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 IHEEZO, formerly known as AMP-100 for ocular surface anesthesia. Two, the launch of Fortisite, which is a patent-pending family of high-concentration refrigeration-stable, compounded fortified antibiotics.

Three, the sale of our non-ophthalmology product line, which enhances our balance sheet and achieved a strategic imperative for Harrow, and that is to be a pure play U.S. based, U.S. focused ophthalmic pharmaceutical company. And four, the completion of Melt Pharmaceuticals, pivotal Phase 2 efficacy study for its MELT-300 program.

Five, the launch of atropine.com to help bring the market a family of patent-pending compounded atropine formulations. And last but certainly not least, six, we made critical progress with product acquisition opportunities we’ve been pursuing for quite some time.

While we can’t guarantee any one of these deals will get done, I believe we’re getting close and that completing any of these deals could meaningfully impact our long-term goal of becoming a leading U.S. ophthalmic pharmaceutical company. So stay tuned.

I’d also like to share some highlights of our results for the third quarter ended September 30, 2022.

Third quarter revenues of $22.8 million represent a 22% increase over the prior year quarter, and a slight decrease over the second quarter of 2022, primarily as a result of supply chain challenges, along with a return to the seasonality that we’ve historically seen in the summer.

Third quarter gross profit was $16.1 million, a 17% increase over gross profit for the year earlier period of $13.8 million. Core gross margin for the third quarter of 2022 was 72%, compared with the prior year’s 74%. GAAP net loss in the third quarter of 2022 was $6.5 million, compared to $8.3 million last year, and adjusted EBITDA was $2.5 million.

Core results for the third quarter of 2022 included core net loss of $1.5 million and core diluted net loss per share of $0.06.

I am pleased with the progress we made in the implementation of our strategic plan, and I stand by my belief that 2022 was the setup year that we’ve been working towards for many previous years with the foundation we built nearly complete we are set for 2023, which we foresee is a breakout year for Harrow.

As you should expect, the Harrow team is focused on getting the market access strategy, infrastructure and systems in place to successfully launch IHEEZO early in the first half of 2023.

I remain confident that within 24 months post postlaunch of IHEEZO with our market access strategy in place, Harrow’s revenues should more than double and our core gross margins should float meaningfully higher.

Concurrent with the launch of IHEEZO, we continue to drive other sources of revenue growth, including revenues from our portfolio of branded pharmaceutical products and compounded pharmaceutical products, including Fortisite, atropine.com and others that we are advancing through our pipeline.

I do want to mention that we continue to own non-controlling but meaningful equity positions in Surface Ophthalmics, Melt Pharmaceuticals, and Eaton Pharmaceuticals and Eaton just reported a nice quarter.

I also want to call special attention to Melt Pharmaceuticals, which recently completed the enrollment of patients in a Phase 2 efficacy and safety study of MELT-300. This is a pivotal study and it’s expected to report top line clinical results in the next few weeks.

This data, which should come between Thanksgiving and Christmas, is of great interest to us at Harrow because we own a very large percentage of Melt and we have tremendous confidence in the commercial viability of their product candidates. Once again, there is quite a bit more color on these issues and others.

And our letter to stockholders, which is published each quarter. And if you’re a stockholder or considering becoming a stockholder of Harrow, I would encourage you to read them. They are our attempt to provide a consistent and meaningful level of transparency and/or our company. With that said, now we are happy to take your questions.

I will pause to have our operator poll for questions.

Operator?.

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 IHEEZO.

That was considered in process R&D. It ran through our P&L that $5 million charge last year and showed up in R&D. When we initially reported adjusted EBITDA last year, we pulled that number out. But based on the SEC’s recent sort of guidance on adjusted EBITDA for life science companies we are changing that.

We changed our methodology and are putting it back in for historical purposes and for any additional acquisitions we have in the future. With IHEEZO becoming approved though, we’re now able to capitalize any additional milestone payments. So we have a – for example, we have a milestone payment in Q3 related to the approval.

That expense is now capitalized. So you’ll see an increase in our intangible assets on the balance sheet this quarter. And then there’s some additional commercial milestones that if we hit, we’ll capitalize those expenses as well. And those will run through our balance sheet, not our P&L..

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 IHEEZO, I know you’re working through some of the pricing methodology, but can you remind us of kind of the reimbursement process here that you have to get through and then, just your market access strategy broadly?.

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 IHEEZO might be passed through eligible.

And so part of a market access strategy would be to apply for a pass through code. In the physician’s office environment, one might want to apply for a J-code, for example. And as I said, those strategies are not mutually exclusive. There are many products that initially received C-codes.

They had passed through status and then ultimately received a J-code as well. One of the nice things about IHEEZO is we believe that the impact of the product is not only, as I said, in the hospital and ASC environment, but also potentially even larger in the physician’s office environment. And so we’re working through those issues.

Obviously, we have a strong position in the market, the cataract surgery space currently. But the team is doing a lot of great work to figure out where we want to target first.

And so we anticipate more information coming out on the initial market for the product as well as the pricing for the product in the coming months as we get ready for our launch in the first half of 2023..

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 IHEEZO and to support other branded products. While remaining adjusted EBITDA positive, we are preparing for the growth that we clearly see on the horizon.

We’re building a different kind of pharmaceutical company, one that is deeply connected to our customers, including doctors, institutions that we serve, and even down to the consumer level.

And this structure facilitates our relentless desire and dedication to serve these customers better, and allows us to maintain a competitive advantage and to differentiate IHEEZO from other rivals in our industry, which should in turn ultimately reward our stockholders.

To borrow a quote from one of my idols, Warren Buffett, the stock market is designed to transfer money from the active to the patient. And we are grateful for our stockholders who have hung in there with us through bad times and good times, and we look forward soon to rewarding them for their patients with further value creation.

Thanks to everyone for attending today’s call and for your interest in Harrow. If you have any investor-related questions, please email Jamie Webb at jwebb@harrowinc.com and this will conclude our call..

The conference has now concluded. Thank you for attending today’s presentation, and you may now disconnect..