Anika Therapeutics, Inc. quarterly report, Q2 FY2016

Anika Therapeutics, Inc. — Form 10-Q Summary

Business Context and Reporting Period

Anika is a global orthopedic medicines company focused on hyaluronic-acid-based products for pain management, tissue repair, and regenerative medicine. Its portfolio includes marketed products such as ORTHOVISC and MONOVISC and pipeline products including CINGAL and HYALOFAST. This unaudited Form 10-Q covers the three and six months ended June 30, 2016, compared with the corresponding 2015 periods.

Financial Performance and Position

Metric	Q2 2016	Q2 2015	Six Months 2016	Six Months 2015
Total revenue	$26.6 million	$22.9 million	$48.9 million	$38.4 million
Product revenue	$26.6 million	$22.9 million	$48.9 million	$38.4 million
Income from operations	$13.5 million	$12.4 million	$24.2 million	$17.9 million
Net income	$8.6 million	$7.8 million	$15.5 million	$11.3 million
Diluted EPS	$0.57	$0.51	$1.02	$0.74
Operating cash flow	Not separately provided	Not separately provided	$6.6 million	$14.9 million

Q2 revenue increased 16%; six-month revenue increased 27%.
Product gross profit was $20.5 million in Q2 and $37.4 million for the first six months. Product gross margin was 77% in both periods, compared with 77% and 75%, respectively, in the prior-year periods.
Approximate Q2 operating and net margins were 50.7% and 32.4%; six-month operating and net margins were 49.5% and 31.7%.
Q2 research and development expense increased 54% to $2.8 million; six-month expense increased 27% to $5.0 million. SG&A increased 26% in Q2 and 18% for the six-month period.
At June 30, 2016, cash and cash equivalents were $89.1 million and investments were $22.5 million, totaling approximately $111.6 million. Working capital was approximately $144.1 million.
The balance sheet presents no borrowings or senior debt; total liabilities were $18.3 million and stockholders’ equity was $204.4 million.
Cash declined from $110.7 million at December 31, 2015, primarily because of the $25.0 million accelerated share repurchase, capital expenditures, and working-capital uses.

Material Changes Versus the Prior Comparable Period

Orthobiologics revenue increased 21% in Q2 and 37% for the first six months, driven by higher MONOVISC-related purchases, increased end-user demand, and international growth. Q2 sales to U.S. partner Mitek increased approximately $2.7 million year over year, partly offset by pricing concessions.
Dermal revenue increased 92% in Q2 and 34% year to date. Surgical revenue declined 13% in Q2 and 9% year to date, while other revenue declined 25% and 34%, respectively.
Management noted that Q2 2015 included approximately $1.8 million of non-recurring MONOVISC-related revenue, making the 2016 growth comparison notable despite that prior-year item.
Operating income increased 8% in Q2 and 35% year to date; net income increased 10% and 37%, respectively.
Operating cash flow fell to $6.6 million from $14.9 million, primarily because of inventory growth associated with transferring HYAFF manufacturing to Bedford and the timing of income-tax payments.
The company repurchased $25.0 million of common stock under an accelerated share repurchase agreement and initially received 377,155 shares. Approximately $7.5 million remained subject to final settlement at June 30, 2016.
Capital expenditures were $9.9 million year to date versus $1.1 million in the prior-year period, reflecting manufacturing-capacity expansion.

Guidance, Outlook, Risks, and Unusual Items

Management expects orthobiologics revenue to continue growing in 2016, supported by MONOVISC, CINGAL launches, and viscosupplementation demand.
Surgical revenue is expected to decline moderately for full-year 2016, while advanced wound-care revenue is expected to increase and other revenue is expected to decline, primarily because of lower veterinary revenue.
Research and development and SG&A expenses are expected to increase as clinical trials, product development, marketing, and international commercialization expand.
CINGAL launched in Canada in May 2016 and the European Union in June 2016. U.S. regulatory discussions continued, and additional clinical work may be required before an NDA pathway is finalized.
HYALOFAST clinical enrollment is ongoing; an IDE supplement expanded eligibility in Q2 to support faster enrollment. The FDA also approved an IDE in June 2016 for a phase III trial addressing pain from repetitive overuse injuries.
The company expects to spend approximately $25 million on manufacturing capabilities in Bedford, including approximately $5.1 million over the following 12 months. A new Italian headquarters facility is expected to be completed in late 2016 and carries an initial annual rent of approximately $0.4 million.
Management believes available cash, investments, and operating cash flow are adequate for at least the next twelve months. It reported no material changes to previously disclosed risk factors or market risks.
Key risks include regulatory approval and clinical-trial requirements, competition, product quality or supply interruptions, pricing pressure, intellectual-property protection, dependence on distributors and key personnel, foreign-currency exposure, and healthcare-policy changes.
Routine legal proceedings are not expected to have a material adverse effect. A U.S. tax audit was ongoing, but management did not expect a material financial impact.

Investor Verification Checklist

Verify the sustainability of orthobiologics growth, including Mitek ordering patterns, pricing concessions, and MONOVISC demand.
Track CINGAL commercialization results and the FDA’s eventual requirements for a U.S. NDA.
Monitor HYALOFAST enrollment, the new phase III program, and related research and development spending.
Reconcile the $25.0 million share repurchase and final settlement of the approximately $7.5 million ASR forward component.
Assess cash conversion, inventory growth, and capital expenditures as the Bedford manufacturing transfer progresses.
Review full-year revenue mix, particularly expected declines in surgical and veterinary products and the effect on gross margin.
Confirm the impact of pending accounting standards, regulatory matters, the U.S. tax audit, and routine litigation in subsequent filings.