IdealisticCapitalist
5 months ago
For the retail investor, the investment case in Harrow rests almost entirely on the stewardship. The stock has minimal analyst coverage, and the company has changed strategic direction several times. The company does not guide for earnings and has never had any. Investing begins and ends with trusting management.
Credibility
Harrow incorporated in 2006 as Bywater Resources, a penny-stock mineral exploration company, merging soon thereafter with Transdel Pharmaceuticals, which also traded as a Pink Sheet penny stock. Around 2012, DermaStar, run by current CEO Mark L. Baum, bought the company and changed its name to Imprimis Pharmaceuticals (IMMY). It soon entered the compounding business, via an agreement with the Professional Compounding Centers of America which received royalties and Imprimis stock. In 2018 it changed its name to Harrow (the compounding business became the subsidiary ImprimisRx). It has created numerous subsidiaries and carve-outs along the way, such as Eton Pharmaceuticals (ETON) and Melt Pharmaceuticals (cool name!).
The company quickly ran afoul of regulators. The U.S. Food and Drug Administration (FDA) has issued numerous warning letters about Harrow and its subsidiaries, carve-outs etc., mainly Imprimis (both Imprimis Pharaceuticals and ImprimisRx are referred to as "Imprimis" below).
Last Year
In May 2023, the FDA repeated previous warnings about unsanitary conditions and misleading labelling. Examples: “Your cleanroom contained fiber-like particles hanging from the ceiling as well as ceiling tiles with peeling caulking….Your firm did not disinfect materials during transfer from the ISO 7 cleanroom into the ISO 5 hood”. And: “The strength of compounded drugs….differed from and fell below their labeled strength.”
In March 2023, the FDA warned a member of Harrow's Medical Advisory Boardregarding “objectionable conditions” during her research on medications for Melt and Imprimis (Harrow subsidiaries). Here are some direct quotes:
FDA regulations require a sponsor to submit, and to have in effect, an investigational new drug application (IND) before initiating a clinical investigation of a drug subject to 21 CFR 312.2(a) (see 21 CFR 312.20 and 312.40(a)) in human subjects….You failed to comply with these requirements. You initiated and conducted a clinical investigation of investigational drugs subject to section 505 of the FD&C Act without submitting and having in effect an IND. Specifically, you initiated and conducted the clinical investigation of the investigational drugs diazepam, tramadol, ondansetron, and MKO Melt®.
…you failed to conduct the investigation in compliance with informed consent requirements set forth in 21 CFR part 50. Specifically, you failed to give any subjects enrolled in your study under Protocol ANES001 a copy of the informed consent form, as required under 21 CFR 50.27(a). In your August 12, 2021, written response, you state that you had a laminated copy of the consent form that you gave to all subjects while they were waiting for surgery, and that you provided the subjects with a copy of the consent form only if they requested it.
In addition, you failed to obtain informed consent that identifies any procedures which are experimental and that describes reasonably foreseeable risks, as required under 50.25(a)(1) and (2). The informed consent form used in your clinical investigation does not identify any procedures which are experimental.
Some other FDA warnings:
In March of 2019,the FDA issued a warnng after a patient died after an infusion of Imprimis’s intravenous castor oil emulsion. The letter cited: "….serious deficiencies in your practices for producing sterile drug products, other product quality issues, and issues related to the labeling of drug products, which put patients at risk.” It also identified labels that were “… false or misleading because they did not include material facts regarding the potential for serious adverse reactions." (See also:“FDA investigates two serious adverse events”).
In 2022, the FDA issued yet another warning: “We are concerned that ImprimisRx is continuing to promote its products in a manner that similarly fails to adequately and truthfully convey risk and efficacy information about the products, despite concerns previously expressed by the FDA.” The alleged violations include: “False or misleading claims regarding FDA approval….Unsubstantiated superiority claims….False or misleading risk presentation” (Emphasis added.)
Harrow discloses most of the FDA warnings in its 2023 Form 10-K. It omits the March 2023 warning, for not notifying the FDA or following patient-consent rules, and the warnings are described very generally, e.g. "related to our alleged marketing activities..."
Stewardship
The Board recently gave performance bonuses totaling near $30 million, half to the Chair and CEO. Here’s that performance: Loss of $25 million in 2023, loss of $14 million in 2022, loss of $18 million in 2021. Since current management took the reins in 2012, the total loss is well over $100 million with no significant periods of profitability. Since 2012, shareholders have been diluted by a factor of 4, from roughly 9 million shares to 35 million today.
Harrow has set up numerous subsidiaries, including the publicly traded Eton Pharmaceuticals (ETON). Eton has accumulated a deficit of over $100 million since 2017, and increased the number of common shares by 50%
.
Harrow licenses a director’s property. Richard Lindstrom is or was a director of Harrow, Imprimis, and Surface Pharmaceuticals (another former subsidiary). Harrow licenses Lindstrom’s patent rights to certain products (see sub-section "Transactions with Related Persons" from 10-K). Those products include Klarity eyedrops, a subject of a 2017 FDA warning:
…your firm’s website and twitter account make false or misleading claims regarding “Simple Drops” and “Klarity C-Drops” – specifically, they represent that these products are made with FDA approved components or are FDA-approved, when that is not the case.
A director is supposed to stand for your interests. There is a conflict of interest when a director personally profits from commercial transactions with the company. A good deal for the director--e.g., an overpriced sale of his product--is a bad deal for the shareholders he represents.
The Prospects
The company’s main assets are licensing agreements for Vevye, Iheezo, and Triesence. Harrow's control of these assets is limited. For example, the active ingredient in Triesence is present in a dosage strength of 40 mg/ml. Harrow has the US rights to Triesence, but the licensing agreement specifically excludes “…any variant of any the Drug Substances, including as to dosage strength or form…”
Vevye. In July 2023, Harrow acquired the commercial rights via a license agreement with Novaliq. Harrow will pay low double-digit royalties on net sales along with potential commercial milestone payments.
The active ingredient is cyclosporine, approved by FDA since 1983. Vevye competes with Restasis, a similar cyclosporine product which is produced by the much larger Allergan (now part of AbbVie) and available as a generic.
There have been no developments since the acquisition, no positive surprises to increase the value of Vevye over what Harrow paid just a year ago.
Iheezo. Harrow pays for the exclusive license and marketing rights to Sinteca’s patented drug, Iheezo. The Sintetica Agreement has a ten-year term. There have been no positive surprises to increase the value of the last agreement.
The active ingredient is chloroprocaine hydrochloride, approved by FDA in 1955.
Triessence. Harrow purchased the commercial rights to Triesence (and a few other drugs) from Novartis (NVS) for $130 million plus a likely $37 million milestone payment related to the timing of its commercial availability. There have been no positive surprises since the January 2023 agreement, and no reason to think value has increased since it was marked to market.
The stock jumped 20% last month, after Harrow announced the successful production of a test batch, but the reaction is overdone. Harrow merely got its product produced, which is what a business is supposed to do. It did not, and cannot, manufacture active ingredients itself; the actual manufacturing was by Alcon, which produced Triesence for years before it discontinuing it recently.
A mark-to-market approach makes sense when normal valuation methods are untenable. If a company buys a drug candidate in a phase II clinical trial, and it advances to phase III or is approved, there is reason to think the asset has increased in value. If the stock price is unchanged, there may be an opportunity.
There have been no significant positive developments in Harrow’s main assets since purchase. Sometimes, Internet research does help counter-balance promotional material, so here’s a look at Triesence through that lens.
The active ingredient in Triesence is triamcinolone acetonide. It was first approved by the FDA in 1957. It is a synthetic corticosteroid (a steroid, like prednisone).
Allergan, again, owns a nearly identical product. Trivaris is a 80 mg/mL dosage of triamcinolone acetonide, whereas Triesence contains 40 mg/mL. Allergan discontinued Trivaris a few years ago for commercial reasons. Both are FDA approved for intraoccular use, and preservative-free (the eye is very sensitive to preservatives).
Kenalog is available as a generic and uses the same active ingredient. It is not preservative-free, but used off-label for similar indications. Contrary to recent press releases and articles promoting Triesence, a drug can be indicated for off-label use. Roughly 20% of prescriptions are off-label. A surgeon writing in the online "Retina Specialist" preferred Kenalog over Triesence based on performance and cost, for example.
In sum, Harrow has licensed the commercial rights in the U.S. to a product type that was discontinued twice by different manufacturers, and that faces established generic competition. Trivaris and Triesence were not discontinued for safety or efficacy reasons. Nothing prevents Allergan from reintroducing Trivaris if the market changes, and a natural inference is that Triesence and Trivaris were withdrawn because of low profitability and serious generic competition.
Financials
Harrow only guides for annual revenue, which is $180 million for 2024. The guidance is not very useful, given the large number of revenue-based royalty and milestone payments the company has to make. From the annual report:
Under the terms of the sales and marketing agreements, the Company is required to make commission payments generally equal to 10% to 14% of net sales for products above and beyond the initial existing sales amounts. In addition, the Company is required to make periodic milestone payments to certain organizations in shares of the Company’s restricted common stock if net sales in the assigned territory reach certain future levels by the end of their terms...
It's hard to see how Harrow can compete on price with Bausch + Lomb or Allergan, even disregarding its reputation, when it starts the margin-race 10 to 14 percentage points behind.
Revenue in 2023 and 2022 was a combined $219 million which resulted in a combined loss of $39 million. There is zero clarity on future earnings, yet the company has a large debt payment due in a year-and-a-half.
Payments this year (and next) will be around $20 million, at an average interest rate exceeding 10%. Recall that Harrow will also owe a $37 million milestone payment this year when Triesence begins commercial production.
The Oaktree loan is part of a senior secured loan facility of up to $135 million. Its baby bonds (HROWL and HROWM) are unsecured, whereas the Oaktree facility is secured by nearly all of the assets, including intellectual property, of the company and its subsidiaries. Debt covenants may further entitle Oaktree to up to 750,000 shares of common stock based on the leverage ratio at the end of this year.
Liquidity for the next 12 months is not a concern, but according to Harrow's Form 10-K, the company will have to make $160 million in debt payments in 2026.
Harrow is prepared to substantially dilute shareholders. The annual report discloses a right to issue five million shares of “blank check” preferred stock without obtaining stockholder approval. The shares could reduce the rights of common stockholders and their portion of assets in bankruptcy.
There’s not much more to say. The company has accumulated more warnings than profits. It doesn't issue earnings guidance and has no track record of earning money; there is no visibility. Its “flagship” products are based on active ingredients approved up to 70 years ago, often with generic competition.
Learn from history, don’t be doomed to repeat it. The company’s annual report discloses:
We only recently started generating cash from operations, but we do not currently earn sufficient revenues to support our operations. We may need significant additional capital to execute our business plan, execute on future acquisitions and fund our proposed business operations…..We have raised over $285,000,000 in gross proceeds through equity and debt financings since 2021.We may seek to obtain additional capital through equity or debt financings, funding from corporate partnerships or licensing arrangements, sales of assets or other financing transactions. If we issue additional equity or convertible debt securities to raise funds, our existing stockholders may experience substantial dilution, and the newly issued equity or debt securities may have more favorable terms or rights, preferences and privileges senior to those of our existing stockholders.
Investors should avoid the stock, resisting the temptation to dismiss the above warning as mere boilerplate. It may prove the company’s most useful guidance.
morokoy
6 years ago
Fourth Quarter 2018 and Other Recent Notable Highlights:
Revenues increased 55% year-over-year to a new record of $11.4 million
Gross Ophthalmology revenue increased 72% year-over-year to a new record of $10 million
Gross Margins hit a new record at 64%
$18.1 million in Net Income (GAAP)
ImprimisRx customers ordering chronic care ophthalmic medicines with refills expected to hit 1,000 by the end of Q1 2019
ImprimisRx products to be featured in a new company record number of presentations at the upcoming American Society of Cataract and Refractive Surgery (ASCRS) meeting on May 3-7, 2019 in San Diego, CA
Total Balance Sheet assets at year-end totaled $49.5 million
Eton Pharmaceuticals, a former Harrow subsidiary, completed an initial public offering in November 2018 and is listed on NASDAQ
Melt Pharmaceuticals subsidiary completed Series A financing, a deconsolidating transaction, in January 2019
Mark L. Baum, CEO of Harrow Health, commented, “We closed our most successful year in business with continued strong revenue growth, achieving record high gross margins, and record net income for the quarter and the year. Our market-leading ophthalmology business, ImprimisRx, has now generated a 187% revenue CAGR from 2014 through 2018 and we see growth continuing in 2019, with line of sight to reaching our 2021 revenue goals. Our first Project 15 business, Eton Pharmaceuticals, completed its IPO on NASDAQ during the fourth quarter of 2018. And our other two deconsolidated businesses – Surface and Melt – are set to have potential value inflection events occur in 2020. With the announcement in February of the completion of the Melt Pharmaceuticals Series A financing, we now own significant equity stakes and royalty rights in three funded and well-managed pharmaceutical businesses. Over the coming months, we intend to reveal more about our plans for Mayfield and Radley, and additional projects we are expecting to discuss later in the year. Finally, during the fourth quarter, we implemented a strategy to aggressively and immediately reduce our future exposure to legal expenses, dismissing a civil case we were plaintiff in, settled a multi-year long civil case we were defending, and are working closely with state regulatory agencies to reach amicable resolutions to other pending matters. Ultimately, Harrow is being positioned to continue to unlock value related to the growth in and profits from our commercial stage business, the growing value of our stakes in Project 15 businesses, and potential future royalty streams.”
Conference Call and Webcast
The company’s management team will host a conference call and audio-only webcast today at 4:30 p.m. EDT (1:30 p.m. PDT) to discuss the financial results and other recent developments. To participate in the call, please dial (844) 369-8770 for domestic callers or (862) 298-0840 for international callers. To listen to the webcast, please click here or visit the investor relations section of the Harrow Health website by clicking here. A dial in replay of the call will be available until April 12, 2019. To access the replay, dial (877) 481-4010 domestically or (919) 882-2331 internationally and reference Replay ID: 44882. The webcast replay will be available until June 12, 2019.
Financial Summary
Selected highlights regarding operating results for the three months and year ended December 31, 2018 and for the same periods in 2017 are as follows (in thousands, except per share data):
For the three months ended
December 31, 2018 For the three months
ended December 31, 2017
Total Revenues $11,384 $7,337
Cost of Sales (4,102 ) (3,457 )
Gross Profit 7,282 3,880
Selling, General & Administrative Expenses (9,012 ) (5,942 )
Research & Development Expenses (433 ) (89 )
Operating Loss (2,163 ) (2,151 )
Other Income (Expense), net 20,293 (620 )
Net Income (Loss) $ 18,130 $ (2,771 )
For the year ended
December 31, 2018 For the year ended
December 31, 2017
Total Revenues $41,372 $26,774
Cost of Sales (16,521 ) (13,505 )
Gross Profit 24,851 13,269
Selling, General & Administrative Expenses (29,243 ) (25,019 )
Research & Development Expenses (825 ) (413 )
Operating Loss (5,217 ) (12,163 )
Other Income (Expense), net 19,842 (757 )
Net Income (Loss) $ 14,625 $ (11,985 )
Net Income (Loss) per Common Share, Basic $ 0.67 $ (0.60 )
Net Income (Loss) per Common Share, Diluted $ 0.61 $ (0.60 )
Adjusted E(L)BITDA
In addition to the company's results of operations determined in accordance with U.S. generally accepted accounting principles (GAAP), which are presented and discussed above, management also utilizes adjusted EBITDA, an unaudited financial measure that is not calculated in accordance with GAAP, to evaluate the company's financial results and performance and to plan and forecast future periods. Adjusted EBITDA is considered a "non-GAAP" financial measure within the meaning of Regulation G promulgated by the SEC. Management believes that this non-GAAP financial measure reflects an additional way of viewing aspects of the company's operations that, when viewed with GAAP results, provides a more complete understanding of the company's results of operations and the factors and trends affecting its business. Management believes adjusted EBITDA provides meaningful supplemental information regarding the company's performance because (i) it allows for greater transparency with respect to key metrics used by management in its financial and operational decision-making; (ii) it excludes the impact of non-cash or, when specified, non-recurring items that are not directly attributable to the company's core operating performance and that may obscure trends in the company's core operating performance; and (iii) it is used by institutional investors and the analyst community to help analyze the company's results. However, adjusted EBITDA and any other non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Further, non-GAAP financial measures used by the company and the manner in which they are calculated may differ from the non-GAAP financial measures or the calculations of the same non-GAAP financial measures used by other companies, including the company's competitors.
The company defines adjusted EBITDA as net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation, other income (expense) and, if any and when specified, other non-recurring income or expense items. The company believes that the most directly comparable GAAP financial measure to adjusted EBITDA is net loss. Adjusted EBITDA has limitations and should not be considered as an alternative to gross profit or net loss as a measure of operating performance or to net cash provided by (used in) operating, investing or financing activities as a measure of ability to meet cash needs.
The following is a reconciliation of adjusted EBITDA, a non-GAAP measure to the most comparable GAAP measure, net loss, for the three months ended December 31, 2018 and for the same period in 2017 (in thousands):
For the three months ended
December 31, 2018 For the three months ended
December 31, 2017
GAAP Net Income (Loss) $ 18,130 $ (2,771 )
Stock-based compensation and payments 536 678
Interest expense, net 689 678
Taxes - (851 )
Depreciation 385 360
Amortization of intangible assets 59 92
Other expenses/loss 35 28
Investment gains/loss from Eton and Surface, net (21,017 ) 765
Non-recurring expenses, net(1) 918 227
Adjusted E(L)BITDA $(264 ) $ (794 )
(1) Non-recurring expenses includes costs accrued in connection with litigation settlements, income from settlements associated with accrued expenses and trade payable disputes, and costs Melt incurred during the period presented that were consolidated in the Company’s financial statements, that will be reimbursed to the Company following the deconsolidation of Melt in the first quarter of 2019.
About Harrow Health
Harrow Health, Inc. (NASDAQ: HROW) owns a portfolio of healthcare businesses, including the nation’s leading ophthalmology pharmaceutical compounding business, ImprimisRx. The company holds large equity positions in Eton Pharmaceuticals, Surface Pharmaceuticals, Melt Pharmaceuticals, Mayfield Pharmaceuticals and Radley Pharmaceuticals, all companies founded as subsidiaries of Harrow Health. The Company also owns royalty rights in certain 505(b)(2) drug candidates being developed by Eton, Surface, Melt, Mayfield and Radley. Harrow intends to create, invest in and grow paradigm shifting health care businesses that put patients first. For more information about Harrow Health, please visit the Investor Relations section of the corporate website by clicking here.
Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statements in this release that are not historical facts may be considered such "forward-looking statements." Forward-looking statements are based on management's current expectations and are subject to risks and uncertainties which may cause results to differ materially and adversely from the statements contained herein. Some of the potential risks and uncertainties that could cause actual results to differ from those predicted include our ability to make commercially available our compounded formulations and technologies in a timely manner or at all; physician interest in prescribing our formulations; risks related to our compounding pharmacy operations; our ability to enter into other strategic alliances, including arrangements with pharmacies, physicians and healthcare organizations for the development and distribution of our formulations; our ability to obtain intellectual property protection for our assets; our ability to accurately estimate our expenses and cash burn, and raise additional funds when necessary; risks related to research and development activities; the projected size of the potential market for our technologies and formulations; unexpected new data, safety and technical issues; regulatory and market developments impacting compounding pharmacies, outsourcing facilities and the pharmaceutical industry; competition; and market conditions. These and additional risks and uncertainties are more fully described in Harrow Health’s filings with the Securities and Exchange Commission, including its Annual Report on Form 10-K and its Quarterly Reports on Form 10-Q. Such documents may be read free of charge on the SEC's web site at www.sec.gov. Undue reliance should not be placed on forward-looking statements, which speak only as of the date they are made. Except as required by law, Harrow Health undertakes no obligation to update any forward-looking statements to reflect new information, events or circumstances after the date they are made, or to reflect the occurrence of unanticipated events.
Investor Contact:
Jon Patton
jpatton@harrowinc.com
858-704-4587
Media Contact:
Deb Holliday
Holliday Communications, Inc.
deb@hollidaycommunications.net
412.877.4519
Source: Harrow Health, Inc.
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