Q2 2020 Harrow Health Inc Earnings Call
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Please standby you're about to begin.
Good afternoon, and welcome to the conference call covering Hill <unk> financial results and business update for the second quarter of Twentytwenty on the call. Joining me today I haven't Harris, Chief Executive Officer, Mark album, and Hills, Chief Financial Officer, Andrew Baum.
They my name is because he and I will be your operator for today's call. Currently all participants are in a listen only mode. Later, we will conduct a question and answer session.
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 relation page of the company's website at Www Dot Hill Inc. Dot com.
Before we begin today, let me remind you that the company's remarks include forward looking statements within the meaning of federal Securities laws.
Well that looking statements are subject to numerous risks and uncertainties many of which are beyond Harrell house control, including risks and uncertainties described from time to time in its S E filing.
Such as the risks and uncertainties related to the company's ability to make commercially available, it's compounded formulations and technology.
And the FTC approval of certain drug candidate in a timely manner or at all.
[laughter].
For a list and description of those risks and uncertainties Pcs or 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.
How house.
So may differ materially from those protected.
Oh 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, so we'll refer to non-GAAP financial metric.
Specifically, adjusted EBITDA and or adjusted earnings.
A reconciliation of any non-GAAP measures with the most directly comparable GAAP measures.
It's included in the company's letter to stockholders.
Billable on the web site with that I'd like to turn the call over to Mark bomb.
To go over some prepared remarks prior to the question and answer session Mark.
Thanks for joining our call today I would encourage everyone listening to review our second quarter 2020 letter to stockholders, which was posted on the Investor Relations section of our website just after the close of trading today.
Before we begin mcewen a portion of today's call I'd like to quickly touch on a few items to provide some additional color on our business since we last spoke in me.
Well the second quarter revenues were impacted by the covert 19 pandemic and a temporary slowdown in ophthalmic surgery, we have moved forward.
And are seeing revenue back to pre coded levels previously we told investors one we weren't going to just stay dormant into that our goal was to continue to drive revenue growth organically and inorganically keeping that promise, we recently announced a commercial alliance agreement with I'd point.
Pharmaceuticals to sell deck CQ, an F.D.A. approved single dose sustained release intra cameral stairway, 9% DEXA method zone injectable for the treatment of inflammation and post okcular surgery to execute an injectable stairway from foam accused is paid.
For through pass through reimbursement from CMS or strategy with execute was simple focus on offering the benefits of F.D.A. approved to execute to our large and loyal customer base, who in 2019 bought more than 250000 injectable.
Steroid containing products from us.
Weve surveyed or customers and a number of them have told us they would love to have the option of choosing an FDA approved product when they order from US. So this partnership with my point is a natural fit.
Index acute was a complimentary offering to the existing imprimis Rx surgical portfolio of products.
Because we sell a lot of ophthalmic injectable steroids used in cataract surgery, probably more than anyone in the United States. The DEXA Q opportunity could be a financial quote big deal for us.
Our tri Moxi customers alone representing more than 25 million dollar annual revenue opportunity at an estimated better than 85% gross margin.
Ultimately, though the outcome of this partnership should result in a benefit to prescribers and patients with the economics of the deal having the potential to make a significant impact for both us and I point.
Let's get into the results for the second quarter, which came in better than our base case predictions revenue for the second quarter of 2020 was 8.1 million compared to $13.5 million for the second quarter of 2019 gross margins were 60% compared to say.
61% for the same period last year adjusted EBITDA in the second quarter was a loss of $1.7 million compared to earnings of $245000 for the second quarter of 2019 gross margins and adjusted EBITDA were impacted by the lower unit volumes.
As a result of the pandemic shutdown, but if revenue can remain at the levels. We saw at the end of June and certainly into July I am confident that those metrics will be closer to what we saw in the fourth quarter of 29 team during our next report.
A few notable highlights from our other business interests.
He.
Has numerous catalyst coming up this quarter with two potential approvals.
Surface is expecting data for served to all one and surf 100, and the next 12 months positioning themselves to execute a series b financing in the near term.
No pharmaceuticals had there I N D for melt 100 accepted by F.D.A.
And we'll begin enrolling patients this week for their PK study generating a read out by the fourth quarter of this year and don't count Mayfield out it is packaged and ready to go with an experienced and capable leader on board.
We hope to also generate data on stoves drug candidates anti viral capabilities by the fourth quarter of this year, which could set still up for the next stages of its development since they've already showed excellent success against bacteria mold and fun Guy.
We're also experience expecting big things from vision allergy this year, including the launch of their exciting platform, which will better serve our ophthalmology focused customers.
On our last update we promised investors that we would keep innovating and pursuing deals that could create more shareholder value and we have and will continue to deliver on those promises. We believe the imprimis Rx ophthalmology platform is well suited to attract more prescribers and mark.
Cutting of more products importantly, revenues are returning to pre pandemic levels.
We will remain cautious about giving an all clear signal related to covert uncertainties for now, but with that said, we're more comfortable with our balance sheet and cash flow projections today than we were three months ago and we are certainly more confident that we should make it through this.
Period of challenge.
Now, let's jump to the Q in a I will pause to have our operator poll for questions operator.
Thank you we will now begin our question and answers.
If you do have a question. Please press Star then one I personally.
And if you're using speakerphone. Please pick up your handset, we'll provide that that sound quality.
Again, ladies and gentlemen, if he would like.
Ask a question. Please press Star then one on your telephone.
And we'll take our first question.
Yes with Lake Street Capital Michael Please go ahead.
Good afternoon, Mark congratulations on the surviving.
The quarter with a cold but.
Thank you Brooks.
Lie, though I yep, that's the good I have a couple of questions first I was a little confused about direct you to you.
Are you.
Thinking that's going to have your customers switching from one of your current steroids or is this.
Something you intend to sell in addition to the current steroids you offer your customers now.
Well, it's it's actually both so we make okay steroid injectables or that we think a decks acute can replace should replace.
And you know so that's that's really the base of the strategy. We sell you know over 200000 units are we did in 2019 of Tri Moxi and we think many of those customers a will strongly consider moving to execute a in a you know that doesn't give them the steroids and the answer.
Hi, biotic that they desire a but many of these these customers also use a moxifloxacin injection and so they can get the coverage and really provide their patients with a nearly well a completely dropless experience by using DEXA Q, along with our Moxifloxacin that we make.
Okay and can you just said I mean, I'm, obviously not familiar with all the economic tier, but you can you help us to think about the benefit the halo and potentially the benefit to customers in making this switch from an economic standpoint.
Sure a you know well if you were to take.
200000 units and you know, we said that we think that that's worth more than $25 million to us just on that.
That a number of units.
You you can you can figure out what we estimate the the value of each to execute unit to be for us so its significant.
On a relative basis.
If you compare that.
To what we make on Tri Moxi, it's kind of easy to figure out more or less what we make on prime oxy, because it's about a $25 products. So if we made a higher percentage would only be $25.
And you know we target a 20% net margin. So Ah you know there's not a lot of profit on a unit of Tri Moxi, but if you compare that to what we estimate.
The value of a deck CQ sale at a you'll see that it is a heck of a trade for us.
Great and a lot of real end and by the way a lot of value for the.
The the surgery center or hospital.
Sure absolutely I get that okay lets a sort of shifted slightly so when you talk just a little bit about the.
Movements in a sense is underway or at least maybe an additional element to the strategy.
That involves moving from compounding to adding in FDIC approved drugs and how do you see that it's probably related to the conversation. We just had a moment ago, but just talk a little bit about how you're thinking about things today, and where you where do you see the biggest opportunities for aero going forward.
Sure. Yeah, we you know imprimis Rx is sort of the the core of our business. It's the nucleus of the business and it really has fed other parts of the the the the hero Eco system. If you will because it was through imprimis Rx that we created a couple of pro.
Products that led to the founding of eating it was through Imprimis Rx that we created the products that led to the founding of surface pharmaceuticals. In the same is true for melt pharmaceuticals as well. So imprimis Rx is sort of the nucleus of what we've been able to build it imprimis Rx.
One of the great challenges with Impermanence Rx is that it has historically been a compounding only business and whether it's an analyst or a shareholder they look at the business as a compounding business and hero, we look at it very differently. We look at it at Imprimis Rx is an optimized.
Would you pharmaceutical platform, we have the ability to make drugs are in dispense them in all 50 states and we have a national sales force to not only sell but also service customers and we have about 10000 customers that buy from us on a fair.
Early regular basis. So if you are a company that has an F.D.A. approved product and you want to get it out there.
To a large audience and you don't want to take a lot of commercial risk, where a very attractive potential partner I think our friends at I point saw that logic, and we were able to partner with them.
And we're excited about that opportunity. We think there are others that also see that value and we think that when we were able to incorporate these F.D.A. approved products into our platform.
And you see the margin that can be generated.
The revenue that can be generated that folks like you and our shareholders would attribute more value to our business because we certainly do we have small work to do obviously, we're going to execute on this DEXA Q opportunity, but we think that when imprimis Rx is viewed as an ophthalmology company as many.
In the ophthalmology community view it.
We'll get a lot more value for that business.
Yeah, well that makes a ton since I I appreciate that explanation. So let's just shift gears again.
I think I saw it just recently that eaten a registered some shares that you own in eat in a recognize there's this stand still a mutually agreed upon that takes us out into late this calendar year I think but can you just talk a little bit about.
Your thinking with regard to your ownership and eat and then what you might be contemplating with regard to.
Potential sale of those shares.
Right well, there's no potential sale of the shares we haven't signal that there's a potential sale of the shares as a holder of our Eaton position, we would certainly prefer to have eaten stock at the same time, we did sign a lockup agreement, we locked up our shares and the inference there.
Should be that we don't need to sell those shares.
And and.
That's a good thing that should also infer that our businesses are doing half bad we don't need the cash from a potential sale of those shares.
It's really a sign of strength I think that we don't need to sell those shares and we are willing to sign a lock up agreement at the same time, we want Eaton's stockholders, our fellow shareholders and eat and to be able to benefit I'm without this herro stock overhang and so we were able to cut a deal.
Where we got our shares registered and we agreed to sign a lock up and you know in due course, if our board of directors decides to take action. They may but there is no urgency at all to do that and that's reflected in our lockup agreement, which extends into the summer of next year by the way.
Okay. Okay. Thanks, a lot.
So I'll just ask one more and I appreciate all the color here. So the one area or maybe I guess two areas that were a little bit higher.
Higher than our forecast this quarter, one was as DNA was about almost a million bucks above what we were thinking about in R&D was just a little bit more than double what we were thinking so could you just talked us about.
Your priorities, what you're spending on and how you think about that spending levels relative to the the business opportunities you see out there.
Sure I'm going to Andrew do you want to cover that question.
Sure and Burks Ah things. So the question just from a relative perspective, we were able to decrease hashing expenses during Q2 versus Q1 by about one of the half million dollars.
And we did that most of it was related to cost savings from decreasing unitil. So there's a lot of Vicki.
Variable expenses that is that are associated with revenue.
[noise] wherever the flex a lot of those down.
Then or is it different string.
Actual numbers and what your forecast was I think you know there could have been a difference and.
Revenue versus your forecast and the associated variable expenses on the the sales and marketing side.
Cool.
And then that's helpful and yes, I was thinking about <unk> <unk> on the R&D side, a lot of that has to do its formulation development. That's ongoing within the Mark talked about this and the shareholder letter of new product development at the company has going on and also the introduction of new formulations.
Into our outsourcing facility, which we continue to do each quarter.
And when we're kind of looking at expenses and what we're really prioritizing.
It it's still continues its what we thought about last quarter, which is we're focused on spending money on areas, they're going to generate value and generate revenue.
And you know if that means promoting new products. That's for the expenses are going to go that's R&D with new products its R&D with new products.
But that's perfect. Thanks, a lot then.
Looking forward to Q3.
Thanks Brooks thinks bricks.
And then I think some answered this along with B. Riley FBR. Please go ahead.
I get asked me. Thanks for taking my question and just a couple of quick ones from me.
So kind of following up on that execute question can you just maybe give a little color on how you would expect that transition from Tri Moxi test that you how that could look like cadence standpoint, and also just a little color on how we should be back racking and hair.
It was gross so look like as that transition to try to come Tri Moxi did that takes place.
Okay, great. Thank you for the question Andy look the the deal that we signed with with I point.
In that we announced here recently it is not as if we're going to flip a switch and the tri moxi orders or any of the other sterile injectable orders that we take are going to instantly turn into to execute workers that is going to take place, though we think over the next quarter.
Two we have surveyed a number of our customers that have experience with to execute and so they're much more familiar with it and we think that the transition to execute a would be much quicker, but it's going to be a customer by customer a situation. What is nice is that we have a relative.
I believe small number of Tri moxi customers under 100 of them that make up a well over half of the overall Tri Moxi units that we sell and the reason why I'm referencing that is to highlight that we don't have to go in call on 600.
Different accounts you know it's it's.
About 50 accounts and so it's it's not there's not a lot of ground to cover in order to hopefully transition. These customers are introduce them to this opportunity.
But we do expect that to take place and me in a fairly meaningful way. This year and we're excited about that the economics are tremendous for us. If you think about it a we didnt spend the money to develop the product.
We didnt spend the money to initially launch the product, but yet we're able to participate with our partners in a very meaningful way to help get the product out we think it's a dynamite product we talk to doctors the doctors like the product they like the results the product delivers and so were.
Excited to be able to add it to our portfolio.
And what's also exciting and also highlighted this in the letter.
Is that these accounts these ambulatory surgery centers in hospitals that by this or that will buy this product. We believe they all need the other elements all of the elements of the improvements Rx surgical portfolio and so they're buying these other.
Pharmaceutical products from us and so this isn't just about selling to execute that's a huge factor obviously, but we're also excited to sell the rest of the portfolio in what we call a pharma pack and that's a trademark that we have on the farm APAC. So that's selling them everything that they need for the surgical case.
In terms of revenue recognition, Andrew do you want to cover the cadence on timing for a from a cash flow perspective.
For sure and <unk>.
But ill talk more about this offline but.
Generally speaking, it's gonna be normal revenue Rec, where you know once the sale occurs.
And we get credit for it on the I point side, which is.
At that time of sale on their end, we should feel the basically crew are our commission and the expense on their side and our commission on the revenue side should line up quarter to quarter.
Okay perfect and.
And then can you just talk about some of the different there's about being included.
As a any expense send their within the bundle it when when you're dealing the tri moxi versus.
Uh huh.
Pass through status work that are being.
Having that that price fall outside of the bundle and maybe what what that means to those 100 or so clients or that you referenced like about 50% of Tri Moxi.
Sure. It's it's it's very simple right now if you're an ambulatory surgery center.
You've got a fixed amount of money coming in.
To pay you for the cost of the surgery that you're delivering and from that you have to buy all the pharmaceutical products as an example, and when the Doctor Who's doing the surgery and the surgery center. They choose Tri Moxi that is a cost center.
And whatever Tri Moxi costs is a cost center.
When doctors and surgery centers choose to execute it's it's not a cost center.
In fact, these the product is reimbursed at a S. P type a plus 6% and so.
Instead of spending you know lets say about 30 Bucks a unit.
The surgery center will get DEXA Q covered.
And they will actually end up positive about 30 $35 or so so it's a it's a complete reversal you go from a cost center to a profit center you go from a compounded product to an F.D.A. approved product.
And and once again, if you need the antibiotic.
We also happen to make compounded moxifloxacin, which we sell probably more of a than anyone else in the country. So not only we do not have to buy the moxifloxacin for whatever we sell it for but you might even have enough from the DEXA Q to cover the cost to the Moxi. So it's a great great economic.
Comic a benefit for these A.S. season hospitals and physicians.
Okay, great and actually I think perfect transition there that there was a notice for comment related to a tour, Alaska and Mark more importantly, my Fox and.
Can you just let us know what happens next year or what happens if lets get it gets removed from the from the last and and one alternative options can you Institute.
From a from a non compounded drug standpoint, and a timing and things that each I'm just curious on your take up that the notice or common.
Yes. So thanks for the question and you know we certainly appreciate the the question on that.
The reality is is that over the last six years or so we have lived through.
Numerous.
Changes that were required for for active ingredients and so this is this is not a anything new to us and without giving away anything.
That would would reveal how we plan to deal with this strategically all I can tell you is is that we have.
Compliant formulations, whether the change takes place or whether the change does not take place. We will continue to serve our customers and make or formulations and the formulations they want available for them.
Okay, great. Thank you very much a good luck close out there and congrats on that you know the progress.
Andy Thank you very much for your questions.
And next well go to Greg <unk> with Pinnacle family.
Please go ahead.
Hi, Mark Marcon, Andrew Thanks for taking my question.
Thanks for your hard work during this quarter I'm really encouraged by the cash management and are they just displayed and I think it proved the durability of their operating model in Q twos, I'm thinking more enthusiastic about harold than I've ever been on I appreciated the color or that you gave on around and.
Imprimis Rx being a platform from which to grow and I think the fact that you're able to form. This I point to execute partnership is is the result of that.
And I'm excited to see what other partnership opportunities you can initiate I'd love. It if you can expand a little bit more upon the reverse inquiries for new products that you got from customers can you help us understand generally how to think about the development costs for these programs relative to the revenue opportunities.
Yeah. Thank you for the support Greg and and your interest in your question.
The I don't think there's anyone in the pharmaceutical industry that has been able to bringing products to market is compounded products are ft approved products.
As efficiently as we have we we don't spend a lot we work with partners, we work with physicians, who come up with the ideas and you know without once again, revealing anything that would hurt us competitively the last I would say this.
Here has been one of the most creative times in the history of the company. We have one particular family of formulations that we recently filed.
IP on in the last 30 days a that we've been working on for three years.
And we have a great. It's it's a tremendous opportunity. It's a it's a formulation that we think.
We would be used in stocked in literally every ophthalmic office, that's in ophthalmology office or an Optimetrics office in the United States.
It seems to be a really big market opportunity.
We continue to to make tremendous progress.
In presbyopia that we've talked about in the past and so we we have where this ongoing R&D function within our business as I said I don't think on a relative basis, it's that expensive.
Or that we spend that much money.
Bringing these these products are getting them position to to come to market, but oh, just save it it's been a very productive first half of the year that's for sure on the R&D side.
Thank you very much and I have one more follow on question. So I was encouraged to see that you're highlighting that you're making progress towards reaching your 100 million revenues, 70% or better gross margin and.
20% or better EBITDA margin targets and I believe in your Q4 shareholder letter that you said you expect to achieve those targets between mid 22 in the end of 2022.
And you know as I look at your company today, you're 150 million dollar company and the value of here Deconsolidated subsidiaries is $50 million. So if I gave zero value for your consolidated subsidiaries, which I think is unreasonable and then hair or would be valued at 100 million.
Dollars, just which is basically imprimis Rx [noise].
And so if you can achieve that hundred million dollar revenue run rate and a 20% EBITDA margin run rate target within the next two two and a half years that implies the hair was trading at five times your run rate EBITDA target.
And you know further that would imply your business is growing at a 30% to 40%.
Cagar over the next two two and a half years from you know sort of the pre kobe levels to reach that that target and so I don't think that harrell would be trading at five times. Your your two year out EBITDA run rate target.
If investors believe that you can achieve it. So maybe you can give us some context around you know your your confidence exiting this co bid on.
Era, you know in your ability to achieve those operating targets clearly you can't control you know theres, another outbreak and complete shutdown, but I'd love to get on an update there.
Sure.
The.
What I would say is.
It's.
We're we're very comfortable in the medium term or the time frames that you laid out with a with the targets that you described in that we previously described it is hard and during a coated.
Period, you know it's been very challenging it was certainly very challenging during the second quarter.
So I'm reticent to stick my neck out or get too far over my skis on a on on revenue targets and gross margins when we're still a in the midst of this pandemic to certain extent that said our.
Our business is really good we had a really good June and we had an even better July and I said in the a in the letter we had record days in July it's terrific and.
The third quarters by the way a pretty slow quarter generally this time of vacations, but for a lot of our customers, but what's nice is as we said and are on our last call. We didn't think a lot of our customers were going to be taking vacations during the third quarter and they're not they're working.
So business is good we're excited about the back half of the year, we've got a lot of exciting things in store.
And a lot of value I think to deliver you know related to the value of the business.
You know I talked to people in the Ophthalmology World you know business development people I talked to bankers from time to time and and folks that are professionals. You know he can valuing these businesses and.
They always say that our value the value of imprimis Rx is significantly more than our market cap I don't think of had anyone tell me that was less than than a than 150 or even at 150. So they told me it's worth more on using you know a number of different valuation metrics I do.
We'll go to Sean overhead Eaton and Cameron over it surface and Greg over a million I tell them, Hey, I don't think our ownership interest in your company is worth anything you're the one that's not worth anything [laughter], but they don't agree with me they think they're sockets worth a lot to.
But somehow Oh, you know, we're getting discounted that's okay. I think what we need to do as a management team is execute and that's going to be the focus of the back half of the year and as we get into 2021, we need to executing our belief is that when we do.
Oh, the market will reward us in due course.
Thanks, Thanks Marni.
Thank you Greg.
And it looks like we have a.
Oh, Yeah with Lake Street Capital Michael Please go ahead.
Thank you and I was just sitting here thinking a little bit more I'm curious mark if you could describe your relationship with.
I point and.
Whether you feel any risk or in your current products or in the relationship you're developing with them. They did exclusive arrangement or do you have any protection from them coming in and try and its deal any of your business that you have today.
Yeah, well first of all its a new relationship but.
Like any like most business relationships. It's a it's a business that was it's a business relationship. That's forged on the foundation of a great contract a strong contract or written contract that protects them.
As well as a as hero and Imprimis Rx. So we've got a great agreement and they they are we're really excited about the relationship there they're good people they've got a great product Ah that's really the important factor here is that is the quality of the product they've got to.
A strong but small commercial team and we're excited to work with them and supplement them a they're largely taking the lead on a lot of the.
Commercial activities like marketing and such but we're gonna get out there.
And we're going to focus on our own customers and so.
In terms of of our concern about them disrupting existing relationships. The way the agreement is structured Brooks it doesn't work like that.
Disallowed out from happening, we actually get credit on specific customers and these are customers definitionally that our customers and a they're not buying to execute because there are customers right now and so we want them to consider to execute we have a as a set of strong belief and the product value there.
Product and that's that's what we're going to do and every time, we have a success. It's it's a it's not only a great clinical success, we believe but also a great economic success for.
Our stockholders.
Absolutely makes total sense. So I guess so does that's one more so do you see opportunities for additional product from.
I point or as you think about other ft approved products are they more likely to come from.
Other.
Companies developing drugs for this market.
It's it's a good question you know DEXA Q is is a you know what powers to execute was a delivery technology and its one of the I'd delivery technology and you know there are certainly opportunities down the line to talk to the I point.
People about developing that that was not the focus of our agreement. Our agreement is specific to execute and once again, we're really excited about launching this product or re launching in effectively with them to our customer base.
But when we talk about other deals.
That we've been working on it is outside of the I point relationship. We've been very active really for the last 12 months working on these these deals.
And so I point to first we hope will have more hopefully maybe the next time before the next time, we speak we'll see and a you know we're gonna we're going to continue to execute the strategy that we described earlier over the last couple of quarters, we're going to bring in F. D approved products, we're going to show that piece.
Apple companies with FDA approved products are really excited about the improvements Rx platform the value. It delivers and then of course, we're going to execute commercially and sell stuff and get these guys. The hopefully reorder from us. So we can drive value for our stockholders.
That's great. Thanks, a lot for taking my questions.
Thank you Brooks.
Oh, Wow I would like to turn the conference call back over to Mike L. Baum field <unk> for any closing remarks.
Thanks again for attending our call today I, just hope that our nations recovery continues to flourish over the coming months and until we speak again. Please stay safe if you have any investor related questions. Please email.
At the following email address I are at Herro, Inc. Dot com, that's eyes in igloo ours, and Robert at Herro, Inc. Dot Com and this will conclude or call. Thank you.
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