Harrow Inc (HROW) 2021 Q2 法說會逐字稿

Good afternoon, and welcome to Harrow Health's Second Quarter 2021 Earnings Conference Call. My name is Ailey, and I will be your operator for today's call. (Operator Instructions) 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 Health.

Thank you, operator. Good afternoon, and welcome to Harrow Health's Second Quarter 2021 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 Health 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 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 Health'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. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company's letter to stockholders 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.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 would like to turn the call over to Mark to go over some prepared remarks prior to the question-and-answer session. Mark?

Thank you, Jamie, and thanks for joining our call today. I would encourage everyone listening to review our second quarter 2021 earnings release, corporate presentation and letter to stockholders, all of which were posted on the Investor Relations section of our website just after the close of trading today.

Before we begin the Q&A portion of today's call, I'd like to provide some additional color on our business since we last spoke in May. Harrow continues to be a reliable and innovative pharmaceutical supplier to hundreds of thousands of Americans and many thousands of eye care institutions across the country, including optometrists, ophthalmologists, ambulatory surgery centers and hospitals. As a result of our commitment to our customers and the diligence of a dedicated team of Harrow-affiliated employees, the second quarter of 2021 was our best financial quarter in company history, marking the fourth consecutive quarter of record results.

We are pleased to report that total revenues for the second quarter were $18.1 million. That's an increase of 125% compared with the $8.1 million reported in the prior year period and up 17% from revenues of $15.4 million in the first quarter of this year, 2021. For the first half of 2021, total revenues were $33.6 million, and that is a 69% increase compared with $19.9 million for the first half of 2020.

Gross margin of 75.6% for the second quarter of 2021 matched our company record for the first quarter of 2021 and was an increase over the prior year's gross margin of 60.2%. Adjusted EBITDA of $5.7 million for the second quarter of 2021 was another record metric, a significant increase compared with a loss of $1.7 million in the prior year quarter and an increase over adjusted EBITDA of $4.3 million recorded in the first quarter of 2021.

In the second quarter of 2021, segment contribution from ImprimisRx was $7.2 million, including noncash expenses related to depreciation, amortization and stock-based compensation of $521,000 compared to a negative segment contribution of $239,000 in the prior year period and segment contribution of $5.7 million in the first quarter of 2021. This important metric demonstrates the earnings power of the ImprimisRx business separately from other Harrow businesses, assets and liabilities.

In addition to recording record operating results in our ophthalmic pharmaceuticals business, we are delivering on our promise to execute our strategic vision aimed at becoming a leading U.S. eye care company. In alignment with that objective, we are focused on growing revenues from FDA-approved products to the point where, in the next few years, they exceed our revenues from compounded products. Our partnership with EyePoint Pharmaceuticals to market Dexycu was the first step towards the achievement of our goal. Our new partnership with NovaBay for its product, prescription-based Avenova, was another step. And our recently announced acquisition of AMP-100 is yet another step and a potentially big step, indeed. We hope there are more steps, if you will, to announce soon.

During the second quarter, we raised $75 million in unsecured capital to fund our growth strategy and to lower our cost of capital, all I might add, without any common stock dilution. As I mentioned, we recently announced the acquisition of rights in the U.S. and Canada to market and sell AMP-100, a patented ophthalmic topical anesthetic drug candidate with a total addressable market, or TAM, estimated at over 10 million annual procedures in the United States, including cataract surgeries and intravitreal injections. We expect a new drug application to be submitted to the FDA in the next few months. And if approved, we plan to launch AMP-100 in late 2022.

Another component of our strategic goal, serving eye care customers directly through Visionology has also made excellent progress. Our regional soft launch continues as we fine-tune our marketing strategy and operational processes before expanding to additional regions and eventually becoming a nationwide enterprise. Based on our early results to date, we believe Visionology has the right marketing approach, functionality and ease of use to be the national leader in the burgeoning direct-to-consumer eye care industry.

We believe we have developed a sound strategy for our company's future, raised the capital needed to execute that strategy, responsibly leveraged our assets to promote growth, both organically and through a robust pipeline of new product opportunities and have a strong management team and partner employees who have the expertise, talent and dedication needed to achieve our very clear and shared objectives. We couldn't be more optimistic and excited about the remainder of 2021.

Now let's take your questions. I will pause to have our operator poll for questions. Operator?

(Operator Instructions) Our first question today comes from Jeffrey Cohen with Ladenburg Thalmann.

I'm just going to fire 5 or 6 at you. So what's the timing of your Q filing? This week?

Jeff, this is Andrew. The Q got filed today, I think around 4:30, so it just got filed.

Okay. Got it. And could you walk us through how we should think about the pull-through into the back half of the year? Is that $18.1 million kind of a new baseline as far as you're thinking of it? Or how should we think about that?

Andrew, do you want to talk through that question?

Yes. Jeff, so $18.1 million, obviously, is a big number from the prior quarter. Q3 is traditionally sort of a seasonally low quarter for us. We're going to expect some of that here. And then coming out of that in Q4, we expect to be building off of $18.1 million and into next year as well.

I'll add to that, Jeff. I mean we're seeing in the month of July and as we get into August, the business continues to be robust. So -- but Andrew is spot on that the third quarter and the eye care world is traditionally a softer quarter, but our business has, as I said, been pretty robust.

Okay. Got it. And could you give us a little better sense of breakouts on revenue contribution or at least perhaps call out the top few contributors behind Imprimis at the 7.2 million?

Andrew, do you want to talk through a couple of the specific disclosures in our filing? That's usually -- that's probably about as much detail as we can provide, I think.

Yes. On a product-by-product basis, Jeff, other than the Dexycu commissions, we're not going to -- we don't provide a whole lot of detail. We did add some revenue concentration in this Q, which was -- we do have 2 products that made up about 36% of total revenues, but that was about -- that's consistent with prior quarters as well. But the revenue growth, in general, this quarter really came from the addition of new customers. We had record unit volumes. And so we're seeing new customers, depth into those new accounts -- greater depth in the accounts and just stronger volumes on the units.

Also, I wanted to add. Another trend, I think, that's really important is that our chronic product growth has been strong. And so as it relates to formulations that we make and dispense to help patients manage dry eye disease and glaucoma, we're seeing very strong refill rates and customer retention rates far higher than what you traditionally see in the industry.

Got it. Okay. And then any commentary on gross margins? It looked like you had a pretty large peak for the quarter of what we had and looks like a little lift going forward. How do you feel about this low to mid-7-digit number?

I think you mentioned the word baseline, I think that within 1 percentage point or 2 of where we are should be a new baseline for us. We're consistently hitting margins in the low to mid-70s. Although we predicted that we would be in the 70s a few years ago back when we were in the 40s and we're quite happy that the team is delivering these types of margins, I always tend to look at what we still can do. And I strongly believe that we can see margins improve even from where they are now. We want to deliver on that, and the team is committed to that. But this is within 1 percentage point or 2, I think, a new baseline for us. But as I said, as more and more revenue comes from FDA-approved products, I think you'll see our gross margins continue to float up as opposed to down.

Okay. Got it. And lastly for us, could you talk about ASPs or revenues on a per order basis? Any trends that you saw through Q2 or any trends that we should think about through Q3 and beyond?

Thank you, Jeff. Yes. So the -- our revenues per 503(b) order were around the same level. I think they may have been even down a smidge, but they're right at sort of all-time highs. I think what Andrew mentioned a few minutes ago is a really critical point, and that is what the key revenue drivers were this quarter. And that was a meaningful increase in the number of new customers that joined the platform. We did all of this without price increases, by the way. So there were no price increases during this period.

And we're also seeing greater density within these accounts that we have. So more accounts are ordering more products from us. And so we've talked about that on prior calls as well. We don't want to be an inch deep and a mile wide. We want to take more of the pharmaceutical revenue opportunity per cataract surgery, per LASIK procedure, per glaucoma surgery, per retina procedures. So we are attempting to provide our customers with more of what they need.

And our philosophy is clear: if we can help a customer with a product opportunity, we want to be there for our customer. We feel like we can provide them with as good or better of a product than anyone else that they would seek to buy products from. So we want to be there for our customers and capture more of that revenue per procedure.

Our next question comes from Brooks O'Neil with Lake Street Capital Markets.

Congratulations on the terrific results. I was hoping, recognizing that COVID has been a topic of some interest nationally, if you could just talk a little bit about how you've seen COVID impact your business in 2Q and what you expect going forward.

Well, thanks for the question, Brooks. When you say Q2 and COVID impact, I'm always reminded of the incredible impact that COVID had on our business in Q2, but it was Q2 of 2020 and not obviously, Q2 of 2021. We were fortunate after the Q2 2020 impact to have record revenue quarter in Q3 of 2020 and then again, a record period in the fourth quarter and then first quarter of 2021, and now we followed it up with more records in the most recent period.

We obviously are aware that there's a lot of media attention and concern and certainly, real concern about the spread of COVID and the Delta variant and the like. We have not seen a lot of that show up in our -- in ordering patterns. We have not seen offices close down. Most of the surgeries, cataract surgeries, for example, take place in ambulatory surgery centers. And so we have not heard of what we saw last year, which is bans on elective procedures. We're not seeing any of the things that we saw in Q2 of 2020, fortunately. And so we really have not seen the impact of COVID, certainly, in the last period. That doesn't mean that we won't see things in the coming months. But even into the third quarter, in the month of July and so far through August, we really have not seen a lot of COVID impact.

Great. And so just to follow on there and just to be sure I'm hearing you correctly, you don't think there's any kind of pent-up demand being satisfied from a eye surgery, eye visits, any of that other stuff that might have actually helped you this quarter as opposed to hurt you this quarter?

No. And we don't think -- first of all, we do believe that there is some pent-up demand from last year, without question, but we also don't believe that the capacity exists for all of that pent-up demand to be satisfied in 1 quarterly period. We believe, and we've talked to colleagues that are in the space that feel the same way, that very likely, the pent-up demand of estimates are of around 1 million-or-so cases will take place over probably 5 or 6 quarters and not the 1 quarter. But we definitely do not see sort of the so-called pent-up demand hitting us this quarter. This quarter was all about new customers coming to the platform and the customers that we had buying more from us, allowing us to satisfy their needs more than we had in the past.

Great. That's fantastic. So secondly, I'd love to just get any additional color you can offer on Dexycu, kind of what you hear about it, what that outlook is for. Would you just expect that business to continue to grow kind of steadily into the future? Or kind of how are you thinking that, that might play out and impact the company going forward?

So first of all, Dexycu, we heard this before we took the product on, and it remains the case today. Dexycu is a fantastic product. We don't hear from ophthalmologists who use the product that it produces bad clinical outcomes. It's the opposite. Ophthalmologists like the product. They -- and our commercial team has done an incredible job. We have not had Dexycu for a year even.

And if you think about the success that we've been able to produce with this terrific product in a very short period of time, we've learned 2 things: one, as I said, Dexycu is a terrific product, and we want to continue selling it, and it's financially rewarding for us to do that. But at the same time, we're getting in the FDA-approved products business in the future. I've talked about that many times. We've talked about that in our stockholder letter. And so our commercial team now has dipped their toes in the water. They understand what's involved in selling a reimbursed product like Dexycu. We have experience now. And so as we acquire more products that are FDA-approved that sort of fit into the surgical suite like a product like Dexycu does, we're going to be ready when it comes to launch time for products that we go out and acquire. And so that's a real value our commercial team. We're not starting from scratch, if you will.

Yes. That's great. So I saw a couple of comments from some of the news services suggesting that EPS missed estimates, and I noticed there was a significant other expense item in the income statement. Can Andrew just talk us to what that was and help us to understand how that impacted the quarter?

Absolutely.

Yes. Certainly, Brooks. The biggest impact was related to the change in value of Eton, of our Eton position. And so that drove most of that loss during the quarter. And then we also had some investment loss in Surface and Melt as well as lost some early extinguishment of loan when we paid off our secured senior lender, SWK.

Right. Great. And then, I guess, lastly, I'd love to hear just a little bit about Visionology and how that's going and what your outlook is for that business as well.

Great. So Visionology, as you know, we did a soft launch about 3 months ago. And so far, we've built our core technology in this digital front door for consumers, which you can see if you visit the Visionology website. But integrated with the front door, the digital front door is a backdoor. And we now have our Visionology Doctor app. We haven't publicized this, but it's out there, but you can go to the Apple, iOS App Store, you can go to the Google Play Store for Android users and the Visionology Doctor app is now live and downloadable for prescribers that will ultimately build out -- will network with to build out our distributed network of eye care providers. So the entire system, by the way, is integrated with a back-end fulfillment system in our pharmacy.

So all of that has been done to date. We've gathered consumer feedback from our website utilization using tools like Hotjar and other amazing tools. And we spent about a month of the last 3 months optimizing the site to relaunch. So we're launching, we're learning, and we're optimizing. So over the next 60 days or so, we're going to continue that process, continue to measure and optimize retention systems, build out capability for call center operations and the like and really build out and put on paper the plan to create a national direct-to-consumer telemedicine service.

So we're excited about it. We've accomplished a lot. Drew and his team have done amazing things. And we believe there's a tremendous amount of value there, and we're excited about the future of Visionology. But it's very new. It's at the -- it's at its infancy. But the good news is, is that it is working. We're delivering prescriptions, and we're taking care of patients.

(Operator Instructions) Our next question comes from Andrew D'Silva with B. Riley FBR.

Yes. That's B. Riley Securities now, but thank you. And my apologies if you answered any of these questions. I was jumping between calls. But very impressive top line for the quarter. I know you gave a little context to the comparison relative to the first quarter. But am I correct in understanding that the primary driver between the 2 periods from a sequential growth standpoint is new customers predominantly? Or was it also just better penetration with existing customers as well as new product launches? I'm primarily talking about from a product sales standpoint, obviously, saw your licensing sales sequentially uptick.

Yes. Andy, thanks for the call. There were 3 revenue drivers: one, a meaningful increase in the number of new customers coming into the platform; two, much more depth within the account, so accounts buying more from us; and then the third factor was continued growth in our chronic care business. And related to that, we saw very solid refill rates for chronic care prescriptions and patient retention rates. So our customer service team is doing an incredible job. We're really pleased there with the improvements that they've made. We're using technology better than we ever have. It's really helping to drive our business. And so all of those 3 factors contributed to this sequential revenue increase.

Great. Great to hear that. And then I heard you referenced a 36% product concentration across 2 products. I remember a couple of years back, around the time you were involved with Allergan, there were a couple of products that were almost at 55%. Can you just talk about the diversification since then on the product side and where you're seeing increased sales come out to kind of bring down that concentration of those 2 primary products?

Yes. So across the line, we're taking a look at an ophthalmic surgery, and we're making products now for -- to serve the entire process from sedation, infection, inflammation, mydriasis, antisepsis, all of the components that a surgeon, that an ASC, that a hospital would need to purchase in order to take care of a cataract case, a glaucoma surgery case, even a retina case and a LASIK case. We have a big presence in the LASIK market in the U.S. as well. So we saw that entire process, and we've now built formulations to serve patients throughout that entire process. And so there's more that we can offer to our customer.

So beyond infection, inflammation, topical medications, we make a number of injectable products that we didn't make back in the -- during the Allergan days. But you're right, I think the diversification has been impressive, not only in terms of the products that we sell but also in terms of our customer base. We don't have any single customers that if they fell off, would be a disaster for us. So we have a very broad customer base, a national customer base, we operate in all 50 states.

But what I think is really exciting also is while it is the case that we have a diversified product portfolio now, one of the points I wanted to highlight is that we really do believe in the next couple of years that our revenues from FDA-approved products will exceed the revenues that we have from compounded products. And so as we make that transition, that is going to create additional diversification as well and I think a more stable revenue source and a more profitable revenue source.

Useful, very useful context. A couple of accounting questions to finalize this. I just noticed in your balance sheet, you no longer have anything attributed to your investment in Surface. Can you just give a little bit of context around that? And then with the recent acquisition or in-licensing acquisition of the AMP-100, any sense of how we should think about that from an accounting standpoint? Will we see R&D expense or amortized over certain periods that are useful?

Andrew, you want to tap on both of those?

You bet. Andy, thanks for the questions. So on the Surface investment, we still account for that investment under equity method accounting. And so we had a value of the investment at the time of deconsolidation back in 2018. That value you got put on the balance sheet, and then we've been decreasing it proportionally for our percentage ownership of their loss. This quarter, we had basically exhausted that investment balance. The irony about GAAP is that during the quarter, even though we've got that investment and Surface Ophthalmics is now down to 0, during the quarter, Surface successfully raised capital at an increase in valuation. However, we're still maintaining ownership position just over 20%. So we'll continue to show that as a -- has no value on our balance sheet, even though the true value of the equity is much more than 0.

And then on to the Sintetica milestones and how the accounting will be. I've had preliminary discussions with our auditors, and it seems like we were on the same page. We'll probably expense most of the milestones -- milestone payments through our income statement, likely through R&D... There are a few milestones post commercialization that we may be able to capitalize, but it will be more of a negotiation or discussion with our auditors at that point on the correct accounting treatment for those milestones. But the initial ones, we'll sure we'll run through R&D in the P&L.

Perfect. Perfect. And last question, sticking with that AMP-100 offering. Could you just help maybe frame the market a little bit? I understand it's very, very large, but just from a realistic opportunity to blocking capital in the near term to medium term would be useful. And then just a little bit about how synergies shift should put out between that offering and just the infrastructure you've built over the last several years.

Yes. So Andy, we are really excited about AMP-100. And I say that with 5 exclamation points behind it, and that's because it is really in our sweet spot. Fundamentally, if you look at how we created the revenue that we did this quarter, it's about ophthalmic surgeries and a lot of cataract surgeries. We probably touch now close to 20% of all of the cataract surgeries in the United States. So a meaningful presence in the market. So every one of those cataract surgeries in the U.S. can use a product like AMP-100. It is a non-opioid topical anesthetic product. And 100% of the clinical programs are completed, and we expect to file an NDA with the FDA this year, as we mentioned before, and hopefully launch the product a little later than a year from now. But the product itself is going to offer unique advantages over the current standard of care. And so when we go to our customers, and we have a lot of customers who we know this space well, we're going to offer a product that, as I said, has a set of advantages that are totally unique over the current standard of care.

When you think about the overall market, and we said this in the press release, it's cataract surgeries, ophthalmic procedures, and that includes intravitreal injections. So you're talking about a very large market. There are a lot of products in the ophthalmic market that are made just for cataract surgery alone. And that's a big space, but this is 10 million procedures annually. It's sort of the granddaddy of them all in the ophthalmic market, 10 million a year.

And by the way, we filed the agreement recently in the Q. The economic -- the specific economic terms are confidential. But we are able to build protections in our agreement related to gross margins at, at least 80%. You'll see that, I think, if you take a look at the agreement. And if you look at our unit cost, that's going to be below $10 a unit, we expect.

And the bottom line is that AMP-100, if it's approved, we believe, has the potential to be a $100 million-plus per year product. We've never had access to products like that. That's a patented product. And we're not going out and hiring a sales organization and hoping to create a presence in the cataract surgery market. We have a great sales team. We have an amazing commercial team. We have the ability to self-distribute our product, and we have a lot of customers that do a lot of cataract surgeries. So we think our team is going to do an incredible job with AMP-100. So this is a big, big deal for us. But the good news is, is that we have more, hopefully, that we'll be able to close kind of connected to our core focus in the ophthalmic surgery market. So we are transforming the company. In the next few years, we intend to become a much larger U.S. eye care company.

Great. Great. Sorry, I have 1 more question that just kind of popped into my head. As it relates to AMP-100, again, you mentioned the non-opioid aspect of it. Right now, we're thinking about it, at least from a modeling standpoint, from a cash pay basis, how should we think about it from a reimbursement standpoint? And then obviously, there's pass-through status, sometimes it can go perpetually if it's a non-opioid product. So just curious if I'm thinking about it right or how we should be thinking about payment for cash pay or reimbursement.

Yes. So we're not really ready to comment on pricing, specifically, or our reimbursement strategy, but I would reiterate that this is a patented non-opioid topical anesthetic product that provides localized analgesia for ocular surgeries. And so we think it's a better product and offers unique advantages over the standard of care. And we've talked to customers about it, and we think there's going to be strong interest. We need to get the NDA application in front of the FDA, and that's the next step. But if we can get it approved, we think it's going to offer tremendous advantages, not only to physicians, but more importantly, even to patients. So we're excited about this opportunity. It's a game changer for us.

Congrats on all the progress, really, and good luck going forward.

Thank you, Andy. We really appreciate it.

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

Thank you, Ailey. And in closing, let me thank everyone on this call for your interest in Harrow Health. I know that a strong company is built on the hard work and commitment and perseverance of its stakeholders, also an amazing group of partner employees, and many of them are on this call listening right now, and we appreciate the incredible work that you provide to us; but also, loyal stockholders, tremendous numbers of customers and vendors. I'm thankful for all of you who share a strong belief, passion and faith in the products that we deliver and the service that we provide. And I'm thankful, once again, for our stockholders, customers and vendors. Without their support, we could never hope to achieve our goals.

Thank you for attending today's call. And if you have any investor-related questions, please e-mail Jamie Webb at jwebb@harrowinc.com. This will conclude our call. Thank you.

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