Anika Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Anika Therapeutics is a global orthopedic and regenerative medicines company using proprietary hyaluronic acid technology. Its portfolio includes ORTHOVISC, MONOVISC, CINGAL, HYALOFAST and other products across orthobiologics, surgical, dermal and ophthalmic/veterinary markets. This unaudited filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Effective June 6, 2018, the company completed its tax-free domestication from Massachusetts to Delaware. The change did not affect operations.
Financial performance and liquidity
| Metric | Three months ended June 30, 2018 | Three months ended June 30, 2017 | Six months ended June 30, 2018 | Six months ended June 30, 2017 |
|---|---|---|---|---|
| Total revenue | $30.5 million | $33.5 million | $51.8 million | $56.8 million |
| Product revenue | $30.5 million | $28.3 million | $51.8 million | $51.7 million |
| Income from operations | $11.2 million | $17.7 million | $3.4 million | $25.7 million |
| Net income | $10.1 million | $11.4 million | $3.4 million | $16.9 million |
| Diluted EPS | $0.68 | $0.76 | $0.23 | $1.12 |
| Product gross margin | 73% | 78% | 69% | 77% |
| Net cash from operating activities | Not separately provided | Not separately provided | $14.1 million | $21.7 million |
Second-quarter operating margin was approximately 36.8%, compared with approximately 53.0% in the prior-year quarter. Six-month operating margin was approximately 6.6%, compared with approximately 45.3% in 2017. Six-month net margin was approximately 6.6%, compared with approximately 29.7% in the prior-year period.
- Cash and cash equivalents were $126.0 million at June 30, 2018, compared with $133.3 million at December 31, 2017.
- Investments were $13.3 million, down from $24.0 million at year-end; cash, cash equivalents and investments totaled $139.3 million.
- Working capital was $178.5 million, compared with $193.3 million at December 31, 2017.
- The company reported $50.0 million of available capacity under its senior revolving credit facility and stated that it was in compliance with the credit agreement. The filing does not provide a clear drawn debt balance.
- Capital expenditures were $3.3 million in the first six months, versus $3.9 million in the prior-year period.
- Cash used in financing activities was $28.8 million, primarily reflecting a $30.0 million accelerated stock repurchase, partially offset by proceeds from equity award exercises.
Material changes versus the prior comparable period
- Second-quarter total revenue declined 9%, primarily because licensing, milestone and contract revenue fell to $6 thousand from $5.1 million. Product revenue increased 8%.
- Six-month total revenue declined 9%, while product revenue was essentially flat, increasing $0.1 million.
- Product gross margin declined to 73% in the quarter and 69% year to date, due to inventory reserves and write-offs, higher-than-planned HYAFF production costs, product mix and pricing.
- Six-month SG&A increased to $22.5 million from $10.0 million. The increase included costs associated with the former CEO’s retirement, higher personnel, professional fees and marketing expenses, and recall-related accruals.
- Six-month stock-based compensation increased to $8.9 million from $2.5 million, including a one-time $6.2 million expense from the accelerated vesting of the former CEO’s awards.
- Research and development expense increased 14% year to date to $9.9 million, reflecting higher clinical, regulatory and preclinical activity.
- The effective tax rate declined to 12.5% for the quarter and 10.4% year to date, compared with 35.9% and 34.7%, respectively, primarily due to the Tax Cuts and Jobs Act and a $1.3 million discrete tax benefit from employee equity award exercises.
Outlook, commentary, risks and unusual items
- Management expects 2018 orthobiologics revenue to increase, driven by MONOVISC and international CINGAL growth, partially offset by lower ORTHOVISC revenue, U.S. pricing pressure and the HYAFF product recall. Surgical revenue is expected to increase modestly, other revenue is expected to increase, and dermal revenue is expected to decrease.
- Management expects research and development spending to increase in 2018 and thereafter. It expects product gross margin to improve as manufacturing and inventory issues are remediated, but cautions that current margins may not be indicative of the full year.
- Results from the second Phase III CINGAL trial showed substantial pain reduction, but the study did not meet its primary endpoint of statistically significant pain reduction versus the approved steroid component at six months. The company is evaluating the extended follow-up data and potential FDA regulatory strategies. U.S. commercialization preparations have been delayed.
- The company voluntarily recalled certain lots of HYALOFAST, HYALOGRAFT C and HYALOMATRIX after quality testing indicated a risk that certain measures would not be maintained throughout shelf life. No safety or efficacy issue had been identified. The company recorded a $1.1 million revenue reserve, an $0.8 million inventory charge and accrued $0.4 million for future recall administration and remediation costs. Management expected to resume production and shipment by year-end 2018.
- MONOVISC’s European CE Mark was temporarily suspended on March 27, 2018 for administrative and technical-information issues unrelated to safety or efficacy. An updated CE Mark was issued on May 30, 2018, and management did not expect a financial impact.
- The company stated that available cash, investments, operating cash flow and credit capacity should support the business for at least 12 months from the financial statement issuance date.
- Key risks include FDA and international approval delays, failure or delay in CINGAL commercialization, clinical trial outcomes, product recalls and quality issues, competition, pricing pressure, dependence on distributors and commercial partners, intellectual property protection, foreign currency exposure and reliance on key personnel.
- The company adopted ASC 606 effective January 1, 2018 using the modified retrospective method; management reported no material impact on revenue or timing of recognition.
Important facts for investors to verify
- Assess the regulatory implications and potential timeline for CINGAL following the failed primary endpoint in the second Phase III study.
- Monitor recall-related returns, reserves, remediation costs and the timing of resumed HYAFF-based product shipments.
- Verify whether gross-margin improvement materializes as planned and whether HYAFF production costs and inventory charges normalize.
- Reconcile the $30.0 million accelerated share repurchase, including the final delivery of approximately 0.4 million additional shares after quarter-end and the total 0.8 million shares repurchased.
- Review the effect of the former CEO’s retirement-related compensation, consulting obligations and accelerated equity vesting on future cash expenses.
- Confirm the drawn balance, covenants and availability under the senior revolving credit facility, as the filing discloses availability but not a clear debt balance.
- Evaluate revenue concentration: agreements with DePuy Synthes Mitek represented 72% of second-quarter revenue and 73% of six-month revenue.