PE Fund's Harrow Investment Amid Revenue Surge Highlights Growth and Risk Dissonance

What happened

Penn Capital Management acquired $15.7 million in Harrow stock in Q3 2025, establishing a new position as the company reported a 45% revenue jump driven by brands like IHEEZO and VEVYE. This growth aligns with Harrow's rapid top-line expansion, but the DeepValue report underscores a stretched balance sheet with net debt/EBITDA of 8.21x and interest coverage below 1x. Despite positive operating income, Harrow remains loss-making at the net level due to high interest costs and volatile free cash flow. Regulatory risks, including potential FDA actions on the New Jersey outsourcing facility, add further uncertainty to the investment case. The PE move may signal confidence in future prospects, but it does not mitigate the fundamental financial and operational vulnerabilities highlighted in the report.

Implication

The PE fund's entry could attract momentum investors, temporarily supporting the stock price despite its rich valuation and negative earnings. However, Harrow's high debt burden and inconsistent cash flow make it vulnerable to any growth slowdown or interest rate pressures. Regulatory overhangs, such as potential FDA enforcement on manufacturing facilities, could swiftly impair operations and erode investor confidence. For existing shareholders, this event does not alter the 'POTENTIAL SELL' thesis, which emphasizes the lack of a margin of safety. New investors should await sustained positive free cash flow and clear deleveraging before considering exposure, as the current risks outweigh the growth narrative.

Thesis delta

The core thesis of high risk due to leverage, volatile profitability, and regulatory exposure remains unchanged. This PE investment does not address the fundamental concerns but may reflect external optimism on Harrow's growth trajectory. Investors should monitor for tangible improvements in free cash flow and debt metrics before reassessing the risk-reward profile.