Harrow Accelerates from 30% to 50% Annual Growth

Yes, this level of growth is possible beyond just software!

Not many people have heard of Harrow, and there's a reason, it is still a small-cap company with a market cap under $2 billion. However, its growth has been nothing short of impressive. Since 2016, Harrow's market cap has surged from $46 million to its current level, reflecting a remarkable 50% annual return (note there also has been a 100% dilution since then), fueled by a revenue CAGR of 30% over the same period.

What is even more incredible is that, despite this impressive growth, the company is projected to accelerate to a 50% growth rate in the coming years. Of course, as a smaller company, it carries a high level of volatility, but expectations are high. So, how is this rapid growth possible? Is it reasonable? And what exactly does Harrow do? Let’s find out!

Company overview

Harrow is a specialty pharmaceutical company focused on ophthalmology, dedicated to developing and delivering innovative products that address unmet medical needs in eye care. The company offers a range of proprietary branded pharmaceuticals, as well as compounded medications tailored specifically for ophthalmologists and optometrists.

The company owns several brands. Among them, the main ones are:

• Iheezo. It is an ocular anesthetic gel with broad indication for all ocular anesthetic use cases. It is patent-protected until 2039

• Vevye. The first and only water-free cyclosporine (0.1%) to treat the signs and symptoms of dry eye disease. It is patent-protected until 2039

• Triesence. Enhances the ability of eye surgeons to see clearly during complex procedures (vitrectomy, posterior uveitis)

• Anterior segment products include a dozen brands including: steroids, anti-inflammatories, lubricant, antihistamine, antibiotics, rare disease medication, anti-glaucoma

• ImprimisRx. It is a specialty pharmacy that focuses on providing customized compounded medications for a variety of medical needs, particularly in ophthalmology. ImprimisRx is able to compound medications in various forms, such as drops, creams, and capsules, while ensuring compliance with regulatory standards.

Harrow also own 46% share in Melt Pharmaceuticals, a former subsidiary of Harrow. Melt-300 is a sublingual sedation drug candidate for short-duration medical procedures.

EPS Growth drivers

Several products have recently launched, including Iheezo in May 2023 and Vevye in January 2024. Melt Pharmaceuticals' Melt-300 is currently in Phase 3, with an expected launch in 2026.

The company aims for $500 million in revenue by 2027, while analysts forecast slightly higher growth, predicting $469 million in 2026 (so they expect a revenue closer to $600 million in 2027).

EPS growth will also stem from improving profit margins. Currently, the net profit margin sits at about -7%, but free cash flow (FCF) is projected to approach zero in 2024, indicating the company is nearing a cash-generating phase. With a robust gross margin of around 70%, which is increasing alongside sales volume, the outlook looks promising. As volume rises, net profit margins are expected to reach 13.8% in 2025 and 30.8% in 2026.

This forecast does not account for additional revenue from new products (via R&D or M&A) or international expansion. 100% of current revenue comes from the U.S.

Risks for an Early-Stage Company

Like many early-stage companies, the potential rewards are appealing, but there are risks to consider:

1. Sales uncertainty. Rapid growth can lead to uncertainties. Can the company achieve its ambitious sales targets? Will supply meet demand?

2. Negative FCF. While FCF is expected to turn positive by 2024, previous negative cash flow created a need for additional financing

3. Dilution risk. Historical financing needs have led to significant dilution, exacerbated by high stock-based compensation (SBC). However, as the company becomes cash flow positive, this should stabilize

4. Competition from larger players. As a smaller company with strong revenue and high gross margins, it may attract interest from bigger competitors looking to develop or acquire similar products, presenting a potential risk

5. Patent expiration. The primary patents are set to expire in 2029, while others extend to 2039, but this remains a consideration for long-term sustainability.

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