Harrow Health, Inc. (NASDAQ:HROW) Q3 2023 Earnings Call Transcript

Harrow Health, Inc. (NASDAQ:HROW) Q3 2023 Earnings Call Transcript November 13, 2023

Harrow Health, Inc. misses on earnings expectations. Reported EPS is $-0.13 EPS, expectations were $0.03.

Operator: Good afternoon, and welcome to Harrow’s Third Quarter 2023 Earnings Conference Call. My name is Betsy, 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: Thank you, operator. Good afternoon, and welcome to Harrow’s third 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’d like to turn the call over to Mark to go over some prepared remarks prior to the question-and-answer session. Mark?

Mark Baum: Thanks, Jamie, and thanks to everyone for joining us on today’s call. Before I begin my prepared remarks, I want to take a minute to encourage you to review our third quarter 2023 earnings release, corporate presentation and letter to stockholders, all of which have been posted to the Investor Relations section of our website, www.harrow.com. Let’s jump into it. As you may have seen, we produced record revenues and improved our adjusted gross margins meaningfully. However, this past quarter showed that our ability to create value far exceeds what we actually delivered. So let me be clear, we could have done better. As I have said before, though, we knew that our growth trajectory would not be a linear path upward.

It never has been over the past 10 years. We knew that some programs would overperform and some would underperform. Today, we find ourselves a few months behind our internal development timelines for some of our programs. As we continue, though, to correct course and move our business forward, the reality for Harrow’s stockholders is simple. We are well funded. We don’t need to access the public equity or debt markets. We’re making money, we’re paying our bills, we’re servicing our creditors and we’re on track to produce another record year of growth and profitability. That only isn’t not bad, it’s a place that most companies would like to be. I am proud of what we achieved this past quarter, including record revenues that represented a 50% year-over-year growth rate as well as a 600 basis point improvement in our core gross margins.

That 50% revenue growth was fueled by our strategic decision to expand into branded pharmaceutical products, and it serves as a solid testimonial and validation of that decision. Without reservation, we could not have produced that level of year-over-year growth with compounded products alone. I’m also pleased with our progress on our IHEEZO launch, which has been tracking ahead of our internal forecast since its May launch. A proof point is the graph we included in our third quarter letter to stockholders, which shows the significant ramp-up in customer unit demand for IHEEZO beginning in September and continuing to date. This ramp in customer demand resulted from boots on the ground learnings and strategic tweaks that yielded immediate positive results and a notable increase in IHEEZO units and revenues for September, surpassing our internal targets for 2023.

We are now seeing sizable orders and reorders from high-volume users and many new accounts, both large and small, who are enjoying the many benefits of IHEEZO, and we remain bullish about what the balance of this year will bring as well as 2024 for IHEEZO. On the other hand, there is no denying that to date, 2023 has presented new challenges. One example is lower-than-expected Q3 revenues from the Fab Five products and our compounded products. Even though we completed the transfer of 4 of the 5 Fab Five products that we acquired earlier this year, namely MAXIDEX, ILEVRO, NEVANAC and VIGAMOX, we were delayed in beginning marketing and sales detailing efforts. Those efforts though have begun, and we are seeing positive data from our awareness campaign, reminding prescribers of the availability of these products and the strong reimbursement support from third-party payers.

Once again, I touched on this in our letter to stockholders. We continue to believe in the high utility of these products and their importance to our branded portfolio for not only our customer base but also for Harrow’s stockholders, because we believe they will provide a reliable stream of income for many years to come. Another Q3 challenge was our compounding business, which underperformed as we invested in improving efficiencies and compliance related to manufacturing, quality systems, the makeup of our sales team and our analytical testing capabilities, as well as our customer care infrastructure. We have had to invest in efficiency and compliance in the past, and importantly, we have a 100% success record of making these investments and returning the business to historical growth levels, and I am 100% confident that this will happen again.

Investing in the required systems, processes and protocols to reliably serve a national market requires adherence to a standard and a level of complexity that we comply with, but which few competitors can achieve. I’d also like to update you on the fifth product in the Fab Five, that’s TRIESENCE, which I view as the diamond of this group. We had reported last quarter that demo batches had been completed and that we were awaiting results from the first of 3 Process Performance Qualification batches, those are PPQ batches for short. While we were not naive about the fact that TRIESENCE is a tricky product to manufacture, which contributes to its out-of-stock status for most of the last 5 years, we were nevertheless disappointed that our first PPQ batch did not meet all specifications.

But this is not the end of the story, and frankly, this was not entirely unexpected. That said, we are working diligently with our contract manufacturer, and we are still committed to having TRIESENCE available next year. We are also making excellent progress on the transfer of the TRIESENCE NDA, or New Drug Application, and we expect to have that completed soon, which will allow us to reasonably adjust the TRIESENCE pricing for the first time in more than 12 years, thus keeping it in stock and available for eye care professionals and their patients who are awaiting its return. Regarding TRIESENCE market availability, frankly, in our view, it is not a matter of if but when, and we think that win will be next year. We continue to believe that Harrow largest future annual market opportunity is VEVYE, the recently FDA-approved patented semi-fluorinated alkane or SFA that contains 0.1% cyclosporine.

We’re going to be launching it in a few weeks. VEVYE is a water-free product. It’s a topical medication, and once again, it’s FDA approved to treat both the signs and symptoms of dry eye disease. We believe eye care professionals have long awaited a product like VEVYE, a dry eye disease product that can deliver effective, fast and sustained clinical results for patients without the negative adverse event profiles associated with many of the current pharmaceutical choices. And preparing for the upcoming launch of VEVYE, it has become evident that most ophthalmologists and optometrists believes strongly in the clinical power of cyclosporin as a therapeutic agent. This should not be surprising, given the tens of millions of U.S. patients who have been prescribed cyclosporin during the past 20 years.

However, VEVYE is different from the currently available cyclosporine-based products, not only because of the comfort and the many benefits of its patented delivery vehicle, only the second water-free product in the U.S. market, but also because it offers the highest available concentration of cyclosporin. This puts VEVYE in a class of its own, and I really can’t wait to get VEVYE into the hands of the ophthalmic community and their patients, and that day is fast approaching. Before opening the call for questions, I wanted to discuss our financial guidance and our expectations for the remainder of 2023 and 2024. Many of you know, but we have never been big fans of giving public revenue or profitability guidance. But as our partners in this journey, we believe you need a reasonable level of visibility into what we expect to achieve next year, at least as a base case.

Therefore, we’re updating our guidance for the remainder of 2023 and giving you some direction for what we expect in 2024. Because the progress of our business is about 60 days behind, we’re adjusting our 2023 revenue guidance to $129 million to $136 million. If we continue to be successful in the execution of a few open 2023 objectives, including IHEEZO sales growing outside the bounds we had anticipated at this stage of the launch as well as the timing of future milestones unfolding in our favor, we could land toward the higher end of the range. Regardless, our business remains solidly in a growth mode for the balance of our 5-year planning cycle, which includes not only the remainder of this year but 2024, and it will continue through 2027.

We are also adjusting our previously issued 2023 adjusted EBITDA guidance to a range of $36 million to $41 million, primarily because of lower revenue estimates coupled with increased costs associated with recent acquisitions, needed investments in the preparation for the launch of VEVYE and one-time integration costs associated with the Santen acquisition. As for 2024, excluding any contribution from TRIESENCE, we expect our 2024 revenues to be north of $180 million. The magnitude of revenue growth beyond $180 million will depend on many factors, including when we restore TRIESENCE inventory, the acceleration of IHEEZO sales and how the VEVYE launch goes. Beginning in the first quarter of 2024, we expect moderate revenue growth from our recently acquired FDA-approved products, including the Fab Five and the recovery of our compounding business to historical growth levels.

From a cost structure perspective, we expect our operating costs to increase incrementally as we scale our business to grow revenues and invest in the VEVYE launch. We expect to continue investing in our commercial infrastructure while maintaining our leverage ratio. That’s debt over adjusted EBITDA and that should be below 5x. We expect to close 2024 with a strong balance sheet, with cash increasing significantly during the period. We remain confident in meeting our obligations to Harrow’s creditors, and we do not expect to dilute our stockholders unless we find a transformative transaction. But candidly, given where our stock price is, we are less inclined to use equity as a currency. We are happy to answer your questions. I will pause to have our operator poll for questions.

Operator?

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Q&A Session

Operator: [Operator Instructions] The first question today comes from Brooks O’Neil with Lake Street Capital Markets. Please go ahead.

Brooks O’Neil: Mark, and thanks for all your comments. I have to confess, I have not completed a detailed reading of the stockholder letter so I might ask you about some things that are highlighted in the letter, and we’ll just have to deal with that. But I’d like to start by asking you about the IHEEZO launch. One of the things that seems important is that you have made some adjustments to your plan that have yielded some noticeable improvement in IHEEZO response in the marketplace, and I’m hoping maybe you could at least give us some qualitative color about some of the things that you’ve changed and what you saw as a result?

Mark Baum: Thanks, Brooks. We did make some strategic amendments to the strategy, the launch strategy in late August, and things kind of were implemented by September. I can’t go into the specific tactical details of our strategy really to our stockholders, but also to potential competitors. I think the important thing is that we did. In fact, see this major ramp when we made these changes, and that’s important. I know I spoke to a lot of stockholders after the last earnings call, and they wanted to see some numbers that were accurate and so we provided them. And all I can tell you is that we not only provided numbers that, I think validate the success of the changes that we made, but importantly, we provided numbers that get us into the fourth quarter. So we’ve seen a continuation of that ramp, and we don’t expect that to yield. We think that will continue through the balance of this quarter, and we do expect meaningful growth in IHEEZO unit demand in 2024 and beyond.

Brooks O’Neil: Right. Let me switch gears and just ask you a little bit about the weakness in the compounding business and a little bit about the Fab Five. But I know historically, I have been following your company for 4, 5 years now, we’ve seen some variability in the compounding business, and it’s always come back. Is there anything that you would describe as materially different this time or anything that gives you pause about believing that the compounding business remains durable and that the growth opportunity is still there?

Mark Baum: Sure. The compounding business discussion that I referred to in this stockholder letter and the issues that we were addressing are not dissimilar from other issues that we’ve addressed of a similar kind in the past. So we were able to overcome those challenges, we made those investments, and as an organization, we improved. Our compounding business is strategically important. It allows us to meet our mission to make products that are accessible and affordable. These are cash pay products, and by far, we’re the national leader. There’s not even a question. It also gives us credibility. We walk into our customers’ offices and they give us hugs instead of weird looks because we’re making their lives more difficult. It is not an easy business, though.

Regulations change, and they’re generally getting stricter, and as a result of that, we have to be prepared to absorb those changes, and we do. We have the people, the processes and the resources to handle these things. It is, as I referred to in the stockholder letter, it’s sort of a superpower that we have that many smaller players do not have. But the reality is, is that as we move into branded products, we are going to strategically cannibalize compounding units and that creates a challenge for the overall growth picture of that business. We want to take cash pay, non-FDA-approved units that we compound that we have to manufacture, and over time, we would like to exchange those units for our FDA-approved products that we don’t have to manufacture that are reimbursable, and so that shift is taking place.

That said, we do have confidence that beginning in 2024, in the first quarter, we will resume our growth in the compounding business.

Brooks O’Neil: That’s good. Let me ask you two questions about the debt and they’re a little bit different. But first is, I guess, there’s some concerns in the marketplace about B. Riley as a debt issuer. I don’t know what the right term is, but any comments on your observations related to your relationship with B. Riley Financial as a lender to your business? And then with the shortfall here in the quarter and outlook for the year, can you just comment a little bit about your outlook for accounts receivable cash flow and cash as we get through the fourth quarter?

Mark Baum: So I’ll take the first part of the question, and Andrew, if you’ll take the second part, that would be great. But B. Riley, to be clear, is not a lender to the company. They’ve banked several transactions for us successfully, I might add. They’ve produced phenomenal results for us. And it’s because of that that I can say with confidence, we have plenty of cash. We have over $68 million in the bank and as I said in the stockholder letter, we expect that cash pile to grow during 2024. So we’re grateful for the work that B. Riley did for us and they are not a direct lender to us at all. They simply bank the transaction. Andrew, do you want to comment on the second part of the question?

Andrew Boll: Sure. Hey, Brooks. On the cash flow side, and more so just talking about AR in particular, because we introduced these branded products, we have a different type of AR and receivables cycle than we have seen on the company side. And on the IHEEZO, in particular, for our customers buying IHEEZO, we’ve been able to extend them additional terms, and that just helps them with their revenue cycle and cash management cycle. For us, what that means is our collections on the branded side are a little bit lengthened out compared to other companies we have historically seen. But just kind of looking out at Q4 and the Asian report, in particular, I’m seeing over $16 million in AR on the branded side that we should be able to collect this quarter, and then that will be in addition to the AR and cash receipts we’re receiving on the company business.

And so I think we’ve gotten through this sort of initial term around the launch with IHEEZO and these branded products, and we should start seeing sort of the AR with the branded products turn a little bit more, more cash receipts coming in and less of a larger spread on AR compared to revenue going forward.

Brooks O’Neil: Great. That’s very helpful. Let me just ask you two more. And I apologize for asking so many but it’s an interesting time for you and for investors. My first question is, can you give us any estimate of the sort of the peak sales potential of VEVYE? I know it’s a unique drug, I know it’s got certain clinical characteristics better than the competition. So what do you see as the opportunity with VEVYE over time?

Mark Baum: Sure. Look, we’ve said in the past that we believe that VEVYE should generate north of $100 million annually in revenues, and it should and could be much higher. It’s not going to happen overnight. It’s going to take a few years to play out though. The fact is that the cyclosporine category, if you look at the prescription counts for cyclosporine-based products. We have the opportunity, I believe, to dominate the cyclosporine category. But more than that, we have the opportunity to expand the overall market. When Restasis was the only product in the market and Xiidra came into the market, you had a new and in some people’s view, better product relative to RESTASIS. The overall market actually expanded. And we believe that a product like VEVYE, the features that it offers, the fact that it works so fast and it provides sustained relief of both signs and symptoms now going out 56 weeks.