Harrow, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; filed May 13, 2024. Harrow is an ophthalmic pharmaceutical company with branded products and the ImprimisRx compounding business. Financial statements are unaudited and prepared under U.S. GAAP.
Financial performance and position
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Total revenue | $34.6 million | $26.1 million; up $8.5 million (about 32.5%) |
| Product sales, net | $34.5 million | $20.5 million |
| Other revenue | $0.1 million | $5.7 million |
| Gross profit / margin | $24.0 million / 69.49% | $17.8 million / 68.31% |
| Operating income (loss) | $(6.9) million | $1.2 million |
| Net loss / loss per share | $(13.6) million / $(0.38) | $(6.6) million / $(0.22) |
| Operating cash flow | $(4.6) million | $(8.2) million |
| Cash and cash equivalents | $68.5 million at March 31 | $74.1 million at December 31, 2023 |
- Gross margin improvement reflected a higher mix of branded ophthalmology products, which generally carry higher margins than compounded products.
- Operating expenses were $31.0 million, including SG&A of $28.8 million and R&D of $2.1 million. SG&A rose $12.9 million year over year, including increased launch, regulatory, staffing and stock-based compensation costs.
- Cash used in investing activities was $0.1 million, versus $131.0 million in Q1 2023, when the company acquired five branded products. Financing activities used $0.8 million, compared with $62.2 million provided in the prior-year quarter.
- At March 31, current assets were $125.5 million and current liabilities were $41.8 million. Working capital was approximately $83.7 million.
- Gross debt principal was $192.8 million; notes payable, net of unamortized issuance costs, were $184.1 million. Debt comprised $75.0 million of 8.625% notes due 2026, $40.25 million of 11.875% notes due 2027, and a $77.5 million Oaktree loan due 2026. The reported effective interest rate was 10.78%.
Material changes and developments
- Branded product sales increased; management attributed the revenue growth primarily to branded ophthalmology products. Branded product revenue was $13.9 million, compared with $6.3 million in the prior-year quarter, which included transferred profits from acquired products.
- Other revenue fell from $5.7 million to $0.1 million, reflecting the prior-year recognition of transferred profits while product NDAs had not yet transferred to Harrow.
- Interest expense rose to $5.4 million from $4.7 million, primarily due to higher outstanding debt. The company recorded a $1.2 million loss on its Eton Pharmaceuticals investment, versus a $2.0 million gain in Q1 2023. The prior-year period also included a $5.5 million debt-extinguishment loss.
- Harrow launched VEVYE in the U.S. in January 2024. It also reported CMS communications indicating IHEEZO is separately payable in physician offices and that its billing edit was expected to increase from one to two units, effective July 2024 and retroactive to January 1, subject to publication.
- In February, Harrow entered a Canadian license and supply agreement with Apotex for specified products, with milestone payments and royalties; the filing does not provide a clear value for potential proceeds.
- In April 2024, Harrow sold its remaining 1,982,000 Eton shares for net proceeds of approximately $5.5 million.
Outlook, risks and contingencies
- Management said March-end cash, together with net proceeds from the April Eton sale, was expected to fund planned operations and capital expenditures for at least 12 months. This is not a guarantee: acquisitions, faster-than-expected growth or other strategic spending could accelerate cash use and require additional financing.
- No specific revenue or earnings guidance was provided. Management highlighted growth in branded products, operational efficiencies, reimbursement and pricing, regulatory constraints, and product development and commercialization as performance factors.
- Risks include regulatory standards and inspections affecting compounding operations; competition, supply-chain and economic conditions; execution of launches and acquisitions; debt service and access to financing; and customer and supplier concentration. One customer represented 27% of Q1 revenue and 68% of quarter-end receivables. Three suppliers provided 85% of active pharmaceutical ingredient purchases.
- A lawsuit between ImprimisRx and Ocular Science/OSRX includes claims and counterclaims; trial was expected in August 2024. The filing states that adverse outcomes in pending matters could materially affect results, financial position or cash flows, but does not provide a clear quantified exposure.
- Harrow had approximately $2.7 million in contract manufacturing commitments for 2024. Contingent consideration under product agreements was not considered probable and reasonably estimable at quarter-end, so no amount was accrued.
- The company reported effective disclosure controls as of March 31, 2024, with no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether VEVYE and other branded products sustain growth, and whether revenue converts to improved operating results given materially higher SG&A and R&D.
- Actual cash burn, liquidity runway and financing needs, particularly alongside $192.8 million of gross debt and its scheduled maturities.
- Final CMS publication and implementation of IHEEZO reimbursement and billing changes, and their realized commercial impact.
- Customer and supplier concentration, compounding regulatory developments, and the outcome and potential exposure of the Ocular Science/OSRX litigation.
- Proceeds and any milestones or royalties ultimately received under the Apotex agreement and other licensing arrangements.