Harrow, Inc.

Q2 2022 Earnings Conference Call

8/9/2022

spk06: Good afternoon, and welcome to Hora Health's second quarter 2022 earnings conference call. My name is Ian, and I'll be your operator for today's call. At this time, all participants are on 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 Ms. Jamie Webb, Director of Communications and Investor Relations for Hora Health. Please go ahead.
spk01: Thank you, operator. Good afternoon and welcome to Herald Health's second quarter 2022 earnings conference call. Before we begin today, let me remind you that the company's remarks may include forward-looking statements within the meaning of federal securities law. Forward-looking statements are subject to numerous risk and uncertainties, many of which are beyond Herald Health 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 FDA-approved products and compounded formulations and technologies and FDA approval of certain drug candidates in a timely manner or at all. For a list and description of those risks and uncertainties, please see the risk factors section of the company's most recent annual report on Form 10-K and subsequent quarterly reports on Form 10-Q filed with the Securities and Exchange Commission. HARAL health results may differ materially from those projected. HARAL 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, HARAL will refer to non-GAAP financial metrics, specifically adjusted EBITDA and or adjusted earnings, as well as core results such as core gross margin, core net income, and core diluted net income per share. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company's earnings release and letter to stockholders, both of which are available on the website. 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.harrellinc.com. Joining me on today's call are Harold's Chief Executive Officer, Mark Elbaum, and Harold'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.
spk07: Thanks, Jamie, and thanks to everyone for joining us on today's call. Our second quarter 2022 earnings release Our corporate presentation and our letter to stockholders have all been posted to the investor relations section of our website, and I would encourage you to review them for a better understanding of the company's results. I'd like to start by saying that I've been looking forward to having this conference call for quite some time. You might say, why? Well, first, we do have strong numbers to report, and business does remain good. even in light of the fact that the summer is traditionally a slower time for eye care, including surgical, with some doctors and staff taking vacations. But second, we are officially in the back half of 2022. This is a period of great consequence for Harrow and a period that I believe will yield some of the most transformative and hopefully financially valuable events in our 10-plus year history. Before we take your questions on the queue and the stockholder letter, I'd like to provide some highlights of our results from the second quarter ended June 30th, 2022. Second quarter revenues of $23.3 million represent a 29% increase over the prior year quarter and a 5% increase over the first quarter of 2022. And this makes the second quarter our eighth consecutive quarter of records, and many key financial metrics, including top-line revenues. Second quarter gross profit was also a record. That was $16.8 million. That's a 22% increase over gross profit for the year earlier period of $13.7 million and a 4% increase over the sequential first quarter of 2022. Core gross margin for the second quarter of 2022 was 73% compared with the prior year's 76%. Adjusted EBITDA was $4.5 million for the second quarter of 2022, compared with $5.7 million in the prior year period. Core net income was $254,000 for the second quarter of 2022, compared with core net income of $2.1 million in the second quarter of 2021. And core diluted net income per share for the second quarter of 2022 was a penny per share compared with $0.07 per share during the same period last year. We did make great progress during the first half of 2022 in terms of the implementation of our strategic plan, which included ensuring that Harrow, as an eye care platform, had the infrastructure, the systems, the resources and talent needed to execute on the growth that we expect in our compounded pharmaceuticals business, And, of course, the new and even more dramatic growth that we expect from the continued integration of FDA-approved branded pharmaceutical products onto the HARO platform. But there is no free lunch in terms of paying for the investments that are required to take advantage of these future highly lucrative sources of revenue. I am happy to say, though, that we can utilize profits that we've made in our core business to make these modest investments without the need to sell equity and dilute our shareholders. And I can assure our shareholders that we expect the proverbial juice, if you will, in other words, the value that we expect to derive to nearly certainly be worth the squeeze in terms of the investment cost. And here are a few additional items to be on the lookout for during the second half of 2022. First, and last, certainly probably the most important thing I would be on the lookout for, and that is our PDUFA target action date of October 16th for AMP 100. This is our patented ocular surface anesthetic drug candidate. Our team is very excited to get this product approved and into the hands of surgeons early next year so that patients, including those receiving intravitreal injections, and those undergoing various eye surgeries, such as cataract surgery, can begin to benefit from the unique and clinically important attributes of AMP-100. Second, at the American Academy of Ophthalmology conference this September, we expect to launch an exciting new patent-pending fortified antibiotic product family. This is something that we've been working on for several years. It's totally unique in the market. It's proprietary, and we are very excited about our launch at the AAO meeting next month. Third, later this year, we intend to launch a new patent-pending formulation suite to address a large and growing chronic care condition. This product family has actually been in the market. We have been perfecting this offering over the last year or so, and I am excited about this launch. This will greatly benefit this large and growing patient population in the U.S., And financially, for Harrow, we believe this has the potential to be a needle mover. Lastly, we continue to evaluate a robust pipeline of acquisition candidates, some of which are in later stages and, although there can be no guarantees, could potentially be announced in the second half of this year. Now, assuming AMP 100 is approved on the PDUFA target action date of October 16th and is launched in early 2023, as we intend, I continue to believe that revenues from branded pharmaceutical products should eclipse revenues from our compounded pharmaceutical products within a couple of years of AMP 100's launch. In addition, we expect our gross margins from branded pharmaceutical products will be larger than our compounded pharmaceutical product gross margins, and that will, in the aggregate, result in our overall gross margins floating higher. When you combine these catalysts that we expect in the second half of 2022 to our growing revenues from the relaunch of Iopidine and Maxitrol and advancements at Surface and Melt and Eaton Pharmaceuticals, in which we own equity positions, you can understand why we're very excited about the balance of the year. Now, let's take your questions. I will pause to have our operator pull for questions. Operator?
spk06: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. And our first question today comes from Jeffrey Kennan of Landenburg-Solomon. Please go ahead.
spk02: Hi, this is actually Destiny on for Jeff. Thank you for taking our questions, and congratulations on a really great quarter. Just quickly, I wanted to see if you could touch on kind of your TAM. I know in a previous call you kind of referenced being able to target some new and additional accounts as you launch these branded products. So how are you looking at the TAM now versus as you launch those products? And then also kind of related to that is how are you having to change your marketing strategy or are you having to change your marketing strategy with the addition of these branded products? And are you able to leverage your existing strategies to really optimize penetration awareness, et cetera?
spk07: Thanks for the question, Destiny. In terms of the addressable market, we really play, obviously, in two core markets within ophthalmology. That's surgical and chronic care. If you break out the surgical market, we are strong in the cataract surgery market. We estimate that we make drug for as many as probably one out of every five cataract surgeries in the United States, so a pretty significant market share. And then other surgical interventions such as LASIK. And our market share in LASIK in terms of participation with a product in those procedures is even higher than in the cataract surgery marketplace. We estimate that we serve more than half. of the LASIK procedures in the market. And then there are other glaucoma surgeries and retinal procedures and so on that we have smaller shares within. Beyond the surgical market, the chronic care market we participate in making medicines that are prescribed for patients to manage glaucoma, dry eye disease, myopia, and conditions like that. The surgical market, that we serve today is going to be different than the surgical market or the procedure market that we serve in the future in one key respect. Currently, we really don't have a presence in the intravitreal injection space. And with AMP 100, we anticipate having a product that will serve patients undergoing those intravitreal injections. And it's a considerable number of patients. You're talking about north of 8 million and some estimates north of 10 million procedures per year. Importantly, there appears to be a new medicine for dry age-related macular degeneration, geographic atrophy, that will come on the market. And some people believe that that that could significantly increase the number of intravitreal injections. And so when you think about an addressable market, for us, having a product like AMP 100 approved, if it's approved this October, creates a meaningful increase in the addressable market that we will serve. However, I must say that our access to the chronic care space with the medicines that are prescribed that we make for patients managing dry eye disease and glaucoma. That happens to be the fastest part of our growth. And your second question was related to marketing strategy and whether we're able to leverage the relationships that we have now and the strategy that we currently use. And the answer is unequivocally yes. We have a large customer base. We, you know, for the last couple of years, we've said it's been more than 10,000 customers. Those are doctors and hospitals and surgery centers around the United States. We sell into all 50 states. But what's important is that, you know, from a marketing perspective, as an example, because we have so many customers, you know, we recently actually did a a survey of our existing customer base to determine a few nuances on a marketing strategy that we were going to pursue. And I think, you know, normal marketing costs for a survey like that would probably be north of six, you know, somewhere north of six figures, north of $100,000. And we were able to get that information very, very inexpensively from our existing customer base. So there's a lot of leverage. That's one example. But we do intend to utilize our presence with these customers going forward as we market our branded products.
spk02: Got it. Thank you. That's super helpful. I guess just curious, I noticed year-over-year R&D increased a bit, and I'm wondering if you could talk to that a little bit.
spk07: Sure. Andrew, you want to cover those costs specifically?
spk04: Yeah. Yeah, absolutely. Hey, Destiny. So most of the new R&D costs are related to the M&A activity that we took on in 2021. So the new costs for developing Mac 100, which we had an FDA, we needed the FDA in August, to talk about that clinical program. And then the AMP 100 program, as well as some R&D costs around Maxitrol and Diapadine more recently. So it's the big driver and the change year over year, those new costs for the brand of products and drug candidates.
spk02: Okay, got it. And that kind of segues into my next question on MAC 100. You just mentioned that you had the meeting, I guess, this month, so a few days ago. What did you take away from that meeting? Is there anything you can call out? Anything of that nature?
spk07: Well, the meeting itself, I'd say, was very positive. Our intention with the program was to leverage the work that had been done in Japan for the approval of the product in that market. And I think the upshot from the meeting is that we continue to believe that we will have access to a, I would say, a very efficient process and efficient way of getting that product into the U.S. market. We still need to see the minutes from the meeting. And we still need to have conversations with our partners in Japan, which are to take place in the next 30 to 45 days or so. But it was a very positive meeting. I think the FDA is interested in having a product in the market for that indication that is FDA approved.
spk02: Got it. That's all very encouraging for sure. Okay. And then I guess lastly, I'm going to ask you about M&A, even though you discussed it a little bit. I know you're not going to give me any specifics. You never do, which is good. I'm curious, though, if you can talk about some of the areas in your portfolio that you may be looking to maybe expand or fill.
spk07: Yes, so you're going to see us do what we've done in the past, the recent past. We're going to focus on where we have commercial credibility, and that is the U.S. market. That is the ophthalmology space. That's the pharmaceutical space, and that is within surgery and in the chronic care market. So in surgical, we're talking about perioperative medications, and on the chronic side, That is, you know, the disease states that I mentioned. And we are very active. Some of these things take longer than we would like, but we are very excited, actually more excited than we've ever been about some of the opportunities that we see. And hopefully, if things go our way, we'll be able to announce some of these things sometime in the back half of this year.
spk02: Great.
spk07: No guarantees, though.
spk02: Right. We'll keep our eyes sealed and look forward to that announcement or an announcement. I think that's all we have for questions, so thank you so much.
spk07: Thank you, Destiny.
spk06: And thanks to Jeff, too. Our next question comes from Sahil Cosman of BRI Securities. Please go ahead.
spk00: Hi. Good afternoon, Mark. Congratulations on another record quarter on the revenue side, and just a couple of questions from us. First, could you maybe talk about how we should think about core gross margin moving forward, you know, with the, both in the context of the, you know, one-time inventory purge that we saw this quarter, but also with, you know, AMP 100 potentially coming on the market and the expansion of the branded product portfolio?
spk07: Sure. You know, I think, In terms of gross margins, obviously we identified that we had this inventory purge. It was a one-time event. It was a couple of percentage points. It didn't have any impact on the quality of our product or anything, and then there were some discounts. Gross margins came down a smidge in this period, but I think the upshot is, you know, that we're going to see margins float in this range in the low to mid-70s as they have you know, for the last, I guess, six to eight quarters or so. Once we have access to AMP 100 and even potentially some of the other products that we're pursuing on the M&A front, our expectation is that next year as these products begin to hit the market and we get revenues in from those products and the gross margins from those products, we expect to be significantly higher than our current range that in the aggregate, our gross margins will begin to float higher. Not only will revenues increase as I laid out, we expect revenues to more than double within 18 to 24 months of the launch of AMP 100. But in addition to that, we should see our gross margin profile rise into the 80s. That is our expectation based on the models that we've built.
spk00: Excellent. Thank you. And then could you provide a bit more color on the Fortified Antibiotics Program? You know, to the extent you're able to disclose, you know, what's really the target market here, and how do you see this contributing to the ratio between the compounded and branded pharmaceutical revenue?
spk07: Yeah, so this is – well, both of the families that we intend to launch in the back half of the year – you know, outside of AMP 100, outside of any of the M&A activity, if we're able to close anything, those are compounded products. In the case of Fortisite, this is an opportunity that we've been pursuing for several years. Fortified antibiotics are used all over the country to treat site-threatening conditions. And unfortunately, there is no FDA-approved product. And so these formulations are compounded at local pharmacies around the country. If you can get access to them, there is no way for an eye care professional to actually stock the medication. And so when a patient presents with a sight-threatening condition, these eye care professionals want to have access right then and there to take care of these patients. And the promise of the formulation that we've been able to create and the IP that we have filed will allow an eye care professional for the first time to have in their office a medication, a fortified antibiotic product to prescribe to these patients and make sure that at their office, at the time the patient presents, they will be able to know that that medication is on the patient's eye and that they are being treated for, as I said, a potentially sight-threatening condition So that's the promise of Fortisite. It has never been offered before to our knowledge in the U.S. or anywhere in the world. And we're really excited about this. As I said, this is something that we've been working on for years. No one else has it. And we're going to bring it to the market. I kind of call it, you know, it's sort of like an EpiPen for the eye. You know, we think that the responsible thing for every eye care professionals to have one of these in their office when patients present so that they can care for those patients. And so we're excited about it.
spk00: That's excellent. Thank you. And maybe just one last one from us. You know, acknowledging that it is a non-controlling equity position, could you just remind us of the progress, particularly across surface ophthalmics that we saw with the SURF 100 study and really what might be the significance of that moving forward?
spk07: Yeah, so, you know, if you look at the stockholder letter, you know, there is on page five a discussion of the SURF 100 study. I'm a member of the Board of Directors of Surface Ophthalmics, and so I have information that I'm not supposed to disclose and I won't disclose. But what we did put in our stockholder letter was, is a clear statement that the phase two clinical trial that SURF has conducted, and by the way, this was a completely unique study in that they actually studied various active drugs that Surface Ophthalmic owns against the two market leaders, and that would be Restasis and Zydra. And these are very valuable franchises. And what I did say in the stockholder letter, and I'll repeat now, is that the trial results themselves absolutely exceeded our expectations. And I believe, and the company believes, that Surface has a clinically superior medicine relative to all currently approved drugs and known data from drug candidates in development for this highly underserved market. We think that Surface is a very valuable asset. The assets that they have are valuable, and, you know, the company itself is in discussions with what their next steps might be.
spk00: Excellent. Thanks for taking our questions and looking forward to following the story the rest of the quarter. Thank you, Sahil.
spk06: And again, as a final reminder, if you have a question, please press door, send one. Our next question comes from Nathan Weinstein of Asia's Capital. Please go ahead.
spk03: Hi, Mark, Andrew, and Jamie. Thanks for taking my questions. Congrats on another strong quarter and a very enjoyable and readable shareholder letter, Mark. Maybe just a question about the operations of the business, where you guys are in terms of headcount and facility investment.
spk07: Sure. And thanks for the question, Nathan. In terms of our actual headcount at the close of a quarter, Andrew, do you have an idea? I think we're probably, what, close to 200 folks?
spk04: Yeah, Nathan. We crossed a threshold at the end of the quarter of over 200 employees.
spk07: So about 200 people. And in terms of the facilities themselves, the expected capex, I mean, you know, we do believe that over the next few years, you know, we'll have to make marginal improvements. in the facilities, but we don't expect our CapEx to be, you know, materially different from, you know, investments that we've made, you know, as we've built the business. So nothing extraordinary. We continue to invest to make sure that we have the capacity to continue to grow the business and invest in robotics and automation and other things tools that make the business more efficient and able to scale.
spk03: Great. Thanks. That's helpful. And then just a broad question, I guess, in terms of the macro with the supply chain. And did you see anything in the quarter in terms of inflation hitting you, any logistical challenges? And then Slightly different subject, anything on the horizon with drug pricing reform that you think could be impactful for the company?
spk07: Well, I'll take the first or the last question first, if that's okay. On drug pricing, you know, in terms of policy and legislation, we really don't see anything that we expect to materially affect what we're doing. We're largely a cash-paid business right now. But as you know, we intend to, as we move more into the FDA-approved products business, the branded pharmaceuticals product business, more and more of our revenue is going to come from reimbursement, whether that's through private or public payers. But what we've seen recently with some of the legislation does not cause us to believe that we're going to see any impact with the market access strategies that we intend to employ for products that would be approved or for products that we own that we're currently executing market access strategies on. In terms of inflation, what we have seen, and I think a lot of other businesses around the country are seeing, is some wage inflation. Anecdotally, it seems a little bit harder to get really great people in certain areas of our business. And there's one exception for us right now in particular, and that is on the sales side. I remember when I was at an iMeeting a few years back, there was a company that really wasn't doing well in the market, and all of a sudden I had many of their salespeople just come up to me and ask me whether or not we had any openings, and I knew that that company wasn't was going south and they ultimately did go south and we picked up their people. On the positive side for us, we are seeing a lot of applicants on the sales side. There seems to be a buzz about what we're doing, what's coming. as we bring these products on. So we are getting a lot of great applicants, and so I think this is a really positive thing for us. But there has been some wage inflation, to answer your question. On the supply chain side, we haven't had huge impacts in terms of getting access to active pharmaceutical ingredients and supplies on our manufacturing business. So things have been relatively stable.
spk03: Great. Thank you, Mark. I appreciate the color of those answers. And again, congrats on yet another very strong quarter.
spk06: Thank you so much, Nathan. Our next question comes from Brooks O'Neill of Lake Street Capital Markets. Please go ahead.
spk05: Thank you. Good afternoon, guys. I'm just first particularly excited about the opportunity with AMP 100. You You clearly believe that's going to be a key driver of the business. Can you just talk about the steps you see for the company following your Purdue for date, assuming you get a positive response to that and what you need to do to bring the product to market and begin harvesting that opportunity?
spk07: Sure. And it's always great to speak to you, Brooks. Thank you for the question. So in terms of the steps following October 16th, the PDUFA date for AMP 100, the primary role we needed filled was we needed to hire the world's greatest market access group. And we were really fortunate. As I said when I was answering Nathan's question, on the sales side, we've had a lot of great folks that have wanted to join the team. And that is also true on the market access side. So we have hired, I think, the world's heavyweight champion market access group, and they are hard at work on our market access strategy for AMP 100 should the product become approved. And they will work on that strategy through the fourth quarter and into the first quarter of next year, and then hopefully we'll be ready to begin the sales process at or around the ASCRS meeting in the spring of next year. That's the current plan. And in between those times, there's a lot of work that has to be done on the supply chain side of things and in other key areas of the business. And that's part of what we are investing in. That's part of what we're investing some of our profits in. But as I said, we've got an incredible sales organization. We've got an incredible market access team, great marketing folks, and everybody's just geared up and ready to go.
spk05: Great. Can you just refresh my memory? Do you plan to manufacture that product yourself, or will you have it manufactured in the contract facility?
spk07: We do not manufacture that product, so we will be bringing that in. Okay, cool.
spk05: And then I guess I'm just curious, obviously, in the early years of the company, the Project 15 businesses and the number you created was a substantial focus for you, Mark, and Andrew and the team. And it seems like the focus has shifted more towards internal efforts and new products. obviously coupled with the M&A strategy. So can you just talk about why you've made that shift and what you think it's going to do for the business and for investors over time?
spk07: Yeah, so part of the reason why we were executing the Project 15 strategy was to take advantage of assets that we had that were, in many cases, outside of our core competency, which was ophthalmology. We also wanted focused management teams to run those businesses. And then we wanted to certainly capitalize those businesses using external resources. And so we were able to create Eaton Pharmaceuticals. We also created Surface Ophthalmics, as well as Melt Pharmaceuticals. Those businesses were capitalized and they were deconsolidated from our balance sheet. Of course, we continue to equity in those businesses and in the case of Eaton as an example we were able to sell about 10 million dollars of our ownership in Eaton in order to help fund the first transaction M&A transaction that we we did with Novartis so we have been able to benefit from the work that we did on you know what we coined as is project 15 I think for us though you know, you need to have a cohesive vision. And for us, we always start with the customer experience and we try to work our way backwards to what our product offering is going to be. And for us, when we talk to our customers, our ophthalmic customers, they really wanted us to focus on ophthalmology and that's what we've decided to do. And in that regard, they've also said very clearly to us, They not only want the market-leading compounded products that we make and offer throughout the United States, but also branded pharmaceutical products. FDA-approved products are the gold standard. And while we make fantastic compounded formulations that are unique and help doctors and patients around the country, we made over 700,000 of them last quarter alone, our customers want branded pharmaceutical products as well. And so We're creating a unified brand, the Harrow brand, a unified offering that will entail both compounded and branded products. And we believe that as we get AMP approved and as we hopefully complete some of these other transactions that we're hard at work on, when we look at what the yield will be for our investors, for our stockholders, we really believe strongly that that what we're doing is going to generate such a significant amount of cash, you know, in the next couple of years. We're not talking about five, ten years from now, but beginning next year, that we'll be able to actually begin to start controlling the destiny even of our stock price or have a little bit more control over it by making the shares a little more scarce. I hope that answers your question.
spk05: No, it definitely answers my question, and I'll just say I'm impressed by your nimbleness, and I appreciate your vision. I'm excited for the future.
spk07: Thank you.
spk06: Ladies and gentlemen, that's all the time we have for questions today, and we'll turn the call back over to Mr. Baum for any closing remarks.
spk07: Thank you, Operator. In closing, let me say that if I had written down on a piece of paper a couple of years ago where I would like to have been today, our team has essentially gotten us to that place. Today we're staring at a massive amount of upside, real leverage, true leverage, and the opportunity to generate cash levels that will, I believe, make our stockholders smile in the coming years. This high potential is real. as sure as I woke up in Nashville this morning. Of course, none of this would be possible without the hard work of the Harrow family, our partners who diligently work alongside us every day, and I sincerely appreciate their commitment, their loyalty and dedication. Nor would it be possible without the confidence and trust of our stockholders. I can assure each stockholder that your investment in Harrow is a responsibility that every member of the Harrow family takes seriously and as we continue to build a profitable business that's committed to making great pharmaceutical products, a focused business in the ophthalmology space, and we want our products to be accessible and affordable and to take care of the unmet needs of eye care professionals and their patients. That's what we're doing every day. So thanks to everyone for attending today's call and for your interest in Harrow Health. If you have any investor-related questions, please email Jamie Webb, that's J Webb with two Bs, J-W-E-B-B at harrowinc.com. And this will conclude our call. Thank you.
spk06: The call 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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