Good afternoon, and welcome to Harrow's Second Quarter 2023 Earnings Conference Call. My name is Kate, 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 Harrow. Please go ahead.

Thank you, operator. Good afternoon, and welcome to Harrow's second quarter 2023 earnings conference call. Before we begin today, let me remind you that the company's remarks may include forward-looking statements within the meaning of federal securities laws. Forward-looking statements are subject to numerous risks and uncertainties, many of which are beyond Harrow's control, including risks and uncertainties described from time to time in its SEC filings, such as the risks 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. Harrow's results may differ materially from those projected. Harrow disclaims any intention or obligation to update or revise any financial projections or forward-looking statements, whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of today. Additionally, Harrow 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.harrow.com. Joining me on today's call are Harrow's Chief Executive Officer, Mark L. Baum; and Harrow's Chief Financial Officer Andrew Boll. With that, I'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 thanks to everyone for joining us on today's call. As always, I would recommend that you review our second quarter 2023 earnings release corporate, presentation and letter to stockholders all of which have been posted to the Investor Relations section of our corporate website. These documents are important to review as we continue to use our time on these calls to provide color on the operational highlights from the quarter and of course taking your questions. To begin based on our results to-date, we remain confident in our 2023 financial guidance of $135 million to $143 million in net revenues and $44 million to $50 million in adjusted EBITDA. We intend to provide an update to our financial guidance later in the year after a few months of operations with our recently launched and newly acquired branded products. As I said in my stockholder letter what a difference a few months makes. Since our last quarterly earnings call, we've added numerous products to our portfolio, including substantially all of the products in the North American Santen ophthalmic pharmaceutical portfolio as well as VEVYE from Novaliq. This is on top of the Fab Five portfolio we acquired from Novartis and closed on in the first quarter of 2023. Through the Santen acquisition, we acquired the rights to five branded prescription products and one OTC product for the US market as well as Canadian rights to one branded prescription product and one OTC product. Demand trends for all of the Santen products are positive and most assets have IP through 2028 or beyond. We expect this transaction to be immediately accretive to earnings following the NDA -New Drug Application or MA - Marketing Authorization transfers which we are currently working on. Now under the Novaliq transaction, we acquired the…

[Operator Instructions] The first question is from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead.

Hi, Jamie, Mark and Andrew. How are you?

Great, great. Good to speak with you Jeff.

I know, it's been a while. So just a few questions from our end. Maybe could you just expand a little bit and clarify I guess Andrew on the core versus the regular on the margin front? Is the core the historical products up to recent and then the other gross margin number includes all the recent additions?

Yeah. Hey, Jeff thanks for the question. So on the core we've got a pretty good reconciliation table on the back of the shareholder letter. But the basic difference between core and GAAP on gross margin is the amortization of those NDAs. So the non-cash amortization of the capitalized purchase price of the Fab Five products primarily. And there are a couple of other capitalized expenses that we're amortizing through cost of goods sold. And so that amortization is reflected in the GAAP number. The core number we're pulling that amortization out.

Okay. Got it. And Mark any specific commentary on the IHEEZO launch thus far from April as far as physician acceptance and any relevant bullet points to communicate thus far?

No, I think the color that's provided in the letter to stockholders on IHEEZO is fairly detailed. I mentioned in my prepared remarks that the performance of the product has been exceptional. We haven't had anyone who has use the product say that it doesn't perform exceptionally well. So people who try the product like the product. With a product like IHEEZO and you have such a large market opportunity, the real key is reimbursement and actually getting claims paid. That was sort of the last piece of the IHEEZO puzzle. We recognize that, we're not going to win over every customer account. We're not going to win every unit opportunity. But given the total number of unit opportunities even winning a very small percentage of those creates a tremendous amount of value for our stockholders and for the company. And so we're really pleased now that the doctors who are using it, we're seeing them get reimbursed not only in the ASC setting of care the hospital study of care, but also in the for the in-office setting of care. And so these are intravitreal injections. And the in-office setting of care our permanent J-code is powerful. And so that, was sort of the last piece of the reimbursement puzzle for us. And I'm really, really pleased that the reports back from retina doctors are very positive. Just got one actually earlier today. So we're seeing claims paid for commercial payers Medicare of course and then also Advantage. So Medicare Advantage plans. So, really excited about the payment side of it. The product is performing really well. And as I said, I gave an analogy in the letter to stockholders about my old Blackberry that I used 15 years ago and said hey, when I had my BlackBerry I love the texting features. The phone was good. The camera was good and had great access to my e-mail. I probably would not have been interested in the iPhone this thing called the iPhone. But of course, once I experience the benefits of the iPhone I never went back to the BlackBerry. And we're seeing that same sort of pattern happened for users of IHEEZO. Doctors are thinking about their old way of doing anesthesia ocular anesthesia, and they're seeing I think a better way to do it. And of course we're the only reimbursable topical anesthetic in the US market which I think is a boon for the product.

Got it. And then lastly for us, could you bring us up to speed on how the commercial team currently looks as far as total FTEs and maybe demographic presence and then tie that into the recent acquisitions to Santen portfolios and VEVYE, and if they came with any commercial folks and how they would be integrated?

I think the -- first of all, we're all dedicated W-2s. we've transitioned away from 1099. So the sales organization they're all employees of Harrow. That's point one. Secondly, I think in terms of FTEs, I believe we're getting close to 50 folks now. And as we've talked about in the past, our strategy here is to let revenue and demand, sort of drive increases in expense and that includes expenses related to sales folks. But we are building the team out slowly. I mean, you can look on LinkedIn and you see that there are open positions. And I think one other comment my sense from our commercial leadership is that the quality of candidates that we're seeing is very different today than it was years ago. There is a bit of a buzz, I think in the ophthalmic pharmaceutical community and very strong sales leaders' are, wanting to join the Harrow team. They're seeing the activity. They're seeing the portfolio that we've built. And so we're getting better candidates to join the team as well. Andrew, do you want to add to that at all?

No Mark. Nothing to add on my side, I'll just echo kind of what you're saying though that, importantly, Jeff, we're going to make sure that -- and we're doing this work on the analytics side that market access, that reimbursement is going to drive hiring. We're not going to go and hire another 50 reps, when we don't have the revenue to support it. We'll let that revenue and demand sort of create and build and fill in behind it with additional expense.

Got it. Okay. Super helpful. Nice readouts. Thanks for that questions.

Thank you, Jeff.

Thanks Jeff.

The next question is from Brooks O'Neil of Lake Street Capital Markets. Please go ahead.

Thank you very much. Good afternoon, everyone. I confess, I skimmed the shareholder letter as quickly and thoroughly as I could, but I did have three companies report after the closing guys. So you can appreciate I might ask you about something that's well documented in the letter. And I apologize in advance for that. But I just want to start maybe down the path Jeff was going with IHEEZO. I saw and read much of the commentary in the letter. But I just want to ask a little bit about -- you mentioned specifically the $544, I think its wholesale acquisition cost that's called for. And you mentioned specifically that, doctors have indicated they're being reimbursed by Medicare and MA and commercial plans. Can you help us just get a sense for, what that $544 price means to you guys? Is that a price that you guys would realize for each vile of IHEEZO that you sell, or help us understand that dynamic and then help us understand how much a doctor gets reimbursed in these various sites of setting for IHEEZO?

Sure. Just to start, we don't sell the doctors on the spread and any benefit, economic benefit that a physician or an ASC gets is not part of the sales process or the marketing process to be clear.

Yeah.

In terms of the costs, we don't get the entire $544 and so there are distribution costs and other related expenses. So Andrew can kind of give you a rough breakdown of, how that works in -- with a broad brush.

Yeah. Brooks. So we're -- like Mark said, we're not seeing the whole growth and this -- this goes for all of our branded products. As Mark mentioned, we're going to -- our net revenue is going to be net of estimated rebates, wholesaler chargebacks, discounts, any other deduction. And so that can run the gamut on products from 12%, up to week. We've seen products that we've done acquisition diligence on where their gross to net is 80% discount. I'm not saying ours are 80%, but it ranges based on the product where it's used and how heavily it's discounted especially with the payers.

Okay. And that’s very helpful guys. Any sense for what the doctor gets reimbursed in these various sites. Again I understand that it's various buckets whether we're talking hospitals or physician offices whether we're talking commercial, Medicare or Medicare Advantage. But just help us with a general sense. If I understand it correctly it's 544 plus some margin right?

Yeah. There is -- so there's obviously a price that the ASC hospital or physician is paying for the product. And then there is -- and that is typically a lower amount than the reimbursed amount. Sometimes there is an extra fee so a so-called GAAP that can be built to a supplemental. And so what we're seeing is that the payments are coming in through the J-code and the supplementals are being paid as well if that coverage is available. So we're not hearing any complaints. And when I say any I literally meet any complaints. There are always cases where the long NDC is billed or there are issues like that. Those are administrative. But the code itself is being paid and the supplementals even commercial and the advantages are covering the delta.

Great. And your sense is that the physicians in their office have had reasonable success getting paid too, which is really the big market, right?

The in-office market is about twice the size we estimate to the cataract and surgical markets. So the intravitreal injection market in particular is double the size of the ASC hospital market. And so we're seeing coverage there as well. And as I said, I think the big picture message with IHEEZO is that that last piece of the puzzle to ensure adoption of the product. When you have a product that works like IHEEZO you want to make sure and it does have a J-code, which IHEEZO has we want to make sure that physicians are able to build the code. And that was the last piece of the puzzle and we're seeing the code get paid. And so there are really no barriers to doctors now adopting the product. And that's I think very, very positive.

Very positive. That's great. Let me shift gears and just ask you I don't know nearly as much -- I don't know much about IHEEZO. I know home was nothing about VEVYE, which I apologize for and I'm going to learn a lot more about it both today and in the near future. But can you help me understand, or us understand the reimbursement picture for VEVYE in terms of where you stand with regard to getting the same kind of reimbursement established for that product, or whatever is required for that product in round numbers what the amount of reimbursement might be for that product?

Yeah. So IHEEZO is a buy-and-bill product and it's a Part B as in bravo product. And VEVYE is different. It is a Part D as in delta. It's a drug product and it will be billed to a different part of the coverage. Now VEVYE is newly FDA-approved and the key activity now in addition to all of the marketing work that's going on behind the scenes that's already started is really market access. And so our team is working and focused on market access activities for VEVYE and in those activities now and we'll go through a contracting price not only with public payers, but also private payers as well. We have an amazing market access team and this product VEVYE is certainly a priority for them. So we have not priced the product, yet. Products in this category, I think range anywhere from in the $600 to $800 range. We have not actually priced VEVYE yet, and so that will take -- that will happen over the coming months. But as I said, regardless of the price and regardless of the access status, what I can tell you because we will work through the market access issues. We are going to vigorously compete. One of the benefits with the VEVYE transaction is, our cost in acquiring the rights that we have is low relative to the costs for example of other competing companies. And so, that gives us I think some leverage some flexibility in terms of pricing, in terms of rebates and so on. So we are going to compete, we're going to compete hard. We're going to try and get as many patients access to what we feel is an extraordinary therapy. But this is not something that's going to impact our 2023 revenues. This is a 2024 and really beyond sort of activity. The market is massive. We have an amazing IP estate behind VEVYE. It is an unusual product, the feel of the product, the efficacy. And so, the key for us is that we have it. It's totally unique. It's FDA approved. We will work through the access issues and we have a large market and a completely really wide-open playing field, we believe to create value not only for patients, but for our stockholders.

That’s fantastic. That’s great. So let me just shift gears one more time and then I'll jump back. TRIESENCE, I think you mentioned in the letter and in your comments, is also a product with enormous potential. My sense is historically one issue has been manufacturability. And I saw in the letter, that you commented that you've made some test batches and had some success, but just give us a little more color about the status there and sort of broadly, what you expect the timing to be because my sense is, if you can get that product to be available to your customers is a pretty big market opportunity for you there?

Without question, we're -- we and I said this in the stockholder letter, we've had a lot of inbound from ophthalmologists every week, about TRIESENCE. They want it back. They want access to it, for all of the various uses of the product. And you can tell from the stockholder letter that we've been doing a lot of work in that regard, with our manufacturing partner. I think the good news is, that the -- a batch of the material has been successfully produced. And so what we're doing now is we're replicating that, our partner is and we expect that activity to really kind of conclude in the early part of the fourth quarter. And so, we should have some results from these PPQ batches and assuming, those results match the results of the batch that was already successfully produced. We should have material available to us hopefully, by the end of the year if not in the early part of the first quarter of next year. One final point. The deal that we struck with Novartis, has a financial incentive for them to provide us, with a release of a commercial batch by or before the middle of January. The payment that is owed to Novartis in connection with the NDA transfer for TRIESENCE, is $45 million. However, if the batch is not produced by that time period, so sort of the middle of January the payment that is owed is reduced from $45 million to $37 million. So there's an $8 million incentive to get this right and to provide us with inventory by the middle of January.

So will they -- just so I understand will they manufacture it for you for a period of time, or are they just helping you and your commercial partner get over the hump of being able to manufacture it?

With all of the products that we've acquired whether it's from Novartis or Santen, we always ensure that we have an ongoing multi-year contract manufacturing agreement in place. And of course, we have flexibility to move the manufacturing to another partner, if we so choose. But we do have a partner in place for TRIESENCE, and we intend to continue that relationship and we're excited to hopefully have some inventory by the end of the year. And I think the nice thing about TRIESENCE is, we don't need a lot of salespeople to sell TRIESENCE. It will pretty much sell itself. So if we have the inventory, I think, our wholesalers will take as much as we could produce and we'll be able to produce a lot of value for our stockholders.

Great. I appreciate your taking my questions and patience with me and I’ll look forward to talking to you guys again soon.

Thank you, Brooks.

The next question is from Mayank Mamtani of B. Riley. Please go ahead.

Good afternoon, Dean, and congrats on a strong quarter and good to see the five-year strategic plan in your stakeholder letter. So a couple of fairly targeted questions from us. Maybe to start and picking your thoughts regarding the full year guidance. We get a lot of question on the push and pull there in terms of how much IHEEZO might be driving that, but also your cap products seem to be ramping up relatively ahead of plan. And I wonder also how much accretion you're able to have Santen and then within the calendar year 2023. If you could just comment on that that would be great.

Yes. So thank you for the question. The revenue growth is being driven broadly speaking by our branded portfolio. That's VIGAMOX, it's MAXITROL, MAXIDEX, ILEVRO, NEVANAC, and of course IHEEZO. So that's where we're seeing the growth. And we expect the Santen portfolio to also provide not only sort of the revenue base that we acquired when we brought the products on, but we also expect to see some meaningful growth in that portfolio once we have the marketing authorizations under our control. That's not going to happen tomorrow. It's going to take a few months. So there's sort of a transition period that we're undergoing. And you should see I think in 2024 a pickup from the Santen portfolio in terms of revenues and overall contribution. But I think the real growth drivers in the business in 2024 are going to come from IHEEZO. We expect significant continued growth in 2024 and 2025 and been beyond for IHEEZO and we're very excited about VEVYE and really beginning the market access work there. And this is just a market I personally have spent a lot of time trying to understand. We have interviewed hundreds and hundreds of chronic dry disease patients conducted telephonic interviews. And so we think we understand this patient population very well and what the nuances are that you have to overcome to help these folks. And so we just are very, very excited about VEVYE and what it will offer to this patient population. And this is going to be a product that will build in 2024 and for many, many years to come. I mean you've got very strong IP on VEVYE out into 2039 and beyond actually. So it's a product that we're going to offer for a long, long time. It's going to help a lot of people.

Great. Thank you. And maybe staying on your -- this DED marketplace entry and by the way we have the water versus water-free analogy. For VEVYE, the product differentiation relative to maybe some more recent drug launches that have created this perception of the uptake being slow, the market opportunity being limited which is a function of a lot of the patients to your point going undertreated. They don't comply as well. So maybe just clearly from a clinical data standpoint what sort of profile we are talking about relative to some of these recent drugs. And obviously folks are also curious to know how it differentiates against the spaces which is genetic cyclosporine?

Yes. As I said the reason for our enthusiasm is twofold. One because of what we have which is exceptional. So we have a great product. But our enthusiasm is buttressed by the competition that we face. And so, on the one hand, you may look at the products that are in the market and say there's a lot of them. But if you're a dry eye patient and you have pain in your eye you're feeling grittiness and redness and you're aggravated and it's hard to work. And you go to put a product in your eye and 22% of the patients experience pain when you instill a product in your eye or the adverse event profile even get worse than that for some of the products that are in development. So, you're that patient and you need something that soothes your pain. I don't think that these products that live in the so-called water world are really helping them. And we have a totally unique different approach. And as I said I personally have put an EyeSol product in my eye on my eye and there's just nothing that feels like it. And having listened to literally hundreds of interviews of chronic dry eye disease patients, I just think we have something that's going to really benefit them. Not on the margin like some of the existing products may benefit patients. But we're talking about in a completely new way something that doesn't have that burning and stinging it doesn't cause dysgeusia. It doesn't cause pain at instillation something you don't have to spray up your nose or doesn't cause sneezing when you put it up your nose. This is a different approach. And we're going to patiently execute strategy to make sure patients have access to VEVYE. It is a totally new world. It's the water-free world.

Got it. And maybe just last one for Andrew. Is there sort of a target range for leverage ratio you're trying to get to in the near to medium term. Obviously it's improved but is there some -- is there a sort of range you're working towards Andrew?

I think that's a good question and thanks for that. We -- it depends is the answer. And I think what I mean by that is we're obviously sort of deal focused in our DNA. And so if there are transactions that we can transact on and lever into it we're not going to pass it up. And so that's what I'm saying is we're not going to and obviously it's got to be an attractive deal to do that. But to the current just based on the current leverage ratio, especially on an annualized basis, I personally would like to see it lower. We're definitely working towards that. I think if you see it in the guidance even our expectation is EBITDA is going to continue to grow throughout the year in order for us to hit the guidance number. But at the same time, we like to use debt as a way to fund these transactions if there are additional transactions for us to do. We'll do that and we'll take advantage of the instrument and our partners on the debt side.

Understood. Makes a lot of sense. Thanks again for taking our questions.

Thank you, Mayank.

The next question is from Jim Roumell of Roumell Asset Management. Please go ahead.

Thanks. Just a quick question. New to the story but been following it. Your net equity dropped nearly 20% in the quarter. I haven't had a chance to look at really the pushes and the pulls, but can you give a little color as to kind of what decisions you're -- balance sheet decisions you're making, expansion of credit for growth. But just a little color on why your net equity dropped nearly 20% in the quarter -- or in the first half of the year?

Hey Jim. This is Andrew. I'm happy to talk about that and address it. So on a GAAP basis for the year, we've lost about -- just under $11 million. There are a lot of noncash impacts related to that such as amortization of the NDAs that we talked about at the beginning of the call with Jeff. Importantly subsequent to quarter end we also did raised about $69 million of new capital that will increase that equity balance in the subsequent periods.

Okay. So a lot of non-cash charges in the first half of the year?

That's right.

So what are you writing off? Are these -- are you -- is this just kind of amortizing acquisitions, or are you actually writing things down?

Sure. So I can go through a couple of examples. A big chunk of that about $4.7 million of it so far is amortization of these intangible assets, non-cash amortization. There's some investment losses related to our holding in Eaton. And then we also had a debt extinguishment costs of about $5.6 million. All of that is essentially non-cash or not operating.

Okay. Well, I appreciate that. I’ll probably follow-up later.

Thank you, Jim.

Okay. Thank you.

That is all the time we have for questions today. I will now turn the call back to Mark Baum for closing remarks.

Thank you, operator. The first half of 2023 has proven to be a productive and exciting period for Harrow. Momentum is continuing to build in 2023 and we expect it to continue for many years to come. I know that we would never have achieved this or had a shot at achieving our goals without the trust of our loyal employees, customers, vendors and stockholders, who have supported us throughout this journey. Thanks to everyone for attending today's call and for your interest in Harrow. If you have any investor-related questions, please e-mail Jamie Webb at jwebb@harrowinc.com. Thank you and this will conclude our call.

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