Good afternoon. And welcome to Harrow’s Q4 2022 Earnings Conference Call. My name is MJ, 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..

Thank you, Operator. Good afternoon. And welcome to Harrow’s fourth quarter and year end 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 law.

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 technology 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 referred 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..

Thanks, Jamie, and thanks to everyone for joining us on today’s call. Our fourth quarter 2022 earnings release, corporate presentation and Letter to Stockholders have all been posted to the Investor Relations section of our website. I want to encourage you to review these documents for a better understanding of the company’s results.

In particular, consider reviewing our Stockholder Letters, which I believe will help you track where we have been and where we are heading as we execute our strategy to become a leading U.S. ophthalmic pharmaceutical company.

Many of you know that I am a follower and admirer of the great American businessmen, capitalists and philosophers, Warren Buffett and Charlie Munger. Our Stockholder Letters are inspired by Mr. Buffett’s similar annual letters for Berkshire Hathaway.

This latest Stockholder Letter stands out, because it describes a bit of the history of our company, which is important to know as we enter our third five-years planning cycle, and for those stockholders who want to know more about our tortuous history, there is an entire section of our Investor Relations section of our website dedicated to this subject.

When I read it, I remind myself of the challenges we have had breaking gravity, if you will, building our business from scratch. In any case, given the recent banking debacle, it has never been more important to really know what you own and I hope these Stockholder Letters provide greater transparency to you as fellow owners of Harrow.

On this call, I want to make a few comments about the Harrow business and we will jump right into our Q&A. As a result of the diligence, tenacity and creativity of the Harrow family, as I promised in prior Stockholder Letters, 2022 was a transformational year in a positive sense and 2023 is continuing that momentum.

Here are a few examples of what I mean.

This January, we completed our Fab Five transaction and we are currently working to transfer all the new drug applications connected to those products as quickly as possible, which will allow Harrow to begin the process of reviving marketing and sales detailing for ILEVRO, NEVANAC, VIGAMOX, MAXIDEX and TRIESENCE, products which in the aggregate in recent years provided north of $200 million in revenue for their former owner.

In February, we received a permanent J-Code for IHEEZO, and just weeks ago, we received temporary pass-through reimbursement status, making IHEEZO the only topical ocular anesthetic in the U.S. eligible for reimbursement.

Combined with the excellent success we have had with our market access strategy to-date, these Codes should greatly enhance our launch of IHEEZO this May as they will allow increased patient access in every traditional site of ophthalmic care, including the eye care professional’s office, the ambulatory surgery center and the hospital and outpatient departments.

I want to add that we are not stopping our momentum. In fact, we are currently working on several M&A transactions that are in various phases of closure, including some which are at an advanced stage. We believe closing any one of these deals could add rocket fuel, if you will, to our growth trajectory for this year and for many years to come.

And while I can’t guarantee that any of these transactions will be consummated, I think, our recent record for executing complementary M&A transactions speaks for itself. Feel free to review our Q4 numbers, which are available in both our press release and our Stockholder Letter.

But beginning with the Fab Five acquisition closing and subsequent market access wins for IHEEZO and while our core ImprimisRx business is improving and we expect it will only continue to grow, as stockholders you need to know that the Harrow of Q4 2022 has a different business and financial prospect than the Harrow of Q1 2023.

With that said, we are all hands on deck for the launch of IHEEZO in the coming weeks, and as we get deeper into this year, we expect continued momentum as we see the Fab Five NDAs transfer, we begin to execute our strategy with VIGAMOX, TRIESENCE comes back into stock, and hopefully, we are able to close some of these acquisitions.

The bottomline for us is that by leveraging the resources and infrastructure that we have put into place, 2023 should be a breakout year and I believe that we have positioned Harrow to be the largest pure-play ophthalmic pharmaceutical company in the United States, uniquely providing both branded pharmaceutical products and high quality compounded pharmaceutical products that meet the needs of our more than 11,000 institutional customers and the millions of Americans they serve.

We are now happy to take your questions. I will pause to have our operator poll for questions.

Operator?.

Thank you very much. [Operator Instructions] Today’s first question comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead..

Thank you very much. Good afternoon. Obviously, you have a lot on the plate and there’s a lot to ask about so I will try to keep it as focused as I can.

I am hoping, Mark, you might just talk a little bit about your initial, how the Fab Five have impacted the company in the first month or two of ownership, the steps you are taking and how you expect that to unfold as the year goes along?.

Sure and thanks for the question, Brooks. We closed the transaction. The way the deal works. Until we have had the NDA transfer to us, we are not permitted to engage in marketing activities, as well as sales detailing activities.

So in effect, the level of revenue, the level of profits from these products is relatively consistent with what we have seen before we actually close the transaction. With that said, we do believe in the coming months, we are going to see these NDAs transfer and I believe the last NDA to transfer will likely be VIGAMOX.

We are expecting that sometime in the middle of the summer. But what I can tell you is that as soon as those NDA transfers take place that does give us the green light to begin our marketing efforts. It gives us the green light to begin the sales detailing that the former owner had engaged in many years past.

Those are the types of activities that led to the types of revenue numbers that I mentioned. We believe that the market need for these products is largely the same today as it was back then when these products were doing $200 plus million in revenue and we are very excited to release our commercial organization in this effort.

We think we will be very successful, time will tell, but this effort is going to begin in the summer in full steam. But in terms of its impact over the last few months, we really have not seen anything inconsistent with the revenue levels that existed prior to our ownership..

Okay. Great. So let me just switch over to IHEEZO. I know we are all excited to see that happen and I think you guys know that I am not a traditional pharmaceutical analyst, so I am going to ask you a basic question that hopefully will be helpful to me, as well as investors on the call.

But talk just a little bit about what it means for IHEEZO, for the company, for doctors, for payers to have the transitional pass-through approval and to have the permanent J-Code for that drug?.

Sure. And to be clear, transitional pass-through is a policy that Congress put into place that really facilitates innovation. In the cataract surgery, for example, in the ASC environment the fees are capitated. And so on a capitated fee environment, there are not the incentives to pharmaceutical companies or for pharmaceutical companies to innovate.

And so the policy really allows for innovators who come up with a novel product like IHEEZO to get it into the market and depending on the pricing of the product, to receive payment outside of the capitated fee, outside of the bundled payment and so that is what pass-through is. It allows doctors to try these new innovative products like IHEEZO.

And so we did, in fact, receive an exemption from that capitated fee and so it can be built outside of the bundled fee beginning on April 1st. We are really excited about that.

As I have said in prior calls, we make drug at Harrow for about one out of every five cataract surgeries and so when you think about what that means in terms of numbers, there’s 5 million or so cataract surgeries, it’s about 1 million procedures a year.

And so we are of the belief that our customers, many of them will be excited to try an FDA approved product as opposed to the compounded products that we have historically sold.

They will also be excited about the opportunity to be -- have reimbursement for the topical anesthetic as opposed to having to pay for it out of their capitated fee, which is what happens when an ASC has to purchase a compounded product.

Now with respect to the office environment and the permanent J-Code that was issued, because the ASC -- in the ASC environment that is a temporary pass-through period. That is a three-year period and there are about 5 million or so procedures, as I said, that we could impact during that period.

But in the office environment, the J-Code itself is permanent and what that allows is for physicians to use the product in that environment and to use the J-Code for payment and there is no limitation in terms of the number of years, unlike that of the ASC environment. Now with respect to the temporary nature of the pass-through code, to be clear.

We do intend to demonstrate that we may be able to extend that pass-through payment period as some other products in that environment have been extended, such as, OMIDRIA and DEXTENZA, but we will have to see how that goes.

Right now, we are very excited about the three-year temporary pass-through period, as well as the permanent J-Code, in particular to potentially impact the intravitreal injection market, which is about twice the size of the cataract surgery market in terms of unit volumes..

Great. I am just going to ask two more. I am sure there are other people who want to ask questions. So I will ask one that may be more appropriate for Andrew. But I think I noticed that G&A expenses were up somewhat this quarter and R&D expenses were down.

Can you guys just talk a little bit about the dynamics there and what we should expect going forward?.

Andrew, do you want to take that?.

Yeah. Brooks, good to hear from you. Thanks for the question. Appreciate you always asking me a question. Mark talks a lot. I never get to say much. But anyways, to your question specifically on G&A or SG&A. The expenses were up for the year, which is sort of the trend throughout 2022.

We had expenses increase in our SG&A as we prepared for the IHEEZO launch and even as we prepared to kind of bring in these Fab Five products.

But, actually, we started to see that settle out a little bit in Q4, so looking at Q3 of 2022, the SG&A expense was slightly down for the quarter, which is great and you kind of see that in our guidance with the -- a lot of that new revenue falling to the adjusted EBITDA line.

In regards to R&D year-over-year, the big difference there is last year, we had a $3.1 million charge related to a milestone payment for IHEEZO and that milestone payment, because it was prior to IHEEZO being approved, we had to run it through R&D as required in process R&D to have the big difference there..

Cool. Great. And then the last one for me, I am just curious, as you guys think about the company and the business, you have a lot on your plate, some truly huge opportunities with IHEEZO and the Fab Five and even some of the other formulations that you have introduced.

So talk to us about why you feel compelled to pursue additional acquisitions and maybe give us some sense of your confidence that you can put more on the plate and not have crumbs fall off?.

Yeah. That’s a great question, Brooks. And I think my answer is, I really need you, well, first of all, I really need to close the transactions. That’s one thing to engage and negotiating them and papering them up, but it’s another thing to getting them closed. So, once again, I don’t want to get over our skis.

I wouldn’t have mentioned it if I didn’t think that we would get at least one of these deals over the line and there are several. But let me get one of them done, any one of them. And I think the answer will be evident that these are highly strategic transactions. These are not simply purchases of products.

These are not, in some way, similar to the purchase of the Novartis -- the first Novartis deal that we did as an example. These are highly strategic deals and there are reasons why we want to engage in these transactions. But let me not get too far afield, let’s just get them completed and then we will have this conversation.

I think that when our stockholders see one of these deals announced, they will be quite pleased. But let’s get one done..

Yeah. Thanks for taking my calls -- my questions and I am pretty excited the outlook for 2023. Thanks..

Thank you, Brooks. Thank you so much, Brooks..

Thanks, Brooks..

The next question comes from Sahil Kazmi with B. Riley Securities. Please go ahead..

Hey. Good afternoon, Mark, Andrew. Congrats on a really -- truly transformative 2022 and looking forward to similar progress in 2023 and appreciate you taking our questions. So a couple from us here. Maybe we can start with, just at a high level, as you have reaffirmed your revenue guidance of $135 million to $143 million.

Can you talk about how you expect that to be different across the first half and the second half of the year as the NDAs get transferred, the IHEEZO launch comes through?.

Yeah. So the -- in terms of the guidance, candidly, I think, when Andrew built his model, we really have not put a whole lot into 2023 on a relative basis for IHEEZO.

What we really, I think, modeled out essentially is some growth in our ImprimisRx business, as well as revenues from the first Novartis transaction and the closing of the second Novartis transaction. And I don’t believe we really included that much TRIESENCE in there either and so we have a very modest amount from IHEEZO.

What we didn’t want to do, because this is a launch, this is a new product and we can’t guarantee that there will be massive instantaneous uptake of this product. We do think we are going to be very successful in due course.

But we would expect the first half to be certainly more biased towards our legacy products and revenues from the Fab Five transaction.

And I think as we get into the second half of the year, as the launch of IHEEZO really takes a footing, that’s when I would expect to see potentially us hopefully getting to where we want to be and possibly even beyond..

Great. That’s really helpful. And then maybe staying on IHEEZO with some of the reimbursement hurdles sort of getting through with the J-Code and pass-through status.

Can you talk about how you are thinking about the pricing strategy there or when you may plan to disclose that to the street?.

Sure. So the price is actually publicly available through Red Book, if you have certain subscriptions, but the price per unit is public and it is $544 per unit..

Excellent. Thank you very much for that. And then just the last question as you kind of think about the subsidiaries here, both Melt and Surface, it was really helpful to see an update from Surface discussing their dry eye program.

But to the extent you have visibility, do you know when we can expect to see some of the Phase 2 data from Surface and kind of what are the next steps in the potential monetization of Melt after their pivotal data?.

Sure. So at the recent AECOS meeting in Aspen, Kamran Hosseini gave a nice talk about the Phase 2 chronic dry eye disease data for his drug candidate. I believe there is some publicly available video or audio related to that and what I will try to do is gather that and make it available to you. But he has spoken about his Phase 2 data.

I know they are in discussions with strategics, the data was extraordinary and they continue to work towards a Phase 3 program for that asset, as well as the other programs that they have. In terms of Melt Pharmaceuticals, which we own 46% of, as well as a senior piece of debt and a 5% royalty on their MELT-300 program.

They did report, once again, amazing data, Phase 2 data and it was really pivotal data in terms of efficacy for this program and they had really excellent sedation data.

They were able to demonstrate that their MK, their midazolam-ketamine combination product from a sedation perspective worked statistically significantly better than the midazolam alone, which is tough to do. Midazolam is a very good sedation drug, they were able to show Stat 6 [ph] on their MELT-300 program using the Zydis delivery technology.

They have a meeting with FDA in the middle of May and it is an end of Phase 2 meeting to confirm what will be required in a Phase 3 program. And in the past, the FDA has indicated that the Phase 3 program would be against placebo. So active versus placebo, which is a very attractive prospect for Melt Pharmaceuticals, it’s a fairly derisked study.

And so the company is going to FDA to confirm what would be required. The FDA could change its mind. The FDA may confirm what they had previously said about what would be required.

We will have to see, that will happen in mid-May, and then once that occurs, we would expect the company to work towards capitalizing itself so that it can complete that program, and ultimately, get that product out to market. We sell at Harrow through our ImprimisRx business a compounded lozenge. We call it the MKO Melt.

It is the compounded product that really inspired us to create Melt Pharmaceuticals in the first place.

And so once again, the idea is that if there’s an FDA-approved version of this product available, we would certainly prefer to sell the FDA approved product, make that available to the significant customer base that already purchases the compounded or a compounded version and so that’s really the idea there.

But unlike some other products, the MELT-300 product, if it’s approved, would not only be impactful in ophthalmology, it could be used in other areas outside of ophthalmology, dermatology, plastics, women’s health, ER medicine, colonoscopies potentially there are many, many uses for this we believe, as a novel IV-free and opioid-free sedation product..

Excellent. Really helpful overview, and once again, congrats on a really successful 2022 and look forward to following the story later this year. Thanks for taking our questions..

Thank you, Sahil..

[Operator Instructions] Seeing no further questions in the queue, I would like to turn the call back to Mark Baum for closing remarks..

Thank you. And as I also said in my Letter to Stockholders, the phenomenal effort of the Harrow family led to the achievement of even more than I had dared hoped for.

Our achievements to-date including the fact that Harrow is in the best financial and operational shape of its history would not have been possible without the tenacity and hard work of our team, nor would it be possible without the financial support of our stockholders, all of you, many of whom have been with us through thick and thin, good and bad days.

I look forward to rewarding those stockholders for their patience and their trust and for helping us to deliver on our mission to make great pharmaceutical products that are accessible, affordable and to stay focused on the unmet needs of the eye care professionals and their patients that we serve.

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. This will conclude our call..

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