I have enough money to last me the rest of my life, unless I buy something.” -Jackie Mason

Today, we take an in-depth look at a small concern from healthcare sector. Like so many in the industry, the firm’s business has been hit hard by the COVID-19 pandemic. However, brighter days should like ahead as the economic restart gains steam. It also is an intriguing off the radar sum of the parts story. A full analysis is provided below.

Company Overview:

Harrow Health, Inc. (HROW) is a Nashville, Tennessee based healthcare business creation concern with a focus on ophthalmology. The company has founded seven companies since 2014, with wholly-owned stakes in five and minority interests in three. Harrow was founded as Bywater Resources in 2006, went bankrupt as Transdel Pharmaceuticals in 2011, emerged as Imprimis Pharmaceuticals – currently its largest subsidiary – in 2012, changing to its current moniker at the start of 2019. The stock trades for just under $7.50 a share, equating to a market cap just under $100 million.

Businesses

ImprimisRx. Harrow’s only revenue generator is ImprimisRx, a pharmacy compounding business with an emphasis on ophthalmology that generated $51.1 million in 2019. For those unfamiliar, pharmacy compounding is the process of combining different FDA-approved active ingredients into specialized pharmaceutical preparations, such as those with different dosage strengths or more tolerable delivery vehicles. These customized solutions are sold directly to the end-user – with a doctor’s prescription – cutting out distributors, pharmacy benefit managers, and other intermediaries, allowing cheaper prices for the customer and greater profit margins for Harrow. This segment is best known for offering customized versions of the parasite drug Daraprim for less than $1 a pill, after Turing Pharmaceuticals infamously jacked its price from $13.50 to $750 a pill in 2015.

ImprimisRx boasts over 1,500 monthly serviced accounts for over 9,000 prescribers and has grown at a CAGR of 149% from 2014-2019. It has plenty of room to grow with over 5 million ophthalmic procedures performed annually. In March 2020, ImprimisRx announced three separate supply agreements with Vision Center Network of America, iOR Partners, and Eye Care Service Partners, representing nearly 250,000 procedures annually.

Eton Pharmaceuticals. Harrow has non-controlling interests in three companies. The most easily measured is its 3.5 million share investment in publicly-traded Eton Pharmaceuticals (ETON). It was deconsolidated from Harrow in 2017 and IPO’d in 2018. Eton employs the 505(B)(2) pathway to manufacture formulations that are superior to existing products, which, unlike ImprimisRx, requires FDA approval. It has one approved therapy, Biorphen, a ready-to-use formulation of phenylephrine for the treatment of hypotension resulting from vasodilation in the setting of anesthesia. Eton also has eight late-stage pipeline candidates submitted or expected to be submitted in 2020 totaling ~$1.9 billion of market size, including EM-100, which has been out-licensed to Bausch Health (NYSE:BHC) with an FDA target action date of August 10, 2020. Based on the July 17, 2020, closing price, Harrow’s investment in Eton is valued at $19.2 million.

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Surface Pharmaceuticals. One of the two privately held drug concerns partially owned by Harrow is Surface Pharmaceuticals, a clinical-stage outfit with a focus on ocular surface and dry eye disease that was deconsolidated from Harrow in 2018. Like Eton, Surface employs the 505(B)(2) pathway. It has three eye-drop candidates: SURF-201, which is being evaluated in a Phase 2 study for pain and inflammation post-ocular surgery with results due YE20; SURF-100, which is undergoing a Phase 2 trial for chronic dry eye disease that should readout in 2H21; and SURF-200, which just entered the clinic for episodic dry eye disease. In addition to owning 3.5 million shares (~30%), Harrow owns the royalty rights to these three candidates. Another round of financing (Series B) for Surface is expected to close in 2020. Based on the conversion price of the Series A preferred stock, Harrow’s investment in Surface is valued at $11.6 million.

Melt Pharmaceuticals. Perhaps the company’s most exciting non-controlling interest lies with Melt Pharmaceuticals, another 505(B)(2) pathway company that is developing a sub-lingual, non-IV, non-steroidal sedation drug candidate (MELT-100) for initial use in the ~4.2 million cataract surgeries performed in the U.S. annually. An IND was submitted in June 2020, with a Phase 1 trial set for 2H20, and if all goes according to plan, a Phase 2 study in 1H21. Like Surface, Harrow owns the royalty rights (5%) to MELT-100, including any label extensions. It also owns 3.5 million shares of Melt, currently representing ~44% ownership interest, or $17.5 million based on the conversion price of the Series A preferred stock.

Mayfield Pharmaceuticals. Harrow also has controlling interests in several other clinical-stage subsidiaries, including Mayfield Pharmaceuticals, which is dedicated to women’s health issues. It has three early-stage candidates: MAY-66, an antimicrobial for the treatment of recurrent bacterial vaginosis; MAY-44 for the treatment of dyspareunia; and MAY-88 for patients suffering from interstitial cystitis. Harrow owns 70% of Mayfield (2.5 million shares) and the royalty rights to MAY-88.

Stowe Pharmaceuticals. The company also owns 70% (2.5 million shares) of Stowe Pharmaceuticals, a concern focused on the development of ophthalmic anti-infective STE-006, currently in the pre-clinic.

Radley Pharmaceuticals. Additionally, Harrow owns Radley Pharmaceuticals, a development-stage pharmaceutical company focused on the development of proprietary 505(B)(2) drug candidates focused on oncology and rare diseases. Radley has three candidates and intends to round out the balance of its pipeline by YE20.

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Visionology. In 2020, Harrow created Visionology and online eye health platform business. A proof-of-concept model is expected to roll out in a selected region in mid-2020 with a national launch – assuming no glitches – scheduled in 2021. The effort is being led by an ex-CEO and co-founder of Doxy.me, the world’s largest SaaS telemedicine platform. Harrow rolled out an exclusive agreement with Doxy.me to provide telemedicine services to its customers in March 2020. The free offering has seen wide and early acceptance with over 500 physicians and 125 new physician customers signed up in its first ten days.

Recent Quarterly Results:

Coming off a strong 4Q19, where it delivered record levels of revenues ($12.4 million) gross margins (72%), and Adj. EBITDA ($2.1 million), the company looked poised for another record quarter in 1Q20 with February hitting daily revenue records. Without coronavirus, management believes it would have attained revenue of at least $13 million.

Instead, with elective procedures effectively postponed throughout most of the country beginning in mid-March, Harrow reported an operating loss $628,000 on revenue of $11.8 million compared to an operating loss of $556,000 on $12.3 million in 1Q19. 1Q20 Adj. EBITDA was $414,000 versus $753,000 in the prior year period as margins dipped sequentially to 69%. Furthermore, Eton’s stock plunged from $7.20 a share to $4.10 a share, devaluing Harrow’s holding by $10.85 million.

However, second quarter results came in better than expected earlier this month as the company posted a loss of a penny a share on sales of just over $8 million. Both top and bottom line numbers easily beat the consensus. Management also seemed upbeat during their earnings conference call. In addition, the share price of Eton has recovered recently to approximately $6.75 a share.

Balance Sheet & Analyst Commentary:

Post 1Q20, the company took steps to sure up its balance sheet, amending its loan facility to draw down an additional $1 million while slightly extending its payment period. It also received ~$2 million from the paycheck protection program.

In addition to its $14.35 million investment in Eton, Harrow’s balance sheet reflected $4.1 million of cash and $16 million of principal debt as of March 31, 2020.

With a market cap of only $190 million, it is not surprising that Harrow is only followed by two Street analysts. B. Riley and Lake Street Capital both rate shares of HROW a buy with twelve-month price targets of $11.50 and $15, respectively.

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Beneficial owner Opaleye Management is also a big and recent sponsor of Harrow, purchasing ~360,000 shares since May 2020, all under $6 a share.

Verdict:

Harrow stock received a bump when it was added to the Russell 2000 and Russell 3000 indices at the end of June 2020.

Harrow was on a solid trajectory before coronavirus struck. Although it predominantly services elective surgeries, these procedures should come back with a vengeance as the economy starts reopening and the hospitals are no longer burdened with Covid-19 patients. CEO Mark Baum indicated that “lot of offices are talking about unprecedented things, such as working double shifts to take care of the expected volume. So, these procedures are going to come back.

With its investment in Eton on the mend (now near $30 million) and the value of its investments in Melt and Surface near $30 million, an investor is paying a low multiple of 2019 revenue for the ImprimisRx business that is growing its top line (pre-coronavirus) and generates ~70% margins. Add in the optionality from its Mayfield, Stowe, Radley, and Visionology ventures, and it is easy to see why Opaleye has added to its position below $6. Although the stock has rebounded well off its mid-March low of $3.33 a share, it is still down for the year.

We obviously liked the risk/reward profile of HROW when it was placed into the Insiders Forum model portfolio at approximately $5.75 a share one month ago. However, the stock still merits being slowly accumulated on dips below seven bucks a share in our opinion.

Economists report that a college education adds many thousands of dollars to a man’s lifetime income – which he then spends sending his son to college.” – Bill Vaughn

Bret Jensen is the Founder of and authors articles for the Biotech Forum, Busted IPO Forum, and Insiders Forum

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Disclosure: I am/we are long ETON, HROW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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