Harrow, Inc.

Good morning and welcome to HARO's third quarter 2024 earnings conference call. My name is Michelle 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. Please go ahead.

Thank you, operator. Good morning and welcome to HARO's third quarter 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 law. Forward-looking statements are subject to numerous risk and uncertainty many of which are beyond Harold's control, including risk and uncertainties described from time to time in its SEC filings, such as 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 risk 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. Harold'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 referred to non-GAAP financial metrics, specifically adjusted EBITDA and or adjusted earnings, as well as core results such as core gross margin, core net income, and core diluted net income per share. A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures is included in the company's earnings release and letter to stockholders both of which are available on the website. By now, you should have received a copy of the earnings press release. If you have not received a copy, please go to the Investor Relations page of the company's website, www.harrow.com. Joining me on today's call are Harrow's Chief Executive Officer, Mark Elbaum, and Harrow's Chief Financial Officer, Andrew Boll. With that, I'd like to turn the call over to Mark to go over some prepared remarks prior to the question and answer session.

Thanks, Jamie, and good morning to everyone. Thank you for joining us today. Please make sure to review our supplemental documents for the quarter, including our earnings release, corporate presentation, and letter to stockholders, all of which are available on the investor relations section of our website. In the third quarter, Harrell reported record revenue of $49.3 million, and that's a 44% increase over the prior year quarter. to slight increase over the previous quarter as well. Gross margins were solid, and we generated cash from operations. And operationally, while we could have done better, as I discussed in my letter to stockholders, overall, we are well positioned to meet my commitment to exceed our 2024 financial guidance, especially given what looks like record performance in October and the fourth quarter, which is expected to be our strongest quarterly period of the year. Now, let's discuss some of our key products and achievements from the third quarter. Vivi, our crown jewel dry eye asset, which we launched in January of this year, has surpassed our expectations, and we believe it is destined to be a category-leading product due to its rapid onset, efficacy, twice daily dosing, and favorable tolerability profile. Total prescription volume increased 55% in the third quarter compared with the second quarter. As I mentioned in my letter to stockholders, our commercial team did such an excellent job of selling Vivi that we reached the outer bounds of our internal forecast, leading to a temporary inventory shortage around mid-September. And our V-VI revenue potential, therefore, for the third quarter was unfortunately capped. The good news is that we were able to recover in the fourth quarter, and we have appropriately adjusted our inventory levels by ordering additional batches so that we will not run out again. What drives V-VI's strong sales growth is its clinical value, which is best demonstrated in the amazing resale rate we have seen. Listen to this statistic. Before Vivi, 90% of patients did not refill their dry eye prescriptions and were not on therapy at the end of the year. However, Vivi patients are now into their eighth and ninth refills, and we continue to see over 90% refill rates for Vivi. It's just incredible. Payers are also taking note. And as a result, we are seeing consistent improvement in insurance formulary access for VBI. And I talk more about that in our letter to stockholders. Strong VBI prescription growth has led us to increase the number of covered territories where we have boots on the ground from 51 in the second quarter to 61 in the third quarter. And in those 61 territories, even though we haven't filled all of those open positions, we are already beating Tervaya in about 50% of these markets, CEQA in about a third of the markets, and MIBO in nearly 10% of the markets. As demand increases and we continue to increase our market share, we will also add territories as warranted. IHESO continues to perform well too. In the third quarter, IHESO saw a 15% sequential increase in unit demand over the second quarter. And in addition, IHESO's reorder rate also was impressive at 82%. Unit demand has increased up and to the right every quarter. largely because eye care professionals are discovering that iHESO is not only an excellent clinical choice for their patients, but we also hear that it enhances their productivity by improving their procedural workflow. That said, in the third quarter, with the advice and support of our commercial leadership and after looking at the incredible opportunity before us, I made a strategic decision to implement what I have referred to in the letter to stockholders, as the retina pivot, which is to say that our commercial teams call points move nearly exclusively to the retina specialist community. There are numerous compelling reasons why I made this decision. It's because of the concentration of retina providers, which allows us to have more IESO unit volume impact with fewer call points. The intravitreal injection market is massive and growing. And IHESO is an ideal clinical choice for ophthalmic anesthesia in this setting of care. And beginning on July 1st of 2024, because we had clarity from CMS on reimbursement, even for same-day bilateral use cases, it just would have been foolish not to make this market our primary interest. I discussed the retina pivot more in the letter to stockholders, but suffice it to say that this pivot may have resulted in a somewhat subdued demand for IESO in the third quarter, as our sales folks focused on sales processes in the retina specialist community. I am more than pleased, though, to report that we are already seeing the benefits of this retina pivot in the fourth quarter, just as our commercial leadership predicted. And I am 100% convinced that this decision was the right one, for not only 2024, but for 2025 and beyond. And as promised, the relaunch of triessence has happened in the month of October. Following years of market absence, bringing triessence back to the retina specialist community is yet another compelling reason for our retina pivot. The absence of triessence in the market created a backlog of demand. for which there has been no on-label alternatives, and we are working hard to make sure that everyone in that community knows that Triessence is back. We are convinced that our investment in Triessence will be richly rewarded, and I can tell you that today I remain more convinced of this than ever. We also see the combination of IHESO and Triessence as a powerful one-two punch enhancing our commercial team's ability to effectively serve the retina market. Finally, other key parts of our business continue to perform, and I would encourage you to review the letter to stockholders to see my latest commentary on our anterior segment business and our Imprimis Rx business. We are happy to answer your questions. I will pause to have our operator poll for questions. Operator?

Thank you. To ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. And our first question comes from Chase Knickerbocker with Craig Hallam. Your line is now open.

Good morning. Thanks for taking the questions. Mark, I guess just first, helpful to see you kind of give that inventory number that you have in Q4 on TriEssence. I mean, how should investors be thinking about the performance of that drug in Q4 with a little bit more detail around kind of what you think will need to be kind of stocked at distributors? And then ultimately, how much of that kind of inventory do you think you can pull through before the end of the year, given that the product has been off the market for so long? Thanks.

Thanks for that, Chase. Well, first, I have some, I think, very positive news about Triessence, and that is that all of the regional MACs have indicated that they are reimbursing for Triessence. So that is very important news. I would also say that the response thus far has been very positive. I've laid out, as you noted in the stockholder letter, the inventory that we have to sell. And what I can tell you is that the commercial team is just actively working to push that inventory through the system and into the system so we can realize revenue, as much revenue as possible from those units in the fourth quarter. And we have, you know, I think some very positive indications in terms of that inventory so far. But the team is working hard, and we're, as I said, I think emboldened by the response, at least from Medicare, on the product-specific J-code thus far. Andrew, do you want to add to that at all?

Yeah, Chase. From our perspective, too, we're obviously early in the game with the relaunch, so a little early for us to give more precise guidance on what we think the exact pull-through will be, but the initial response has been great. The team was a big point for us at AEO in October when we came out, and I think the The physicians, we're happy to see you back. Obviously, it's an important product in the market. We're really focused on also making sure that supply chain is set for the duration for next year and well beyond. And so that is also another critical focus for us. We've got this initial stock, and we're going to focus really on continuing to make sure supply is there so that there's no shortages for the market going forward.

And I do want to add, we do have additional batches being made and scheduled to be made in 2025. So I think the issue that Andrew is referring to is just longer-term supply shortages.

Got it. And just a confirmation question there, I guess, on those batches. You would expect to have more inventory next year, you know, in a material sense than, you know, what you had in Q4 here for TriEssence. And then just a couple on Vivi. Mark, I'm sorry if I missed this, but can you quantify kind of what you guys think from a dollar perspective that disruption caused kind of in late Q3? And then a little bit more kind of color around that initial Part D coverage that you were talking about in the recent press release and in the shareholder letter, kind of any color there around kind of formulary management? Is there any step edits in there? What are those kind of contracts look like on the Medicare side?

Yeah, so I think, and my phone went on mute, but I think your question was around, you know, quantifying what the VBI disruption was and then also kind of where we work on a qualitative basis with this Medicare Part D contract. Is that right?

That's correct.

Okay. Yeah, so, I mean, look, if you add up what we would have had with Serviate and V-Buy, you know, it's several million dollars of additional revenue and probably would have allowed us to meet revenue guidance from the external analyst. The good news is we're going to recapture that. We are recapturing that revenue in the fourth quarter. So it was, as I think characterized it in my letter to stockholders, we view it as a bump. It's an unfortunate bump, but it's something that we had to deal with nevertheless. Kind of a good problem to have if you're going to have any problem, that the demand is so strong that it is outside of the bounds of your forecasts. But we do take responsibility. We can do a better job, I think, of forecasting. But the answer to your question is that it was several million dollars for the period. In terms of the Part D plans, that's a really great story because we're talking about a preferred brand position with one of the largest MedD providers. So it's not easy to get those sorts of positions. We're still working on additional agreements. But the response so far, I think, is better than we had anticipated. And we're getting these contracts in place before we thought we would get them in place. So we're doing well there. And I think, you know, we should expect additional coverage arrangements in the fairly near term. Andrew, do you want to add to that at all?

Nothing to add.

Great. And then just one confirmation. I'll hop back in queue, guys. Sorry for all the questions. But just on VBI at the eight months and that 91% refill rate that you mentioned, is that kind of from first fill? And so just I guess that's another way that would be kind of like two or three X kind of what we would think of from kind of competitive dry eye kind of discontinuation rates kind of improvement there. Can you just confirm that I'm looking at that number right now?

Andrew can comment on that. And I would just say, by the way, I mean, Vivi conservatively next year is set to way more than double. That's if we don't do much of anything. So it's a really exciting product. And I think also we're slated to capture more and more of that revenue next year as we get more contracting done, which is very exciting as our ASP hopefully improves. Andrew, do you want to?

comment on the... Yeah, Chase, so the refill rate is based on patients eligible for that refill. And so if they're eligible for their 10th refill, we're seeing that large portion of patients refill. And I think for the last two calls, I've said how excited I am about that refill rate because For us, I mean, from a modeling perspective, it is well beyond what we expected and definitely well beyond what we modeled. That's one of the reasons we had that inventory shortage issue in the last couple weeks of September. But it's something shareholders should be really excited about. It's going to drive a ton of value, I think. in next year and certainly in the long term because those refills are just continuing to stack. The product is really performing well, performing better than we expected from a clinical perspective and certainly from a financial perspective. And it continues for me as CFO to be my favorite product. It's something I want to continue to invest in on the sales and marketing side. and really just see revenues from that product scale up and drive further value in the medium and long term.

Great. Thanks, guys. Thanks, Chase.

And the next question comes from Brooks O'Neill with Lake Street Capital. Your line is now open.

Good morning, guys. So I have a couple quick questions. First, Just curious if you'd provide any additional color on summer seasonality. I think you called that out as a factor that maybe normally limits results in Q3, but any color would be helpful.

Sure. Since we began producing revenue back in 2014, because a lot of our revenue was dependent on surgical scheduling, the summer months are always the weakest months. And that's not only true for our business, but really any drug company or device company that sells into those markets. So in the summertime, patients go on vacation, doctors go on vacation, staff goes on vacation. And so there is always a reduced number of surgical openings.

Makes sense. Let me just ask you one other one that is, you know, I appreciate all the color you gave on, on V by and I, he's oh, and try essence. As you take a step back and think about the launches of each of those products and, and the response in the marketplace, is there anything you'd call out that worries you that strikes you as that? That's not what we hope for. That's not what we expected. kind of thing beyond the color you've offered so far? Thank you very much for taking my questions.

Sure. I think with any launch, things go your way many times, and then there are always things that don't go your way. That just happens. I think with IHESO, there have been a number of challenges over the last year and a half or so. I'm really excited about where we stand right now. I mean, the product is on track next year. I mean, it is heading towards being a nine-figure revenue product in short order. That's what we promised. And that's what looks like is happening. And that's a good thing. We have absolute clarity on the reimbursement side now. That's very positive. We didn't have that when we launched. So in many ways, I would say, Things didn't go perfectly out of the gate, but the team has done such an extraordinary job of positioning the product now for many years into the future. Our stockholders, I think, should be really excited about IHESO. Vivi, as Andrew said, he's incredibly enthusiastic about it, and he should be because Once patients start using this product, it looks like they continue to use it. They continue to refill it. And as I've said many times over the years, the value of products like Vivi is really on the refill. It's the chronic use of the product without having to invest further in sales and marketing. That's how you get the economic compounding effect taking place for chronic pharmaceutical products like Vivi. And then finally, I would say with triessence, you know, it's right now. And I can tell you, once again, some things have gone absolutely as we expected and some things have not. But it's really important to note that our team, when we launch something or take a particular action, we not only have a primary action, but we have secondary and tertiary strategies behind them. because you have to anticipate that not everything is going to go your way. We've seen that happen with Triessence. We actually have a really exciting lifecycle management strategy for that product. As I've said on these calls, I think in the past, our expectation is that we want to be able to sell more Triessence in 2035 than we do in 2025. So our stockholders should count on the fact that we have a lifecycle management strategy that will be implemented to affect what I'm saying. And I think that means that we should be able to, over the longer term, realize the value from these products that we had expected and that we've promised to our stockholders over the last year and a half or so.

Makes total sense. Let me just flip in one more. I thought of it as you were talking. You've commented on the pivot, the Ahizo pivot, I think it was, do you have plans to go back and try to capture the opportunity in the ophthalmic and cataract surgery areas? Or how are you thinking about that now?

Yeah, first of all, we're not abandoning that market. We have quite a few IHESO customers in those markets, and we'll continue to service those customers without question. But when you take a look at what I've said, regarding how do you get to a billion dollars of revenue by the end of 2027 on a revenue rate basis during one of those quarterly periods. One of the things we need is significant revenue from IHESO. And I discussed that in the letter to stockholders. We penciled in about $75 million of quarterly revenue from that product. And what does that mean? That means that we need to capture about 6% or 7% of the intravitreal injection market for IHESO. And so it just makes sense, given what we're trying to accomplish by 2027, to really laser focus on that specific market. Does that mean we're not going to have any units sold in the cataract surgery market? No. You can expect that we'll probably sell into that market even by that date, even if it's not reimbursed in the ASC environment. But because we have such clarity on in-office reimbursement, that's really where we need to focus. We have a permanent J-code, and we have clarity of reimbursement in the office setting. And there are just more than 10 million annual procedures that take place there, And we have an ideal product that is gaining traction and that is producing a lot of value, not only clinically, but also, I think, for our stockholders.

Great. Thank you very much.

And the next question comes from Jeffrey Cohen with Lattenberg Thalman & Company. Your line is open.

Hey, Mark and Andrew. Good morning. I guess you did talk about the size of the organization in commercial for VIVA. I wanted to kind of jump that over to adheso and triacins. Could you give us at least some relative metrics on size if those folks out there are selling both adheso and triacins, and maybe talk about or tie that into OPEX going forward and how you're thinking about ramping that up?

Sure. Thanks for that, Jeff. To be clear, the team that is selling IHESO is also the same team that is selling TriEssence. So they now have two products in their bag. Our strategic accounts team is also selling both products, obviously. And what we're working on, I think, to make our efforts even more potent are new GPO relationships. outside of even our sales organization, where we can efficiently reach very large segments of the market. And particularly, that's true with strategic accounts. So we have a small but very mighty sales organization, moving IHESO and TriEssence. And as I said, that team, which is extraordinarily experienced, coupled with these new relationships that we're bringing on which i also talked about or mentioned in the letter to stockholders are really going to set us up well not only for the fourth quarter but also for 2025 and beyond andrew do you want to comment uh on uh the balance of the question yep

Yeah, Jeff, on the operating expense side, you know the approach. It's typically we take kind of a moderated approach where we're trying to make sure the business is profitable while we're still in that growth mode. The operating infrastructure, the G&A part of SG&A is really there. It's in place for the most part. So any investment further in operating expenses is going to be tied primarily to the commercial side. And we'll continue to do that as revenues ramp as market access improves on Vivi. You should see us continue to invest in the sales and marketing and market access type activities to further drive revenue and further drive growth. So all those important part about that really is that those expenses should be tied to correlating revenue increase as well. So the overall profitability of the company as we as we grow up X will continue to expand in 2025 and out years.

Okay, got it. That's helpful. And one more, if I may. We haven't heard about it in a while. Any commentary or thoughts on how everything's going at room permission, please?

Andrew, do you want to I had a comment about Imprimis. I think business is doing really well. It's producing a lot of cash, that's for sure.

Yeah. And Jeffrey, we added a new disclosure in the queue where we broke out segments so you can kind of get an idea of profitability of the Imprimis business as well as our branded business and how those two things are performing on an individual level. But we've been really pleased with how the Imprimis business has been operating this year. Summer months are traditionally slow, as Mark mentioned, but despite that, it's continuing to see improvement. We really see a pathway, especially in 2025, to see that double-digit revenue growth that we've talked about in the past hitting. Definitely seeing new accounts get added there and continue to see a real market need for the products. and seeing even new products come to market. We launched a new product called Tovacane at AAL, and we're seeing initial uptake there, and customer reception has been really positive.

Super. Thanks for taking our questions. Thank you, Jeff.

As a reminder, to ask a question, press star 1-1 on your telephone. The next question comes from Mayank Tani with B-Raleigh Securities. Your line is now open.

Good morning, team. Thanks for taking your questions and appreciate the 4Q trend update. That's helpful. Just quickly on the VY script volume and market share trends that look impressive, could you talk a bit more on what you're doing to improve gross to net? Based on our map, you know, you're trending a third lower than a dry eye launch. Anything there to comment on relative to your commercial payer coverage goals or how you might be investing in access payer efforts? And also, should we see some DTC activity from you as we've seen from your peers? And then I have a couple of quick follow-ups.

Sure. Thanks for the question. Let me start by commenting on the DTC. effort? And the answer is absolutely not. You will not see us investing in DTC. That said, we really appreciate the investments that we are seeing in DTC because they are definitely increasing awareness of dry eye disease. And when you have a product like Vivi that is so effective and that patients appreciate so much they refill at the rates that we're seeing you just really want as much awareness consumer awareness in particular about the conditions so we're not going to invest there but I think we're going to benefit there which is terrific I also want to add that the market access team that's working on vivi is doing an extraordinary job we took a look at the gross this last quarter and we just are seeing you know a massive number especially for a new launch and a very small on a relative basis sales organization so very i think efficient uh team you know doing a lot of uh building a lot of revenue the question is how do we get more and more of that revenue we're going to do that through obviously contracting Um, there is a lot of interest on the payer side with the product because of the refill rate because of what is, uh, is being seen clinically. Um, but what I can tell you is that on a net basis, and that's really what our stockholders care a lot about is not only the refill rate, but what are we capturing on a per prescription basis? There is a significant, uh, amount of revenue per unit that we can capture by tweaking a few little things. And those efforts underway right now. And I think over the next couple of quarters, we have the ability to very meaningfully improve our ASP. And that's what we're going to do. I think our stockholders can count on us to do that. That's not only going to improve revenue, but it's going to improve margins as well for the product. Andrew, do you want to add to that?

Yeah, from a gross-to-net perspective, this year, especially on the launch side, we've really been focused on volume and getting volume and getting patients on therapy and getting doctors introduced to the product. That That said, next year and beyond, as we gain more access, as Mark was saying, that gross net should continue to improve. And then importantly, I think as access improves, obviously you should also help drive volume. So we should get a double benefit as those things start coming online.

Very helpful. And then on the tri-essence relaunch at AAO, I know it's early, but is there any overlap in patients and procedures where you see use of both AHISO and tri-essence? And similar question, is there a net price you expect for tri-essence that, you know, based on your early discussions, I know the gross net for Ahizo, for example, is trending at 70%. So is the expectation tri-essence would also be in that same range?

Yeah. So first thing, we're not going to really comment on sort of net pricing for tri-essence right now. We're actually still completing that work. But with respect to the first part of the question, What I can tell you is at least like on a GPO basis, we're moving both products together. And so, you know, you can create a sort of retina specialist formulary. And that's one of the real big positives about having both IHUSO and TriEssence. I think we're one of the only companies in the ophthalmic pharma market. We may even be the only company. company that actually has two products to sell into that market, which is exciting.

Okay. And lastly, I noticed a bit more color on MEL 300 in your shareholder letter, including the SPAR reached with FDA recently, and the Phase 3 readout is obviously expected shortly. How should we think about value creation from that? And thanks for taking our questions.

Thank you, Mayank. I believe that by this time next week, we're going to know where we stand with MELT in terms of the phase three data. So my expectations are that the phase three data will read out early next week and that there'll be some sort of external communication regarding that by this time next week. In terms of value creation for MELT, we are very interested in that product obviously as I've said in prior communications we sell a compounded version of the melt formulation and you know if we were able to sell an FDA approved version of that product it would result in nearly a hundred million dollars of annual revenue so We know who those customers are that use the compounded formulation, and I have a high degree of confidence they would prefer to use an FDA-approved version of the product. And so, as I said, it creates sort of as much of a no-brainer commercial launch as you could possibly have. That's something we're really attracted to. But all of that is premature unless we have a positive readout. And so we'll hopefully know more about that this time next week. If the data is strong, if the data comes through, especially given the spa that the company was able to reach with FDA, we'll be well positioned to do great things with that patented formulation. It's patented not only domestically, it's patented internationally. It has uses certainly in ophthalmology where we're focused, but the greater number of use cases is outside of ophthalmology and it's going to be a big product but we need to see what the data looks like and if we were to fast forward a week from now we will know that's all the time that we do have for questions and i would like now to turn it back to mark for closing remarks sure thank you operator and thanks for joining us today I just want to reiterate how grateful we are for your continued support and trust in the company as we execute on this vision. It's not a short-term vision. It's a long-term vision. I think we have a pretty good record of creating value over the longer term. It's a really exciting time to be a part of our journey, though, whether you're an investor, a customer, a partner, or a member of the Harrow family. The progress and achievements that we've made this year are a testament to the team's hard work and dedication. the partnerships that we've built along the way. And as we move towards the very end of this year, which I believe is going to certainly be a record year, our focus is going to be delivering sustainable growth, operational excellence, and importantly, value for all of our stockholders and stakeholders. So if you have any other questions or you need additional information, don't hesitate to reach out to Jamie Webb, Her email address is jwebb at harrowinc.com. This will conclude our call.

Thank you so much for participating. This does conclude the call. You may now