HROW - NASDAQ

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. [Operator Instructions] And 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.

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.

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, 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 which the Harrow team just returned from where we formally launched FDA-approved IHEE

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

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 the -- 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?

Yes. No. So first of all, thanks for the question. To be clear, the agreement is related to compounded formulations that our ImprimisRx compounded business makes and dispenses. So these are products that are not FDA approved. They don't have a specific label or an indication for use to be clear. However, in the case of Klarity-C, which is a proprietary product, the vehicle is patented, and it contains 0.1% of cyclosporin. That is a compounded formulation that, believe it or not, has been prescribed in the United States to date by more than 6,000 eye care professionals. So this is a product, a formulation that has a tremendous history in helping many, many thousands of patients, tens of thousands of patients. And it is a cash pay product. Many of the patients who have been prescribed Klarity-C have also been prescribed -- before Klarity-C, they've been prescribed FDA-approved products and there are several of them out there, and we all know which products they are. And for whatever reason, they failed on those products and were ultimately prescribed Klarity-C. Our objective is to not only sell a formulation to help these patients, but to also service these patients. We've realize that in the dry eye space, in particular, these are patients that not only need the product, but they also need the service in order to create this continuity of the relationship with the patient. As far as the atropine formulations go, we talked a lot about the unique formulations that we've been able to make that are not only preservative free, but boric acid free that are now available. And they're available through a 503B. So these are available from an outsourcing facility and made to the highest federal standards. So this partner that we've created this relationship with is a very large entity and they have an extremely large vision care network, and they're interested in providing access to their members to these formulations on a cash pay basis. For many years, I have said that we have been able to make available these compounded formulations at or below the co-pays that patients oftentimes pay for other alternatives. And so they realize that. And in this case, they've negotiated a deal with us to make these products available. And as I said, I think they're quite confident that these formulations will be compelling to their member base and from a value perspective, will potentially save these patients money as they seek to take care of their specific needs.

Got it. And then Mark, walk us through now what the commercial organization looks like in size or maybe geography and then tie that into -- I know you have got a lot of more products coming away, tied at least into the three products coming the way ILEVRO, NEVANAC and MAXIDEX, which arguably in their hands as well as IHEE

Yes. So first and foremost, our number one priority within our commercial organization without question above all other opportunities is IHEE

Got it. And then a couple of quick ones for Andrew, if I may. Firstly, on the margins, how you're feeling about Q1 margins and is that sustainable for the balance of 2023? And then secondly, on the guide, if you could put forth any commentary, which -- it's unchanged now, which leads me to believe that the extra few from the first quarter doesn't change the full year, but that may be the case in subsequent quarters?

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?

Sure. Jeffrey, we have -- we've been reticent to put out guidance for many, many years. I think Andrew and I looked at each other earlier this year when we closed the Fab Five deal. And when we received this permanent J-Code, and we just said, I think I feel comfortable and we felt comfortable putting out guidance. We're not going to put out guidance that we don't have a fairly high degree of confidence we can achieve. We don't want to put out guidance for the first time really in more than a handful of years and then just absolutely fall right on our face. And so we would like to put out a number, and we have put out a number that we think we can put smiles on the faces of our stockholders when we're actually able to deliver our quarterly results. And then ultimately, by the end of the year, hopefully, we'll have an even much bigger smile on their face. I think the reality is that IHEE

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

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 IHEE

Sure. And thank you for the question, Mayank. The -- the feedback from the folks I spoke to was extremely positive. And I say this in the stockholder letter that my experience with the commercial launches that we've had over the last seven years or so is that the first thing that has to happen and it's paramount is that the product has got to work. It's got to not only work for the physician who's prescribing and/or administering it, got to work for the patient, who is being administered to, and frankly, it's got to work for the office staff, who are dealing with payment issues. They're dealing with receiving inventory and setting up a surgery for the physician or the surgeon. So what I heard repeatedly, and it's not just from KOLs, but really everyone who is using and I hate to say everyone, but it literally is everyone, who I spoke to and who was referred to me as being a user from our commercial leadership, had very positive experiences using IHEE

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?

Thank you. To be candid with you, I recently dropped off of the Surface Ophthalmics Board of Directors. I was on the Board of Directors since the founding of the company. And so I am not privy to give that information any longer. What I can tell you is that Cameron was able to produce some extraordinary chronic dry eye disease data, but he also has produced extraordinary data with the other products that they've now completed Phase II studies with. We think there's significant value there. They have unique drug candidates that they're in the middle of developing, but I can't tell you specifically what the next steps are with Surface. We're hoping, though, that the company sooner rather than later, will be a little bit more communicative, not necessarily at eye conferences, but to the broader interested -- more broadly to more interested parties, I'll say, including, frankly, me and the rest of our stockholders. So that's all I really have to say about Surface at this time.

[Operator Instructions] Our next question here will come from Brooks O'Neil with Lake Street Capital Markets.

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 IHEE

Yes. Thank you for that, Brooks. As I said, everybody on our team is all hands on deck for IHEE

But look, there's a big opportunity. It's a huge market. It's the first new topical anesthetic in almost 14 years. And doctors are having great experiences, and we're going to help more of them, have more of those experiences throughout the year.

Great. Sounds perfect. And I think you guys know that I'm wildly excited about the many exciting things you have going on with IHEE

Yes, that's -- I appreciate the question. Look, everything is a question of priority. And as I've said a few times on this call, our number one priority is IHEE

Well, that sounds great. You guys have executed beautifully in the four or five years I've been following the company, and I'm pretty confident you're going to continue to execute beautifully going forward.

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

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 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 that's [email protected]. This will conclude our call.