Anika Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2014; filed August 4, 2014. The unaudited consolidated statements cover Anika and its subsidiaries. Anika develops, manufactures, and commercializes hyaluronic-acid-based therapeutic products for tissue protection, healing, and repair, with one reportable operating segment.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Change | Six months 2014 | Six months 2013 |
|---|---|---|---|---|---|
| Total revenue | $26.3 million | $20.8 million | +26% | $60.3 million | $36.1 million |
| Product revenue | $21.3 million | $20.1 million | +6% | $35.6 million | $34.6 million |
| Licensing, milestone and contract revenue | $5.0 million | $0.8 million | +558% | $24.7 million | $1.5 million |
| Income from operations | $15.2 million | $9.4 million | +62% | $39.1 million | $14.4 million |
| Net income | $9.3 million | $5.9 million | +58% | $24.3 million | $9.0 million |
| Diluted EPS | $0.60 | $0.40 | +50% | $1.57 | $0.62 |
| Operating cash flow | Not separately provided | Not separately provided | — | $20.3 million | $9.6 million |
- Product gross margin increased to 75% in Q2 and 73% for the six-month period, compared with 69% and 68%, respectively, in the prior-year periods. Management attributed the improvement to product mix, material cost reductions, and manufacturing efficiency gains.
- Research and development expense was $1.9 million in Q2 and $4.2 million year to date, while SG&A expense was $3.9 million and $7.4 million, respectively.
- The effective tax rate was 39% in Q2 and 38% year to date, versus 37% in both prior-year periods. The increase primarily reflected expiration of the federal R&D tax credit and a lower estimated production activities deduction.
- Cash and cash equivalents increased to $84.9 million at June 30, 2014 from $63.3 million at December 31, 2013. Working capital was approximately $112.2 million, compared with $85.3 million at year-end 2013.
- The balance sheet reported no current or long-term debt balance. Total liabilities were $16.7 million and stockholders’ equity was $162.4 million at June 30, 2014.
Material changes versus the prior comparable period
- MONOVISC was approved by the FDA during the first quarter, and its first U.S. commercial sale occurred on April 15, 2014. The Q2 results included a $5.0 million milestone payment tied to that first commercial sale.
- Year-to-date licensing, milestone, and contract revenue included the $17.5 million MONOVISC milestone related to FDA approval and resolution of patent litigation, plus approximately $2.2 million of previously deferred upfront consideration recognized after development obligations were completed.
- Product revenue growth was led by orthobiologics, which increased 11% in Q2 and 7% year to date, primarily due to MONOVISC. Veterinary revenue increased 27% in Q2 but declined 13% year to date due to distributor order timing.
- Dermal revenue declined 37% in Q2 and 33% year to date; ophthalmic revenue declined 22% and 59%, respectively. Ophthalmic weakness reflected delayed minimum purchases by Bausch & Lomb.
- Operating cash flow increased by $10.7 million year to date, primarily reflecting the $22.5 million of MONOVISC milestone payments, partly offset by increased inventory.
- The Genzyme patent lawsuit was dismissed with prejudice on March 10, 2014, and the case was terminated.
- Shares issued and outstanding increased to 14.8 million at June 30, 2014 from 14.3 million at December 31, 2013, primarily reflecting equity award activity. Minimum tax withholding on share-based awards resulted in a $6.3 million financing cash outflow.
Guidance, outlook, risks, and unusual items
- Management expects 2014 orthobiologics, dermal, and surgical product revenue to exceed 2013 levels. It expects overall ophthalmic revenue to decline because the Bausch & Lomb supply agreement expires at year-end 2014 and will not be renewed.
- Management expects research and development spending to increase in future quarters and SG&A expense to increase during 2014 as the business expands domestically and internationally.
- CINGAL Phase III enrollment was completed in February 2014; management expects to submit a CE Mark application by December 31, 2014, or shortly thereafter. The company also filed an FDA pre-submission package for HYALOFAST during Q2.
- Management cautioned that the Q2 product gross margin may not be indicative of the remainder of the year because of product mix and other factors.
- The company believes existing cash and operating resources are adequate for the next twelve months. It may require additional debt, equity, strategic alliance, or other financing if current resources become insufficient, and no assurance is provided that such financing will be available on acceptable terms.
- Key risks include regulatory approvals, clinical development, reimbursement, competition, intellectual property, dependence on distribution and licensing partners, foreign currency exposure, manufacturing execution, and the ability to commercialize new and existing products.
- The company reports routine legal proceedings but does not expect them to have a material adverse effect. It had no accrued product warranties and no history of warranty claims.
- New accounting standards on revenue recognition, share-based compensation, and discontinued operations were issued during 2014; the company was evaluating the potential effects and did not expect ASU 2014-08 to have a material impact.
Important facts for investors to verify
- How much of 2014 revenue and earnings growth is attributable to nonrecurring MONOVISC milestone and deferred-revenue recognition versus recurring product sales.
- The pace and sustainability of U.S. and international MONOVISC sales following the April launch.
- Whether expected growth in orthobiologics, dermal, and surgical products offsets the anticipated ophthalmic decline after the Bausch & Lomb contract expires.
- Progress, costs, and regulatory outcomes for CINGAL and HYALOFAST.
- Inventory growth, product gross-margin sustainability, and the timing of distributor orders.
- Potential effects of higher tax rates, foreign currency movements, intellectual-property matters, and future financing requirements.