Earnings Call Transcript - HROW Q2 2022

Operator, Operator

Good afternoon, and welcome to Harrow Health's Second Quarter 2022 Earnings Conference Call. My name is Ian, and I will be your conference operator for today. 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 Health. Please go ahead.

Jamie Webb, Director of Communications and Investor Relations

Thank you, operator. Good afternoon, and welcome to Harrow Health's second quarter 2022 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 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 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, 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.harrowinc.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 like to 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. Our second quarter 2022 earnings release, our corporate presentation, and our letter to stockholders have all been posted to the Investor Relations section of our website, and I would encourage you to review them for a better understanding of the company's results. I'd like to start by saying that I've been looking forward to having this conference call for quite some time. You might ask why? Well, first, we do have strong numbers to report and business does remain good even in light of the fact that this summer is traditionally a slower time for eye care, including surgical procedures, with some doctors and staff taking vacations. But second, we are officially in the back half of 2022. This is a period of great consequence for Harrow and a period that I believe will yield some of the most transformative and hopefully financially valuable events in our 10-plus year history. Before we take your questions on the Q3 and the stockholder letter, I'd like to provide some highlights of our results from the second quarter ended June 30, 2022. Second quarter revenues of $23.3 million represent a 29% increase over the prior year's quarter and a 5% increase over the first quarter of 2022. This makes the second quarter our eighth consecutive quarter of records in many key financial metrics, including top line revenues. Second quarter gross profit was also a record at $16.8 million, which is a 22% increase over gross profit for the year earlier period, which was $13.7 million, and a 4% increase over the sequential first quarter of 2022. Core gross margin for the second quarter of 2022 was 73% compared with the prior year's 76%. Adjusted EBITDA was $4.5 million for the second quarter of 2022 compared with $5.7 million in the prior year period. Core net income was $254,000 for the second quarter of 2022 compared with core net income of $2.1 million in the second quarter of 2021, and core diluted net income per share for the second quarter of 2022 was a penny per share compared with $0.07 per share during the same period last year. We made great progress during the first half of 2022 in terms of the implementation of our strategic plan, which includes ensuring that Harrow, as an eye care platform, has the infrastructure, the systems, the resources, and talent needed to execute on the growth that we expect in our compounded pharmaceuticals business, and of course, the new and even more dramatic growth that we expect from the continued integration of FDA-approved branded pharmaceutical products onto the Harrow platform. However, there is no free lunch in terms of paying for the investments required to take advantage of these future highly lucrative sources of revenue. I am pleased to say, though, that we can utilize profits made in our core business to make these modest investments without the need to sell equity and dilute our shareholders. I can assure Harrow shareholders that we expect the proverbial juice, if you will, in other words, the value that we expect to derive, to nearly certainly be worth the squeeze in terms of the investment cost. Here are a few additional items to be on the lookout for during the second half of 2022. First, and certainly probably the most important item I would advise keeping an eye on is our PDUFA target action date of October 16 for AMP-100. This is our patented ocular surface anesthetic drug candidate. Our team is very excited to get this product approved and into the hands of surgeons early next year so that patients, including those receiving intravitreal injections and those undergoing various eye surgeries such as cataract surgery, can begin to benefit from the unique and clinically important attributes of AMP-100. Second, at the American Academy of Ophthalmology Conference this September, we expect to launch an exciting new patent-pending fortified antibiotic product family. This is something we've been working on for several years. It's totally unique in the market, proprietary, and we are very excited about our launch at the AAO meeting next month. Third, later this year, we intend to launch a new patent-pending formulation suite to address a large and growing chronic care condition. This product family has actually been in the market already. We have been perfecting this offering over the last year or so, and I am excited about this launch. This will greatly benefit a large and growing patient population in the U.S., and financially for Harrow, we believe this has the potential to be a significant revenue driver. Lastly, we continually evaluate a robust pipeline of acquisition candidates, some of which are in later stages and although there can be no guarantees, could potentially be announced in the second half of this year. Now, assuming AMP-100 is approved on the PDUFA target action date of October 16 and is launched in early 2023 as we intend, I continue to believe that revenues from branded pharmaceutical products should eclipse revenues from our compounded pharmaceutical products within a couple of years of AMP-100's launch. In addition, we expect our gross margins from branded pharmaceutical products to be larger than our compounded pharmaceutical product gross margins, and that will, in the aggregate, result in our overall gross margins floating higher. When you combine these catalysts that we expect in the second half of 2022 with our growing revenues from the relaunch of IOPIDINE and MAXITROL, and advancements in Surface and Melt Pharmaceuticals, in which we own equity positions, you can understand why we're very excited about the balance of the year. Now, let's take your questions. I will pause to have our operator pull for questions.

Operator, Operator

Thank you. Our first question today comes from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead.

Destiny Buch, Analyst

Hi. This is actually Destiny on for Jeff. Thank you for taking our questions and congratulations on a really great quarter. Just quickly, I wanted to see if you could touch on your TAM? I know in the previous call, you had referenced being able to target some new and additional accounts as you launch these branded products. So, how are you looking at the TAM now versus as you launch those products? And then, also kind of related to that, are you having to change your marketing strategy with the addition of these branded products? And are you able to leverage your existing strategies to really optimize penetration, awareness, etcetera?

Mark Baum, CEO

Thanks for the question, Destiny. In terms of the addressable market, we really operate within two core markets in ophthalmology: surgical and chronic care. If you break out the surgical market, we are strong in the cataract surgery market. We estimate that we have a presence in approximately one out of every five cataract surgeries in the United States which gives us a significant market share. Additionally, our market share in LASIK procedures is even higher than in cataract surgeries; we estimate that we serve more than half of the LASIK procedures in the market. Beyond the surgical market, we participate in the chronic care market by making medicines that are prescribed for patients managing glaucoma, dry eye disease, myopia, and related conditions. The surgical market that we serve today will be different in the future, particularly with the introduction of AMP-100, which we anticipate will allow us to serve patients undergoing intravitreal injections, a considerable number of patients comprising upwards of 8 million to 10 million procedures per year. Importantly, there appears to be new treatments for dry eye-related macular degeneration that could significantly increase the number of intravitreal injections. Thus, having a product like AMP-100 approved in October would create a meaningful increase in our addressable market. However, I must highlight that our access to the chronic care space, particularly medicines for dry eye disease and glaucoma, represents the fastest-growing segment of our business. Regarding your second question about marketing strategy, the answer is unequivocally yes—we are leveraging our existing relationships and strategies for our branded products. We have a large customer base; for the last couple of years, our customer base has been over 10,000 doctors and hospitals and surgery centers across the United States. We sell in all 50 states. Recently, we even conducted a survey of our existing customer base to refine our marketing strategy, and I must say we accomplished this at a fraction of the cost that typically would involve six figures. So, we have significant leverage here and we intend to utilize our presence with these customers as we market our branded products.

Destiny Buch, Analyst

Got it. Thank you. That's super helpful. I guess I just noticed year-over-year R&D increased a bit? And I'm wondering if you could talk to that a little bit?

Mark Baum, CEO

Sure. Andrew, do you want to cover those costs specifically?

Andrew Boll, CFO

Yes, happy to. Hey, Destiny. Most of the new R&D costs are related to the new drug candidates we filed in 2021, including the development costs for AMP-100 and the operations associated with it, which we discussed in our recent FDA meeting. There are also some R&D costs around MAXITROL and IOPIDINE, more recently. The key driver for the year-over-year change is due to those new candidates and their associated costs.

Destiny Buch, Analyst

Okay, got it. And that kind of segues into my next question on MAQ-100. You just mentioned that you had the meeting this month, so a few days ago. What did you take away from that meeting? Is there anything you can highlight?

Mark Baum, CEO

Well, the meeting itself was very positive. Our intention with the program was to leverage the work that had been done in Japan for the approval of the product in that market. The main takeaway from the meeting is that we continue to believe we will have access to a very efficient process for getting that product into the U.S. market. We still need to see the minutes from the meeting and have further discussions with our partners in Japan, which will take place in the next 30 to 45 days, but overall, it was a very promising meeting. I believe the FDA is interested in having an approved product for that indication.

Destiny Buch, Analyst

Got it. That's all very encouraging for sure. Okay. And then I guess lastly, I'm going to ask you about M&A, even though you discussed it a little bit. I know you're not going to give me specifics, which is good, but could you talk about some areas in your portfolio that you may be looking to expand or fill?

Mark Baum, CEO

Yes. You're going to see us do what we've done in the recent past. We're going to focus on areas where we have commercial credibility, specifically in the ophthalmology space and particularly within surgical and chronic care markets. For surgical, we are looking at perioperative medications, and on the chronic side, we are focusing on disease states I mentioned earlier. We are very active, and while some of these processes take longer than we'd like, we are genuinely excited about the opportunities we see. Hopefully, if things go our way, we will be able to make some announcements in the back half of this year.

Destiny Buch, Analyst

Great. No, I’m looking forward to that announcement, or any announcement. I think that's all we have for questions. So thank you so much.

Mark Baum, CEO

Thank you, Destiny. Thanks to Jeff too.

Operator, Operator

Our next question comes from Sahil Kazmi of B. Riley Securities. Please go ahead.

Sahil Kazmi, Analyst

Hi, good afternoon, Mark. Congratulations on another record quarter on the revenue side. I just have a couple of questions for you. First, could you talk about how we should think about core gross margin moving forward, both in the context of the one-time inventory purge we saw this quarter and with AMP-100 potentially coming on the market and the expansion of the branded product portfolio?

Mark Baum, CEO

Sure. In terms of gross margins, we identified that we had an inventory purge; it was a one-time event and had a minimal impact. Gross margins came down slightly during this period, but we expect margins to remain in the low to mid-70s, as they have for the last 6 to 8 quarters. Once we have access to AMP-100 and other products we are pursuing, our expectation is that as these products hit the market, our gross margins will significantly increase into the 80s over time.

Sahil Kazmi, Analyst

Excellent. Thank you. Could you provide more color on the fortified antibiotics program? As much as you are able to disclose, what is the target market and how do you see this contributing to the revenue balance between compounded and branded pharmaceutical revenue?

Mark Baum, CEO

Yes. Both of the families we're launching later this year, outside of AMP-100 and any potential M&A activity, are compounded products. In particular, our fortified antibiotics represent an opportunity we have been pursuing for several years and are used nationwide to treat sight-threatening conditions. Importantly, there is no FDA-approved product currently available, which is why local pharmacies compound these formulations. When patients present with a sight-threatening condition, eye care professionals want immediate access to effective treatment. This formulation allows eye care professionals to prescribe these medications in their offices, providing immediate care. This offering has never before been available in the U.S. or globally, and we are incredibly excited about taking it to market. It is somewhat akin to having an EpiPen for the eye; we believe that every eye care professional should have one available in their office for urgent cases.

Sahil Kazmi, Analyst

That's helpful. Thank you. Lastly, could you remind us of the progress with Surface Ophthalmics, particularly with the SURF-100 study and its potential significance moving forward?

Mark Baum, CEO

Yes. Referencing our stockholder letter, on Page 5, we discussed the SURF-100 study. I am a member of the Board of Directors of Surface Ophthalmics and I have information that isn't permissible to disclose, but what we published in our stockholder letter is that the Phase 2 clinical trial outcomes exceeded our expectations. We believe Surface has a clinically superior medicine relative to all current therapies and known candidates in development for this highly underserved market. We find Surface to be an exceptionally valuable asset.

Sahil Kazmi, Analyst

Excellent. Thanks for taking our questions. We look forward to following the story for the rest of the quarter.

Mark Baum, CEO

Thank you, Sahil.

Operator, Operator

Our next question comes from Nathan Weinstein of Aegis Capital. Please go ahead.

Nathan Weinstein, Analyst

Hi, Mark, Andrew, and Jamie. Thanks for taking my questions. Congrats on another strong quarter and a very enjoyable and readable shareholder letter, Mark. I have a question about the operations of the business related to headcount and facility investment.

Mark Baum, CEO

Sure. Thanks for the question, Nathan. As for our actual headcount at the close of the quarter, Andrew, do you have an idea?

Andrew Boll, CFO

Nathan, we crossed a threshold at the end of the quarter with over 200 employees.

Mark Baum, CEO

So, about 200 people, and regarding facilities, we believe we need to make marginal improvements over the coming years but do not expect our CapEx to differ materially from previous investments as we continue to build our business. We're focused on robotics, automation, and tools to ensure efficient scalability.

Nathan Weinstein, Analyst

Great. Thanks. That's helpful. A broader question regarding macroeconomic impacts: did you see inflation or logistical challenges in the quarter? Additionally, any insights on drug pricing reform's potential impact on the company?

Mark Baum, CEO

I'll address the last question first if that's okay. On drug pricing policy and legislation, we really don't foresee anything that would materially affect our operations. Currently, we operate largely as a cash pay business. As we transition to the FDA-approved products and branded pharmaceuticals, more revenue will come from reimbursements through private or public payers, but recent legislation does not suggest we'll see any substantial impact on our market access strategies for approved or owned products. Concerning inflation, we have experienced some wage inflation, and it seems relatively harder to attract top talent in certain areas. On the positive side, we've had many great applicants particularly on the sales side due to current buzz surrounding our products and future prospects. In terms of supply chain access to active pharmaceutical ingredients and manufacturing supplies is relatively stable.

Nathan Weinstein, Analyst

Great, thank you, Mark. I appreciate the insights, and once again, congrats on a very successful quarter.

Mark Baum, CEO

Thank you so much, Nathan.

Operator, Operator

Our next question comes from Brooks O'Neil of Lake Street Capital Markets. Please go ahead.

Brooks O'Neil, Analyst

Thank you. Good afternoon, guys. I'm particularly excited about the opportunity with AMP-100, as you clearly believe that's going to be a key driver for the business. Can you talk about the steps you envision for the company following your PDUFA date, assuming you get a positive response and what you need to do to bring the product to market and begin harvesting that opportunity?

Mark Baum, CEO

It's always great to speak with you, Brooks. Thank you for the question. In terms of the steps following October 16, the PDUFA date for AMP-100, the primary role we needed filled was hiring a top-notch market access group, and fortunately, we did just that. As I mentioned earlier, we have attracted high-quality salespeople and the same applies to our market access team. They are currently hard at work on our market access strategy for AMP-100, should the product gain approval. This strategy will be developed throughout Q4 and into Q1 of next year, which positions us to hopefully begin the sales process around the ASCRS meeting in the spring of next year. Between now and then, significant work remains in supply chain and other key areas where we are investing some of our profits. Our exceptional sales organization, market access team, and marketing personnel are excited and ready to execute.

Brooks O'Neil, Analyst

Great. Can you remind me whether you plan to manufacture that product in-house or through a contract facility?

Mark Baum, CEO

We do not manufacture that product in-house, so we will be bringing it in.

Brooks O'Neil, Analyst

I'm curious, as it seems the earlier focus on Project 15 is now more towards internal efforts and product development alongside an M&A strategy. Could you share why this shift occurred and its potential for future business and investor returns?

Mark Baum, CEO

Certainly. The rationale behind Project 15 was to capitalize on assets outside of our core competency, ophthalmology, and ensure focused management teams for those businesses. We were able to create Eaton Pharmaceuticals, Surface Ophthalmics, and Melt Pharmaceuticals. Those businesses were capitalized and deconsolidated from our balance sheet. While we maintain equity in those, our customers have strongly indicated a desire for us to focus primarily on the ophthalmology sector. They want leading compounded products and FDA-approved products. Hence, we are creating a cohesive brand—Harrow—which will encompass both compounded and branded offerings. We believe this unified approach will generate significant cash flow starting next year, thus empowering us to manage our stock price and enhance shareholder value.

Brooks O'Neil, Analyst

That's impressive. I appreciate your nimbleness and vision. I'm excited for the future.

Mark Baum, CEO

Thank you.

Operator, Operator

Ladies and gentlemen, that's all the time we have for questions today. I will turn the call back over to Mr. Baum for any closing remarks.

Mark Baum, CEO

Thank you, operator. In closing, let me say that if I had written down on a piece of paper where I would like to have been today, our team has essentially gotten us to that place. Today, we're looking at a massive amount of upside, real leverage, and the opportunity to generate cash levels that we believe will yield satisfaction among our shareholders in the upcoming years. This potential is real, as sure as I woke up in Nashville this morning. Of course, none of this would be possible without the hard work of the Harrow family and our partners who diligently work alongside us every day. I sincerely appreciate their commitment, loyalty, and dedication. Nor would it be possible without the confidence and trust of our stockholders. I assure each stockholder that your investment in Harrow is a responsibility that every member of our team takes seriously. We continue to build a profitable business committed to providing excellent pharmaceutical products focused on the ophthalmology landscape. We want our offerings to be accessible, affordable, and to meet the unmet needs of eye care professionals and their patients. That's our daily mission. Thanks to everyone for attending today's call and for your interest in Harrow Health. If you have any investor-related questions, please email Jamie Webb at [email protected], and this will conclude our call. Thank you.

Operator, Operator

The call is now concluded. Thank you for attending today's presentation. You may now disconnect.