Good afternoon, and welcome to Harrow's Q3 2022 earnings conference call. My name is Andrea, 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. Please go ahead.
Thank you, operator. Good afternoon, and welcome to Harrow's Q3 2022 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.harrowinc.com.
Joining me on today's call are Harrow's Chief Executive Officer, Mark L. Baum, and Harrow's Chief Financial Officer, Andrew R. 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.
Thanks, Jamie, and thanks to everyone for joining us on today's call. Our Q3 2022 earnings release, corporate presentation, and letter to stockholders have all been posted to the investor relations section of our website. I would encourage you to review them. These are great resources for anyone interested in what we have done and what we intend to accomplish going forward. I'd like to begin by reminding you of what I said on our Q2 earnings conference call, and that is that I believe the back half of 2022 would be a period of great consequence for Harrow and one that would yield some of the most transformative and hopefully financially valuable events in our history.
I believe the Harrow team is making good on that statement, given what has transpired in the past 60 days, including, one, the FDA approval of IHEEZO, formerly known as AMP-100, for ocular surface anesthesia. two, the launch of Fortisite, which is a patent-pending family of high-concentration, refrigeration-stable, compounded, fortified antibiotics. three, the sale of our non-ophthalmology product line, which enhances our balance sheet and achieved a strategic imperative for Harrow, and that is to be a pure-play, U.S.-based, U.S.-focused ophthalmic pharmaceutical company. Four, the completion of Melt Pharmaceuticals' pivotal phase 2 efficacy study for its MELT-300 program. Five, the launch of atropine.com to help bring to market a family of patent-pending compounded atropine formulations. Last, but certainly not least, six, we made critical progress with product acquisition opportunities we've been pursuing for quite some time.
While we can't guarantee any one of these deals will get done, I believe we're getting close and that completing any of these deals could meaningfully impact our long-term goal of becoming a leading U.S. ophthalmic pharmaceutical company. Stay tuned. I'd also like to share some highlights of our results for Q3 ended September 30, 2022. Q3 revenues of $22.8 million represent a 22% increase over the prior year quarter and a slight decrease over Q2 of 2022, primarily as a result of supply chain challenges, along with the return to the seasonality that we've historically seen in the summer. Q3 gross profit was $16.1 million, a 17% increase over gross profit for the year earlier period of $13.8 million.
Core gross margin for Q3 of 2022 was 72% compared with the prior year's 74%. GAAP net loss in Q3 of 2022 was $6.5 million compared to $8.3 million last year, and adjusted EBITDA was $2.5 million. Core results for Q3 of 2022 included core net loss of $1.5 million and core diluted net loss per share of $0.06. I am pleased with the progress we made in the implementation of our strategic plan, and I stand by my belief that 2022 was the setup year that we've been working towards for many previous years. With the foundation we built nearly complete, we are set for 2023, which we foresee as a breakout year for Harrow.
As you should expect, the Harrow team is focused on getting the market access strategy, infrastructure, and systems in place to successfully launch IHEEZO early in the first half of 2023. I remain confident that within 24 months post-launch of IHEEZO with our market access strategy in place, Harrow's revenues should more than double, and our core gross margin should float meaningfully higher. Concurrent with the launch of IHEEZO, we continue to drive other sources of revenue growth, including revenues from our portfolio of branded pharmaceutical products and compounded pharmaceutical products, including Fortisite, atropine.com, and others that we are advancing through our pipeline. I do wanna mention that we continue to own non-controlling but meaningful equity positions in Surface Ophthalmics, Melt Pharmaceuticals, and Eton Pharmaceuticals. Eton just reported a nice quarter.
I also want to call special attention to Melt Pharmaceuticals, which recently completed the enrollment of patients in a phase 2 efficacy and safety study of MELT-300. This is a pivotal study, and it's expected to report top-line clinical results in the next few weeks. This data, which should come between Thanksgiving and Christmas, is of great interest to us at Harrow because we own a very large percentage of Melt, and we have tremendous confidence in the commercial viability of their product candidates. Once again, there is quite a bit more color on these issues and others in our letter to stockholders, which is published each quarter. If you're a stockholder or considering becoming a stockholder of Harrow, I would encourage you to read them. They are our attempt to provide a consistent and meaningful level of transparency into our company.
With that said, now we are happy to take your questions. I will pause to have our operator poll for questions. Operator?
We will now begin the question-and-answer session. To ask a question, you may press Star-Then One on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press Star then Two. At this time, we will pause momentarily to assemble the roster. Our first question will come from Jeffrey Cohen of Ladenburg Thalmann. Please go ahead.
Hi, Mark, Andrew, and Jamie. How are you?
Good. Good to speak with you, Jeff.
A few questions from our end. Just clarifying your last comment on MELT-300. That's top-line phase 2 data, which could then lead to a pivotal, or did you say that was pivotal?
This is the pivotal efficacy study that we discussed with the FDA, and the phase 3 program is essentially a safety program. As far as efficacy goes, this is the pivotal program.
Okay. What could that mean for , as far as a filing at the agency on timing basis?
In terms of timing, obviously, we need to see what the data looks like for the program that's gonna read out here in the next few weeks. From our standpoint, as I said in the stockholder letter, the way the study was designed, it was designed to actually produce a data set that should yield an approvable product. That could either be the two ten program, which is the midazolam only program, or it could yield a data set that supports the three hundred combination midazolam ketamine program. We really need to take a look at what the data are once we receive them and then assess the pathway forward for each project. The pathways themselves, to directly answer your question, are different for each product.
The MELT-210 program, we believe, could have a far shorter period to an NDA filing, and the MELT-300 program would be extended somewhat because we would have to complete the safety study in the phase three. In terms of the commercial value of those programs, I think as I tried to allude to in our stockholder letter, we just have a very clear understanding of what the uptake might be in for a product like that, particularly in the cataract surgery market, where, we have sold a compounded version of the MELT-300 product, a combination product, for many years.
It's been administered as a compounded medication many hundreds of thousands of times. We do know that there's a large customer base that is paying for that product from a capitated fee, the cataract surgery. We think if we can offer them an FDA-approved product, whether it's next year or the year after, we're gonna really change the game as far as sedation and analgesia go in the cataract surgery environment. Finally, it goes without saying that the MELT-300 program, the MELT-210 program, have applications we believe far outside of the ophthalmic arena. They can make a big difference, I think, in women's health, and in a number of very large market opportunities.
Okay, got it. Mark, could you talk about the Fortisite platform? How many SKUs would you imagine? And is formulation one-time use in nature?
We first started talking about Fortisite at the AAO meeting, and I know you visited our booth at the meeting, and hopefully you had an opportunity to see some of the physician reactions to Fortisite. We initially envisioned one product. We've built one product, but from discussions with our customers, we believe there will be a family of products. Once we were able to talk to customers about Fortisite, they gave us more ideas about versions of Fortisite, the Fortisite technology that they believe could be impactful in their practices. You know, I think next year it would not surprise me to see two or even three versions of Fortisite made available. We're really excited about Fortisite and provided some additional color about Fortisite once again in the stockholder letter.
It's a great value to customers. We've been able to open up some new customer accounts that we had never been able to penetrate before without Fortisite. We're really excited about it. The feedback from our users, the clinical feedback has been tremendous. They're really excited about it. We are as well. We think that the usage of Fortisite is gonna be far broader than we had originally anticipated for , just a narrow band of sight-saving conditions. We're excited about it. We'll see how things play out. It's still early in the launch, but the feedback has just been tremendous. As I said in the stockholder letter, it is the most positive feedback I have ever received for a product that we have brought to market.
Super, that's helpful. One more if I could for Andrew. This charge last year that you received from Sintetica, $5 million of cash, was just a reclassification. If you could just clarify that and then walk us through then its impact on the adjusted margins and maybe some commentary as far as the, adjusted margins hitting the high teens range, perhaps for full year 2022 and certainly at that level beyond.
Sure, Jeff. Thanks for the question. I always like getting a couple from you. I think I just wanna clarify, you're asking about the change to 2021 adjusted EBITDA number, correct?
Yes.
The SEC recently came out with some suggestions about life science companies in particular, including that in-process R&D, acquired in-process R&D costs in their adjusted EBITDA number. That for us, what that means is we paid Sintetica a $5 million upfront milestone payment when we acquired AMP-100 or IHEEZO. That was considered in-process R&D. It ran through our P&L, that $5 million charge last year, and showed up in R&D. When we initially reported adjusted EBITDA last year, we pulled that number out. Based on the SEC's recent sort of guidance on adjusted EBITDA for life science companies, we are changing that.
We changed our methodology and are putting it back in for historical purposes and for any additional acquisitions we have in the future. With IHEEZO becoming approved, though, we're now able to capitalize any additional milestone payments. We have, for example, a milestone payment in Q3 related to the approval. That expense is now capitalized, so you'll see an increase in our intangible assets on the balance sheet this quarter. Then there's some additional commercial milestones that, if we hit, we'll capitalize those expenses as well. Those will run through our balance sheet, not our P&L.
Okay, got it. Lastly for us, any comment on this $1 million backlog order? Any color as far as the product, the segment, the counterparty, et cetera? Thanks for taking our questions.
Thanks, Jeff. We have. I think before this quarter, we had, I believe eight quarters in a row of sequential revenue growth, and we really were trying to make it a ninth. But for our ability to fill those orders, we would have actually hit the mark. Unfortunately, we did not. These were just sales of products that we had no inventory of, or that inventory was becoming available early into Q4 . The good news is we were able to ring the register, as I said in our stockholder letter on these orders.
We really wanted to have that sequential revenue growth that we have had for so many prior quarters and wanted to make our stockholders aware of that back order, which we traditionally have not had. Once again, there's additional color on the back order in our stockholder letter. Thanks for that, Jeff.
Super. Thanks again.
Once again, if you would like to ask a question, please press Star then One. Our next question will come from Sahil Kazmi of B. Riley. Please go ahead.
Hey, good afternoon, Mark, Andrew, Jamie. Thanks for taking our questions, and congratulations on a really productive quarter. Maybe starting on IHEEZO. I know you're working through some of the pricing methodology, but can you remind us of kind of the reimbursement process here that you have to get through? You know, just your market access strategy broadly.
Yes. Well, to take a step back, there are two significant markets for the product in ophthalmology. The first is in the ASC and hospital environment for procedures such as cataract surgery, as an example. The second large market would be in the physician's office for procedures such as intravitreal injections, as an example. The market for intravitreal injections or the unit volumes are significantly higher than those for cataract surgery, but the type of coding or payment for each of those markets is very different. For example, in the ASC and hospital environment, a product like IHEEZO might be pass-through eligible. Part of a market access strategy would be to apply for a pass-through code.
In the physician's office environment, one might want to apply for a J code, for example. As I said, those strategies are not mutually exclusive. There are many products that initially received C codes. They had pass-through status and then ultimately received a J code as well. One of the nice things about IHEEZO is we believe that the impact of the product is not only, as I said, in the hospital and ASC environment, but also potentially even larger in the physician's office environment. We're working through those issues. Obviously, we have a strong position in the market, in the cataract surgery space currently. But the team is doing a lot of great work to figure out, where we want to target first.
We anticipate more information coming out on the initial market for the product as well as the pricing for the product in the coming months as we get ready for our launch in the first half of 2023.
Excellent. That's really helpful. Thank you. As it relates to the new launch of atropine.com, based on the existing formulation, can you talk a little bit about the competitive advantage of sort of the next generation formulation that'll be distributed through the 503B facility? Just in general, how you're thinking about the TAM.
Yeah. Atropine is a really interesting market. It's a big market. Let me just start by saying, our formulation is compounded. It is not FDA approved, and as such, it is not specifically labeled for any condition. There are a number of companies that are working on products to treat pediatric myopia, which is traditionally one of the markets, one of the areas where atropine has been very helpful and is frequently prescribed. By the way, all of the companies that we know that are developing products for the pediatric myopia market, 100% of them are developing atropine. You know, it's a really interesting pharmaceutical ingredient to treat this condition. As I said, our formulation is not FDA approved. It is compounded.
The market itself is significant. I think Kaiser just put some numbers out, and they said that about 8.6% of a targeted population of kids, and this is of 50 million people, would be impacted by a formulation to treat pediatric myopia. You're talking about 6 million potential patients. Some of the companies that are developing these types of products have said that, the number is, somewhere between 5-6 million. It's a big market in terms of the overall patient population. It's public information what our formulation is selling for, which is $39 for a bottle. You can kind of do the math and figure out how we think about the market.
It is certainly a market that exceeds $1 billion a year. We have a formulation that we believe is differentiated from anything else that is being developed or that is available in the compounded market. We're really excited about that. We filed some IP on that. We've done a lot of freedom to operate work and a lot of analysis of the overall market, and we're excited to be able to make an affordable, accessible atropine formulation available to this very large market, which is consistent with how we have operated our business in terms of serving the market, serving physicians, and serving their patients from inception.
That's great. Now, thanks very much for that. Maybe just one final one. Great to hear all the updates.
By the way, Sahil. We love our brand.
Right.
atropine.com. I think if you're gonna be in the atropine business, to own atropine.com and to be able to offer compounded atropine is just fantastic.
No, certainly. It does not get much better than that from a marketing perspective. I appreciate all the updates on MELT-300, but also just was wondering if you could provide any color on Surface Ophthalmics and the dry eye disease program specifically. I know we've heard anecdotally about the data from the phase two program, but just wondering if there are plans for near-term publication or distributing that data at a large medical meeting.
We sure would like to see the data published. I really don't have much more to say about the process that Surface is undergoing. They do have some additional data, sort of the final data set from their phase three or phase two programs, that we're expecting in the month of December, actually. But there's really not much more to say about that. I would suspect that you'll see that data published certainly in the next quarter or so. I think on the positive side, there has been some serious interest in chronic dry eye disease and dry eye in general. There's been a couple of meaningful transactions in the space.
We continue to believe that the data that I've seen that Surface has been able to create is the best data that I've ever seen and that I think has been published on chronic dry eye disease. We think there's real value there. They're going through a process now to assess what is next, whether it's to do a strategic transaction or to work with a partner to take things to the next step. We believe there's a lot more value there and , I think there'll be more information coming here fairly soon about what Surface intends to do.
Excellent. We will look out for that. Thanks very much for taking the questions. Again, congratulations on a really productive quarter here. Looking forward to continued progress.
Thank you, Sahil.
This concludes our question and answer session. I would like to turn the conference back over to Mark Baum for any closing remarks.
Thank you, Andrea. I hope everyone on this call is able to see what we see, and that is that we have been able to lay the groundwork for the commercialization of IHEEZO and to support other branded products. While remaining adjusted EBITDA positive, we are preparing for the growth that we clearly see on the horizon. We're building a different kind of pharmaceutical company, one that is deeply connected to our customers, including doctors, institutions that we serve, and even down to the consumer level. This structure facilitates our relentless desire and dedication to serve these customers better and allows us to maintain a competitive advantage and to differentiate Harrow from other rivals in our industry, which should in turn ultimately reward our stockholders.
To borrow a quote from one of my idols, Warren Buffett, "The stock market is designed to transfer money from the active to the patient." We are grateful for our stockholders who have hung in there with us through bad times and good times, and we look forward soon to rewarding them for their patience with further value creation. Thanks to everyone for attending today's call and for your interest in Harrow. If you have any investor-related questions, please email Jamie Webb at j webb, W-E-B-B, @harrowinc.com. This will conclude our call.
The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.