Harrow, Inc.

Q2 2021 Earnings Conference Call

8/10/2021

spk06: Good afternoon and welcome to HARO Health's second quarter 2021 earnings conference call. My name is Ilee 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 HARO Health.
spk05: Thank you, Operator. Good afternoon and welcome to Herald 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 risk and uncertainties, many of which are beyond Herald Health's control, including risk and uncertainties described from time to time in its SEC filings, such as the risk 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 factor 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. Herald Health's results may differ materially from those projected. Harold 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 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. For 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 Elbaum, and Harrow's Chief Financial Officer, Andrew Bowd. 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?
spk04: 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 dollars. 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, which 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 Imprimis RX was $7.2 million, including non-cash 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 in the first quarter of 2021. This important metric demonstrates the earnings power of the Imprimis Rx 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 US 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 iPoint Pharmaceuticals to market Dexacu was the first step towards the achievement of our goal. Our new partnership with Novabay for its product, Prescription-Based Avanova, 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?
spk06: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. Our first question today comes from Jeffrey Cohen with Ladenburg Salmon.
spk03: Hi, Mark and Andrew. How are you? Real good, Jeff. Good to speak with you. I'm just going to fire five or six at you. So what's the timing of your queue filing this week?
spk00: Hey, Jeff. This is Andrew. The queue got filed yesterday.
spk03: uh today so i think around uh 4 30. so just got filed okay got it and could you walk us through uh how we should think about the pull through into the back half of the year is that 18-1 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 yeah jeff so
spk00: 18-1, 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 and into next year as well.
spk03: Okay, Kyle. Okay.
spk04: I'll add to that, Jeff. We're seeing in the month of July and as we get into August, the business continues to be robust. But Andrew's spot on that the third quarter in the eye care world is traditionally a softer quarter. But our business has, as I said, been pretty robust.
spk03: 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.
spk04: Andrew, do you want to talk through a couple of the specific disclosures in our filing? It's usually, it's probably about as much detail as we can provide, I think.
spk00: Yeah, on a product-by-product basis, Jeff, other than the DEXA Q commissions, we don't provide a whole lot of detail. We did add some revenue concentration in this Q, which was we do have two products that made up about 36% of total revenues. But 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 within the accounts, greater depth within the accounts, and just stronger volumes on the units.
spk04: Also wanted to add another trend I think that's really important is that our chronic product growth has been strong. And so, you know, 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.
spk03: Got it. Okay, and then any commentary on gross margins? It looked like you had a pretty large beat for the quarter off what we had, and it looks like a little lift going forward. How do you feel about this low to mid-70s number?
spk04: I think, you know, you mentioned the word baseline. I think that, you know, within a percentage point or two 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, you know, 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 a percentage point or two, 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.
spk03: Okay, got it. And lastly, Forrest, could you talk about ASPs or revenues on a per-order basis and any trends that you saw through Q2 or any trends that we should think about through Q3 and beyond? Thanks.
spk04: Thank you, Jeff. Yes, so our revenues per 503B 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 procedure. 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.
spk03: Okay, got it. Thanks for the commentary. Thank you, Jeff.
spk06: Our next question comes from Brooks O'Neill with Lake Street Capital Markets.
spk02: Good afternoon, guys, and congratulations on the terrific results. I was hoping, recognizing that COVID has been a topic of some interest nationally, that you could just talk a little bit about how you've seen COVID impact your business in 2Q and what you expect going forward.
spk04: 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, 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 Delta variant and the like. We have not seen a lot of that show up in ordering patterns. We have not seen offices closed down. Most of the surgeries, cataract surgeries, for example, take place in ambulatory surgery centers. And so we have not heard of, you know, what we saw last year, which is, uh, you know, bans on elective procedures, not seeing any of the things that we saw in Q2 of 2020, fortunately. Um, and so we, we really have not seen the impact of, uh, of COVID certainly in the last period. That doesn't mean that, uh, we won't see things, uh, you know, in the coming months, but even into the third quarter in the month of July and, and, uh, You know, so far through August, we really have not seen a lot of COVID impact.
spk02: Great. And so just to follow on there and just be sure I'm hearing you correctly, you don't think there's any kind of pent-up demand being satisfied from eye surgery, eye visits, any of that other stuff that might have actually helped you this quarter as opposed to hurt you this quarter?
spk04: No, you know, 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 one 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, you will take place over probably five or six quarters and not the one quarter. But we definitely do not see, you know, 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.
spk02: Great. That's fantastic. So secondly, I'd love to just get any additional color you can offer on Dexacue, kind of, you know, what you hear about it, what the outlook is for it. 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?
spk04: So first of all, Dexacue, when we heard this before we took the product on and it remains the case today, Dexacue is a fantastic product. We don't hear from, from ophthalmologists who use the product that it produces bad clinical outcomes. It's the opposite. Ophthalmologists like the product. They, and, and, you know, our commercial team has done an incredible job. You know, we have not had Dexacue 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, you know, we've learned two things. One, as I said, Dexacue 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 talk about that in our stockholder letter. And so our commercial team now has dipped their toes in the water. They understand, you know, what's involved in selling a reimbursed product like Dexacute. We have experience now. And so as we acquire more products that are FDA approved that sort of fit into the surgical market, suite like a product, like DexEQ 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 for our commercial team. You know, we're not starting from scratch, if you will.
spk02: Yep, 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 through what that was and help us to understand how that impacted the quarter?
spk00: Absolutely. The biggest impact was related to the change in value of our Eaton 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 loss from early extinguishment of loan when we paid off our secured senior lender, SWK.
spk02: Right. Great. And then I guess last, 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.
spk04: Great. So Visionology, as you know, we did a soft launch about three 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 back door. And we now have our Visionology Doctor app. We haven't publicized this, but, you know, 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 online. that we'll ultimately build out, we'll 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 at 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 three 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 a capability for call center operations and the like, and really build out and put on paper the plan to create a national network 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 its infancy, but the good news is that it is working. We're delivering prescriptions, and we're taking care of patients.
spk02: Great. Fantastic. Thanks for all that color.
spk04: Thank you, Brooks.
spk06: As a reminder, if you have a question, please press star, then one. Our next question comes from Andrew DeSilva with B. Riley FBR.
spk01: Yeah, it's B. Riley Securities now, but thank you, and good afternoon. And my apologies if you answered any of these questions. I was jumping between calls. But, you know, 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 two 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, I saw the licensing sales sequentially upset.
spk04: Andy, thanks for the call. There were three revenue drivers. One, a meaningful increase in the number of new customers coming to the platform. Two, much more depth within the accounts, 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 a 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 three factors contributed to you know, this sequential revenue increase.
spk01: Great. Great to hear that. And then I heard you reference 36% product concentration across two products. I remember a couple years back around the time you were involved with Allergan, there were a couple products that were almost at 65%. Can you just talk about the diversification since then? on the product side and, you know, where you're seeing increased sales come out to kind of bring down that concentration of those two primary products?
spk04: Yeah, so across the line, we're taking a look at an ophthalmic surgery and we're making products now 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, um, to, uh, to serve patients, uh, throughout that entire process. And so there's more that we can, we can offer to, uh, to a customer. So, you know, beyond infection, inflammation, topical medications, we make a number of injectable products that we, uh, didn't make, uh, back in the, uh, during the Allergan days. Uh, but you're right. I think the diversification is, has been impressive, not only in terms of, uh, of the products that we sell, but also in terms of our customer base, you know, we don't have any single customers that, you know, if they fell off, you know, it 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, you know, a more stable revenue source and a more profitable revenue sources.
spk01: Useful, very useful context. A couple accounting questions to finalize this. I just noticed in your balance sheet you no longer have anything attributed to your investment in surface. Could you just give a little bit of context around that? And then with the recent acquisition or, you know, in-licensing acquisition of the AMP-100, Any sense of how we should think about that from an accounting standpoint? Will it just be an R&D expense or amortized over certain periods that are useful?
spk04: Andrew, you want to tackle both of those?
spk00: You bet. Hey, Andy, thanks for the questions. So on the service investment, we still account for that investment under Equity Method Accounting. And so we had a value of the investment at the time of the consolidation back in 2018. That value 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 in service ophthalmics is now down to zero, during the quarter, Surface successfully raised capital at an increase in valuation. However, we're still maintaining an ownership position just over 20%, so we'll continue to show that as no value on our balance sheet, even though the true value of the equity is much more than zero. And then on to the Synthetica milestones and how the accounting will be. I've had preliminary discussions with our auditors, and it seems like we're on the same page with 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'll 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 for sure will run through R&D and the P&L.
spk01: Perfect. Perfect. And our last question, sticking with that A&P 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 block and tackle in the near term to medium term would be useful. And then just specifically, a little bit about how synergies should play out between that offering and just the infrastructure you've built over the last several years.
spk04: Yeah, so Andy, we are really excited about AMP 100, you know, and I say that with five 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, you know, close to 20% of all of the cataract surgeries in the United States. So a meaningful presence in the market. And 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, so 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, you know, by the way, we filed the agreement recently in the queue The specific economic terms are confidential, but we were 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 costs, you know, that's going to be below $10 a unit, we expect. And the bottom line is, 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 surgery. 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 that we have more, hopefully, that we'll be able to close soon. 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.
spk01: Great, great. Sorry, I have one more question that just kind of popped into my head. As it relates to AMP100 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 we're thinking about it right or how we should be thinking about payment for cash pay or reimbursement.
spk04: Yeah, so we're not really ready to comment on pricing specifically or our reimbursement strategy. But, you know, I would reiterate that this is a patented non-opioid topical anesthetic product that provides, you know, 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, you know, 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.
spk01: Great, Austin. Hey, thank you very much for taking my question. Congrats on all the progress, really, and good luck going forward.
spk04: Thank you, Andy. We really appreciate it.
spk06: This concludes our question and answer session. I'd like to turn the call back over to Mark Baum for any closing remarks.
spk04: Thank you, Eileen. 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 hard work, 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 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 email Jamie Webb at jwebb, W-E-B-B, at harrowinc.com. This will conclude our call. Thank you.
spk06: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer

This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.

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