Good afternoon, and welcome to Harrow's Third Quarter 2023 Earnings Conference Call. My name is Betsy, 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.

Thank you, operator. Good afternoon, and welcome to Harrow's third 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 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.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. Mark?

Thanks, Jamie, and thanks to everyone for joining us on today's call. Before I begin my prepared remarks, I want to take a minute to encourage you to review our third quarter 2023 earnings release, corporate presentation and letter to stockholders, all of which have been posted to the Investor Relations section of our website, www.harrow.com. Let's jump into it. As you may have seen, we produced record revenues and improved our adjusted gross margins meaningfully. However, this past quarter showed that our ability to create value far exceeds what we actually delivered. So let me be clear, we could have done better. As I have said before, though, we knew that our growth trajectory would not be a linear path upward. It never has been over the past 10 years. We knew that some programs would overperform and some would underperform. Today, we find ourselves a few months behind our internal development timelines for some of our programs. As we continue, though, to correct course and move our business forward, the reality for Harrow's stockholders is simple. We are well funded. We don't need to access the public equity or debt markets. We're making money, we're paying our bills, we're servicing our creditors and we're on track to produce another record year of growth and profitability. That only isn't not bad, it's a place that most companies would like to be. I am proud of what we achieved this past quarter, including record revenues that represented a 50% year-over-year growth rate as well as a 600 basis point improvement in our core gross margins. That 50% revenue growth was fueled by our strategic decision to expand into branded pharmaceutical products, and it serves as a solid testimonial and validation of that decision. Without reservation, we could not have produced…

[Operator Instructions] The first question today comes from Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Mark, and thanks for all your comments. I have to confess, I have not completed a detailed reading of the stockholder letter so I might ask you about some things that are highlighted in the letter, and we'll just have to deal with that. But I'd like to start by asking you about the IHEEZO launch. One of the things that seems important is that you have made some adjustments to your plan that have yielded some noticeable improvement in IHEEZO response in the marketplace, and I'm hoping maybe you could at least give us some qualitative color about some of the things that you've changed and what you saw as a result?

Thanks, Brooks. We did make some strategic amendments to the strategy, the launch strategy in late August, and things kind of were implemented by September. I can't go into the specific tactical details of our strategy really to our stockholders, but also to potential competitors. I think the important thing is that we did. In fact, see this major ramp when we made these changes, and that's important. I know I spoke to a lot of stockholders after the last earnings call, and they wanted to see some numbers that were accurate and so we provided them. And all I can tell you is that we not only provided numbers that, I think validate the success of the changes that we made, but importantly, we provided numbers that get us into the fourth quarter. So we've seen a continuation of that ramp, and we don't expect that to yield. We think that will continue through the balance of this quarter, and we do expect meaningful growth in IHEEZO unit demand in 2024 and beyond.

Right. Let me switch gears and just ask you a little bit about the weakness in the compounding business and a little bit about the Fab Five. But I know historically, I have been following your company for 4, 5 years now, we've seen some variability in the compounding business, and it's always come back. Is there anything that you would describe as materially different this time or anything that gives you pause about believing that the compounding business remains durable and that the growth opportunity is still there?

Sure. The compounding business discussion that I referred to in this stockholder letter and the issues that we were addressing are not dissimilar from other issues that we've addressed of a similar kind in the past. So we were able to overcome those challenges, we made those investments, and as an organization, we improved. Our compounding business is strategically important. It allows us to meet our mission to make products that are accessible and affordable. These are cash pay products, and by far, we're the national leader. There's not even a question. It also gives us credibility. We walk into our customers' offices and they give us hugs instead of weird looks because we're making their lives more difficult. It is not an easy business, though. Regulations change, and they're generally getting stricter, and as a result of that, we have to be prepared to absorb those changes, and we do. We have the people, the processes and the resources to handle these things. It is, as I referred to in the stockholder letter, it's sort of a superpower that we have that many smaller players do not have. But the reality is, is that as we move into branded products, we are going to strategically cannibalize compounding units and that creates a challenge for the overall growth picture of that business. We want to take cash pay, non-FDA-approved units that we compound that we have to manufacture, and over time, we would like to exchange those units for our FDA-approved products that we don't have to manufacture that are reimbursable, and so that shift is taking place. That said, we do have confidence that beginning in 2024, in the first quarter, we will resume our growth in the compounding business.

That's good. Let me ask you two questions about the debt and they're a little bit different. But first is, I guess, there's some concerns in the marketplace about B. Riley as a debt issuer. I don't know what the right term is, but any comments on your observations related to your relationship with B. Riley Financial as a lender to your business? And then with the shortfall here in the quarter and outlook for the year, can you just comment a little bit about your outlook for accounts receivable cash flow and cash as we get through the fourth quarter?

So I'll take the first part of the question, and Andrew, if you'll take the second part, that would be great. But B. Riley, to be clear, is not a lender to the company. They've banked several transactions for us successfully, I might add. They've produced phenomenal results for us. And it's because of that that I can say with confidence, we have plenty of cash. We have over $68 million in the bank and as I said in the stockholder letter, we expect that cash pile to grow during 2024. So we're grateful for the work that B. Riley did for us and they are not a direct lender to us at all. They simply bank the transaction. Andrew, do you want to comment on the second part of the question?

Sure. Hey, Brooks. On the cash flow side, and more so just talking about AR in particular, because we introduced these branded products, we have a different type of AR and receivables cycle than we have seen on the company side. And on the IHEEZO, in particular, for our customers buying IHEEZO, we've been able to extend them additional terms, and that just helps them with their revenue cycle and cash management cycle. For us, what that means is our collections on the branded side are a little bit lengthened out compared to other companies we have historically seen. But just kind of looking out at Q4 and the Asian report, in particular, I'm seeing over $16 million in AR on the branded side that we should be able to collect this quarter, and then that will be in addition to the AR and cash receipts we're receiving on the company business. And so I think we've gotten through this sort of initial term around the launch with IHEEZO and these branded products, and we should start seeing sort of the AR with the branded products turn a little bit more, more cash receipts coming in and less of a larger spread on AR compared to revenue going forward.

Great. That's very helpful. Let me just ask you two more. And I apologize for asking so many but it's an interesting time for you and for investors. My first question is, can you give us any estimate of the sort of the peak sales potential of VEVYE? I know it's a unique drug, I know it's got certain clinical characteristics better than the competition. So what do you see as the opportunity with VEVYE over time?

Sure. Look, we've said in the past that we believe that VEVYE should generate north of $100 million annually in revenues, and it should and could be much higher. It's not going to happen overnight. It's going to take a few years to play out though. The fact is that the cyclosporine category, if you look at the prescription counts for cyclosporine-based products. We have the opportunity, I believe, to dominate the cyclosporine category. But more than that, we have the opportunity to expand the overall market. When Restasis was the only product in the market and Xiidra came into the market, you had a new and in some people's view, better product relative to RESTASIS. The overall market actually expanded. And we believe that a product like VEVYE, the features that it offers, the fact that it works so fast and it provides sustained relief of both signs and symptoms now going out 56 weeks. I mean look at the data that I provided actually in our stockholder letter, it's extraordinary. So we think that VEVYE is going to expand the market, and as a result, this product should definitely be a 9-figure revenue product annually. And I believe that it could be much higher than that as we get further into the launch.

Great. I'll ask you more about that offline. But let me just ask one last one, and I appreciate your patience with me. I have some sense that ILEVRO and NEVANAC had some improving sales in the past month or two. Can you comment on what you're seeing from those 2 products specifically? And again, thanks for taking my questions.

Thank you, Brooks. Right, so we said in the stockholder letter that like a mission-critical victory for our company was the IHEEZO launch. We needed to provide our stockholders with evidence that we could execute on the IHEEZO launch. I hope, if you look at the line graph provided in the letter to stockholders, that you will agree that we have in fact changed and markedly improved the outlook for IHEEZO sales. And so that was a critical victory that we had to achieve, and I think that we are on our way and things are going in the right direction. As a result, we did decide to not deploy commercial assets right away for both ILEVRO and NEVANAC. And so the question is, did we in fact deploy those resources? And we did. About 6 weeks ago, 7 weeks ago, we began to do exactly what we said we would do. We provided information to prescribers, reminding them not only of the existence of the product but the incredible insurance coverage for these products. And in the letter to stockholders, once again, I actually provided 1 of our marketing pieces that we use on the market access side of things. And the good news is that nearly immediately, once again, immediately as we began to execute on our strategy, we saw improvement in the prescription volumes as an overall share of the topical NSAID market or non-steroidal anti-inflammatory market in the U.S. And so if you look at the trailing 4-week data, I think we're up on both products in the mid-to-high single digits over the last 4 weeks. And look, it's early, but this is very positive. And so we may be a little bit late, but what we said that we were going to do seems to be working, and I do believe it will continue as we continue to execute the strategy.

Great. Thank you for all that color. I appreciate it very much.

Thanks, Brooks.

The next question comes from Jeffrey Cohen with Ladenburg Thalmann. Please go ahead.

So a few questions on our end. I guess, firstly, talk a little bit about without getting too much into the weeds pricing strategy on VEVYE, I did see in your shareholder letter calling out some of the holes that folks meant to identify in the value?

Sure. We have not announced the pricing for VEVYE. What I can tell you is that it will be sort of competitively priced with the other water-free product in the market, which is Miebo and so we'll have more information about the WACC pricing for VEVYE here in the coming weeks as we approach the launch. In terms of the product itself, it is an extraordinary product. Cyclosporin is known to work. We've got the highest concentration of cyclosporin. If you put our product in your eye, if you prescribe it and you have put Restasis or other cyclosporin-based products in your eye, you will see our product feels completely different. VEVYE is very different from these other products, and the data is extraordinary. So we have 56-week data that I provided in our letter to stockholders. I would encourage anyone who understands anything about the dry eye disease market to look at that data. It is extraordinary. So we've got great clinical data, we're going to have a bang-up market access strategy and commercialization strategy that's going to begin in a couple of weeks, and we're going to generate our first revenues for VEVYE in the fourth quarter, so in a few weeks.

Okay. Got it. And then maybe, could you target into lessons learned on launches more recently? And perhaps some lessons learned on IHEEZO that may carry over to VEVYE, and then kind of carry that forward as well to the Fab Five, sounded like a couple of months of marketing and delayed efforts there. Was that potential as a result of spend parameters from the past quarter, or was it somewhat accidental in which how it came out?

Yes. So first of all, IHEEZO is a buy-and-bill product. So the strategy, the market access strategy or the commercialization strategy with IHEEZO is very different than VEVYE, and frankly, they're both different from our approach to the Fab Five and the Santen products. So the strategy with the Fab Five and Santen was to incrementally grow those revenues and to produce streams of cash that would grow over many years. And so as I said to Brooks, it appears that our strategy of just simply doing a little bit of marketing and some sales detailing around those products is working for the Fab Five, and we think the same will be true for the Santen products. But in terms of creating significant stockholder value over the long-term, it's IHEEZO, it is VEVYE. And the one product that is similar to IHEEZO is TRIESENCE. So they're both buy-and-bill products, they're both J-Coded products, and so the strategy there, although they are buy-and-bill products. IHEEZO is a new product and TRIESENCE is not, and so we probably will not need very many resources to get the word out about TRIESENCE, but they're all sort of different. Andrew, do you want to add to that?

No, Mark, I think you nailed it.

Got it. Okay. And then a couple more quick ones. You talked about 2024 for launching TRIESENCE after some of the [buy availability] [ph] work is done. Any narrowing of that to thinking about first half versus second half?

What I can tell you is that our purchase price for TRIESENCE is $45 million, and it slides down over time as we do not have inventory. And the purchase price is only triggered, the payment is only triggered once we have inventory. January 20, our purchase price goes from $45 million to $37 million. I can tell you that our partner is working diligently to ensure that the purchase price is $45 million and not $37 million, so they are actively working to create inventory for us, which is a very good thing. We would frankly love to pay $45 million because once we do, we'll have sufficient inventory, assuming we have the NDA to recover substantially all of our purchase price and perhaps even more, depending on how much inventory we have. So we are really excited about having TRIESENCE sooner rather than later. We don't mind paying more for it because we are highly confident in the market research that we've done around that product. As I said, our expectation though is right now that we'll have it in 2024, and our partner would like for us to have it before January 20 of 2024. But what we've said publicly is that we expect to have inventory sometime during the year. I don't want to be more specific right now, but we're working diligently to make this happen.

Okay. Good. And one more brief one. You had mentioned some back-end systems. Are you currently using one ERP system, or is that being consolidated as part of the back end? And what's going on as far as leveraging up the size of the business on the back end with regard to mostly billing?

On the compounding side or on the branded side, or both?

Across the board.

Yes. I don't know that we can discuss specific software platforms or ERPs. Andrew, do you want to tackle that one?

Jeff, we're on a single ERP. We are going through some updates from the CRM perspective and just implementing that additional pieces to the ERP, like within quality and supply chain, for example, and bringing that in on the company side and on the brand side. But for the most part, that infrastructure is in place, and we're just kind of tailing off of it.

I got it. Okay. So your comment was basically just scaling up as the size of the business runs?

That's right.

Perfect. That does it for us. Thanks for taking the questions.

The next question comes from Mayank Mamtani with B. Riley. Please go ahead.

We'll try to keep it short. So two quick ones on IHEEZO. When you say your internal revenue targets for 3Q or 2023, could you just clarify that? And help me understand the components of your 4Q guide. It looks like the new range is $35 million to $44 million, and for 2024, it's about $180 million. What's tied to IHEEZO versus maybe some accretion that you might be expecting from the Santen transaction, if you could break down some of those elements? And then I have a quick follow-up on IHEEZO.

Andrew, do you want to cover Q3 confidence, 2023 and Q4 and also the projections in 2024? I think that was it.

Yes, I can try. Hey, Mayank. Thanks for the question. Just in regards to the confidence, we put out the new range. It is fairly large. We realize that. And as Mark kind of mentioned in the letter, there's a couple of things that we're working on that if they go away, we're going up on the higher end of the range. If they get pushed into Q1, we're going to have to capture it in 2024. But we feel pretty confident about the numbers. Anything can happen obviously. We're halfway through the quarter, but we feel good about the first half and feel good about the potential for the second half. In regards to the sort of breakdown between your contribution between products from Santen and IHEEZO, we're expecting that Santen portfolio to continue to perform. I can kind of talk, Mark talk about the strategic rationale for that transaction. It's not going to be a big, big driver of revenue in the future. It's going to have an incremental impact on the financials this year and next year, but we think it's going to be positive and it's going to be accretive. IHEEZO, as Mark talked about a lot on the call today and in the shareholder letter, that ramp we're seeing where we saw at the end of last quarter, we should see continue in Q4 and we expect it to continue to increase in 2024. And so contribution from IHEEZO as a major product should just continue next year as we grow revenues. Mark, do you want to comment a little bit more?

Yes. Look, the Santen basket we paid $8 million upfront is very low risk. It was really connected to rounding out our branded portfolio, allowing us to play a larger role in the prescriber's office, and it's going to produce a great ROI. We paid $8 million for it, but we also paid $8 million for VEVYE upfront. VEVYE, in terms of affecting the overall value of the company is going to far exceed what we paid for Santen and what we expect from the Santen assets. So that should give you some scale. We're going to invest significantly in VEVYE because the market opportunity is much, much larger for us. And I think that's a great place to invest resources.

Maybe I can throw my two questions together. So number one on IHEEZO quickly. On the stockholder letter, you say somewhere that you're planning to meet with CMS to clarify a billing policy that has historically not allowed for a separate billing in a physician's office. So could you just clarify if that's related to cataract surgery offices, specifically? And also, anything specific to your recent effort with [indiscernible] offices that is where we are sharing? What sort of sales metrics you're tracking there that you are seeing now translate into unit demand and revenues? And then, lastly, what you just said about VEVYE, the excitement there. I know it's early with Miebo launch with Bausch + Lomb but they seem to be allocating a lot of resources there. So could you just share? You have an opportunity to learn from what they are doing going second. And I believe you also showed some 12-month data there in your stockholder letter. Could you just put in context the clinical relevance of that chart that you have put in your stockholder letter for VEVYE? And then, thanks for taking my questions.

Okay. I think that's a 3 or a 4 parter, so I'm going to try and tackle it. Andrew, let me know where I fall short. As far as CMS goes, let me be clear, our pass through is 100% intact in the ASC and the hospital and outpatient department. We are, as I said in the stockholder letter, we are actively working to ensure that we can extend that pass through. That decision will not be up to us. It will be up to CMS. But there are other products in this category, in the ophthalmic pharma category, that are buy and bill that have been able to extend their pass through. The meeting that we have with CMS is coming up fairly soon, we expect. I can't really comment on the specifics of that meeting, but we do seek to just clarify the use of J2403 in the physician's office. That said, we are selling into that market and reimbursements are happening. And this, I think will depending on the outcome of the meeting, I think have a significant upward potential value impact on that asset and that's why we're going to be meeting with CMS. So once again, we don't control that decision-making, but we're excited to meet with CMS in the fairly near term. In terms of VEVYE and what we can learn from the Miebo launch, obviously, Miebo is the other SFA or semi-fluorinated alkane product, water-free product to hit the market. I think you may have even, I believe, put it in your eye, you've experienced it, it's a great product. And B&L, I think, has had a fairly successful launch. So we can learn a lot from that experience. We think that there will be many, many prescribers that will want to have…

Got it. Thanks for taking our questions.

I will now turn the call back over to Mark Baum for closing remarks.

Sure. Thank you, Betsy. I've never been more confident in our prospects. I think the value of our company is far greater today than it ever has been. And we remain on track with a well-structured disciplined plan that is going to lead to the accomplishment of our goals, even though we may be a few months behind, the goals will be accomplished, we will get there. This is going to benefit not only our customers, the prescribers, but patients, our employees and our valued stockholders. So thanks to everyone for attending today's call and your interest in Harrow. If you have any investor-related questions, please e-mail Jamie Webb at jwebb@harrowinc.com. This will conclude our call.

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