HROW - NASDAQ

Good morning, and welcome to Harrow's Third Quarter 2024 Earnings Conference Call. My name is Michelle, 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. Please go ahead.

Thank you, operator. Good morning, and welcome to Harrow's Third Quarter 2024 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 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 our 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 Baum; and Harrow's Chief Financial Officer, Andrew Boll. With that, I would like to turn the call over to Mark to go over some prepared remarks prior to the question-and-answer session.

Thanks, Jamie and good morning to everyone. Thank you for joining us today. Please make sure to review our supplemental documents for the quarter, including our earnings release, corporate presentation and letter to stockholders, all of which are available on the Investor Relations section of our website. In the third quarter, Harrow reported record revenue of $49.3 million and that's a 44% increase over the prior year quarter. It is a slight increase over the previous quarter as well. Gross margins were solid, and we generated cash from operations. And operationally, while we could have done better, as I discussed in my letter to stockholders overall, we are well positioned to meet my commitment to exceed our 2024 financial guidance, especially given what looks like record performance in October and the fourth quarter which is expected to be our strongest quarterly period of the year. Now, let us discuss some of our key products and achievements from the third quarter. VEVYE, our crown jewel dry eye asset, which we launched in January of this year has surpassed our expectations, and we believe it is destined to be a category-leading product due to its rapid onset, efficacy, twice daily dosing and favorable tolerability profile. Total prescription volume increased 55% in the third quarter compared with the second quarter. As I mentioned in my letter to stockholders, our commercial team did such an excellent job of selling VEVYE that we reached the outer bounds of our internal forecast, leading to a temporary inventory shortage around mid-September. And our VEVYE revenue potential, therefore for the third quarter was unfortunately capped. The good news is that we were able to recover in the fourth quarter, and we have appropriately adjusted our inventory levels by ordering additional batches so that we will not run out again. What drives VEVYE's strong sales growth is its clinical value, which is best demonstrated in the amazing refill rate we have seen. Listen to this statistic. Before VEVYE, 90% of patients did not refill their dry eye prescriptions and were not on therapy at the end of the year. However, VEVYE patients are now into their eighth and ninth refills and we continue to see over 90% refill rates for VEVYE. It's just incredible. Payers are also taking note. And as a result, we are seeing consistent improvement in insurance formulary access for VEVYE. And I talked more about that in our letter to stockholders. Strong VEVYE prescription growth has led us to increase the number of covered territories where we have boots on the ground from 51 in the second quarter to 61 in the third quarter. And in those 61 territories, even though we haven't filled all of those open positions, we are already beating TYRVAYA in about 50% of these markets, CEQUA in about one-third of the markets and MIEBO in nearly 10% of the markets. As demand increases and we continue to increase our market share, we will also add territories as warranted. IHEE

[Operator Instructions] And our first question comes from Chase Knickerbocker with Craig-Hallum. Your line is now open.

Good morning, thanks for taking the questions. Mark, I guess, just first, helpful to see you kind of give that inventory number that you have in Q4 on TRIESENCE. I mean how should investors be thinking about the performance of that drug in Q4 with a little bit more detail around kind of what you think will need to be kind of stocked at distributors? And then ultimately, how much of that kind of inventory do you think you can pull-through before the end of the year given that the product has been off the market for so long? Thanks.

Thanks for that, Chase. Well, first, I have some I think, very positive news about TRIESENCE and that is that all of the regional MACs have indicated that they are reimbursing for TRIESENCE. So that is very important news. I would also say that the response thus far has been very positive. I laid out as you noted in the stockholder letter, the inventory that we have to sell. And what I can tell you is that the commercial team is just actively working to push that inventory through the system and into the system so we can realize revenue, as much revenue as possible from those units in the fourth quarter. And we have, I think some very positive indications in terms of that inventory so far. But the team is working hard. And we are, as I said, I think, emboldened by the response, at least from Medicare on the product-specific J-code thus far. Andrew, do you want to add to that at all?

Yes, Chase, I think from our perspective, too, we are obviously early in the game with the relaunch. So a little early for us to give kind of more precise guidance on what we think exact pull-through will be, but the initial response has been great. The team was a big point for us at AEO in October when we came out. And I think the physicians were happy to see it back. Obviously, it's an important product in the market. We are really focused on also supplying, making sure that supply chain is set for the duration for next year and well beyond. And so that is also another critical focus for us. We've got this initial stock, and we're going to focus really on continuing to make sure supply is there so that there's no shortages for the market going forward.

And I do want to add, we do have additional batches being made and scheduled to be made in 2025. So I think the issue that Andrew is referring to is just longer term supply chain.

Got it. And just a confirmation question there, I guess on those batches, you would expect to have more inventory next year in a material sense than what you had in Q4 here for TRIESENCE. And then just a couple on VEVYE. Mark, I'm sorry if I missed this, but can you quantify kind of what you guys think from a dollar perspective, that disruption caused kind of in late Q3? And then a little bit more kind of color around that initial Part D coverage that you were talking about in the recent press release and in the shareholder letter. Kind of any color there around kind of formulary management? Is there any step edits in there? What does that, what do those kind of contracts look like on the Medicare side?

Yes. So I think -- and my phone went on mute, but I think your question was around quantifying what the VEVYE disruption was and then also kind of where we work on a qualitative basis with this Medicare Part D contract. Is that right?

That's correct.

Okay. Yes. So I mean, look, if you add up what we would have had with

Nothing.

Great. And then just one confirmation, and I'll hop back in queue guys. Sorry for all the questions. But just on VEVYE, the eight months and that 91% refill rate that you mentioned, is that kind of from first fill? And so just, I guess, asked another way, that would be kind of like 2 times or 3 times kind of what we would think of from kind of competitive dry eye kind of discontinuation rates kind of improvement there. Can you just confirm that I'm looking at that number right?

Andrew can comment on that. And I would just say, by the way, I mean, VEVYE conservatively next year is set to way more than double. That's if we don't do much of anything. So it is a really exciting product. And I think also we're slated to capture more and more of that revenue next year as we get more contracting done, which is very exciting as our ASP hopefully improves. Andrew, do you want to comment on --.

Yes, Chase. So the refill rate is based on patients eligible for that refill. And so if they are, in other words, if they're eligible for their 10th refill, we're seeing that large portion of patients refill. And I think for the last two calls, I've said how excited I am about that refill rate because for us, I mean, from a modeling perspective, it is well beyond what we expected and definitely well beyond what we modeled. That's one of the reasons we had that inventory shortage issue in the last couple of weeks of September. But it's something shareholders should be really excited about. It is going to drive a ton of value, I think, in next year and certainly in the long-term because those refills are just continuing to stack. The product is really performing well, performing better than we expected from a clinical perspective and then certainly from a financial perspective. And it continues for me as CFO to be my favorite product. It is something I want to continue to invest in on the sales and marketing side and really just see revenues from that product scale up and drive further value in the medium and long term.

Great, thanks guys.

Thanks Chase.

Sure. I think with any launch, things go your way many times, and then there are always things that don't go your way. That just happens. I think with IHEE

Yes. First of all, we are not abandoning that market. We have quite a few IHEE

Great. Thank you very much.

And the next question comes from Jeffrey Cohen with Ladenburg Thalmann & Company. Your line is now open.

Hi Mark and Andrew, good morning. I guess you did talk about the size of the organization in commercial for VEVYE. I wanted to kind of jump that over to IHEE

Sure. Thanks for that, Jeff. To be clear the team that is selling IHEE

Yes, Jeff on the operating expense side, so you know the approach, we take kind of a moderated approach where we are trying to make sure the business is profitable while we're still in that growth mode. The operating infrastructure, the G&A part of SG&A is really there. It's in place for the most part. So any investment further in operating expenses is going to be tied primarily to the commercial side. And we will continue to do that as revenues ramp as market access improves on VEVYE, you should see us continue to invest in the sales and marketing and market access type activities to further drive revenue and further drive growth. So all the important part about that really is that those expenses should be tied to correlating revenue increase as well. So the overall profitability of the company as we grow OpEx, we will continue to expand in 2025 and out years.

Okay. Got it. That's helpful. And then one more, if I may. We haven't heard about it in a while. Any commentary or thoughts on how everything is going at ImprimisRx, please?

Andrew, do you want to add a comment about ImprimisRx? I think business is doing really well. It is producing a lot of cash. That's for sure.

Yes. And Jeffrey, we added a new disclosure in the Q where we broke out segments, so you can kind of get an idea of profitability of the ImprimisRx business, as well as our branded business and how those two things are performing at an individual level. But we've been really pleased with how the ImprimisRx business has been operating this year. Summer months are traditionally slow, as Mark mentioned. But despite that, it's continuing to see improvement. We really see a pathway especially in 2025 to see that double-digit revenue growth that we've talked about in the past hitting. Definitely seeing new accounts get added there and continue to see a real market need for the products and seeing market and seeing even new products come to market. We launched a new product called Povacaine AEL, and we're seeing initial uptake there and customer reception has been really positive.

Thank you taking my questions.

[Operator Instructions] The next question comes from Mayank Mamtani with B. Riley Securities. Your line is now open.

Hi, team. Thank you for taking my questions and I appreciate the 4Q trend update. That's helpful. Just quickly on the VEVYE script volume and market share trends that look impressive. Could you talk a bit more on what you are doing to improve gross to net? Based on our math, you are trending one-third lower than a peer dry eye launch. Anything there to comment on relative to your commercial payer coverage goals or how you might be investing in access payer efforts? And also, should we see some DTC activity from you as we've seen from your peers? And then I have a couple of quick follow-ups.

Sure. Thanks for the question. Let me start by commenting on the DTC effort. And the answer is absolutely not. You will not see us investing in DTC. That said we really appreciate the investments that we are seeing in DTC because they are definitely increasing awareness of dry eye-disease. And when you have a product like VEVYE that is so effective and that patients appreciate so much that they refill at the rates that we are seeing, you just really want as much awareness, consumer awareness in particular about the condition. So we are not going to invest there, but I think we are going to benefit there, which is terrific. I also want to add that the market access team that's working on VEVYE is doing an extraordinary job. We took a look at the gross this last quarter, and we just are seeing a massive number, especially for a new launch and a very small on a relative basis, sales organization. So very, I think efficient team building a lot of revenue. The question is, how do we get more and more of that revenue. We are going to do that through, obviously, contracting. There is a lot of interest on the payer side with the product because of the refill rate, because of what is being seen clinically. But what I can tell you is that on a net basis, and that's really what our stockholders care a lot about is not only the refill rate, but what are we capturing on a per prescription basis. There is a significant amount of revenue per unit that we can capture by tweaking a few little things. And those efforts are underway right now. And I think over the next couple of quarters, we have the ability to very meaningfully improve our ASP. And that's what we are going to do. I think our stockholders can count on us to do that. That's not only going to improve revenue, but it's going to improve margins as well for the product. Andrew, do you want to add to that?

Yes. From a gross to net perspective, Mayank, I mean this year, especially on the launch side, we really have been focused on volume and getting volume and getting patients on therapy and getting doctors introduced to the product. That said next year and beyond as we gain more access, as Mark was saying that gross to net should continue to improve. And then importantly, I think as access improves obviously, it should also help drive volume. So we should get a double benefit as those things start coming online.

Very helpful. And then on the TRIESENCE relaunch at AAO, I know it is early, but is there any overlap in patients and procedures where you see use of both IHEE

Yes. So first thing, we are not going to really comment on sort of net pricing for TRIESENCE right now. We are actually still completing that work. But with respect to the first part of the question, what I can tell you is at least like on a GPO basis, we are moving both products together. And so you can create a sort of retina specialist formulary. And that's one of the real big positives about having both IHEE

Okay. And lastly, I noticed a bit more color on MELT-300 in your shareholder letter, including the SPA reached with FDA recently and the Phase 3 readout is obviously expected shortly. How should we think about value creation from that? And thanks for taking my questions.

Thank you, Mayank. I believe that by this time next week, we are going to know where we stand with MELT in terms of the Phase 3 data. So my expectations are that the Phase 3 data will read out early next week and that there'll be some sort of external communication regarding that by this time next week. In terms of value creation for MELT, we’re very interested in that product, obviously. As I've said in prior communications we sell a compounded version of the MELT formulation. And if we were able to sell an FDA-approved version of that product, it would result in nearly $100 million of annual revenue. So we know who those customers are that use the compounded formulation and I have a high degree of confidence they would prefer to use an FDA-approved version of the product. And so as I said, it creates sort of as much of a no-brainer commercial launch as you could possibly have. That's something we're really attracted to. But all of that is premature, unless we have a positive readout. And so we'll hopefully know more about that this time next week. If the data is strong, the data comes through, especially given the SPA that the company was able to reach with FDA, we'll be well positioned to do great things with that patented formulation. It's patented not only domestically, it is patented internationally. It has uses certainly in ophthalmology, where we are focused, but the greater number of use cases is outside of ophthalmology. And it is going to be a big product. But we need to see what the data looks like. And, if we were to fast forward a week from now, we will know.

That's all the time that we do have for questions. And I would like now to turn it back to Mark for closing remarks.

Sure. Thank you, operator and thanks for joining us today. I just want to reiterate how grateful we are for your continued support and trust in the company as we execute on this vision. It is not a short-term vision. It's a long-term vision. I think we have a pretty good record of creating value over the longer term. It is a really exciting time to be a part of our journey, though, whether you're an investor a customer, a partner or a member of the Harrow family. The progress and achievements that we've made this year are a testament to the team's hard work and dedication, the partnerships that we've built along the way. And as we move towards the very end of this year which I believe is going to certainly be a record year, our focus is going to be delivering sustainable growth, operational excellence and importantly value for all of our stockholders and stakeholders. So if you have any other questions or you need additional information, don't hesitate to reach out to Jamie Webb. Her e-mail address is [email protected]. This will conclude our call.