Anika Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Anika develops, manufactures, and commercializes hyaluronic-acid-based products for tissue protection, healing, and repair across orthobiologics, dermal, ophthalmic, surgical, and veterinary markets. This unaudited Form 10-Q covers the three and six months ended June 30, 2012, compared with the corresponding 2011 periods. The company reported one operating segment.
Financial performance and position
| Metric | Three months ended June 30, 2012 | Year-over-year change | Six months ended June 30, 2012 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $19.6 million | +21.6% | $34.0 million | +21.9% |
| Product revenue | $18.9 million | +22.5% | $32.5 million | +22.7% |
| Operating income | $6.1 million | +66.8% | $9.2 million | +117.2% |
| Net income | $3.7 million | +63.7% | $5.6 million | +116.7% |
| Diluted EPS | $0.26 | From $0.17 | $0.39 | From $0.19 |
| Product gross margin | 57.2% | From 56.8% | 55.4% | From 53.7% |
- Licensing, milestone, and contract revenue was $0.7 million in the quarter and $1.5 million year to date, modestly above the prior-year periods. Revenue includes ratable recognition of prior DePuy Mitek payments and the $2.5 million initial payment under the December 2011 MONOVISC licensing and supply agreement.
- Research and development expense declined 17.5% in the quarter and 8.9% year to date, reflecting lower clinical-study spending. SG&A declined 2.9% in the quarter and 9.9% year to date.
- The effective tax rate increased to 38.6% for the quarter and 37.9% year to date, versus 37.0% in both 2011 periods, primarily because the federal R&D tax credit expired after 2011.
- Cash provided by operating activities was $3.5 million for the six months, compared with cash used of $0.1 million in the prior-year period. Capital expenditures were $1.1 million, compared with $0.7 million.
- Cash and cash equivalents were $37.9 million at June 30, 2012, up from $35.8 million at December 31, 2011. Working capital was approximately $54.4 million, compared with $49.6 million at year-end.
- Total debt was $10.4 million, including $1.6 million current and $8.8 million long term, versus $11.2 million at December 31, 2011. The debt bears interest at 1.72% as of June 30, 2012 and is variable based on LIBOR plus 1.25% or the lender’s prime rate.
- Inventory increased to $10.8 million from $7.3 million at year-end, primarily reflecting the Woburn facility closure and transfer of ACP manufacturing.
Material changes versus the prior comparable periods
- Orthobiologics revenue increased 12% in the quarter and 18% year to date, driven by U.S. ORTHOVISC market penetration and stronger international sales, partly offset by weakness in certain European markets and the Italian distributor transition.
- Ophthalmic revenue increased 105% in the quarter and 90% year to date, primarily from higher Bausch & Lomb orders. Management nevertheless expects full-year ophthalmic revenue to be slightly lower because Bausch & Lomb is transitioning volume to another supplier.
- Veterinary revenue increased 51% in the quarter and 55% year to date because of distributor order timing and expanded Middle East distribution.
- Dermal revenue declined 81% in the quarter and 53% year to date due to lower U.S. and Italian advanced wound-care sales and order timing from a Korean aesthetic-product distributor.
- Surgical revenue declined 6% in the quarter and 9% year to date, primarily because of ENT order timing.
- FDA approvals required to manufacture aseptic products, including AmVisc and AmVisc Plus, at the Bedford facility were received during the first half. Depreciation expense is expected to increase by approximately $1.5 million annually beginning in March 2012.
- The former Woburn manufacturing facility was closed in June 2012; its annual operating expenses had been approximately $2.5 million, and approximately $0.2 million of exit costs were recorded.
- The company plans to transfer a significant portion of Anika S.r.l. manufacturing to Bedford over the next two years, beginning with ACP gel products in the second half of 2012. Management expects this to improve gross margin over time.
Guidance, outlook, risks, and unusual items
- Management expects 2012 joint-health revenue to increase versus 2011 and HYVISC revenue to be higher than in 2011. Dermal-market sales expectations are modest, while ophthalmic revenue is expected to be slightly lower because of the Bausch & Lomb transition.
- Research and development spending is expected to increase in future quarters for planned Hyalograft C Autograft and CINGAL clinical trials and other pipeline programs. A multi-country, multi-year Hyalograft C Autograft trial was planned to begin in September 2012.
- MONOVISC’s U.S. PMA remained under FDA appeal. Following a June 2012 supervisory appeal meeting, the FDA requested additional information; the company submitted it but had no specified decision date. U.S. approval and timing remain uncertain.
- Genzyme patent litigation concerning MONOVISC remained a contingency for which no loss was accrued because management determined a loss was not probable. Genzyme dismissed its claims involving U.S. Patent No. 5,399,351 in May 2012. Separately, on August 3, 2012, a jury found U.S. Patent No. 7,931,030 invalid as obvious and not infringed in related litigation involving other parties.
- Merogel Injectable was withdrawn in 2011 because of a packaging-labeling error. The company is disputing potential claims by Medtronic and seeking indemnification from Fidia; no loss was accrued because management considered a loss not probable.
- Italian operations face customer and collection exposure: Italian accounts receivable totaled approximately $2.6 million at June 30, 2012, including approximately $1.6 million due from public hospitals and government-funded agencies.
- Key risks include regulatory approvals, clinical-trial outcomes, intellectual-property disputes, product commercialization, dependence on distribution and supply partners, foreign currency exposure, competition, healthcare cost controls, manufacturing transfers, and the ability to maintain debt-covenant compliance.
- Management stated that existing financial resources are adequate to support the business for the next twelve months. No material changes to previously disclosed risk factors or market risks were reported.
Most important facts for investors to verify
- Whether revenue growth, particularly in orthobiologics, ophthalmics, and veterinary products, is sustainable after order timing effects and the Bausch & Lomb transition.
- The timing and outcome of FDA action on MONOVISC and the planned clinical and regulatory programs for Hyalograft C Autograft and CINGAL.
- Whether the Bedford manufacturing transfer delivers the expected gross-margin benefits and offsets higher depreciation and transition costs.
- Inventory normalization, operating cash generation, and the company’s ability to fund planned capital expenditures and clinical programs.
- The effect of the variable-rate debt, including the stated approximate $100,000 annual cash-flow sensitivity for each 1% interest-rate increase.
- Potential financial or operational consequences of the Genzyme, Medtronic, and Fidia disputes, notwithstanding management’s conclusion that losses were not probable.
- Future Italian collections and the impact of the new Italian distributor on Anika S.r.l. revenue.