Harrow Q1 2024 Earnings Call Transcript

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May 14, 2024

There are 7 speakers on the call.

Operator

everyone, and welcome to the Harrow, Inc. First Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. Please note this event is being recorded. I would now like to turn the conference over to Jamie Webb, Director of Communications and Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Good morning, and welcome to Harrell's Q1 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 the Reascan 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 ks and subsequent quarterly reports on Form 10 Q filed with the Securities and Exchange Commission.

Speaker 1

Harrold's results may differ materially from those projected. Herald 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, Harold referred 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.

Speaker 1

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.harro.com. Joining me on today's call are Harrow's Chief Executive Officer, Mark Elbaum and Harrow's Chief Financial Officer, Andrew Bull. 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.

Speaker 2

Thanks, Jamie, and welcome to everyone joining us on today's call. I will start as I always do with a reminder to review our earnings release, corporate presentation and letter to stockholders, all of which are posted to the Investor Relations section of our website. Our business demonstrated remarkable resilience in the Q1 of 2024, especially given the effects of the change healthcare cyber attack, with revenues for the Q1 of 2024 increasing 33% over the same period in 2023. Here are a few key recent accomplishments of note. We strengthened our management team, adding Greg DePasquale, who started this week in the newly created role of Senior Vice President and Head of Commercial.

Speaker 2

Greg is responsible for all sales, marketing and sales activities for Harrow's portfolio of branded ophthalmic products. Greg comes to us from a sales leadership role at Regeneron, where he experienced great success driving revenue growth for the retina product EYLEA and EYLEA HD. Prior to Regeneron, Greg held leadership roles at Essilor, Novartis' retina division, Zeiss and Bausch and Lomb. We are excited about what Greg brings to Harrow, especially at this time in our development. John Saharic will continue to oversee Harrow's commercial business as Chief Commercial Officer.

Speaker 2

However, he also serves as the CEO of ImprimisRx and he will focus on the day to day management of our market leading ImprimisRx compounded division. Let's talk about VIVI, the first and only water free cyclosporin designed to treat the signs and symptoms of dry eye disease. VIVI is the cornerstone product in our dry eye disease franchise. We launched VIVI in January of 2024 and with 4 months under our belt since the launch, the early success we are seeing in the numbers coupled with feedback from very experienced ophthalmic leaders is gratifying. For our stockholders, given the opportunity we see in the U.

Speaker 2

S. Chronic dry disease market, the reception for VIVI thus far should give you confidence in what we are doing at Harrow. Not only have new prescriptions continue to ramp up month to month, but we are now seeing the beginning of our 5th refill cycle. This is very good news as the true value to Harrow stockholders is not in the initial VBuy prescription, but in the stream of monthly refills. We're also pleased with our success with market access for VBuy.

Speaker 2

As of our last earnings call in mid March, only a couple of months ago, our market access team had secured coverage for just over 40,000,000 lives. I am thrilled to report that this number has since climbed to north of 100 million covered lives for VIVI. New payer contracts are also being added daily. I've always believed that being the best product in a market, while important, isn't enough for long term success. It must also be accessible and affordable to patients.

Speaker 2

And I'm delighted to say that our market access strategy is ahead of schedule and is helping to ensure patient access to this amazing new dry eye product. VIVI's success is also the result of our dedicated and experienced small but mighty VIVI sales team. Size can matter less when your team has deep experience in the ophthalmic business and specifically with dry eye. And many of our sales leaders have participated in launching some of the best selling dry disease products. That said, as we ramp up sales, gain coverage and hit our internal average sales price or ASP targets, we intend to add more vVy sales professionals.

Speaker 2

The most rewarding aspect of our Vivi launch so far has been the positive responses from both prescribers and patients. Prescribers are anecdotally reporting patients who previously found no relief with other treatments are experiencing significant improvements with VIVI, often in as little as 2 weeks and with little or no adverse side effects. VBI refills are also a great story. Our data demonstrates and plain common sense supports the notion that patients don't refill a chronic disease prescription unless they're getting relief. The consistent increase in VIVI prescription refills, as I said, now into this 5th cycle, the only J coded or reimbursable ophthalmic anesthetic in the U.

Speaker 2

S. Market. IHEZO is now a full year into its launch. We are pleased with the increase in adoption that we are seeing from eye care professionals in all settings of care, particularly following the recent confirmation from the Centers For Medicare and Medicaid Services or CMS that IHESO is separately reimbursable in the physician's office setting of care and for both unilateral and bilateral in office procedures. As a result, IHIZO is well positioned to gain market penetration, especially among retina specialists and in particular with large group purchasers.

Speaker 2

Since CMS confirms separate payment, we have executed supply agreements with 7 large multi practice strategic accounts that in the aggregate are responsible for over 450,000 annual cataract surgeries and over 1,100,000 intravitreal injections each year. These supply agreements are critical to our commercial strategy as is order pull through at the practice level, which will be a primary focus for Gregg over the next few months. One last item of note on IHESO is that the U. S. Patent and Trademark Office recently granted IHESO a new set of patent claims with an expiration date of 2,039.

Speaker 2

We also continue to progress in our strategy to reintroduce testing of the commercial scale process performance qualification or PPQ batch of Tri Essence that was manufactured during the week of April 15 is nearing completion. And I am pleased to report that the batch has passed all preliminary release parameters. We anticipate having final results by the end of May and we intend to communicate our plan for the balance of our Tri Essence relaunch program during the current calendar quarter. I want to add that we are making solid progress with our anterior segment products as well and we expect this line of products to continue to be valuable for eye care physician customers who count on these products on a daily basis to maintain the eye health of their patients. These products have great market access stories as well.

Speaker 2

For example, you can see from Slide 6 in our corporate presentation, Madison has 88% coverage or approximately 276,000,000 covered lives, while Allevo has 75% coverage or 236,000,000 covered lives. It's up to us to get out there and tell the stories of these great products, and we are. Lastly, I want to confirm that the progress we reported last quarter in our ImprimisRx compounding business is continuing. We are firmly back on track with our historical growth trajectory over the last several years of low double digit growth in this business. Our balance sheet continues to be solid with $76,000,000 in cash and cash equivalents, including our investment in Eaton Pharmaceuticals as of the end of the Q1.

Speaker 2

Since the close of the Q1, however, we divested our non strategic holdings of about 2,000,000 shares in Eaton, adding $5,500,000 to our cash position, which can now be deployed into more strategic investments and activities. In closing, Harrow has made critical strides to execute our 5 year strategic plan. And this progress and what we're working on currently are the sources for the tremendous enthusiasm for what lies ahead during the balance of 2024. We're now happy to answer your questions. I will pause to have our operator poll for questions.

Speaker 2

Operator?

Operator

We will now begin the question and answer session. The first question today comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

Speaker 3

Hi, Mark and Andrew. How are you?

Speaker 2

Good morning, Jeff.

Speaker 3

So I guess, firstly, could you talk about VIVI a bit? It looks like you made some strong progress on covered lives. How does that look for the balance of the year on the covered lives? And remind us how things look with Medicare and CMS?

Speaker 2

Yes. So obviously, in a matter of really less than 2 months, we've dramatically increased the number of covered lives, as I said on the call, from the low $40,000,000 range to more than $150,000,000 And we continue to add covered lives almost on a daily basis. We expect that to continue through the balance of the year and into the Q1 of next year. From the time that we launched VBIO, we always said that coverage was about an 18 month activity and that Medicare Part D coverage in particular would take some time. The coverage improvements that we're seeing with VVIA, I think, may accelerate our timeframes.

Speaker 2

But right now, we're kind of still leaving the overall coverage picture in that Q1 of 2025 range. But you should expect on a quarterly basis in August when we report Q2 numbers to see further improvements and then further improvements in November when we report again.

Speaker 3

Got it. That's helpful. Andrew, any comment on margins at all as far as gross margins for 2024 and how you expect them to fold out or any cadence or any guidance on the margin side for the year?

Speaker 4

Yes, absolutely, Jeff. Thanks for the question. Good morning. On gross margins, core gross margins in particular, where we're backing out the amortization of acquisition NDAs for the non cash expense, We expect those right now in the mid-70s to float up, hopefully into the low 80s by the end of the year. And the reason for that is as the company grows this year from a revenue standpoint, most of that growth we expect to come from the branded products, which are going to carry a higher gross margin profile than our compounded products.

Speaker 3

Got it. Okay. And could you talk about we've heard about this cyber attack from a couple of folks out there. So was there an impact on the revenue for Q2? And if so, is that impact going to be seeping back in for Q3 or from Q1 to Q2?

Speaker 2

Sure. Obviously, the and you've heard from other companies you cover the change cyber attack had a big impact on the overall U. S. Healthcare industry. It certainly had an impact on our customers.

Speaker 2

And in Q1, to be clear, it had a material impact on our sales. We're still assessing the total hit, but it's definitely in the 1,000,000 of dollars. The good news I think is that we saw signs of improvement in the month of March and in April, and we're seeing the overall hitch kind of die down. And frankly, the month of April and Q2 in general, the numbers look pretty good. So we think the risks and the damage from the change cyber attack are waning for sure.

Speaker 3

Okay, got it. And then lastly, first, can you talk about the top line and its cadence for 2020 4, anything to guide us on as far as quarterly readouts?

Speaker 2

Yes. So we don't really give quarterly guidance. As you know, we've given a guidance number for the 2024 period, which is greater than $180,000,000 And what I can tell you is, as we have kind of creeped into 2024's Q2, so this present quarter, the numbers look pretty good. And we have a lot of interesting activities, I think, that we're excited about this year that give us even greater confidence that we'll be able to focus on the greater than sign of the $180,000,000 and not just on the $180,000,000 but hopefully going over $180,000,000 in a more pronounced way.

Speaker 3

Got it. Is there any reason to believe it would not be sequential through the balance of the year

Speaker 2

Talk about that.

Speaker 4

Yes, Jeff. So the answer to that is, I think it depends. Our belief is it will we will see sequential quarterly revenue growth. There are times though we'll see wholesaler stocking quarter to quarter that may have some fluctuations. But our general expectation this year is that each quarter we will continue to see revenue growth.

Speaker 4

Part of that is, Mark talked about the vVAS resales coming in, those should just mount and grow and that will help extend and really accentuate that quarterly revenue growth we believe. In addition to the additional new accounts on the EASA on that pull through on some of these larger account wins that we landed recently.

Speaker 3

Perfect. Okay, that does it for us. Thanks for the questions. Nice quarter.

Speaker 2

Thanks, Jeff.

Speaker 4

Thanks,

Operator

Jeff. The next question comes from Chase Knickerbocker with Craig Hallum.

Speaker 5

I just want to start first on kind of that impact from change. Those 1,000,000 of dollars of impact, Mark, that you just mentioned, was that primarily in the anterior segment kind of products bucket? And then maybe a related question, can you kind of speak to if there was any kind of impact from change just from like a physician payment perspective, driving less willingness there? That kind of drove sequential declines in volumes for IHESO in Q1. And then along those lines, just maybe speak to what you're seeing so far in Q2 for IHESO.

Speaker 5

I think the script data that we've seen so far in April has gotten some people excited from an acceleration perspective now that you have that J code.

Speaker 2

Yes. So thanks for the question. And welcome to the mix, by the way. Good to speak with you. The assessment that we've done so far has really been on IHIZO with respect to the change cyber attack.

Speaker 2

And so when I say that the hit has been in the 1,000,000 of dollars, that assessment is really just for IHESO. We're still looking at the other lines of our business as we think about what our options are with respect to the change healthcare cyber attack. So I really can't comment on anything other than IHESO specifically, but it certainly was in the 1,000,000 of dollars. As far as IHESO in the quarter 2, we are seeing a pickup. And I would say that the pickup is not only due to the waning nature of the change health care cyber attack, which certainly affected our customers.

Speaker 2

I was in an office in New Jersey recently and this doctor was still not getting paid. In fact, I know of several accounts that were taking out personal loans in order to make payroll. So this is a very serious event, not only for our customers, but for the entire health care system in the United States. I think the good news on IHESO is that we have seen a recovery, not only as I said because of the waning nature of change, but primarily because of what happened on March 20 with CMS confirming that IHESO was separately payable and then only a few hours later confirming that it was separately payable in the office for not only unilateral but also bilateral cases. This completely changed the game for us in terms of our ability to sell that product into the office setting.

Speaker 2

And we say that for good reason because our J code, our ability to get reimbursement in the surgical setting is limited. It's a temporary pass through period. But that is simply not the case for the office setting. And so we have permanence there. We have a permanent J code and we have now confirmation that it is separately payable.

Speaker 2

So we are seeing an uptick in a meaningful way for IESO. That was one of, I think, the attractants to Greg, along with some other interesting attractants as well to come and join Harrow. And he's going to do a great job, I think, helping us with pull through with the strategic accounts that we have signed since March 20 and then numerous others that are in the works.

Speaker 5

Got it. And then maybe just kind of parlaying that into kind of peeling back the layers on guidance. Just to confirm, there's still no Tri Essence contribution in that. And then just maybe speak to what that $180,000,000 floor kind of assumes from a sequential growth perspective. The largest growth driver sequentially certainly in our model is IHESO.

Speaker 5

Can you just kind of confirm that? And then on the anterior segment, ocular surface products, does it assume a fairly meaningful kind of sequential growth from that bucket of products as well, Mark?

Speaker 2

Andrew, you want to take both of those on guidance related to inclusion of Tri Essence and then interior surface?

Speaker 4

Yes. Hey, Chase. Good morning. In regards to sort of the in regards to Tri Essence, just to confirm, the $180,000,000 does not include any contribution from Tri Essence on the revenue side. We feel good about that number regardless of any outcome with Tri Essence and the ability to relaunch that product this year.

Speaker 4

In regard to sort of product contribution to that revenue number, IHIZO is definitely going to be a big contributor and that's what we have modeled certainly from a product perspective. VeeVai is really kicking in too. I've been surprised at what we had modeled and how the actuals are coming in. The refill rates are higher than remodeled, which is for a product like this where it's chronic and refills are super important to actual revenue contribution. We're seeing a regional rate much higher.

Speaker 4

We're taking up our own internal expectations. So vVy could be a bigger contributor than we initially thought as well. And then on the other anterior segment products, we talked a little bit about the change impact to IHESO and certainly we focused in on that impact internally, but we definitely saw fluctuations and volatility in the other front of the eye products during the Q1 and we think part of that was related to change. But we're also investing a little bit on the sales and marketing for those other products, bringing in some additional commercial resources to help stabilize and then turn those products into growth products as well. So our expectation is we should get growth in all of the product lines, including the ImprimisRx business, which we didn't really even discuss here.

Speaker 4

But that product is returning to or that product line and business is returning to growth as well from a top line perspective.

Speaker 5

Thanks, Andrew. And then just last for me guys. I just wanted to talk a little bit about the supply agreements with those 7 large multi practice organizations. What are the terms there? Is that essentially just you guys have access to their clinic network and now you it's a fairly easy process for those individual clinics to adopt when you kind of send your sales rep out and kind of pull that demand through?

Speaker 5

Or is there some sort of contracted kind of volume commitment from these large kind of multi practice organizations? Just kind of dive into a little bit more detail around terms there. Thank you.

Speaker 2

Sure. Sure. I can't get into specific terms with an individual account, but it's a bit of a mix actually. Some of these deals are essentially licenses to hunt, if you will. And they're really more than that though, because in order to get into some of these practices, you really need to have authorization and approval.

Speaker 2

It's got to be easy for the physician to go ahead and make an order ultimately purchase. In other contracts, we certainly have volume discounts and other incentives built into those agreements. But it's a bit of a mix, mixed bag. And I think the exciting thing for us is it's not easy to get these agreements in place, number 1. And I think the most important feature that I'm seeing and I believe you'll start to see this more in the numbers as we progress into the quarter and into the Q3 as well is pull through.

Speaker 2

Pull through is the key. And we certainly are signing these agreements, but I think our team is doing a much better job of pull through and actually getting orders from these accounts. I think you're going to see more of those strategic accounts happen in the retina side, which is very exciting. And that really hasn't even begun to kind of kick in, but we expect it to. And certainly Greg's involvement will, I think, support that effort.

Operator

The next question comes from Brooks O'Neil with Lake Street Capital. Please go ahead.

Speaker 6

Thank you. Good morning. I jumped on a few minutes late. So if I ask you about something you talked about already, just mention it and I'll read the transcript. But I was hoping you could provide a little color on your pricing realization, in particular for the 2 e branded drugs and what you're seeing and how that's impacting your performance so far with those products?

Speaker 2

Yes. So pricing really from our perspective is all about ASP, so our average selling price, which is really kind of what we end up getting. I can't go into ASP specifically by product for competitive reasons. But what I can tell you is with respect to both IHESO and VIVI, we're really pleased with where we are. And internally, I think we're probably ahead of where we thought we would be.

Speaker 2

But we're still getting data, particularly with VBI, it's a new launch, but we're pleased with where we are on ASP. And as we collect more data, we'll be able I think there'll be more visibility into kind of where we are with that publicly. Perfect. Yes.

Speaker 6

And then I'm just curious, I think the G and A spending was a couple of million higher than we were thinking, not a shock to me at all, but I'm just curious how you're thinking about your level of G and A spending so far and what you anticipate sort of for the balance of the year?

Speaker 2

Andrew, you want to take that?

Speaker 4

Sure. Hey, Brooks, good morning. Good morning. In regards to SG and A and spend there, so the answer is as we look at the year, the answer is it depends. We're trying to manage to that leverage ratio number that we talked about on the last call being coming in under 5 times.

Speaker 4

And so if revenue growth is there, if we're able to support the revenue growth and can with additional resources on the sales and marketing side to drive further growth and still hit our EBITDA number, at least from what we project internally, then we're going to do that. Right now, the expectation is we'll make some incremental investments on the sales and marketing side. And G and A side, you just support what we have. And if there's an opportunity to invest, we will, but we're going to be cautious and sort of take a measured approach on that expense to manage the EBITDA number. I think last quarter we talked about too right after the right after we filed the 8 ks regarding the announcement from CMS or the message from CMS, we put up job postings for additional IHIZO key account managers.

Speaker 4

And so we invested in that sales So we'll see a little bit of additional sales and marketing expense related to that in Q2. And if there are opportunities to continue to be strategic with deployment of capital on the sales and marketing side that will drive revenue growth and we'll do that. But in full, we'll be cautious and measured about the approach to make sure we're managing to an EBITDA number that we have targeted.

Operator

That's all the time we have for questions today. I would like to turn the conference back over to Mark Baum for any closing remarks.

Speaker 2

Thanks, Betsy, and thank you for everyone joining today. We remain confident that our 5 year strategic plan is going to lead Taharo becoming a leader in the North American ophthalmic pharmaceuticals industry. And your trust and collaboration are the cornerstones of our success and we're excited to share further developments in the near term and of course in upcoming quarters. Thank you once again for your commitment to our journey towards innovation and excellence. And thank you to everyone for attending today's call and for your interest in Harrow.

Speaker 2

If you have any investor related questions, please email Jamie Webb at

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