Harrow, Inc. has rapidly grown its market presence since its inception in 2014. The company, which began with no products and no revenue, now operates the largest ophthalmic compounding pharmacy in the US, holding a 35% market share.
Despite this significant market presence, the company’s revenue from this segment remains modest, under $100 million, due to the low price point of compounded drugs.
Business Expansion and Growth Strategy
Harrow’s founder and CEO, Mark Baum, aims to leverage the company’s extensive customer base to expand into the branded pharmaceutical product (BPP) space. By utilizing its robust distribution network, Harrow seeks to market BPPs to its existing ophthalmic prescribers.
The company’s initial launches of Iheezo and Vevye have shown promising starts. However, skepticism remains among some investors, as indicated by the substantial short interest in the stock.
Key Developments
A significant development for Harrow occurred on June 20, 2024, when the company announced the successful manufacture of Triesence (3e), a drug in high demand but difficult to produce, which had been in shortage for five years.
This milestone has already positively impacted the stock price, reflecting increased investor confidence.
Triesence (3e) Production and Market Potential
Triesence, a drug used to visualize the vitreous during vitrectomy and treat posterior uveitis, had been in shortage due to economic disincentives for production. Harrow acquired the rights to 3e from Novartis for $37 million and successfully negotiated a price increase to $944 per unit, up from the previous $175.
The market for 3e is substantial, with approximately 420,000 vitrectomies and over 100,000 diagnosed cases of posterior uveitis annually in the US. At a net price of $700 per unit after discounts, the total addressable market (TAM) for 3e is over $350 million.
Given the drug’s critical role and the reimbursement incentives for doctors, Harrow anticipates strong demand, potentially exceeding $200 million in annual revenue.
Synergies with Iheezo and Vevye
3e is expected to drive significant cross-selling opportunities, particularly with Iheezo, a drug used in ophthalmic procedures with a TAM of $7 billion. The high demand for 3e among retina specialists can facilitate access and boost sales for Iheezo.
Recent data suggests a sharp recovery in Iheezo sales, indicating a promising trajectory.
Similarly, Vevye, Harrow’s most important drug with a $20 billion TAM, has shown strong early performance. The additional EBITDA from 3e will allow Harrow to expand its sales force for Vevye, accelerating its market penetration and revenue growth.
Financial Outlook and Valuation
Harrow projects reaching $1 billion in revenue by 2027, with most of this coming from high-margin BPPs. Assuming a blended gross margin of 85% and SG&A expenses growing to $250 million, the company could generate $600 million in EBITDA and $450 million in fully taxed free cash flow (FCF) by 2027.
With 35 million shares outstanding, this translates to nearly $13 per share in FCF.
Balance Sheet
Harrow currently holds $193 million in debt, with interest rates ranging from 8.625% to 11.875%, and approximately $75 million in cash, resulting in a net debt of $118 million. The company was FCF positive in 2023 and expects to maintain this trend, further supported by the anticipated revenue from 3e.
Risks and Conclusion
While the outlook is positive, there are risks, particularly regarding the successful completion of the remaining PPQ batches for 3e. Any issues here could delay revenue contributions from this critical drug.
Harrow’s successful production of 3e and its strategic expansion into the BPP space position the company for significant growth. The potential revenue from 3e alone could justify the current share price, with substantial upside from its broader portfolio.
Given these factors, Harrow appears poised for continued success and increased investor confidence.
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