UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-K
(Mark One)
For the fiscal year ended December 31, 2024
OR
For the transition period from to
Commission File Number: 001-35814
HARROW, INC.
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1A Burton Hills Blvd., Suite 200
Nashville, TN37215
(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. ☒
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to § 240.10D-1(b). ☐
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 28, 2024, 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 $678 million, based on the closing price of $20.89 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 26, 2025, there were 35,654,171 shares
of the registrant’s common stock outstanding.
Portions of the registrant’s definitive Proxy
Statement for its 2025 Annual Meeting of Stockholders to be held on June 18, 2025 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 4
Item 1. Business 4
Item 1A. Risk Factors 19
Item 1B. Unresolved Staff Comments 52
Item 1C. Cybersecurity 52
Item 2. Properties 53
Item 3. Legal Proceedings 53
Item 4. Mine Safety Disclosures 53
Item 6. [Reserved] 54
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 67
Item 8. Financial Statements and Supplementary Data 67
Item 9A. Controls and Procedures 68
Item 9B. Other Information 69
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections 69
PART III 69
Item 10. Directors, Executive Officers and Corporate Governance 69
Item 11. Executive Compensation 69
Item 14. Principal Accountant Fees and Services 69
Item 15. Exhibits, Financial Statement Schedules 70
SIGNATURES 75
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; the ongoing communications
with the U.S. Food and Drug Administration relating to compliance and quality plans at our outsourcing facility
in New Jersey; 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 of America (“U.S.”),
including, but not limited to: VEVYE®, IHEEZO®, ILEVRO®, TRIESENCE®, ImprimisRx®,
and LessDrops®. 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.
We help 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.
Branded Ophthalmic Pharmaceuticals
Over
the past few years, we have invested in broadening our product portfolio of Food and Drug Administration (“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 that we market and sell:
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. ImprimisRx is focused 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 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.
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 Federal Food, Drug and Cosmetic Act (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 U.S.
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 Melt Pharmaceuticals, Inc. (“Melt”) and Surface Ophthalmics, Inc. (“Surface”) and hold
royalty interests in some of Surface’s and Melt’s drug candidates. These companies are pursuing market approval for their
drug candidates under the FDCA, including in some instances under the abbreviated
pathway described in Section 505(b)(2), which permits the submission of a 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. We previously held ownership interest in Eton Pharmaceuticals, Inc. (“Eton”) and sold
such interests in April 2024.
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.
MELT-300
is a novel, sublingually delivered, non-IV, opioid-free drug candidate being developed for procedural sedation. In November 2024, Melt
announced data from, and the successful completion of, its pivotal Phase 3 study for MELT-300. The MELT-300 pivotal Phase 3 clinical
trial was a randomized, double-blind, three-arm study comparing, at a 4:1:1 ratio, MELT-300, sublingual midazolam, and sublingual placebo,
respectively, for procedural sedation in patients undergoing cataract surgery. The study was conducted at 13 clinical sites in the U.S.
and enrolled over 530 patients. Results from the clinical study are summarized below:
· MELT-300’s safety profile was generally comparable to the placebo arm.
The
Phase 3 study was conducted following the successful completion of the MELT-300 Phase 2 clinical trial in patients undergoing cataract
surgery, which compared MELT-300 against (i) sublingual placebo alone, (ii) sublingual midazolam, and (iii) sublingual ketamine in over
300 patients. MELT-300 was statistically superior for procedural sedation compared to all individual comparator arms: (i) sublingual
placebo (P<0.0001), (ii) sublingual midazolam (P=0.0129), and (iii) sublingual ketamine (P=0.0096).
During
2024, Melt reached an agreement with the FDA on a Special Protocol Assessment (“SPA”) for the MELT-300 Phase 3 study. FDA
agreed the study would “adequately address the objectives necessary to support a regulatory submission.” The SPA agreement
establishes a binding agreement on key elements to support a future marketing application. During 2025, we believe Melt intends to conduct
ancillary studies including a confirmatory pharmacokinetic, hepatic impairment, renal impairment and 28-day toxicity studies. Following
completion of those ancillary studies, in early 2026, we believe Melt intends to submit an NDA to the FDA for marketing approval of MELT-300.
A final decision regarding marketing approval will be based on the FDA’s review of the full MELT-300 submission package. Melt can
require ImprimisRx to cease compounding like products at the time of FDA approval of MELT-300.
As of
December 31, 2024, we owned approximately 45% of Melt’s equity and voting interests issued and outstanding, along with a mid-single
digit royalty on future net sales of MELT-300.
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 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, 2024. We own mid-single-digit royalty rights on future net sales of 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 was
created and formed as a wholly-owned subsidiary of Harrow. In May 2017, we gave up our controlling interest in Eton. In April 2024, we
sold all of our remaining equity interests in Eton which was 1,982,000 shares of common stock in a block trade at a gross price of $3.00
per share. After deducting trading expenses and commissions of approximately $436,000, we received net proceeds of $5,510,000 and recorded
a loss of $3,171,000 related to the sale of our investment in Eton.
Sales and Marketing
The focus of our sales and marketing
is in the U.S. We do, however, believe that our 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 drug products. 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 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.
Supply Chains
100%
of our ImprimisRx finished compounded products are made in the U.S. at our compounding facilities located in New Jersey.
We do
not manufacture any of our branded pharmaceutical products and rely on third party manufacturing partners to make these finished goods.
The following table describes by product the country where our finished branded products are made:
Product Country Finished Product Is Manufactured
IHEEZO France
VEVYE U.S.
TRIESENCE U.S.
VIGAMOX Belgium
ILVERO Belgium
FLAREX U.S.
NATACYN U.S.
TOBRADEX ST U.S.
ZERVIATE France
VERKAZIA France
NEVANAC U.S.
FRESHKOTE France
MAXIDEX U.S.
MAXITROL Belgium
IOPIDINE 1% France
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 U.S. 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 data from Definitive Health from 2023, U.S. surgeons perform about 420,000 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 U.S. 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 U.S. 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 Item 1A. “Risk Factors” for 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 product 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 became 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 and temporary pass-through reimbursement for TRIESENCE was made effective April 1, 2025. 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.
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 U.S. 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.
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, 2025, 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, 2025, 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
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 (NDA)
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