urbazon
Harrow Health (NASDAQ:HROW) should re-rate in 2023 as the market recognizes it as a pharmaceutical business as it launches IHEEZO and integrates additional Novartis (NVS) assets. It’s reasonable for the stock to trade up to $20/share and beyond that as growth prospects for 2024 and beyond are understood.
Overview
Harrow Health offers a range of eyecare services to doctors and other healthcare providers. It has acquired U.S. rights to a portfolio of eyecare products from Novartis in December 2022 and Harrow’s ocular anesthetic IHEEZO product received FDA approval in September 2022. In addition, Harrow has an existing compounded formulary business and distributional channel (ImprimisRx) which gives broad reach with eyecare specialists.
Valuation
The company now expects to deliver $44M to $50M of EBITDA in 2023 on most recent guidance. Here’s what that looks like in valuation terms, and this ignores potential growth into 2024:
| Bull case | Bear case | |
| EBITDA (based loosely on company guidance) | $55M | $40M |
| EV/EBITDA multiple (pharma comps) | 14x | 12x |
| Resulting EV | $770M | $480M |
| Net debt as of 9/30/2022 | $22M | $22M |
| Purchase cost of Novartis assets for $175M, less $25M equity proceeds (shares included in share count below) | $150M | $150M |
| Resulting net debt after full payment to Novartis mid-2023 | $172M | $172M |
| Equity and debt stakes (Surface, Melt, Eton) | $40M | $40M |
| HROW equity value | $638M | $348M |
| Shares out (adjusted for Dec ’22 equity issuance) | 29.4 | 29.4 |
| Value per share | $21.7 | $11.8 |
| Upside | +70% | -8% |
Dependent on execution against 2023 guidance and the multiple you ascribe to the business, the shares are worth in a range of $12-$22. This suggests upside if execution goes well, especially as material growth should be sustained into 2024 and 2025 if launches gain traction. On the downside case, if profitability comes in weaker than expected for 2023, the shares may have some downside, but, still, the current valuation is not much of a stretch and this is a business with a history of execution growing from essentially nothing in 2012.
Quant Rankings
In terms of quant rankings, Harrow has a neutral assessment. Growth, profitability, and momentum are all strong (A rated). The quant model views Harrow valuation as stretched, which is understandable as new product launches, acquisitions, and FDA pipelines, can’t be picked up in a quant model. Earnings revisions have also been negative, which is a negative for the quant ranking, and would be a concern if it continued into 2023.
Equity/Debt Holdings
Harrow has investments in various related businesses that have been spun-out of Harrow. All of these are relatively early-stage and the valuations are imprecise, but the range of entities that Harrow has launched, or help launch, is impressive. Conservatively these are worth around $40M in aggregate but with a broad range of potential outcomes.
Surface Ophthalmics, Inc – Harrow’s holding in Surface is worth around $12 million with additional royalty rights.
Melt Pharmaceuticals, Inc. (MELT) – this is a company that is looking for IPO, Harrow has a 46% equity stake and has made a $13.5M loan to the business as well as royalty rights. This stake could easily be worth around $20M if the IPO occurs and more if royalty rights have value and the company’s drug candidates gain traction.
Eton Pharmaceuticals, Inc. (ETON) – Harrow owns 10% of Eton, this is a listed company and the value is around $8M.
Cataract Surgery As a Growth Market
Cataract removal, as one of the primary surgeries that Harrow Health supports, are far more likely as you age, and the U.S. population is aging. On my estimates using population tables and incidence of cataracts by age cohorts you have incidence of cataracts in the U.S. growing by around +2% a year over the coming decades. This provides a favorable tailwind to Harrow Health’s end-users.
A Platform For Growth
Harrow’s strategy is robust. They have strong relationships with U.S. eye doctors, this builds their understanding of the needs of this group. Now they are adding and developing branded products that they can sell into this customer group. That started out with a focus on compound products, which they still sell, but increasingly they are moving into branded products. This should enable the company to continue to grow and build an increasing moat through its vertical integration and customer intimacy. As they move into branded markets, they are also exiting lower value services, such as with their disposal of a non-core business in October 2022.
Risks
- In 2023 Harrow will have some work to do in integrating new products into its platform and bringing new products to market. That presents execution risk and new product launches can be slower to ramp than expected.
- Growth is increasingly becoming inorganic, or at least, partnership driven, and there is a risk the company has overpaid, or will overpaid for its partnerships. Though with the CEO owning 10% of the company his interests are reasonably aligned with shareholders.
- The recent Novartis deal is large compared to the size of the company today, it’s not quite a ‘bet the company’ decision, but a bad deal would be a drag on the equity for some time and we don’t have firm reported numbers to assess the deal yet.
- The company is likely to end 2023 with a reasonable debt-load that creates some risk if operations do disappoint
Catalysts For 2023
- Early May 2023 – Q1 results include new ‘Novartis assets’ contribution (but don’t switch to the Harrow salesforce until H2)
- May 2023 – planned launch of IHEEZO
- Potential IPO of Melt Pharmaceuticals (timing unknown, S-1 filed September 2022)
- H2 – Novartis assets integrated into Harrow sales platform
Conclusion
With a market cap of around $350M, Harrow is at a size where it likely has a robust growth runway for some time, and should increasingly re-rate to pharma multiples as it moves increasingly to branded products and demonstrates strong growth.
In addition, with Harrow you receive call options on three other pharma businesses that it has previously spun-out (Eton, Melt and Surface). It doesn’t seem too much of a stretch for Harrow to move to around $20/share in 2023 if things go well, and growth will likely continue beyond that assuming Harrow can continue to find ways to develop its pipeline and better serve its customer set over time. The CEO’s 10% equity stake creates strong alignment. There is some execution risk to monitor, but Harrow may deliver to shareholders in 2023 and for some time beyond.
Editor’s Note: This article was submitted as part of Seeking Alpha’s Top 2023 Pick competition, which runs through December 25. This competition is open to all users and contributors; click here to find out more and submit your article today!
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