Earnings Call Transcript - HROW Q4 2023

Operator, Operator

Good morning and welcome to Harrow's Fourth Quarter and Year-End 2023 Earnings Conference Call. My name is Drew, 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 is being recorded. I would now like to turn the call over to Jamie Webb, Director of Communications and Investor Relations for Harrow.

Jamie Webb, Director of Communications and Investor Relations

Thank you, operator. Good morning, and welcome to Harrow's fourth quarter and year-end 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'd turn the call over to Mark to go over some prepared remarks prior to the question-and-answer session.

Mark L. Baum, CEO

Thanks, Jamie, and thanks to everyone for joining us on today's call. I wanted to first address the change in timings for our earnings release and conference calls. We believed it was in the best interest of our analysts and investors to extend the amount of time between when we issued our earnings release and hosted our calls. We hoped this would allow more time to digest the results and read through our corporate presentation and my letter to stockholders prior to the call. We hope you have found this timing change helpful. So if you're on this call, I assume you've reviewed these materials, and I'll use this time to augment your understanding through some high-level commentary. 2023, which is now more than 75 days in the rearview mirror, was a transformative year for Harrow. It was a transformation that was four years in the making, all of which I pointed out in my letter to stockholders when I quoted what I said about four years ago in 2020, when we were hatching our plan to become a leading North American ophthalmic pharmaceutical business. Here are a few of the 2023 fruits of that plan. Number one, we achieved record revenues with 2023 revenues increasing 47% over 2022 revenues. Two, adjusted EBITDA more than doubled in 2023 from 2022. Three, the addition of numerous high-utility ophthalmic pharmaceutical products to our portfolio. Four, beginning to generate cash flow from our big three products, IHEEZO, VEVYE, and Triesence, which made up our most significant short-term and long-term financial drivers. And finally, delivering $8.7 million in cash from operating activities in the fourth quarter of last year and delivering our second consecutive year of positive cash flow from operations. You see, we strengthened our balance sheet last year, especially our cash position, ending the year with $83 million in cash and cash equivalents, and this includes our position in pharmaceuticals. We expect our cash pile to continue to grow over the coming years. Equally important, we fortified our talent base, adding new members to the Harrow family, professionals with the experience, commercial relationships, and fresh perspectives to further enhance our transformation. I have highlighted the names of a few of these folks in both the letter to stockholders and the new Harrow corporate deck. Our stockholders have been asking us for more granularity around our quarterly results. They want to know why we're so bullish on our company and the growth trajectory we see in front of us. In this cycle, I've tried to provide more granularity. This detailed information highlights, among other things, the amazing success we've had with our VEVYE launch. Based on our success to date, I am convinced that VEVYE has the potential to dominate the large U.S. chronic dry eye disease market as the leading cyclosporine and anti-inflammatory product. The VEVYE adoption curve, driven by our small but mighty sales force speaks volumes, as does the positive feedback about VEVYE from actual patients on social media. I would encourage you to think about the size of the cyclosporine market alone in the United States. It was about 8 million units last year. Without question, cyclosporine is the number one most trusted active ingredient for U.S. dry eye disease patients. Eye care professionals trust cyclosporine. Payers trust cyclosporine. Patients trust cyclosporine. You see, the VEVYE train is rolling with all of our key performance metrics moving in the right direction. In fact, the CEO of SILAREX, our specialty pharmacy partner, recently told me that VEVYE has been one of, if not the most successful launches he has seen. Mark my word, VEVYE will significantly benefit millions of U.S. dry eye disease patients and generate substantial value for Harrow stockholders over a very long period. I also discussed our progress in manufacturing Triesence, including a production batch, which is set for next month. This is a PPQ batch, and to the extent that we're successful in meeting all of the parameters, it would become a commercial batch. I talk about the number of units we expect to have available for sale when Triesence is eventually reintroduced into the market. I also layout the expected addressable market in terms of unit volume and our new pricing, which combined make clear why we believe Triesence should be a multi-9-figure revenue product, and hopefully soon. I hit on the continued uptake of IHEEZO since its May 2023 launch and news about the recent publication by CMS of the IHEEZO ASP, or average selling price in the physician’s ASP file. This is something that we had previously requested from CMS and that was not acted upon until soon after we met with them on January 9th of this year. I also talk about the return of ImprimisRx to its previous growth trajectory, fulfilling our performance promise that I made in my last stockholders' letter. I also included quotes from actual users of our product. You see in recent conversations with fellow stockholders, I've noted the reliance on opinions of so-called key opinion leaders, or KOLs, who, upon my further investigation, actually do not use our products. I thought it was important for you to hear from ophthalmologists and optometrists who with 100% certainty have actually used our products. I also want to mention that it's never been a better time to be a Harrow stockholder. I say this because of the amazing progress we made in 2023, and because of what is right in front of us, a clear pathway to achieving our goals, including significant revenue and profitability growth, ultimately making us a leading strategic North American ophthalmic pharmaceutical company. Finally, as both a Harrow stockholder and a Senior Executive at this company, I continue to be perfectly fine eating my own cookie. I have never sold a share of Harrow stock, and I do not plan to do so. In fact, recently, I purchased Harrow shares. In fact, three times in the past 12 months, precisely because I believe in Harrow's long-term value and because the shares have been available at an attractive price. We are now happy to answer your questions. I will pause to have our operator poll for questions.

Operator, Operator

The first question comes from Mayank Mamtani with B. Riley Securities. Please go ahead.

Mayank Mamtani, Analyst

Hi, good morning team. Thanks for taking our questions and appreciate the granularity provided to both Q4 results and the forward-looking outlook. Maybe just on the 2024 guide and also the longer-term 2027 number that you put out. Are you able to give some breakdown on the incremental contribution you are reviewing there between your three growth drivers, IHEEZO, Triesence and VEVYE? And also relatedly, I notice you didn't give EBITDA guidance forward-looking; it could help to understand how you're thinking of spend in 2024? And then I have a couple of quick follow-ups.

Mark L. Baum, CEO

Thank you, Mayank. Yes. So look, we're standing behind the better than $180 million in revenue guidance that we put out for 2024. We don't guide by product. The one comment that I'll make is what I think is the 800-pound elephant in the room, and that is what we put out today in our Form 8-K filing and the confirmation from CMS that in fact, IHEEZO will be paid for separately in the physician's office setting is, without a question, the most positive consequential event, I think, that has happened to our company since I founded it with Andrew back in 2011. So this is a very big event. It certainly supports our confidence in our guidance, which is a number greater than $180 million. However, once again, we're not going to guide by product. But we're very excited about what we put out today in the Form 8-K. It's something that happened yesterday afternoon about 2 o'clock Central. It kind of hit us with a very, very positive surprise. But it certainly gives us far greater confidence in our guidance. In terms of our spend in 2024, Andrew, do you want to kind of talk about our approach with some of the spend in the fourth quarter of maybe 2023 and how we're thinking about 2024, especially in light of what we put out in the 8-K this morning?

Andrew R. Boll, CFO

Yes, thank you for the question. You can see some changes in our expense structure in the Q4 numbers. In November, we began adjusting our plans for the launch of VEVYE, leading to higher spending on sales and marketing than initially anticipated. In the Form 8-K, you can see year-over-year comparisons, and we added about 100 new employees, mostly during the fourth quarter, focused on the commercial side of the VEVYE launch. A significant portion of this expense will continue into 2024. We are not providing specific EBITDA guidance because as our revenues increase, we will continue to invest in operating expenses and sales and marketing to drive further growth. However, we aim to achieve a leverage ratio of less than five times, which remains a priority. At the same time, we will work on growing revenues and accelerating growth in these product areas, identifying opportunities to enhance our sales and marketing efforts. For example, with the positive outcome with CMS regarding IHEEZO, now is the right time to invest more in our sales and marketing initiatives to boost revenues.

Mark L. Baum, CEO

Yes, I'll add one further comment to that, and we said this in our Form 10-K, which we filed, you obviously know, and this kind of hits on one of the points Andrew made related to Oaktree, who is our senior lender, and you probably know that they can receive warrants if our leverage ratio exceeds five times in 2024. And I think both Andrew and I have a far greater confidence, as a result of the Form 8-K that was filed this morning, we sincerely doubt that our friends at Oaktree will be receiving any warrants under our agreement with them.

Mayank Mamtani, Analyst

Yes. That's very helpful color, thank you. And on the cyber-attack issue in February, could you just clarify if that is unique to Harrow or that's a broader pharma-wide issue of processing claims right now? Also, what visibility you have on the utility of IHEEZO in year-to-date and expectation for that segment to expand, including, I think you made some reference for the bilateral IVT procedures; is that sort of organic demand you're getting from these retina specialists as they're using more injections on both eyes that you can have separate billing for two units versus one unit? And maybe one final question on VEVYE...

Mark L. Baum, CEO

Sure, yes. So the issue with Change Healthcare has affected numerous companies, including us, that sell not only Part D products but also Part B products. So the system is still sort of being unclogged. And the Change Healthcare issue has affected payments to our customers from the government. This has affected our sales temporarily in the first quarter, but we are seeing evidence of the systems beginning to be unclogged. We expect recovery and full normalization in the second quarter. But this is an issue, the cyber-attack that has affected us but it has affected many, many companies who sell into the pharma market. In terms of retina, the reason why we went to CMS, and I talked about this in our last letter to stockholders, is because there was uptake in the retina market. The retina market is in the form of the intravitreal injection market, specifically it is a very large market, exceeding 10 million unit opportunities per year. We saw uptake in that market. We were seeing reimbursement happen in that market around the country. But the market is unique in that it is highly concentrated. There are very large groups of potential buyers for these products. And so in the face of those sorts of opportunities in front of us, we thought it was prudent to confirm with CMS that, in fact, our J-code, which is a product-specific permanent J-code, would, in fact, be separately reimbursable in the physician's office setting. And so, as we promised in the last letter to stockholders, we requested a meeting with CMS. We had that meeting on January 9th, and we have been waiting patiently to hear from them. As we said in the prepared remarks, we were added to the ASP file, the physicians ASP file recently, but we did not know whether or not that confirmed separate payment in the physician's office. And that happened just yesterday afternoon, which, as I said, is a very important event for the company. Our expectation now is that we will be able to, with this news, open up the market for intravitreal injections that can benefit from unique attributes of IHEEZO and that is going to start here very, very soon, and that it will significantly change, I think, the trajectory for IHEEZO and also, I think, for our company. But IHEEZO is a fantastic product for that application. It's also obviously used in numerous other ophthalmic interventions, and it's a very, very exciting opportunity for us.

Mayank Mamtani, Analyst

Thank you. And lastly, on VEVYE, you put out some good launch metrics. Yet you said it could take up to 18 months for ramp-up. So just curious what dynamics in play are here to follow, to get visibility on what peak sales could be? And with that, I'll hop back in the queue. Thanks for taking my questions.

Mark L. Baum, CEO

Thank you, Mayank. First of all, with respect to VEVYE, I want to mention a person, because VEVYE, the team, the commercial effort is being led by a woman named Maria Lloyd. And she is extraordinary. And the effort that she has put into this project is just amazing. So I'm really grateful to everything that she has done. She is very experienced. She was involved in the launch of Restasis. She knows the dry eye market extremely well, and she's brought a lot of wonderful people into our organization that are working on her team. But as you saw in our recent corporate presentation, all of the numbers, all of the metrics with respect to the VEVYE launch are up into the right, which is fantastic. Importantly, the product is performing extremely well in the market; I referenced the social media information that's out there and publicly available. And so we have very high hopes for that product. As I've said for several years, we've studied the dry eye market. We know it very well. We've compounded 0.1% cyclosporine with our ImprimisRx business now for over five years. What VEVYE presents to the market is really a complete shift in the cyclosporine market, which is 8 million units strong last year in the U.S. market. So we think we have a product that can dominate the category. In terms of what the opportunity is, there are so many patients that have failed other cyclosporine products, whether it's the 0.05% branded version of cyclosporine or its generic version or even the 0.09% cyclosporine product that is branded and available. The tolerability profile of those products is very different from the tolerability profile of VEVYE. Therefore, there are a lot of people that have failed those products, and those are candidates to benefit from VEVYE. And in terms of what the size of the market can be, this is a product that gives me far greater confidence that the number that I wrote about a couple of letters to stockholders ago, which was $1 billion in revenue in the aggregate for our product portfolio that can actually be met. I mean that is a real target for us now. The uptake in VEVYE, certainly, this Form 8-K that was filed this morning, this puts us in the zone of where we wanted to be. I talked about our revenue getting to $1 billion or more with our product portfolio if certain things went our way. Well, the things that we announced today certainly qualify as something going our way. So we're really excited about that and what Maria and her amazing team are doing with VEVYE.

Operator, Operator

The next question comes from Aaron Wukmir with Lake Street Capital Markets. Please go ahead.

Aaron Wukmir, Analyst

Good morning. This is Aaron on the line for Brooks. Thank you for the information shared so far. Regarding Triesence, have there been any additional setbacks? I know you mentioned a few things in the prepared remarks, but could you provide more details on the inventory timing and your confidence in achieving that before year-end? That would be helpful.

Mark L. Baum, CEO

Sure. Thank you, Aaron. So look, as I said in the letter to stockholders, Triesence was not really being made for more than five years by our manufacturing partner, and the people and the processes that are involved in making that product were kind of dormant and because they weren't practicing, that knowledge wasn't being produced. We knew that it was going to be a challenge, reintroducing the product into the market in terms of manufacturing it. But what I can tell you is that the progress that we've made in the last six months in particular has given everyone in our organization a very high degree of confidence that we're going to have success meeting all of the required parameters to make Triesence here very soon. There were people in our organization, by the way, that were somewhat doubtful. But what I can tell you is at this point, because of the progress that we've made, there is no one in our organization, whether they're an employee or a consultant who does not have a high degree of confidence that we're going to have Triesence made successfully and very soon. We have a batch being produced, a PPQ batch, which is effectively a commercial batch that meets the production parameters, performance specifications that's going to happen, as I said, in the middle of April. So we'll produce two more batches if that first one is successful. And then within a period of a couple of months, we should be able to be back on track. There's quite a bit more information, as I said in the letter to stockholders and also in our corporate presentation about Triesence, but it is a very high utility product. It's an unusual product with an unusual label. And the physician community, I can tell you, is very interested in seeing it back in the market, and we think it's going to happen very soon. I can't predict whether it's going to happen by June or by August. What I can tell you is that we're getting very strong help from our manufacturing partner, and our manufacturing partner, as you can see on the box for the product, is a very sophisticated organization. And we, as I said, have a high degree of confidence we'll have Triesence back here very, very soon.

Aaron Wukmir, Analyst

Great, that’s super helpful commentary. Thanks for taking the questions guys.

Operator, Operator

The next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Jeffrey Cohen, Analyst

Good morning. Thank you for taking our questions. I have two for Mark and Andrew. First, could you discuss the expected growth in revenue for the year? Should we anticipate a linear increase similar to last year? Secondly, could you provide insight into the expected profit margins for the year, including Triesence?

Mark L. Baum, CEO

Andrew, would you like to address that? I believe we will maintain our projections at over $180 million. Additionally, as I mentioned earlier, the news from this morning indicates that our margins are expected to improve rather than decline. Andrew, do you have anything to add?

Andrew R. Boll, CFO

Yes, to reiterate what Mark said, we are maintaining our revenue expectation of over $180 million this year, which we believe is solid. Regarding EBITDA or operating margins, our strategy will depend on revenue opportunities. We will balance revenue growth with our EBITDA expectations. We have mentioned our leverage ratio, and we want to ensure it stays below four times by the end of the year. Beyond that, if we identify opportunities to invest in future revenue growth, particularly with VEVYE, IHEEZO, and to some extent, Triesence, we will pursue them. Therefore, the actual margin percentage could vary based on the year's revenue figures, but we will definitely keep the leverage ratio in mind when making investments and planning ahead.

Jeffrey Cohen, Analyst

Okay, got it. And then lastly, first, could you talk about pricing at all, did you take any pricing in 2023 or is there any anticipated pricing for 2024, and any comments there would be appreciated? Thank you.

Mark L. Baum, CEO

Andrew, do you want to touch on that? I'll just say to start and that, to be clear, our philosophy on pricing of any product is focused on access and affordability. That is the cornerstone of our company. And there are products that we have raised prices on. There are also other products in our portfolio we've actually lowered prices on and made them even more accessible. But before we do anything, just philosophically, we always make sure that we have a patient assistance program in place that is aggressive, whether it's a branded product or a compounded product to ensure access and affordability to one who can benefit from our product. Andrew, do you want to add anything on pricing?

Andrew R. Boll, CFO

Yes. Jeff, just more specifically in the corporate deck, we have some wholesale acquisition cost pricing for some of the products. Triesence probably being the most notable one, where WAC pricing for that product is going to be $944 at the time we relaunched the product in some markets. But to Mark's point, WAC is the list price. There's a gross-to-net element to that. You see that in the accounting and the footnotes. We talked a lot about the gross in our accounting which factors in the patient assistance programs, the co-pay assistance programs, making sure we're living up to our mission, which is access and affordability for the patient. And so ultimately, we're going to price the products to make sure we have a steady supply of the products that we can make money selling the products and getting them to the patients, but we're also keeping in mind the patient element and the access element.

Mark L. Baum, CEO

A great example related to Triesence is that the price of Triesence had not changed for 16 years since it was launched. One of the challenges is that this product is on the FDA's drug shortage list and is not being produced competitively, resulting in no profit incentive to make it available, which leads to its ongoing presence on the shortage list. When we considered the pricing for Triesence, which is $944 per unit, we compared it to another preservative-free triamcinolone product in the market, priced over $1,800 per unit. Our price is nearly half of that, and we aim to remain more accessible and affordable. Other intravitreal steroid products are also priced above $1,400 or $1,500 per unit. We are significantly lower than these alternatives, but we adjusted our price to ensure we have a sufficient profit incentive to invest in the product and maintain a steady supply for the market.

Jeffrey Cohen, Analyst

Awesome, thank you guys. Thanks again for the comprehensive comments here and read out. Appreciate it.

Mark L. Baum, CEO

Thank you, Jeff.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Mark L. Baum, for any closing remarks.

Mark L. Baum, CEO

Thank you, Drew. And I guess I kind of want to apologize to those of you who are waiting for the issuance of our fourth quarter and year-end earnings and letter to stockholders yesterday, which we intended to publish immediately after the market close. But as I said earlier, very fortunately, yes, fortunately, after drafting all of our documents and preparing our press release, getting everything ready to go, the most positively consequential thing that has happened to our company actually happened. I mentioned the news that we received from CMS yesterday, which is going to make IHEEZO, which is our low viscosity patented topical anesthetic gel, which is doing fantastic things in clinics and surgery centers across the country. It's going to make it separately payable, separately reimbursable in the physician's office. This opens up a very large market for IHEEZO and allows Medicare beneficiaries to experience the unique benefits of the product. So after we calmed down from that excitement and we decided not to delay our filings, we made those filings and ultimately put out a separate Form 8-K before the market opened revealing this wonderful new development. So once again, we apologize for being slightly tardy yesterday in publishing everything we heard from some of our stockholders, but we hope you appreciate that this was an example of no news being very good news. Indeed, yesterday was special for every member of the Harrow family, and it was an answer to some of our prayers actually. In past letters to stockholders, as I mentioned earlier, I've opined about aggregate revenue potential. I said that our product portfolio could achieve $1 billion in annual revenue. If, as I said, some things go our way. Yesterday's news was an example of a thing that went our way. It's a beautiful thing for many reasons because we're seeing amazing stories, practical stories of how IHEEZO is positively changing anesthesia protocols around the country for ophthalmic procedures. It's even reducing patient exposure to dangerous opioids. Our team feels very good about what we believe is going to happen to IHEEZO and therefore Harrow. So as I close this communication from what has been a whirlwind couple of days, I want to acknowledge and thank all members of our Harrow family, our loyal employees, their families, who support our employees and our stockholders for their patience and steadfast support. Your belief in our mission has been a cornerstone of our progress. And together, we're going to build a company that we can be proud of. It has never been truer than today that the very best is not only yet to come for Harrow, but it is soon to come. 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 for attending today's presentation. You may now disconnect.