UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
For the fiscal year ended December 31, 2022
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 Stock Market LLC
8.625% Senior Notes due 2026 HROWL The Nasdaq Stock Market LLC
11.875% Senior Notes due 2027 HROWM The Nasdaq Stock Market LLC
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, 2022, 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 $159 million, based on the closing price of $7.28
for the registrant’s common stock as quoted on The Nasdaq Stock Market LLC 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 22, 2023, there were 29,967,749 shares of the registrant’s common stock outstanding.
Portions
of the registrant’s definitive Proxy Statement for its 2023 Annual Meeting of Stockholders to be held on June 21, 2023 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 15
Item 1B. Unresolved Staff Comments 39
Item 2. Properties 40
Item 3. Legal Proceedings 40
Item 4. Mine Safety Disclosures 40
PART II
Item 6. Selected Financial Data 41
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 on Form 10-K (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, are the property of their respective owners.
PART
I
ITEM
1. BUSINESS
Overview
We
are an ophthalmic-focused pharmaceutical company. Our business specializes in the development, production, sale, and distribution of
innovative prescription medications that offer unique competitive advantages and serve unmet needs in the marketplace through our subsidiaries
and deconsolidated companies. We serve ophthalmologists and optometrists by providing FDA-approved branded ophthalmic pharmaceuticals
and innovative compounded prescription medicines that are accessible and affordable. We own the U.S. commercial rights to ten branded
ophthalmic pharmaceutical products, including IHEEZOTM, IOPIDINE® (both approved concentrations), MAXITROL® eye drops,
MOXEZA®, ILEVRO®, NEVANAC®, VIGAMOX®, MAXIDEX®, and TRIESENCE®. We own and operate ImprimisRx, one of the nation’s
leading ophthalmology-focused pharmaceutical-compounding businesses, and our branded drugs are marketed under our Harrow name. 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 carved-out of our corporate structure and deconsolidated from
our financial statements. We also own royalty rights in certain drug candidates being developed by Surface and Melt.
ImprimisRx
ImprimisRx
is our ophthalmology-focused pharmaceutical compounding businesses. 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. 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.
Our current ophthalmology formulary includes over 30 compounded formulations, many of which are patented or patent-pending, that are
customizable for the specific needs of a patient. 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.
Branded
Pharmaceuticals and Drug Candidates
Over
the past three years, in order to more fully serve the needs of our growing customer base, we have invested in broadening our product
portfolio to include FDA-approved products. Our investments in this regard have led to the pursuit and completion of several announced
transactions, and others we are continuing to pursue, all of which are focused on eyecare pharmaceuticals. We believe that our continued
investments in these and other products will result in our ability to provide more physician prescribers and their patients with access
to a complete portfolio of affordable eyecare pharmaceuticals to address their clinical needs.
ILEVRO®,
NEVANAC®, VIGAMOX®, MAXIDEX®, TRIESENCE®
In
December 2022, we entered into an Asset Purchase Agreement (the “Purchase Agreement”) with Novartis Technology, LLC and Novartis
Innovative Therapies AG (together, “Novartis”), pursuant to which the Company agreed to purchase from Novartis the exclusive
commercial rights to assets associated with the following ophthalmic products (collectively the “Fab 5 Products”) in the
U.S. (the “Fab 5 Acquisition”):
We
closed the Fab 5 Acquisition on January 20, 2023. Under the terms of the Purchase Agreement, we made a one-time payment of $130,000,000
at closing, with up to another $45,000,000 due in a milestone payment related to the timing of the commercial availability of TRIESENCE.
Pursuant to the Purchase Agreement and various ancillary agreements, immediately following the closing and subject to certain conditions,
for a period that we expect to last approximately six months, and prior to the transfer of the Fab 5 Products new drug applications (the
“NDAs”) to us, Novartis will continue to sell the Fab 5 Products on our behalf and transfer the net profit from the sale
of the Fab 5 Products to us. Novartis has agreed to supply certain Fab 5 Products to the Company for a period of time after the NDAs
are transferred to us and to assist with technology transfer of the Fab 5 Products manufacturing to other third-party manufacturers,
if needed.
IOPIDINE®,
MAXITROL® EYE DROPS, MOXEZA®
In
December 2021, we acquired U.S. commercial rights to four FDA-approved ophthalmic medicines: IOPIDINE 1% and 0.5% (apraclonidine hydrochloride);
MAXITROL (neomycin/polymyxin B/dexamethasone) ophthalmic suspension; and MOXEZA (moxifloxacin hydrochloride). We believe by expanding
our product portfolio to include branded FDA-approved products, we will be uniquely positioned to leverage our commercial 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.
At
the time of closing the acquisition of the four products, we agreed to a transition period with the seller, which lasted six months following
the closing of the transaction. During the transition period, the seller continued to sell the products and transferred the net profit
from those sales to us. Following the transition period which ended in June 2022, we made IOPIDINE 1% and MAXITROL commercially available,
and expect to re-launch MOXEZA at a later date.
IHEEZO
In
July 2021, we acquired the exclusive U.S. and Canadian marketing and supply rights to IHEEZO (chloroprocaine hydrochloride ophthalmic
gel) 3% from Sintetica S.A. (“Sintetica”). The FDA approved IHEEZO for ocular surface anesthesia in September 2022. IHEEZO
is protected by an Orange Book-listed patent that is valid until 2038. We expect to commercially launch IHEEZO in the U.S. market during
2023.
We
expect our commercial focus of IHEEZO to be on ophthalmic procedures that traditionally require the eye to be anesthetized, including
intravitreal injections and lens replacement procedures, which in aggregate we estimate to be over 11 million instances annually in the
U.S. (see also subheading “Ophthalmology Market”).
IHEEZO
is protected by one issued, Orange Book listed patent and another patent-pending. The issued patent includes composition of matter and
method of use claims and could provide protection for IHEEZO 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 are currently working with Wakamoto to assess a clinical pathway for MaQaid.
We
are currently evaluating several programs to internally develop product candidates based on technology and know-how we own. We also expect
to continue to acquire and/or develop additional FDA-approved/approvable ophthalmic products and product candidates that will allow us
to leverage our commercial infrastructure to promote, sell, and ultimately bring these products to market.
Ophthalmology
Market
For
any ocular procedure, a surgeon may require drugs for sedation, dilation, anesthesia, inflammation and infection prevention, and ocular
surface preservation. The cataract surgery market continues to experience significant growth. According to Market Scope, approximately
4.8 million lens procedures were performed in the U.S. in 2021, 97% of those procedures for cataracts, with the number expected to grow
to 5.5 million lens procedures in 2026. Nearly 96% 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 an article published
in 2021 in Clinical Ophthalmology, an estimated 800,000 eyes have been treated with laser correction surgery (such as LASIK) each
year for the last 10 years.
Intravitreal
injections are one of the most common procedures performed by ophthalmologists in the United States. According to a 2023 article
published in Healio, approximately 8 million intravitreal injections are expected to be performed this year. These injections
are utilized to administer critical medications into the eye that treat diseases including but not limited to: proliferative
diabetic retinopathy, diabetic macular edema, wet age-related macular degeneration, neovascular glaucoma, retinal vein occlusions,
intraocular tumors, and endophthalmitis. In addition, products and product candidates are being developed and used to treat symptoms
associated with an eye disease known as geographic atrophy. Most of the medicines in these products and product candidates are
administered via intravitreal injection. Therefore, we believe as these products and product candidates gain commercial adoption,
the number of annual intravitreal injections should increase further and at an increased rate as compared to recent
years.
Vitrectomy
is a surgical procedure undertaken by a specialist where the vitreous humor gel that fills the eye cavity is removed to provide
better access to the retina. This allows for a variety of repairs, including the removal of scar tissue, laser repair of retinal
detachments and treatment of macular holes. According to an October 2022 article on the Cleveland Clinic website,
U.S. surgeons perform about 225,000 vitrectomies each year. The number is likely to continue to grow as eye care providers find more
uses for vitrectomy.
Chronic
non-infectious uveitis affecting the posterior segment of the eye is an inflammatory disease that afflicts people of all ages, producing
swelling and destroying eye tissues, which can lead to severe vision loss and blindness. We estimate this disease affects approximately
100,000 people each year in the U.S. and causes approximately 30,000 new cases of blindness every year. The standard of care treatment
for this disease typically involves the use of short-acting corticosteroids to reduce uveitic flares (such as TRIESENCE) followed by
additional treatments of sustained release, lower dose steroids to minimize the risk of further flares.
According
to the Glaucoma Research Foundation, there are over 3 million Americans experiencing glaucoma, and that only half of this population
are aware of their condition. 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 analog (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 that combination products including a PGA
(Xalacom®, DuoTrav® and Ganfort®) are available outside of the U.S. According to a 2023 Market
Scope report, the global glaucoma pharmaceuticals market was expected to be $4.3 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 2022 Market Scope
report, the global dry eye product market was expected to grow from $5.7 billion in 2022 to $7.0 billion in 2027. Dry eye is among
the most common conditions seen by eyecare professionals.
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.
A
majority of our sales revenue in 2021 and 2022 was derived from making, selling and dispensing our compounded prescription drug formulations
as cash payment transactions between us and our end-user customer. As such, the majority of our commercial transactions did not involve
distributors, wholesalers, insurance companies, pharmacy benefit managers or other middle parties. In regard to our compounded formulations,
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 compounding 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.
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 of our compounded
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
Subsidiaries (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 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.
Noncontrolling
Equity Interests
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 is seeking 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. In February 2021, Melt
announced data from, and the successful completion of, its Phase 1 study. In December 2022, Melt announced topline data from its Phase
2 study for MELT-300:
● MELT-300’s safety profile was generally comparable to the placebo arm.
In
January 2019, Melt closed an offering of its Series A Preferred Stock. At that time, we gave up 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 Melt’s
equity and voting interests issued and outstanding as of December 31, 2022. In September 2021, we provided Melt with a senior secured
loan with a principal amount of $13,500,000, which was used to fund the Phase 2 program of MELT-300.
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.
Surface
Ophthalmics, Inc.
Surface
is a clinical-stage pharmaceutical company focused on development and commercialization of innovative therapeutics for ocular surface
diseases.
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 was approximately 20% of Surface’s equity and voting interests as of December
31, 2022. Harrow owns mid-single-digit royalty rights on net sales of SURF-100, SURF-200 and SURF-201.
Eton
Pharmaceuticals, Inc.
Eton
is an innovative pharmaceutical company focused on developing, acquiring, and commercializing treatments for rare diseases. Eton currently
commercializes ALKINDI SPRINKLE® and Carglumic Acid tablets and has additional rare disease products under development, including
dehydrated alcohol injection and the ZENEO® hydrocortisone autoinjector. In May 2017, we gave up our controlling interest in Eton.
We own 1,982,000 shares of Eton common stock, which represented less than 10% of Eton’s equity and voting interests issued and
outstanding as of December 31, 2022.
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 activities
consist primarily of efforts to educate doctors, ambulatory surgery centers, healthcare systems, hospitals and other users throughout
the U.S. about our branded drug products and compounded formulations. We expect that we may experience growth in the sales of our products
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 our existing commercial
infrastructure to promote, sell, and ultimately bring these products to market. As we execute this strategy, we will continue to expand
our sales and marketing team, expertise and expenses. This includes 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.
In
the past, we entered into various sales and marketing agreements with certain organizations to provide exclusive sales and marketing
representation services 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 a certain percentage
of net sales for products above and beyond the initial existing sales amounts. At the end of 2022, we began to end many of these arrangements
and we plan to replace these arrangements with and invest in a traditional salaried salesforce over time.
Competition
The
pharmaceutical and pharmacy industries are highly competitive. We compete against branded drug companies, generic drug companies, outsourcing
facilities and compounding pharmacies. We are 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 branded products and proprietary formulations or compete
for market share in these sectors. The drug products available through branded and generic drug companies with which our products and
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 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 compounded 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 compounding 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 only 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.
Medicare,
Medicaid and Other Reimbursement Options
Sales
in the United States of our marketed products are dependent, in large part, on the availability and extent of reimbursement from third-party
payors, including private payor healthcare and insurance programs, health maintenance organizations, pharmacy benefit management companies,
and government programs such as Medicare and Medicaid, see also Part I, Item 1A. “Risk Factors” for additional risks related
to reimbursement and government programs.
We
participate in, and have certain price reporting obligations to, the Medicaid Drug Rebate program, state Medicaid supplemental rebate
program(s), and other governmental pricing programs. We also have obligations to report the average sales price for certain drugs to
the Medicare program. Under the Medicaid Drug Rebate program, we are required to pay a rebate to each state Medicaid program for our
covered outpatient drugs that are dispensed to Medicaid beneficiaries and paid for by a state Medicaid program as a condition of having
federal funds being made available for our drugs under Medicaid and Part B of the Medicare program.
Medicare
is a federal program that is administered by the federal government that covers individuals age 65 and over or that are disabled as well
as those with certain health conditions. Medicare Part B generally covers drugs that must be administered by physicians or other health
care practitioners; are provided in connection with certain durable medical equipment; or are certain oral anti-cancer drugs and certain
oral immunosuppressive drugs. Medicare Part B pays for such drugs under a payment methodology based on the average sales price of the
drugs. Manufacturers, including us, are required to report average sales price information to the Centers for Medicare & Medicaid
Services (“CMS”) on a quarterly basis. The manufacturer-submitted information may be used by CMS to calculate Medicare payment
rates. Starting in 2023, manufacturers must pay refunds to Medicare for single-source drugs or biological products, or biosimilar biological
products, reimbursed under Medicare Part B and packaged in single-dose containers or single-use packages for units of discarded drug
reimbursed by Medicare Part B in excess of 10% of total allowed charges under Medicare Part B for that drug. Manufacturers that fail
to pay refunds could be subject to civil monetary penalties. Further, starting in 2023, the Inflation Reduction Act of 2022 (“IRA”)
establishes a Medicare Part B inflation rebate scheme under which, generally speaking, manufacturers will owe rebates if the average
sales price of a Part B drug increases faster than the pace of inflation. Failure to timely pay a Part B inflation rebate is subject
to a civil monetary penalty.
The
IRA also creates a drug price negotiation program under which, after being on the market for a certain period of time, the prices for
certain high Medicare spending drugs and biological products provided to Medicare patients without generic or biosimilar competition
will be capped by reference to, among other things, a specified non-federal average manufacturer price, starting in 2026. Failure to
comply with requirements under the drug price negotiation program is subject to an excise tax and a civil monetary penalty. This or any
other legislative change could impact the market conditions for our products.
IHEEZO
and TRIESENCE are covered under Medicare Part B and we may develop other drug candidates and/or acquire drug products that are also covered
under Medicare Part B. In February 2023, we announced that CMS had issued a permanent, product specific J-code for IHEEZO (J2403) which
will become effective under the Healthcare Procedure Coding System (HCPCS) on April 1, 2023. TRIESENCE has a permanent product specific
J-code (J3301) as well, which physicians can use for reimbursement purposes of that product. New drugs approved by the FDA that are used
in surgeries performed in a 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 CMS, pass-through status applies for a period of three years; which is measured from the date Medicare
makes its first pass-through payment for the product. Following the three-year period, the product would be incorporated into the cataract
bundled payment system, which could significantly reduce the pricing for that product. Temporary pass-through reimbursement for IHEEZO
was awarded by CMS and will be made effective in the second quarter of 2023. Following the expiration of pass-through status, under current
CMS policy, non-opioid pain management surgical drugs when used on Medicare Part B patients in an outpatient setting can qualify for
ongoing separate payments. 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.
In
July of 2022, CMS issued its Proposed CY 2023 Payment Rule for Hospital Outpatient Services and ASCs. Based on the summary in the proposed
rule, DEXYCU, a product we previously promoted through a commercial alliance agreement with EyePoint Pharmaceuticals, Inc. no longer
qualified as a separately payable product in an ASC or outpatient setting and instead is now bundled into the general cataract procedure
code effective January 1, 2023.
Medicaid
is a joint federal and state program that is administered by the states for low-income and disabled beneficiaries. Medicaid rebates are
based on pricing data reported by us on a monthly and quarterly basis to CMS, the federal agency that administers the Medicaid and Medicare
programs. These data include the average manufacturer price and, in the case of innovator products, the best price for each drug which,
in general, represents the lowest price available from the manufacturer to any entity in the U.S. in any pricing structure, calculated
to include all sales and associated rebates, discounts, and other price concessions. The amount of the rebate is adjusted upward if the
average manufacturer price increases at a faster rate than inflation (measured by reference to the Consumer Price Index – Urban).
Currently, the rebate is capped at 100% of the average manufacturer price, but effective January 1, 2024, this cap on the rebate will
be removed, and our rebate liability could increase accordingly.
If
we become aware that our reporting for a prior quarter was incorrect, or has changed as a result of recalculation of the pricing data,
we are obligated to resubmit the corrected data for up to three years after those data originally were due, which revisions could affect
our rebate liability for prior quarters. The federal Patient Protection and Affordable Care Act (the “PPACA”) made significant
changes to the Medicaid Drug Rebate program, and CMS issued a final regulation, which became effective on April 1, 2016, to implement
the changes to the Medicaid Drug Rebate program under the PPACA. Effective in 2022, CMS modified Medicaid Drug Rebate program regulations
to, among other things, permit reporting multiple best price figures with regard to value-based purchasing arrangements and provide definitions
for “line extension,” “new formulation,” and related terms with the practical effect of expanding the scope of
drugs considered to be line extensions.
Civil
monetary penalties can be applied if we are found to have knowingly submitted any false pricing or other information to the government,
if we are found to have made a misrepresentation in the reporting of our average sales price, or if we fail to submit the required data
on a timely basis. Such conduct also could be grounds for CMS to terminate our Medicaid drug rebate agreement, in which case federal
payments may not be available under Medicaid or Medicare Part B for our covered outpatient drugs.
Federal
law requires that any company that participates in the Medicaid Drug Rebate program also participate in the Public Health Service’s
340B drug pricing program (the “340B program”) in order for federal funds to be available for the manufacturer’s drugs
under Medicaid and Medicare Part B. The 340B program, which is administered by the Health Resources and Services Administration (“HRSA”),
requires participating manufacturers to agree to charge statutorily defined covered entities no more than the 340B “ceiling price”
for the manufacturer’s covered outpatient drugs. Covered entities include hospitals that serve a disproportionate share of financially
needy patients, community health clinics, and other entities that receive certain types of grants under the Public Health Service Act.
The PPACA expanded the list of covered entities to include certain free-standing cancer hospitals, critical access hospitals, rural referral
centers, and sole community hospitals, but exempts “orphan drugs” from the ceiling price requirements for these covered entities.
The 340B ceiling price is calculated using a statutory formula, which is based on the average manufacturer price and Medicaid rebate
amount for the covered outpatient drug as calculated under the Medicaid Drug Rebate program. In general, products subject to Medicaid
price reporting and rebate liability are also subject to the 340B ceiling price calculation and discount requirement.
HRSA
issued a final regulation regarding the calculation of the 340B ceiling price and the imposition of civil monetary penalties on manufacturers
that knowingly and intentionally overcharge covered entities, which became effective on January 1, 2019. It is currently unclear how
HRSA will apply its enforcement authority under this regulation. Any charge by HRSA that we have violated the requirements of the regulation
could result in civil monetary penalties. Moreover, under a final regulation effective January 13, 2021, HRSA established a new administrative
dispute resolution (“ADR”) process for claims by covered entities that a manufacturer has engaged in overcharging, and by
manufacturers that a covered entity violated the prohibitions against diversion or duplicate discounts. Such claims are to be resolved
through an ADR panel of government officials rendering a decision that could be appealed only in federal court. An ADR proceeding could
subject us to onerous procedural requirements and could result in additional liability. On November 30, 2022, HRSA issued a notice of
proposed rulemaking that proposes several changes to the ADR process. HRSA also implemented a price reporting system under which we are
required to report our 340B ceiling prices to HRSA on a quarterly basis, which then publishes those prices to 340B covered entities.
In addition, legislation could be passed that would further expand the 340B program to additional covered entities or would require participating
manufacturers to agree to provide 340B discounted pricing on drugs used in an inpatient setting.
In
order to be eligible to have our products paid for with federal funds under the Medicaid and Medicare Part B programs and purchased by
certain federal agencies and grantees, we participate in the U.S. Department of Veterans Affairs (“VA”) Federal Supply Schedule
(“FSS”) pricing program. FSS participation is required for our products to be purchased by the VA, Department of Defense
(“DoD”), Coast Guard, and Public Health Service (“PHS”). Prices for innovator drugs purchased by the VA, DoD,
Coast Guard, and PHS are subject to a cap (known as the “Federal Ceiling Price”) equal to 76% of the annual non-federal average
manufacturer price (“non-FAMP”) minus, if applicable, an additional discount. The additional discount applies if non-FAMP
increases more than inflation (measured by reference to the Consumer Price Index - Urban). We also participate in the Tricare Retail
Pharmacy Program, under which we pay quarterly rebates to DoD for prescriptions of our innovator drugs dispensed to Tricare beneficiaries
through Tricare Retail network pharmacies. The governing statute provides for civil monetary penalties for failure to provide information
timely or for knowingly submitting false information to the government.
Medicare
Part D provides coverage to enrolled Medicare patients for self-administered drugs (i.e., drugs that are not administered by a physician).
Medicare Part D is administered by private prescription drug plans approved by the U.S. government and, subject to detailed program rules
and government oversight, each drug plan establishes its own Medicare Part D formulary for prescription drug coverage and pricing, which
the drug plan may modify from time to time. The prescription drug plans negotiate pricing with manufacturers and pharmacies, and may
condition formulary placement on the availability of manufacturer discounts. In addition, manufacturers, including us, are required to
provide to CMS a 70% discount on brand name prescription drugs utilized by Medicare Part D beneficiaries when those beneficiaries are
in the coverage gap phase of the Part D benefit design. The IRA includes a sunset provision with respect to the coverage gap discount
program starting in 2025 and replaces it with a new manufacturer discount program. In addition, as of October 2022, the IRA established
a Medicare Part D inflation rebate scheme under which, manufacturers will generally owe additional rebates if the average manufacturer
price of a Part D drug increases faster than the pace of inflation. Failure to timely pay a Part D inflation rebate is subject to a civil
monetary penalty.
Private
payor healthcare and insurance providers, health maintenance organizations, and pharmacy benefit managers in the United States are adopting
more aggressive utilization management techniques and are increasingly requiring significant discounts and rebates from manufacturers
as a condition to including products on formulary with favorable coverage and copayment/coinsurance. These payors may not cover or adequately
reimburse for use of our products or may do so at levels that disadvantage them relative to competitive products.
Our
proprietary ophthalmic compounded formulations are primarily available on a cash-pay basis and generally are not subject to Medicare,
Medicaid, or other payor-related initiatives.
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 15, 2023, we owned
and/or licensed more than 50 total issued and pending patent applications, which include U.S.-issued patents, international-issued patents,
and 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 15, 2023, we had, on a worldwide basis, more than 100 issued trademarks, pending trademark and copyright applications, or
registered copyright and/or trademarks including, but not limited to IHEEZOTM, 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