you will see us grow our commercial organization accordingly.

Jeffrey Cohen, Analyst

Got it. I have a couple of quick questions for Andrew. First, how do you feel about the margins for Q1 and are they sustainable for the rest of 2023? Secondly, could you provide any commentary on the guidance? It seems unchanged, which makes me think that the additional figures from the first quarter might not impact the full year, but could it affect subsequent quarters?

Andrew Boll, CFO

Sure, Jeff. I'll let Mark talk about the guidance a little bit, but in regard to gross margins and specifically core gross margins, I was pleased with where we came in at. I always think we can do better. I know Mark feels the same way. But 76% on the core gross margin was a good number. We feel like there's room to grow, definitely as the branded portfolio starts getting more sales from those products, in particular, which are going to have higher gross margins tied to them. So it's definitely a number that we think is sustainable throughout the year. Mark, do you want to talk a little bit about the guidance?

Mark Baum, CEO

Sure. Jeffrey, we have been hesitant to provide guidance for many years. Earlier this year, after closing the Fab Five deal and receiving the permanent J-Code, we felt comfortable putting out guidance. We want to ensure that the guidance we provide reflects a high degree of confidence in our ability to achieve it. We don’t want to give guidance for the first time in years and then not meet it. We aim to present a number that will make our stockholders happy when we deliver our quarterly results, and we hope that by year-end, we can bring them even more joy. I believe IHEEZO will continue to grow financially and within the market. In this second calendar quarter, we anticipate modest revenues, but we expect significant growth in the third and fourth quarters, leading to even more considerable growth in 2024 and beyond. We ask for your understanding regarding our conservative approach. We could have adjusted the guidance, but we prefer to hit our targets first and then provide additional guidance as we move forward.

Operator, Operator

And our next question will come from Mayank Mamtani with B. Riley.

Mayank Mamtani, Analyst

Congrats on the progress. So maybe just on the ASCRS KOL feedback. I think you mentioned you got some good traction on understanding where exactly the initial uptake for IHEEZO could be. So in terms of patient populations, and also your clinical data that you have, the faster onset of action, could you just talk about like these early adopters, what they feel is really innovative for them, having not seen a lot in the past two decades? And then also, we get a lot of questions on the importance of J-Code and pass-through status. Could you talk a little bit about how the early grant of that is helpful to understand the trajectory of this drug? And then I have a quick follow-up.

Mark Baum, CEO

Thank you for the question, Mayank. The feedback I received from those I spoke to was extremely positive. In my stockholder letter, I mention that my experience with our commercial launches over the past seven years has shown that the first priority is to ensure the product works effectively. It must work not only for the physicians prescribing and administering it but also for the patients receiving it and the office staff managing payment issues, inventory, and surgical setups. The consistent message I heard, not just from key opinion leaders but from everyone referred to me by our commercial leadership, was that their experiences with IHEEZO were very positive. The drug performs as promised on the label, which is excellent. I found it noteworthy that its use has been broader than I expected. A colleague, a well-known ophthalmologist in Wisconsin, utilized IHEEZO in glaucoma surgeries. Additionally, doctors are using it for retina injections and other procedures, as well as for various laser treatments. All these applications align with our broad label for this novel ocular anesthetic. This feedback aligns well with our clinical data. I've learned over the past couple of years, as we expanded beyond compounded formulations, not to promote an FDA-approved product beyond what the label specifies. However, I'm very pleased with the feedback from both key opinion leaders and regular ophthalmologists who manage our patient customers. Regarding the J-Code and pass-through status, it is crucial. In terms of cataract surgery, the policy of providing payment outside a capitated fee for a product like IHEEZO fosters innovation that might not occur otherwise. The ability for surgeons to use IHEEZO, benefit from its unique features, and have it reimbursed outside the capitated fee is essential. This J-Code also enables the product to be reimbursed in an office setting for many of the other procedures I mentioned. We believe this is a positive indicator, as we anticipate an increasing number of ophthalmic procedures being performed in office settings, including cataract surgeries and retina procedures. This transition is highly beneficial for the usage of IHEEZO and certainly for the J-Code we have for it.

Mayank Mamtani, Analyst

I appreciate the helpful color, very detailed. And then just quickly on the Surface Ophthalmics, the Phase II dry eye disease data that was presented at a retina meeting recently or eye conference. Could you just talk about what the next steps are there in terms of doing a late-stage registration-enabling study?

Mark Baum, CEO

Thank you. I recently stepped down from the Surface Ophthalmics Board of Directors, where I had been since the company's inception. Therefore, I am no longer in a position to provide that information. However, I can share that Cameron has produced impressive data on chronic dry eye disease as well as on other products that have completed Phase II studies. We believe there is significant value in these unique drug candidates currently under development, but I cannot specify the next steps for Surface. We are hopeful that the company will communicate more openly with interested parties, including me and our stockholders, in the near future. That's all I have to say about Surface for now.

Operator, Operator

Our next question will come from Brooks O'Neil with Lake Street Capital Markets.

Brooks O'Neil, Analyst

I got on a few minutes late. So if I ask a question about something you've already talked about, indeed then maybe you can just give me the quick answer, and we can go into the details later. But I see you've written about and talked about the launch of IHEEZO in San Diego, and I'm just hoping you could maybe tell us a little bit about what you think the key steps are for commercializing that product in the balance of 2023?

Mark Baum, CEO

Thank you for that, Brooks. As I mentioned, our entire team is fully committed to IHEEZO. We are now generating revenue from IHEEZO, which is exciting. Doctors are using the J-Code for IHEEZO, and we haven't received any negative feedback so far, which is also encouraging. We have a detailed commercial strategy in place. On the cataract surgery side, there are certainly accounts utilizing other pass-through products in the market, and we are prioritizing discussions with those groups. There is a strategic approach as we roll this out. There are numerous opportunities to sell product units in this market when considering cataract surgeries, intravitreal injections, and, as I mentioned in the stockholder letter and during this call, glaucoma surgeries and other ophthalmic procedures, including laser procedures. If we look at the overall potential, it represents a significant number, totaling over 15 million unit opportunities annually.

Brooks O'Neil, Analyst

Great. Sounds perfect. And I think you guys know that I'm wildly excited about the many exciting things you have going on with IHEEZO and atropine and Fortisite and some of these additional formulations in various areas, the Fab Five. I'm curious to think about kind of not overreaching the size of your company and your organization. How do you think you'll know when there's enough on the plate and before you get to too much on the plate?

Mark Baum, CEO

I appreciate the question. Everything comes down to priorities. As I've mentioned several times, our top priority is IHEEZO, which represents the biggest opportunity for our company in terms of both revenue and profitability. That said, we are not planning to abandon our ImprimisRx compounding business; it's a steady source of cash flow and value, and I regularly review the daily sales numbers. It's encouraging to see this business continue to thrive and to hear from doctors who appreciate these products in their practices. At the ASCRS meeting, I listened to Dr. Neel Desai's presentation, which I included a link to in the stockholder letter. I encourage you to check it out to understand how Fortisite is benefiting his practice. While Dr. Desai received just under $1,000 for his talk, many doctors like him genuinely recognize the value of this patent-pending formulation in caring for their patients. The potential from this opportunity is substantial. I spoke with another doctor about Fortisite and mentioned our product replacement guarantee—if the product expires while it's in his refrigerator without a patient needing it, we would replace it. He immediately insisted he wouldn't let it expire because he could use it for various procedures beyond just central corneal ulcers. Regarding atropine.com, I have discussed the significant market opportunity for atropine, with around five million American patients who could benefit from this type of therapy, resulting in a considerable market size. We have numerous initiatives in progress, and having a large insurance company assist us in marketing to their patients is definitely advantageous. However, I don't feel overwhelmed by our commercial prospects. Our portfolio includes VIGAMOX, which we had already sold extensively before acquiring it, and the FDA approval of VIGAMOX enhances our position. Similarly, the rest of our portfolio, particularly the Fab Five with NSAIDs like ILEVRO and NEVANAC, supports our efforts. Overall, these products collectively help us better serve our customers' needs.

Operator, Operator

And this concludes our question-and-answer session. I'd like to turn the conference back over to Mark Baum for any closing remarks.

Mark Baum, CEO

Thank you, operator. Even to talk a little bit more about the last question, there really is sort of a vacuum in the ophthalmic pharmaceutical space in the United States. All of the major pharmaceutical companies, for whatever reason, are focused on other therapeutic areas, it seems. The large and sort of high science players seem to be focused on wet or dry AMD within the ophthalmic pharmaceutical space. The last 10 years or so, there's really been a domination in the pharmaceutical space by PBMs and insurance companies. It sort of derailed a lot of drug development in small to medium markets, then we had COVID and now we've had massive inflation, not only for labor and materials and other related costs like promotion. So today, Harrow is in the best financial and operational shape of its history, and that would not be possible without the support of our stockholders and the entirety of our incredible team. So I offer all of you very, very sincere thanks. Thanks to everyone for attending today's call and for your interest in Harrow. If you have any investor-related questions, please e-mail Jamie Webb at [email protected]. This will conclude our call.

Operator, Operator

The conference has now concluded. Thank you very much for attending today's presentation. You may now disconnect your lines and have a great day.