HROW - NASDAQ

Good afternoon, and welcome to Harrow’s Third Quarter 2022 Earnings Conference Call. My name is Andrea, and I’ll 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. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Harrow’s third 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’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. And 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.

Thanks Jamie, and thanks to everyone for joining us on today’s call. Our third quarter 2022 earnings release, corporate presentation and letter to stockholders have all been posted to the Investor Relations section of our website. I would encourage you to review them. These are great resources for anyone interested in what we have done and what we intend to accomplish going forward. I’d like to begin by reminding you of what I said on our second quarter earnings conference call, and that is that I believe the back half of 2022 would be a period of great consequence for Harrow and one that would yield some of the most transformative and hopefully financially valuable events in our history. I believe the Harrow team is making good on that statement, given, what has transpired in the past 60 days, including one, the FDA approval of IHEE

We’ll now begin the question-and-answer session. [Operator Instructions] And our first question will come from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead.

Hi, Mark, Andrew and Jamie. How are you?

Good. Good to speak with you Jeff.

So a few questions from our end. So just clarifying your last comment on MELT-300. So that’s top line Phase 2 data, which could then lead to a pivotal or did you say that was pivotal?

This is the pivotal efficacy study that we discussed with the FDA. And the Phase 3 program is essentially a safety program. And so as far as efficacy goes, this is the pivotal program.

Okay. And what could that mean for Melt [ph] as far as a finally they got the agency on timely basis?

In terms of timing, obviously, we need to see what the data looks like for the program that’s going to read out here in the next few weeks. But from our standpoint, as I said in the stockholder letter the way the study was designed, it was designed to actually produce a dataset that should yield an approvable product. And that could either be the 210 program, which is the midazolam only program or it could yield a dataset that supports the 300 combination midazolam, ketamine program. We really need to take a look at what the data are once we receive them and then assess the pathway forward for each project. The pathways themselves to directly answer your question are different for each product. And the 210 program, we believe could have a far shorter period to an NDA filing. And the 300 program would be extended somewhat because we would’ve to complete the safety study in the Phase 3. But in terms of the commercial value of those programs, I think as I tried to allude to in our stockholder letter, we just have a very clear understanding of what the uptake might be and for a product like that, particularly in the cataract surgery market where we have sold a compounded version of the MELT-300 product, the combination product for many years. It’s been administered as a compounded medication many hundreds of thousands of times. And so, we do know that there’s a large customer base that is paying for that product from a capitated fee, the cataract surgery. And so we think if we can offer them an FDA approved product, whether it’s next year or the year after, we’re going to really change the game as far as sedation and analgesia go in the cataract surgery environment. And then finally, it goes without saying that the MELT-300 program, the MELT-210 program have applications we believe far outside of the ophthalmic arena. And so they can make a big difference, I think, in women’s health and in a number of very large market opportunities.

Okay. Got it. Mark, could you talk about the Fortisite platform? How many SKUs would you imagine and is formulation one time use in nature?

We first started talking about Fortisite at the AAO meeting, and I know you visited our booth at the meeting and hopefully you had an opportunity to see some of the physician reactions to Fortisite. We initially envisioned one product. We built one product, but from discussions with our customers, we believe there will be a family of products. Once we were able to talk to customers about Fortisite, they gave us more ideas about versions of Fortisite, the Fortisite technology that they believed could be impactful to their practices. And so, I think next year it would not surprise me to see two or even three versions of Fortisite made available. But we are really excited about Fortisite and provided some additional color about Fortisite once again in a stockholder letter. It’s a great value to customers. We’ve been able to open up some new customer accounts that we had never been able to penetrate before without Fortisite. We’re really excited about it and the feedback from our users, the clinical feedback has been tremendous. So they’re really excited about it, we are as well, and we think that the usage of Fortisite is going to be far broader than we had originally anticipated for just a narrow band of site saving conditions. So we’re excited about it. We’ll see how things play out. It’s still early in the launch, but the feedback has just been tremendous. As I said in the stockholder letter, it is the most positive feedback I have ever received for a product that we have brought to market.

Super. That’s helpful. One more if I could for Andrew, if – so this charge last year that you received from Sintetica 5 million of cash was just a reclassification. If you could just clarify that and then walk us through then its impact on the adjusted margins and maybe some commentary as far as the adjusted margins hitting the high teens range, perhaps for full year 2022 and certainly at that level beyond?

Sure. Jeff and thanks for the question. I always like getting a couple from you. And I think I just want to clarify, you’re asking about the change to the 2021 adjusted EBITDA number, correct?

Yes.

Okay. Yes, the SEC recently came out with some suggestions about life science companies in particular including that in process R&D – acquired in process R&D costs and their adjusted EBITDA number. So that for us, what that means is we paid Sintetica $5 million upfront milestone payment when we acquired AMP-100 or IHEE

Okay, Got it. And then lastly for us, any comment on this $1 million backlog order any color as far as the product, the segment, the counterparty, et cetera? Thanks for taking our questions.

Thanks for that, Jeff. We have – I think before this quarter we had, I believe eight quarters in a row of sequential revenue growth, and we really were trying to make it a ninth, and – but for our ability to fill those orders, we would’ve actually hit the mark. Unfortunately, we did not. And so these were just sales of products that we had no inventory – that inventory was becoming available early into the fourth quarter. So the good news is we were able to bring the register, as I said in our stockholder letter on these orders. But we really wanted to have that sequential revenue growth that we have had for so many prior quarters and wanted to make our stockholders aware of that back order, which we traditionally have not had. And once again, there’s additional color on the back order in our stockholder letter. Thanks for that, Jeff.

Super. Thanks again.

[Operator Instructions] And our next question will come from Sahil Kazmi of B. Riley. Please go ahead.

Hey, good afternoon, Mark, Andrew, Jamie. Thanks for taking our questions and congratulations on a really productive quarter. Maybe starting on IHEE

Yes. So the – well, to take a step back, there are two significant markets for the product. The – in ophthalmology, the first is in the ASC and hospital environment for procedures such as cataract surgery, as an example. And the second large market would be in the physician’s office for procedures such as intravitreal injections, as an example. The market for intravitreal injections of the unit volumes are significantly higher than those for cataract surgery. But the type of coating or payment for each of those markets is very different. So for example, in the ASC and hospital environment a product like IHEE

Excellent. That’s really helpful, thank you. And then as it relates to the new launch of atropine.com based on the existing formulation, can you talk a little bit about the competitive advantage of sort of the next generation formulation that’ll be distributed through the 503B facility? And then just in general how you’re thinking about the TAM?

Yes, so atropine is a really interesting market. It’s a big market. Well, let me just start by saying our formulation is compounded. It is not FDA approved, and as such, it is not specifically labeled for any condition. There are a number of companies that are working on products to treat pediatric myopia, which is traditionally one of the markets, one of the areas where atropine has been very helpful and is frequently prescribed. So the – and by the way, all of the companies that we know that are developing products for the pediatric myopia market, 100% of them are developing atropine. So it’s a really interesting pharmaceutical ingredient to treat this condition. As I said, our formulation is not FDA approved, It is compounded, but the market itself is significant. I think Kaiser just put some numbers out and they said that about 8.6% of targeted population of kids, and this is of 50 million people would be impacted by a formulation to treat pediatric myopia. So you’re talking about 6 million potential patients. Some of the companies that are developing these types of products that said that the number is somewhere between 5 million and 6 million. So it’s a big, big market in terms of the overall patient population. It’s public information, what our formulation is selling for, which is $39 for a bottle. And so you can kind of do the math and figure out how we think about the market, but it is certainly a market that exceeds $1 billion a year. We have a formulation that we believe is differentiated from anything else that is being developed or that is available in the compounded market. And we’re really excited about that. We filed some IP on that. We’ve done a lot of freedom to operate work and a lot of analysis of the overall market. And we’re excited to be able to make an affordable, accessible atropine formulation available to this very large market, which is consistent with how we have operated our business in terms of serving the market, serving physicians, and serving their patients from inception.

That’s great note. Thanks very much for that. Maybe just one final one. Great to hear all the updates.

And by the way Sahil, we love our brand. We love the brand atropine.com. I think if you’re going to be in the atropine business to own atropine.com and to be able to offer compounded atropine is just fantastic.

No, certainly, it does not get much better than that from a marketing perspective. Yes, so I appreciate all the updates on MELT-300, but also just was wondering if you could provide any color on Surface and the dry eye disease program specifically. I know we’ve heard anecdotally about the data from the Phase 2 program, but just wondering if there are plans for near-term publication or distributing that data at a large medical meeting?

We sure would like to see the data published. I really don’t have much more to say about the process that Surface is undergoing. They do have some additional data, sort of the final data set from their Phase 3 – or Phase 2 programs that we’re expecting in the month of December, actually. But there’s really not much more to say about that. I would suspect that you’ll see that data published certainly in the next quarter or so. I think on the positive side, there has been some serious interest in chronic dry eye disease and dried in general. We’ve been a couple of meaningful transactions in the space. And so we continue to believe that the data that I’ve seen that Surface has been able to create is the best data that I’ve ever seen and I think has been published on chronic dry eye disease. So we think there’s real value there. And they’re going through a process now to assess what is next, whether it’s to do a strategic transaction or to work with a partner to take things to the next step. But we believe there’s a lot more value there and I think there’ll be more information coming here fairly soon about what Surface intends to do.

Excellent. We will look out for that. Thanks very much for taking the questions, and again, congratulations on a really productive quarter here. Looking forward to continued progress.

Thank you, Sahil.

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

Thank you, Andrea. And I hope everyone on this call is able to see what we see, and that is that we have been able to lay the groundwork for the commercialization of IHEE