Item 1A. Risk Factors 19
Item 1B. Unresolved Staff Comments 51
Item 1C. Cybersecurity 51
Item 2. Properties 52
Item 3. Legal Proceedings 52
Item 4. Mine Safety Disclosures 52
PART II
Item 6. [Reserved] 52
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 66
Item 8. Financial Statements and Supplementary Data 67
Item 9A. Controls and Procedures 67
Item 9B. Other Information 68
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 68
PART III
Item 10. Directors, Executive Officers and Corporate Governance 68
Item 11. Executive Compensation 68
Item 14. Principal Accountant Fees and Services 68
PART IV
Item 15. Exhibits, Financial Statement Schedules 69
SIGNATURES 74
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, 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: 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,
including inflation and supply chain challenges; 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: VEVYE®, IHEEZO®, VIGAMOX®, ILEVRO®, TRIESENCE®, ImprimisRx®,
LessDrops®, Dropless Cataract Surgery®, Klarity-C®, 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 a leading eyecare pharmaceutical company engaged in the discovery, development, and commercialization of innovative ophthalmic pharmaceutical
products for the U.S. market. Harrow helps U.S. eyecare professionals preserve the gift of sight by making its comprehensive portfolio
of prescription and non-prescription pharmaceutical products accessible and affordable to millions of Americans each year. We own commercial
rights to one of the largest portfolios of branded ophthalmic pharmaceutical products in North America, all of which are marketed under
the Harrow name. We also own and operate ImprimisRx, one of the nation’s leading ophthalmology-focused pharmaceutical-compounding
businesses. In addition, we have a non-controlling equity interest in Melt Pharmaceuticals, Inc. (“Melt”), and two other
companies that began as subsidiaries of Harrow and were subsequently carved-out of our corporate structure and deconsolidated from our
financial statements.
Branded
Ophthalmic Pharmaceuticals
Over
the past few years, we have invested in broadening our product portfolio of FDA-approved products. Our investments in this regard have
led to the pursuit and completion of several announced transactions, all of which are focused on eyecare pharmaceuticals primarily for
the U.S. and Canadian markets. 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. We own U.S. commercial rights to the following products:
We
also own U.S. rights to some discontinued products. In February 2024, we announced that we out-licensed Canadian rights for VERKAZIA,
Cationorm® PLUS (a preservative-free formulation for dry eye or allergy relief), VEVYE, ZERVIATE and IHEEZO to Apotex Inc. (“Apotex”).
We also own worldwide rights to NATACYN and FRESHKOTE.
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
ophthalmologist and optometrist 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.
Carved-Out
Subsidiaries (De-Consolidated Businesses)
We
have ownership interests in Melt, Surface Ophthalmics, Inc. (“Surface”) 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 Federal Food Drug and Cosmetic Act (the “FDCA”), including in some instances under the
abbreviated pathway described in Section 505(b)(2), which permits the submission of a new drug application (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.
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 many clinical 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 as set forth below:
● MELT-300’s safety profile was generally comparable to the placebo arm.
Melt
expects to begin Phase 3 program activities in 2024, which will consist of a single pivotal study comparing MELT-300 to sublingual midazolam
and placebo in subjects undergoing cataract surgery. Beginning in July 2023 through March 1, 2024, Melt had raised over $23,000,000 in
gross proceeds from the sale and issuance of Melt’s Series B Preferred Stock. We own 3,500,000 shares of Melt common stock, 2,260,000
shares of Melt’s Series B-1 Preferred Stock and 74,256 shares of Melt’s Series B Preferred Stock, which in aggregate represented
approximately 47% and 46% of Melt’s equity and voting interests issued and outstanding as of December 31, 2023 and March 1, 2024,
respectively.
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. Surface is developing four product candidates at various stages of development for certain ocular surface related indications.
We
own 3,500,000 shares of Surface common stock, which represented approximately 20% of Surface’s equity and voting interests as of
December 31, 2023. Harrow owns mid-single-digit royalty rights on net sales on Surface’s drug candidates 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, 2023.
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.
Sales
revenue from our compounded products are derived from us making, selling and dispensing our compounded prescription drug formulations
as cash payment transactions between us and our end-user customers. As such, the majority of our commercial transactions for compounded
products do 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.
ImprimisRx
Compounding Facilities
Pharmaceutical
compounding businesses are governed by Sections 503A and 503B of 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.
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 have engaged distributors and entered into out-licensing arrangements
for certain of our products and 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 recent product launches and commercial campaigns. However, we may not be successful in
doing so, whether due to the safety, quality or availability of our products and proprietary compounded formulations, the size of the
markets for such products, 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 products relative to alternative products or the success
of our sales and marketing efforts, which is dependent on our ability to further build and continue to grow a qualified and adequate
internal sales function.
We
expect to continue to acquire and/or develop additional FDA-approved ophthalmic products 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.
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 which were 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 were treated with laser correction surgery (such as LASIK) each year
for the previous ten years.
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. According to a 2023 Market Scope report, there are 39 million people in
the U.S. that suffer from both signs and symptoms of dry eye, with 49% of diagnosed dry eye patients having moderate to severe dry eye.
The same report stated the global dry eye product market is expected to grow from $5.8 billion in 2023 to $7.5 billion in 2028. Dry eye
is among the most common conditions seen by eyecare professionals.
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 were expected to be performed that 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 published 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. Based on internal estimates and information
published on the MedScape website (which was updated as of March 2023) that cites various ranges of prevalence of uveitis, we estimate
this disease affects approximately 100,000 people each year in the U.S. 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.
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) Chapter <795> (“USP 795”) and
USP Chapter <797> (“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 a significant 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 ophthalmic products, grow and gain
operating efficiencies in our pharmacy operations, successfully adjust our operations to account for any future regulatory-related restrictions,
optimize pricing and obtain reimbursement options for our ophthalmic products, and continue to pursue development and commercialization
opportunities for certain of our ophthalmology and other assets that we have not yet made commercially available or have been recently
launched. 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 increased 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 are now required to 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”) established a Medicare Part B inflation rebate scheme, effective in 2023, 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 created 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 (J3300) 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 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
are also working to ensure our continued access to the Medicare market for the ambulatory surgery center (ASC), hospital and outpatient
department (HOPD), and in-office use markets for IHEEZO. In this regard, we are designing and intend to execute, during 2024, clinical
studies to build data sets that could be presented to CMS to extend our temporary pass-through period for IHEEZO in ASCs and HOPDs. We
also met with CMS in January 2024 to request clarification related to its anesthesia billing policy which has historically not allowed
for the separate billing of anesthesia services in the physician’s office. During the meeting we requested that CMS clarify that
J-Code 2403, IHEEZO’s permanent J-Code, is appropriate to be billed for the anesthesia product itself (i.e., IHEEZO in our case)
in the physician’s office setting. As of the date of this Annual Report, we have not received feedback from CMS following our meeting
in January 2024.
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).
The rebate was previously capped at 100% of the average manufacturer price, but effective January 1, 2024, this cap on the rebate was
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” or “Health
Care Reform Law”) 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 1, 2024, 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 1, 2024, we had, on a worldwide basis, more than 100 issued trademarks, pending trademark and copyright applications, or registered
copyrights and/or trademarks. We also rely on unpatented trade secrets and know-how and continuing technological innovation in order
to develop our products and 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.
The
following table lists our outstanding material patents in the U.S. for certain branded products, general subject matter and latest expiry
date. One or more patents with the same or earlier expiry dates may fall under the same general subject matter and are not listed separately.
Product General Subject Matter Expiration
IHEEZO Methods using topical formulations September 2038
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 of 1996 (“HIPAA”); the Health Care Reform Law; statutes and regulations of the FDA, the
U.S. Federal Trade Commission (the “FTC”), 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 “DQSA”). 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
presented, 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 pursuing, and may continue to pursue, alone or with project partners, FDA approval
to market and sell one or more of our product candidates 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
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 referenced 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
an overview of the key priorities the FDA planned to focus on in 2018 in connection with compounding regulations. One of the priorities
outlined in the 2018 Compounding Plan addressed the FDA’s plan to release a revised MOU (the “Revised MOU”). Pursuant
to the statements in the 2018 Compounding Plan, the Revised MOU would consider amounts shipped interstate by a compounder to be inordinate
amounts if the “number of prescriptions of compounded drugs distributed interstate during any calendar month is greater than 50
percent.” Importantly, instead of that number serving as a “hard limit, for state action,” the 50% target would trigger
certain additional reporting requirements. On October 27, 2020, the FDA announced availability of a final MOU, Memorandum of Understanding
Addressing Certain Distributions of Compounded Human Drug Products Between the State Board of Pharmacy or Other Appropriate State Agency
and the U.S. Food and Drug Administration (the “Final MOU”). The Final MOU describes the responsibilities of a state
board of pharmacy, or other appropriate state agency that chooses to sign the Final MOU, in investigating and responding to complaints
related to drug products compounded in such state and distributed outside such state and in addressing the interstate distribution of
inordinate amounts of compounded human drug products. Additionally, as part of the Final MOU, the FDA refined the definition of “inordinate
amount,” a threshold for certain information identification and sharing which does not place a limit on the distribution of compounded
human drug products interstate by a pharmacy located in a state that has entered into the Final MOU. Section 503A of the FDCA sets a
5% limit on compounded drugs distributed outside the state by a pharmacist, pharmacy or physician located in a state that has not entered
into the Final MOU. In February 2022, the FDA said it would suspend implementation of the Final MOU and engage in a formal rulemaking
process. During the rulemaking process, the agency will not enter into new agreements with states based on the Final MOU. The FDA does
not expect states that have signed the Final MOU to carry out the activities described in the Final MOU. Thus, there is no reporting
requirement for any pharmacy concerning interstate shipments pursuant to Section 503A and there will not be one until the Final MOU is
finalized through the rulemaking process, which will include the engagement of a notice-and-comment and rulemaking period to implement
certain provisions of Section 503A. The agency indicated that the process may take “several years” to complete. In the same
announcement, the FDA stated it does not intend to enforce the statutory 5% limit on the distribution of compounded drugs out of the
state in which they are compounded by compounders located in states that do not sign the Final MOU for the duration of the rulemaking
process.
Certain
provisions of the FDCA govern the preparation, handling, storage, marketing and distribution of pharmaceutical products. The DQSA clarifies
and strengthens the federal regulatory framework governing compounding pharmacies. Title 1 of the DQSA, the Compounding Quality Act,
modified provisions of the Section 503A of the FDCA that were found to be unconstitutional by the U.S. Supreme Court in 2002. In general,
Section 503A provides that pharmacies are exempt from the provisions of the FDCA requiring compliance with cGMPs, labeling with adequate
directions for use and FDA approval prior to marketing if the pharmacy complies with certain other requirements. Among other things,
to comply with Section 503A, a compounded drug must be compounded by a licensed pharmacist for an identified individual patient on the
basis of a valid prescription. Pharmacies may only compound in limited quantities before receipt of a prescription for an individual
patient and are subject to limitations on anticipatory compounding for distribution, which generally permit anticipatory compounding
only based on historical prescription volumes.
The
DQSA also contained new Section 503B of the FDCA, which established an outsourcing facility as a new form of entity that is permitted
to compound larger quantities of drug formulations without a prescription, thus permitting the practice of anticipatory compounding,
and distributing them out of state without limitation, if the drug formulations appear on the FDA’s drug shortage list or the bulk
drug substances contained in the formulations appear on a “clinical need” list to be established by the FDA. In January 2017,
the FDA issued Interim Policy on Compounding Using Bulk Drug Substances Under Section 503B of the FFDCA (“Interim Policy”)
which informs stakeholders about how the FDA intends to exercise its enforcement discretion for compounding with those substances on
a “Category 1 list” while the agency compiles and evaluates its clinical needs list, and in March 2019 the FDA issued Evaluation
of Bulk Substances Nominated for Use in Compounding Under Section 503B of the Federal Food, Drug and Cosmetic Act which provides
further guidance as to the FDA’s policy for evaluating bulk drug substances nominated for use in compounding by outsourcing facilities.
Entities voluntarily registering as outsourcing facilities are subject to cGMP requirements and regular FDA inspection, among other requirements.
As described above, our current pharmacy operations in New Jersey are governed by Section 503A of the FDCA, and our New Jersey based
outsourcing facility is governed by Section 503B of the FDCA.
On
July 30, 2020, the FDA issued a notice for comments related to certain bulk drug substances to be removed from the 503B Bulk’s
List (or Category 1 List). Included in this notice for comment were certain bulk drug substances which we currently use in some of our
compounded products. In the event one or more of these bulk substances are ultimately removed from the Category 1 List, we intend to
utilize commercially available versions of these substances or similar active pharmaceutical ingredients as replacements of the bulk
powders contained in our sterile products. Nonetheless, if all or some of the bulk drug substances we use are removed from the 503B Bulk’s
List, this may result in a disruption in our operations, revenues and cash flows. In addition, between September 2020 and January 2021,
NJOF was inspected by the FDA (the “2020 Inspection”) and certain observations were made by the FDA in a Form 483. Five observations
made during the 2020 Inspection were considered repeat observations from a 2017 FDA inspection of NJOF. In addition, during the 2020
Inspection, the FDA noted that we were compounding drugs that did not produce for an individual patient a clinical difference from comparable
approved drugs, as determined by a prescribing practitioner. We have responded to the FDA regarding all of their observations from the
2020 Inspection, including providing documentation from prescribing clinicians that indicate a clinical difference between our compounded
drugs and the comparable approved drugs, while also committing to amend our order process to collect “medical necessity/clinical
difference” information for each order of our compounded drugs on a go-forward basis.
We
prepare our compounded formulations in accordance with the standards provided by USP <795> and USP <797> and applicable state
and federal law. In November 2023, USP made effective finalized revisions to USP <795> and USP <797>, which had been previously
proposed for public comment in September 2021. The revisions include limitations on beyond use dating of sterile and preservative-free
products and batch sizes, among other changes. Some regulatory bodies such as state boards of pharmacy adopted these changes at that
time, and some have not or plan to on different dates, on a case-by-case basis. While USP has no role in enforcement, we believe the
revisions to USP <797> in particular will likely cause two changes to our business, which in the aggregate should have a neutral