UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
For the fiscal year ended December 31, 2021
OR
For
the transition period from to
Commission
File Number: 001-35814
HARROW
HEALTH, INC.
(Exact
name of registrant as specified in its charter)
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
102
Woodmont Blvd., Suite 610
Nashville,
TN37205
(Address
of Principal Executive Offices)(Zip Code)
(615)733-4730
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol Name of Each Exchange on Which Registered
Common Stock, $0.001 par value per share HROW The Nasdaq Global Market
8.625% Senior Notes due 2026 HROWL The Nasdaq Global Market
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No☒
Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
☐No☒
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). Yes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ Accelerated filer ☐
Non-accelerated filer ☒ Smaller reporting company ☒
Emerging growth company ☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness
of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered
public accounting firm that prepared or issued its audit report. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
☒
As
of June 30, 2021, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market
value of the common stock held by non-affiliates of the registrant was approximately $196 million, based on the closing price of $9.29
for the registrant’s common stock as quoted on The Nasdaq Global Market on that date. For purposes of this calculation, it has
been assumed that shares of common stock held by each director, each officer and each person who owns 10% or more of the outstanding
common stock of the registrant are held by affiliates of the registrant. The treatment of these persons as affiliates for purposes of
this calculation is not conclusive as to whether such persons are affiliates of the registrant for any other purpose.
As
of March 8, 2022, there were 27,030,127shares of the registrant’s common stock outstanding.
Portions
of the registrant’s definitive proxy statement for its 2022 Annual Meeting of Stockholders are incorporated by reference in Part
III of this Annual Report on Form 10-K, to the extent stated herein.
TABLE
OF CONTENTS
Page
PART I
Item 1. Business 1
Item 1A. Risk Factors 14
Item 1B. Unresolved Staff Comments 36
Item 2. Properties 36
Item 3. Legal Proceedings 36
Item 4. Mine Safety Disclosures 36
PART II
Item 6. Selected Financial Data 37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 52
Item 8. Financial Statements and Supplementary Data 52
Item 9A. Controls and Procedures 52
Item 9B. Other Information 52
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 52
PART III
Item 10. Directors, Executive Officers and Corporate Governance 53
Item 11. Executive Compensation 53
Item 14. Principal Accountant Fees and Services 53
PART IV
Item 15. Exhibits, Financial Statement Schedules 54
SIGNATURES 58
As
used in this Annual Report, unless indicated or the context requires otherwise, the terms the “Company,” “Harrow,”
“we,” “us” and “our” refer to Harrow Health, Inc. and its consolidated subsidiaries.
In
addition to historical information, the following discussion contains forward-looking statements regarding future events and our future
performance. In some cases, you can identify forward-looking statements by terminology such as “will,” “may,”
“should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,”
“predicts,” “forecasts,” “potential” or “continue” or the negative of these terms or
other comparable terminology. All statements made in this Annual Report other than statements of historical fact are forward-looking
statements. These forward-looking statements involve risks and uncertainties and reflect only our current views, expectations and assumptions
with respect to future events and our future performance. If risks or uncertainties materialize or assumptions prove incorrect, actual
results or events could differ materially from those expressed or implied by such forward-looking statements. Risks that could cause
actual results to differ from those expressed or implied by the forward-looking statements we make include, among others, risks related
to: the impact of the COVID-19 pandemic on our financial condition, liquidity or results of operations, our ability to successfully implement
our business plan, develop and commercialize our proprietary formulations in a timely manner or at all, identify and acquire additional
proprietary formulations, manage our pharmacy operations, service our debt, obtain financing necessary to operate our business, recruit
and retain qualified personnel, manage any growth we may experience and successfully realize the benefits of our previous acquisitions
and any other acquisitions and collaborative arrangements we may pursue; competition from pharmaceutical companies, outsourcing facilities
and pharmacies; general economic and business conditions; regulatory and legal risks and uncertainties related to our pharmacy operations
and the pharmacy and pharmaceutical business in general; physician interest in and market acceptance of our current and any future formulations
and compounding pharmacies generally; our limited operating history; and the other risks and uncertainties described under the heading
“Risk Factors” in Part I, Item 1A of this Annual Report. You should not place undue reliance on forward-looking statements.
Forward-looking statements speak only as of the date they are made and, except as required by law, we undertake no obligation to revise
or publicly update any forward-looking statement for any reason.
We
have registered trademarks, copyrights and/or pending trademark and copyright applications for a number of proprietary names in the United
States, including, but not limited to: Imprimis®, ImprimisRx®, Harrow Health®, Visionology®,
Dropless®, LessDrops®, Dropless Cataract Surgery®, Klarity-C®, Dropless Therapy®,
MKO Melt®, and Simple Drops®. We may choose to pursue trademark protection in other jurisdictions for one
or more of these or other marks in the future. All other trademarks, service marks and trade names included or incorporated by reference
into this Annual Report on Form 10-K (this “Annual Report”), are the property of their respective owners.
PART
I
ITEM
1. BUSINESS
Overview
We
are an ophthalmic-focused healthcare company. Our business specializes in the development, production and sale of innovative medications
that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries and deconsolidated companies.
We own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical businesses, and Visionology, Inc.
(“Visionology”), a direct-to-consumer eyecare subsidiary focused on chronic vision care. In addition, we also have non-controlling
equity positions in Surface Ophthalmics, Inc. (“Surface”) and Melt Pharmaceuticals, Inc. (“Melt”), both companies
that began as subsidiaries of Harrow and were subsequently deconsolidated. We also own royalty rights in various drug candidates being
developed by Surface and Melt.
ImprimisRx
ImprimisRx
is our ophthalmology-focused prescription pharmaceutical business. From its inception in 2014, ImprimisRx, whose business consists of
integrated research and development, production, dispensing/distribution, sales, marketing, and customer-service capabilities, has offered
physician customers and their patients access to critical medicines to meet their clinical needs. Initially, ImprimisRx focused exclusively
on compounded medications to serve needs unmet by commercially available drugs. We make our formulations available at prices that are,
in most cases, lower than non-customized commercial drugs, ImprimisRx’s customer base has grown to include more than 10,000 U.S.
eyecare-dedicated prescribers and institutions. Our current ophthalmology formulary includes over 20 compounded formulations, many of
which are patented or patent-pending, and are customizable for the specific needs of a patient. Our compounded medications include various
combinations of drugs formulated into one bottle and numerous preservative free formulations. Depending on the formulation, the regulations
of a specific state and ultimately the needs of the patient, ImprimisRx products may be dispensed as patient-specific medications from
our 503A pharmacy, or for in-office use, made according to current good manufacturing practices (“cGMPs”) or other guidance
documents from the U.S. Food and Drug Administration (the “FDA”), in our FDA-registered New Jersey outsourcing facility.
Over
the past two years, in order to more fully serve the needs of our growing customer base, we have invested in broadening ImprimisRx’s
product portfolio to include FDA-approved products. Our investments in this regard have led to commercial partnerships to sell DEXYCU®
(“Dexycu”) and Avenova, the acquisition of two later stage drug candidates, and the recent acquisition of U.S. rights
to four FDA-approved ophthalmic products. These transactions, and those we are continuing to pursue, are focused in eyecare pharmaceuticals.
We believe that our continued investments in these and other products will enable us to provide more physician prescribers and their
patients with access to a complete portfolio of affordable eyecare pharmaceuticals to address their clinical needs.
DEXYCU®
ImprimisRx
entered into a Commercial Alliance Agreement (the “Dexycu Agreement”) with Eyepoint Pharmaceuticals, Inc. (“Eyepoint”),
pursuant to which Eyepoint granted ImprimisRx the right to promote DEXYCU® (dexamethasone intraocular suspension) 9% for the treatment
of post-operative inflammation following ocular surgery in the United States. Pursuant to the Dexycu Agreement, Eyepoint pays ImprimisRx
a fee that is calculated based on the quarterly sales of Dexycu in the U.S.
IOPIDINE®,
MAXITROL® EYE DROPS, MOXEZA®
In
December 2021, we entered into an Asset Purchase Agreement (the “NVS Agreement”) with Novartis Technology, LLC and Novartis
Ophthalmics AG (together, “NVS”), pursuant to which we acquired U.S. commercial rights to four FDA-approved ophthalmic medicines:
Pursuant
to the NVS Agreement, NVS will continue to sell the products and transfer the net profit to us for a transitional period of approximately
six months after the date of execution. Following the transition period, we expect to have the products manufactured by third parties
and commercialize the products for the U.S. market.
We
believe by expanding our product portfolio to include these branded FDA-approved products, we will be positioned to leverage our ImprimisRx
platform to introduce unique lifecycle management strategies that could grow sales and address needs of our customers that we are unable
to meet with our other compounded product offerings.
AMP-100
In
July 2021, we acquired the exclusive marketing and supply rights to AMP-100 in the U.S. and Canada from Sintetica S.A. (“Sintetica”).
AMP-100 is a patented, ophthalmic topical anesthetic drug candidate. If FDA-approved, the active ingredient used in AMP-100 will be the
first approved use of this active ingredient in the U.S. ophthalmic market.
The
safety and efficacy of AMP-100 were evaluated in various clinical trials, including a Phase 2/3 randomized, double-masked, vehicle-controlled,
efficacy, safety and tolerability study in healthy volunteers and a non-inferiority Phase 3 study of 342 patients undergoing cataract
surgeries, comparing AMP-100 to an active comparator. Ultimately, these studies demonstrated:
A
new drug application (“NDA”) for AMP-100 was submitted by Sintetica to the FDA in the fourth quarter of 2021 and the FDA
has assigned the application standard review and a Prescription Drug User Fee Act (PDUFA) target action date of October 16, 2022. If
approved, we expect our initial commercial focus of AMP-100 to be on ophthalmic procedures that traditionally require the eye to be anesthetized.
AMP-100
is protected by one issued patent and another patent-pending. The issued patent includes composition of matter and method of use claims
and could provide protection for AMP-100 into 2037.
MAQ-100
In
August 2021, we acquired exclusive marketing rights to MAQ-100 in the U.S. and Canada from Wakamoto Pharmaceutical Co., Ltd. (“Wakamoto”).
MAQ-100 is a preservative-free triamcinolone acetonide ophthalmic injection drug candidate. MAQ-100 is marketed and sold by Wakamoto
in Japan as MaQaid®. Following Japan’s Ministry of Health Labor and Welfare (“MHLW”) approval, MaQaid was launched
in Japan in 2010, indicated as an intravitreal injection for visualization for vitrectomy. Since its initial MHLW approval, the indication
for MaQaid was expanded to include (a) treatments for alleviation of diabetic macular edema, (b) macular edema associated with retinal
vein occlusion (or RVO), and (c) non-infectious uveitis. We intend to leverage the clinical data used for Japanese market approval of
MaQaid to support a clinical program and U.S. market NDA submission of MAQ-100 for visualization during vitrectomy. We intend to request
a meeting with FDA during the first half of 2022 to discuss our planned clinical program for MAQ-100.
We
expect to acquire and/or develop additional FDA-approved/approvable ophthalmic products and product candidates that will allow us to
leverage the commercial infrastructure of ImprimisRx to promote, sell, and ultimately bring these products to market.
Visionology
Visionology,
a direct-to-consumer online eye health platform, leverages our experience in the ophthalmic pharmaceutical business as well as our relationships
with eyecare professionals across the United States. We recently launched a proof-of-concept model for Visionology within certain U.S.
markets, and if successful, expect to expand the launch on a nationwide basis in 2022.
Ophthalmology
Market
For
any ocular procedure, a surgeon may require drugs for sedation, dilation, inflammation and infection prevention, and ocular surface preservation.
The cataract surgery market continues to experience significant growth. According to Market Scope, approximately 4.2 million cataract
surgeries were performed in the U.S. in 2019. The National Eye Institute estimates that over 24 million Americans currently have cataracts
and that this number will grow to 38 million by 2030 and reach more than 50 million by 2050. In addition, the American Academy of Ophthalmology
(AAO) estimates that over one-half of Americans require some form of vision correction and 43 million of these individuals are candidates
for refractive surgery. Nearly 96 percent of the refractive surgery procedures performed are LASIK (laser in situ keratomileusis) surgeries,
an outpatient surgical procedure used to treat nearsightedness, farsightedness, and astigmatism. According to Statista, an estimated
600,000 LASIK procedures were performed in the U.S. in 2015.
According
to the Glaucoma Research Foundation, there are over 3 million Americans with glaucoma but only half are aware they have it. Open-angle
glaucoma (the most common type of glaucoma) is a condition of increased intraocular pressure that causes gradual loss of sight. Glaucoma
is incurable, and if not managed, can lead to blindness. Generally, the first line of treatment consists of a prostaglandin analogue
(PGA) eye drop regimen. As the disease progresses, non-PGA products are generally added as a second line treatment. Topical agents, other
than PGAs, include beta blockers, alpha agonists, miotics and steroids. According to a 2013 article in Glaucoma Today, up to 50%
of glaucoma patients require more than one drug following a few months of initial treatment and there is a direct correlation between
the number of glaucoma bottles and decreased adherence; however, the FDA has yet to approve a PGA combination product despite combination
products including a PGA (Xalacom®, DuoTrav® and Ganfort®) available outside of the U.S.
According to a 2017 Market Scope report, the glaucoma pharmaceuticals market is expected to reach $5.3 billion in 2022.
Dry
eye occurs when the eye does not produce enough tears, or when the tears are not of the correct consistency and evaporate too quickly.
Inflammation of the surface of the eye may also occur. We believe that dry eye disease (“DED”) affects over 30 million people
in the U.S., and a major epidemiological study, the Beaver Dam Offspring Study, published in 2014 in the American Journal of Ophthalmology,
reported that in a cohort of over 3,000 patients, DED was self-reported by 14.5% of the patients. According to a 2017 Market Scope
report, the global dry eye treatments market is expected to grow from $3.7 billion in 2017 to $4.9 billion in 2022. Dry eye is among
the most common conditions seen by eyecare professionals.
Presbyopia
is the normal loss of near focusing ability that occurs with age. Most people begin to notice the effects of presbyopia sometime after
age 40, when they start having trouble seeing small print clearly. According to an American Academy of Ophthalmology report from
2018, there are an estimated 1.8 billion people worldwide who suffer from presbyopia, with eye glasses (more commonly referred to as
“readers”) being the most common treatment option. Based on our understanding, there are currently four eyedrops undergoing
clinical trials/development in the U.S. aiming to be first to market topical eye drops to treat the symptoms associated with presbyopia.
We believe most of these are designed to enhance depth of field via a “pinhole effect” and in one case to reduce lens stiffening;
and some of these medications could be synergistic with each other or combined with refractive surgery to enhance outcomes. However,
as of the date of this Annual Report, none of these drug candidates has received market approval from the FDA.
Pharmaceutical
Compounding Businesses
Pharmaceutical
Compounding
Pharmaceutical
compounding is the science of combining different active pharmaceutical ingredients (APIs), all of which are approved by the FDA (either
as a finished form product or as a bulk drug ingredient), and excipients to create specialized pharmaceutical preparations. Physicians
and healthcare institutions use compounded drugs when commercially available drugs do not optimally treat a patient’s needs. In
many cases, compounded drugs, such as ours, have wide market utility and may be clinically appropriate for large patient populations.
Examples of compounded formulations include medications with alternative dosage strengths or unique dosage forms, such as topical creams
or gels, suspensions, or solutions with more tolerable drug delivery vehicles.
Almost
all of our sales revenue is derived from making, selling and dispensing our compounded prescription drug formulations as cash pay transactions
between us and our end-user customer. As such, the majority of our commercial transactions do not involve distributors, wholesalers,
insurance companies, pharmacy benefit managers or other middle parties. By not being reliant on insurance company formulary inclusion
and pharmacy benefit manager payment clawbacks, we are able to simplify the prescription transaction process. We believe the outcome
of our business model is a simple transaction, involving a patient-in-need, a physician’s diagnosis, a fair price and great service
for a quality pharmaceutical product. We sell our products through a network of employees and independent contractors, and we dispense
our formulations in all 50 states, Puerto Rico and in select markets outside the United States.
Our
Compounding Facilities
Pharmaceutical
compounding businesses are governed by Sections 503A and 503B of the Federal Food Drug and Cosmetic Act (the “FDCA”). Section
503A of the FDCA provides that a pharmacy is only permitted to compound a drug for an individually identified patient based on a prescription
for the patient and is only permitted to distribute the drug interstate if the pharmacy is licensed to do so in the states where it is
compounded and where the medication is received.
Section
503B of the FDCA provides that a pharmacy engaged in preparing sterile compounded drug formulations may voluntarily elect to register
as an “outsourcing facility.” Outsourcing facilities are permitted to compound large quantities of drugs without a prescription
and distribute them out of state with certain limitations, such as the formulation appearing on the FDA’s drug shortage list or
the bulk drug substances contained in the formulations appearing on the FDA’s “clinical need” list. Entities voluntarily
registering with FDA as outsourcing facilities are subject to additional requirements that do not apply to compounding pharmacies (operating
under Section 503A of the FDCA), including adhering to standards such cGMPs or other FDA guidance documents and being subject to regular
FDA inspection.
We
operate two compounding facilities located in Ledgewood, New Jersey. Our New Jersey operations are comprised of two separate entities
and facilities, one of which is registered with the FDA as an outsourcing facility (“NJOF”) under Section 503B of the FDCA.
The other New Jersey facility (“RxNJ”) is a licensed pharmacy operating under Section 503A of the FDCA. All products that
we sell, produce and dispense are made in the United States.
We
believe that, with our current compounding pharmacy facilities and licenses and FDA registration of NJOF, we have the infrastructure
to scale our business appropriately under the current regulatory landscape and meet the potential growth in demand we are targeting.
We plan to invest in one or both of our facilities to further their capacity and efficiencies. Also, we may seek to access greater pharmacy
and production related redundancy and markets through acquisitions, partnerships or other strategic transactions.
Carved-Out
Businesses (De-Consolidated Businesses)
We
have ownership interests in Surface, Melt, and Eton Pharmaceuticals, Inc. (“Eton”) and hold royalty interests in some of
Surface’s and Melt’s drug candidates. These companies are pursuing market approval for their drug candidates under the FDCA,
including in some instances under the abbreviated pathway described in Section 505(b)(2), which permits the submission of a NDA where
at least some of the information required for approval comes from studies not conducted by or for the applicant and for which the applicant
has not obtained a right of reference.
In
2018 and 2019, we formed and created subsidiaries named Radley Pharmaceuticals, Inc. (“Radley”), Mayfield Pharmaceuticals,
Inc. (“Mayfield”), and Stowe Pharmaceuticals, Inc. (“Stowe”). In 2020, we halted nearly all operating activities
related to these subsidiaries to invest resources in other areas, and we may not restart any or all activities related to these businesses.
In addition, we terminated license and acquisition agreements for Mayfield’s MAY-66 and MAY-44 drug candidates, and Stowe’s
STE-006 drug candidate.
Noncontrolling
Equity Interests
Surface
Ophthalmics, Inc.
Surface
is a clinical-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular surface
diseases.
In
January 2021, Surface announced positive top-line results from a Phase 2 trial of its drug candidate SURF-201, a 0.2% betamethasone,
preservative-free ophthalmic solution in the Klarity delivery vehicle for the treatment of post cataract surgery pain and inflammation.
According to the Surface results, SURF-201 was dosed twice daily, met its primary endpoints of absence of inflammation at both Day 8
and Day 15 and was found to be safe and well-tolerated by the patient group. In addition, a secondary endpoint showed almost 90% of patients
given SURF-201 were pain free at Day 15. SURF-201 marks the first ophthalmic therapeutic in the United States to utilize betamethasone
and the first preservative-free unit dose therapy for the treatment of post-operative pain and inflammation.
Also
in January 2021, Surface announced the first patient dosed in a head-to-head Phase 2 trial for its drug candidate SURF-100 (mycophenolate
sodium and betamethasone in Klarity vehicle) for the treatment of chronic dry eye disease. The head-to-head study will compare SURF-100
against leading on-market competitors lifitegrast ophthalmic solution 5% (marketed as Xiidra®) and cyclosporine ophthalmic emulsion
0.05% (marketed as Restasis®).
In
February 2021, Surface announced the first patient dosed in a Phase 2 trial for its drug candidate SURF-200 (betamethasone in Klarity
vehicle) for the treatment of episodic dry eye flares. The dose ranging study for SURF-200 will be administered in two different low
concentration formulations of betamethasone in the Klarity vehicle. The trial will enroll 120 to 140 patients with a primary endpoint
of Symptom Improvement of one unit based on the University of North Carolina Dry Eye Management Scale by the eighth day.
In
2018, Surface closed an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated Surface
from our consolidated financial statements. During May, June and July of 2021, Surface closed an offering of its preferred stock at a
purchase price of $4.50 per share resulting in gross proceeds to Surface of approximately $25,000,000 (the “Surface Series B Offering”).
We own 3,500,000 shares of Surface common stock, which is approximately 20% of the equity and voting interests as of December 31, 2021.
Harrow owns mid-single digit royalty rights on net sales of SURF-100, SURF-200 and SURF-201.
Melt
Pharmaceuticals, Inc.
Melt
is a clinical-stage pharmaceutical company focused on the development and commercialization of proprietary non-intravenous, sedation
and anesthesia therapeutics for human medical procedures in hospital, outpatient, and in-office settings. Melt intends to seek regulatory
approval for its proprietary technologies, where possible. In December 2018, we entered into an Asset Purchase Agreement with Melt (the
“Melt Asset Purchase Agreement”), pursuant to which Harrow assigned to Melt the underlying intellectual property for Melt’s
current pipeline, including its lead drug candidate MELT-300. The core intellectual property Melt owns is a patented series of combination
non-opioid sedation drug formulations that we estimate to have multitudinous applications.
MELT-300
is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. Melt filed an investigational
new drug application (“IND”) with the FDA in June 2020 and began its clinical program for MELT-300. In February 2021, Melt
announced data from, and the successful completion of, its Phase 1 study. Melt recently began enrolling patients in its Phase 2 study
for MELT-300.
In
January 2019, Melt closed an offering of its Series A Preferred Stock. At that time, we lost our controlling interest and deconsolidated
Melt from our consolidated financial statements. We own 3,500,000 shares of Melt common stock, which was approximately 46% of the equity
and voting interests issued and outstanding as of December
31, 2021. In September 2021, we provided Melt with a senior secured loan in the amount of $13,500,000,
which is intended to fund the Phase 2 program of MELT-300. In connection with the loan, we also were provided the right, but not the
obligation, to match any offer received by Melt associated with the commercial rights to any of its drug candidates for a period of five
years. Melt is required to make mid-single digit royalty payments to the Company on net sales of MELT-300, while any patent rights remain
outstanding, subject to other conditions. Melt can require the Company to cease compounding like products at the time of FDA approval
of MELT-300. If approved, we do not expect a cessation of compounding like products to have a material impact on our operations and financial
performance.
Eton
Pharmaceuticals, Inc.
Eton
is a commercial-stage pharmaceutical company focused on developing and commercializing innovative drug products. Its pipeline includes
several products and drug candidates in various stages of development across a variety of dosage forms. In May 2017, Eton closed an offering
of its Series A Preferred Stock, as a result of which we gave up our controlling interest in it. In November 2018, Eton completed an
initial public offering of its common stock. We own 1,982,000 shares of Eton common stock, which is less than 10% of Eton’s equity
and voting interests issued and outstanding as of December 31, 2021.
Sales
and Marketing
The
focus of our sales and marketing is in the U.S. We do, however, believe that our proprietary drug formulations, drug candidates and drug
products could have commercial appeal in international markets, and in the past we have engaged distributors and entered into out-licensing
arrangements for certain of our proprietary formulations in certain non-U.S. markets, including Canada. Our sales and marketing efforts
are currently organized into two teams, the larger of which focuses on our ophthalmology pharmaceutical business and the other on our
non-ophthalmology pharmaceutical compounding business. Our sales and marketing activities consist primarily of efforts to educate doctors,
ambulatory surgery centers, healthcare systems, hospitals and other users throughout the U.S. about our compounded formulations. We expect
that we may experience growth in the sales of our proprietary pharmaceutical compounded formulations in future periods, particularly
in light of our current and planned launches of new formulations and commercialization campaigns. However, we may not be successful in
doing so, whether due to the safety, quality or availability of our proprietary compounded formulations, the size of the markets for
such formulations, which could be smaller than we expect, the timing of market entry relative to competitive products, the availability
of alternative compounded formulations or FDA-approved drugs, the price of our compounded formulations relative to alternative products
or the success of our sales and marketing efforts, which is dependent on our ability to build and grow a qualified and adequate internal
sales function.
We
expect to continue to acquire and/or develop additional FDA-approved ophthalmic drugs that allow us to leverage the commercial infrastructure
of ImprimisRx to promote, sell, and ultimately bring these products to market. As we execute this strategy, we will likely expand our
sales and marketing team, expertise and expenses. This would include the addition of market access expertise and team members, where
roles include discussions with payors regarding the costs and benefits of our products for their members, assisting with the addition
of our products to the medical policy of payors, and providing the market with assistance regarding reimbursement queries.
We
have entered into various sales and marketing agreements with certain organizations to provide exclusive sales and marketing representation
services to ImprimisRx in select geographies in the U.S., in connection with our pharmaceutical products and compounded formulations.
Under the terms of the sales and marketing agreements, we are 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, we are required to make periodic milestone payments
to certain organizations in shares of our restricted common stock if net sales in the assigned territory reach certain future levels
by the end of their terms, as applicable. We believe these sales and marketing agreements will continue to accelerate launches of our
new ophthalmology programs and limit our initial capital requirements commonly associated with new product launches and increased sizes
of sales forces.
Competition
The
pharmaceutical and pharmacy industries are highly competitive. We compete against branded drug companies, generic drug companies, outsourcing
facilities and other compounding pharmacies. We are significantly smaller than some of our competitors, and we may lack the financial
and other resources needed to develop, produce, distribute, market and commercialize any of our proprietary formulations or compete for
market share in these sectors. The drug products available through branded and generic drug companies with which our formulations compete
have been approved for marketing and sale by the FDA and are required to be manufactured in facilities compliant with cGMP standards.
Although we prepare some of our compounded formulations in accordance with cGMP standards and our other formulations are produced according
to the standards provided by United States Pharmacopoeia (USP) <795> and USP <797> and applicable state and federal law,
our proprietary compounded formulations are not required to be, and have not been, approved for marketing and sale by the FDA. As a result,
some physicians may be unwilling to prescribe, and some patients may be unwilling to use, our formulations. Additionally, under federal
and state laws applicable to our current compounding pharmacy operations operating under Section 503A of the FDCA, we are not permitted
to prepare significant amounts of a specific formulation in advance of a prescription, compound quantities for office use or utilize
a wholesaler for distribution of our formulations; instead, our compounded formulations must be prepared and dispensed in connection
with a physician prescription for an individually identified patient. Pharmaceutical companies, on the other hand, are able to sell their
FDA-approved products to large pharmaceutical wholesalers, who can in turn sell to and supply hospitals and retail pharmacies. Even though
we have registered NJOF with the FDA, our business may not be scalable on the scope available to our competitors that produce FDA-approved
drugs, which may limit our potential for profitable operations. These facets of our operations may subject our business to limitations
our competitors offering FDA-approved drugs may not face.
Biotechnology
and related pharmaceutical technologies are subject to rapid and significant change. Our future success will depend in large part on
our ability to maintain a competitive position with respect to these technologies. Products developed by our competitors, including FDA-approved
drugs and compounded formulations created by other pharmacies, could render our products and technologies obsolete or unable to compete.
Any products that we develop may become obsolete before we recover expenses incurred in developing the products, which may require that
we seek additional funds that may or may not be available to continue our operations. The competitive environment requires an ongoing,
extensive search for medical and technological innovations and the ability to develop and market these innovations effectively, and we
may not be competitive with respect to these factors. Other competitive factors include the safety and efficacy of a product, the size
of the market for a product, the timing of market entry relative to competitive products, the availability of alternative compounded
formulations or approved drugs, the price of a product relative to alternative products, the availability of third-party reimbursement,
the success of sales and marketing efforts, brand recognition and the availability of scientific and technical information about a product.
Although we believe we are positioned to compete favorably with respect to many of these factors, if our proprietary formulations are
unable to compete with the products of our competitors, we may never gain market share or achieve profitability.
Factors
Affecting Our Performance
We
believe the primary factors affecting our performance are our ability to increase revenues of our proprietary compounded formulations
and certain non-proprietary products, grow and gain operating efficiencies in our pharmacy operations, potential regulatory-related restrictions,
optimize pricing and obtain reimbursement options for our proprietary compounded formulations, and continue to pursue development and
commercialization opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available as
compounded formulations. We believe we have built a tangible and intangible infrastructure that will allow us to scale revenues efficiently
in the near and long-term. All of these activities will require significant costs and other resources, which we may not have or be able
to obtain from operations or other sources. See “Liquidity and Capital Resources” below.
Reimbursement
Options
Dexycu
is covered under Medicare Part B, and we are developing drug candidates that we believe will be covered under Medicare Part B. New drugs
approved by the FDA that are used in surgeries performed in hospital outpatient departments or ambulatory surgical centers may receive
a transitional pass-through reimbursement under Medicare, provided they meet certain criteria, including a “not insignificant”
cost criterion. Pass-through status allows for separate payment (i.e., outside the packaged payment rate for the surgical procedure)
under Medicare Part B, which consists of Medicare reimbursement for a drug based on a defined formula for calculating the minimum fee
that a manufacturer may charge for the drug. Under current regulations of the Centers for Medicare & Medicaid Services (“CMS”),
pass-through status applies for a period of three years, measured from the date Medicare makes its first pass-through payment for the
product, following which the product would be incorporated into the cataract bundled payment system, which could significantly reduce
the pricing for that product. Following expiration of pass-through status, under current CMS policy, non-opioid pain management surgical
drugs when used on Medicare Part B patients in the ASC setting can qualify for ongoing separate payment. CMS’ current non-opioid
separate payment policy, like other CMS policies, can be changed by CMS through its annual rulemaking and comment process. We believe
that CMS will continue its separate payment policy for non-opioid pain management surgical drugs, which has been in effect since 2019.
We
are working with outside consultants to potentially gain an extension to the transitional payment system, or to separate the drug payment
from the bundled cataract surgery payment after the three-year transitional payment ends and continue to be reimbursed separately for
a longer period of time, potentially through patent life. Unless extended, Dexycu transitional pass-through reimbursement status will
expire on December 31, 2022, which will have an adverse impact on our commission revenues from this product.
Our
proprietary ophthalmic compounded formulations are currently primarily available on a cash-pay basis. However, MOXEZA, MAXITROL and IOPIDINE,
are and we expect that other drug candidates we are developing, if approved, will be eligible for reimbursement by third-party payors.
We may devote time and other resources to seek reimbursement and patient pay opportunities for these and other drug products and candidates.
However, we may be unsuccessful in achieving these goals, as many third-party payors have imposed significant challenges for products
to be eligible for reimbursement in recent years. Moreover, third-party payors, including Medicare, are increasingly attempting to contain
health care costs by limiting coverage and the level of reimbursement for new drugs and, in some cases, by refusing to provide coverage
for uses of approved products for disease indications for which the FDA has not granted labeling approval. Further, the Patient Protection
and Affordable Care Act, as amended by the Health Care and Education Affordability Reconciliation Act of 2010 (collectively, the “Health
Care Reform Law”), may have a considerable impact on the existing U.S. system for the delivery and financing of health care and
could conceivably have a material adverse effect on our business. As a result, reimbursement from Medicare, Medicaid and other third-party
payors may never be available for any of our products or, if available, may not be sufficient to allow us to sell the products on a competitive
basis and at desirable price points. We are communicating with government and third-party payors in order to make our drug products and
candidates available to more patients and at optimized pricing levels. However, if government and other third-party payors do not provide
adequate coverage and reimbursement levels for our drug products and candidates, the market acceptance and opportunity for them may be
limited.
Intellectual
Property
Our
success and ability to compete depends upon our ability to protect our intellectual property. We conduct a fulsome analysis of the intellectual
property landscape prior to acquiring rights to formulations and filing patent applications. In addition, as of March 1, 2022,
we owned and/or licensed 117 total issued and pending patent applications, which includes 18 U.S. issued patents, 11
international issued patents, and 88 U.S. and foreign/international patent pending applications. We expect to file additional
patent applications in the U.S. and pursue patent protection for certain of our formulations in other important international jurisdictions
in the future.
As
of March 1, 2022, we had, on a worldwide basis, 162 issued trademarks, pending trademark and copyright applications, or
registered copyright and/or trademarks including, but not limited to: Imprimis®, ImprimisRx®, Harrow Health®,
Dropless®, LessDrops®, Dropless Cataract Surgery®, Dropless Cataract Therapy®,
Dropless Therapy®, MKO Melt®, and Simple Drops®. We may choose to pursue trademark protection
in other jurisdictions for any one or more of these or other marks in the future.
We
also rely on unpatented trade secrets and know-how and continuing technological innovation in order to develop our formulations, which
we seek to protect, in part, by confidentiality agreements with our employees, consultants, collaborators and others, including certain
service providers. We also have invention or patent assignment agreements with our current employees and certain consultants. However,
our employees and consultants may breach these agreements, and we may not have adequate remedies for any breach, or our trade secrets
may otherwise become known or be independently discovered by competitors. In addition, inventions relevant to us could be developed by
a person not bound by an invention assignment agreement with us, in which case we may have no rights to use the applicable invention.
Governmental
Regulation
Our
business is subject to federal, state and local laws, regulations, and administrative practices, including, among others: federal, state
and local licensure and registration requirements concerning the operation of pharmacies and the practice of pharmacy; the Health Insurance
Portability and Accountability Act (“HIPAA”); the Health Care Reform Law; statutes and regulations of the FDA, the U.S. Federal
Trade Commission, the U.S. Drug Enforcement Administration and the U.S. Consumer Product Safety Commission, as well as regulations promulgated
by comparable state agencies concerning the sale, advertisement and promotion of the products we sell. The regulatory and quality compliance
environment for compounded drugs has become significantly more rigorous, complex and strict since the passage of The Drug Quality and
Security Act of 2013. The complexity of the current state and federal regulatory environment, as well as the expected continued evolution
of state and federal laws governing pharmaceutical compounding, have and will continue to present potentially significant challenges
to our business model and the fulfillment of our mission as a company. Below are descriptions of some of the various federal and state
laws and regulations which may govern or impact our current and planned operations.
FDA
New Drug Application Process
As
discussed in other sections of this Annual Report, we are pursing, and may continue to pursue, alone or with project partners, FDA approval
to market and sell one or more of our formulations through the FDA’s NDA process. As a condition of approval, the FDA or other
regulatory authorities may require further studies, including Phase 4 post-marketing studies, to provide additional data. Other post-marketing
studies may be required to gain approval for the use of a product as a treatment for clinical indications other than those for which
the product was initially tested and approved. Also, the FDA or other regulatory authorities require post-marketing reporting to monitor
the adverse effects of a drug. Results of post-marketing programs may limit or expand the further marketing of a product.
The
FDA closely regulates the post-approval marketing and promotion of drugs, including standards and regulations for direct-to-consumer
advertising, off-label promotion, industry-sponsored scientific and educational activities and promotional activities involving the Internet.
A company can make only those claims relating to safety and efficacy that are approved by the FDA. Failure to comply with these requirements
can result in adverse publicity, warning letters, corrective advertising, fines and potential civil and criminal penalties.
Section
505(b)(2) New Drug Applications
As
an alternate path for FDA approval of new indications or new formulations of previously-approved products, a company may file a Section
505(b)(2) NDA instead of a “stand-alone” or “full” NDA. Section 505(b)(2) of the FDCA was enacted as part of
the Drug Price Competition and Patent Term Restoration Act of 1984, otherwise known as the Hatch-Waxman Amendments. Section 505(b)(2)
permits the submission of an NDA where at least some of the information required for approval comes from studies not conducted by or
for the applicant and for which the applicant has not obtained a right of reference. Some examples of products that may be allowed to
follow a Section 505(b)(2) path to approval are drugs that have a new dosage form, strength, route of administration, formulation or
indication. The AMP-100 NDA that was submitted and we expect the MAQ-100 NDA will be submitted as Section 505(b)(2) NDAs.
The
Hatch-Waxman Amendments permit the applicant to rely upon certain published nonclinical or clinical studies conducted for an approved
product or the FDA’s conclusions from prior review of such studies. The FDA may require companies to perform additional studies
or measurements to support any changes from the approved product. The FDA may then approve the new product for all or some of the labeled
indications for which the reference product has been approved, as well as for any new indication supported by the Section 505(b)(2) application.
While references to nonclinical and clinical data not generated by the applicant or for which the applicant does not have a right of
reference are allowed, all development, process, stability, qualification and validation data related to the manufacturing and quality
of the new product must be included in an NDA submitted under Section 505(b)(2).
To
the extent that the Section 505(b)(2) applicant is relying on the FDA’s conclusions regarding studies conducted for an already
approved product, the applicant is required to certify to the FDA concerning any patents listed for the approved product in the FDA’s
Approved Drug Products with Therapeutic Equivalence Evaluations, or Orange Book. Specifically, the applicant must certify that: (i) the
required patent information has not been filed; (ii) the listed patent has expired; (iii) the listed patent has not expired, but will
expire on a particular date and approval is sought after patent expiration; or (iv) the listed patent is invalid or will not be infringed
by the new product. The Section 505(b)(2) application also will not be approved until any non-patent exclusivity, such as exclusivity
for obtaining approval of a new chemical entity, listed in the Orange Book for the reference product has expired. Thus, the Section 505(b)(2)
applicant may invest a significant amount of time and expense in the development of its products only to be subject to significant delay
and patent litigation before its products may be commercialized.
Pharmacy
Regulation
Our
pharmacy operations are regulated by both individual states and the federal government. Every state has laws and regulations addressing
pharmacy operations, including regulations relating specifically to compounding pharmacy operations. These regulations generally include
licensing requirements for pharmacists, pharmacy technicians and pharmacies, as well as regulations related to compounding processes,
safety protocols, purity, sterility, storage, controlled substances, recordkeeping and regular inspections, among other things. State
rules and regulations are updated periodically, generally under the jurisdiction of individual state boards of pharmacy. Failure to comply
with the state pharmacy regulations of a particular state could result in a pharmacy being prohibited from operating in that state, financial
penalties and/or becoming subject to additional oversight from that state’s board of pharmacy. In addition, many states are considering
imposing, or have already begun to impose, more stringent requirements on compounding pharmacies. If our pharmacy operations become subject
to additional licensure requirements, are unable to maintain their required licenses or if states place burdensome restrictions or limitations
on pharmacies, our ability to operate in some states could be limited.
Federal
law limits compounding pharmacies from engaging in the practice of anticipatory compounding, which involves preparing compounded medications
before the actual receipt of a prescription or practitioner’s order, unless the compounding pharmacy has a history of filling certain
prescriptions for a customer. In such cases, it is acceptable to engage in anticipatory compounding or the preparation of larger batches
so that medications will be ready when they are needed. Anticipatory compounding also reduces the cost of compounded medications, as
economies of scale can be realized by producing larger batches. Anticipatory compounding also leads to less wasted chemicals, dilutions,
fillers, and other associated products that are produced, and greater accuracy and uniformity in finished medications, as larger batches
decrease the variation caused by preparing multiple, smaller batches. Based on our history of meeting the needs of our customers, we
are able to anticipatorily compound batches of our formulations for our customers, per the applicable regulations.
Many
of the states into which we deliver pharmaceuticals have laws and regulations that require out-of-state pharmacies to register with,
or be licensed by, the boards of pharmacy or similar regulatory bodies in those states. These states generally permit the dispensing
pharmacy to follow the laws of the state within which the dispensing pharmacy is located. However, various state pharmacy boards have
enacted laws and/or adopted rules or regulations directed at restricting or prohibiting the operation of out-of-state pharmacies by,
among other things, requiring compliance with all laws of the states into which the out-of-state pharmacy dispenses medications, whether
or not those laws conflict with the laws of the state in which the pharmacy is located, or requiring the pharmacist-in-charge to be licensed
in that state. To the extent that such laws or regulations are found to be applicable to our operations, we believe we comply with them.
Further,
under federal law, Section 503A of the FDCA previously had language that implied a limitation of the amount of compounded products that
a pharmacy can distribute interstate. The interpretation and enforcement of this provision is dependent on the FDA entering into a standard
Memorandum of Understanding (“MOU”) with each state setting forth limits on shipments of interstate compounding. In January
of 2019, the FDA released the “2018 Compounding Policy Priorities Plan” (the “2018 Compounding Plan”) which provided