Harrow Inc (HROW)

[IdealisticCapitalist]

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.