Anika Therapeutics, Inc. — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; filed May 22, 2020. Anika is a global joint-preservation and regenerative-therapies company using hyaluronic-acid and surgical-platform technologies. The quarter included the acquisitions of Parcus Medical on January 24 and Arthrosurface on February 3.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $35.4 million | $24.7 million | Up 43% |
| Product revenue | $35.4 million | $24.7 million | Up 43% |
| Product gross profit | $21.2 million | $17.4 million | Up 22% |
| Product gross margin | 60% | 70% | Down 10 percentage points |
| Income from operations | $7.1 million | $5.5 million | Up 29% |
| Net income | $5.8 million | $4.5 million | Up 29% |
| Diluted EPS | $0.40 | $0.31 | Up $0.09 |
| Adjusted EBITDA | $9.5 million | $8.3 million | Up $1.2 million |
| Operating cash flow | $1.0 million | $8.5 million | Down $7.4 million |
Revenue and Business Developments
- Joint Pain Management revenue was $25.5 million, up 12%, primarily reflecting growth in CINGAL and MONOVISC.
- Orthopedic Joint Preservation and Restoration revenue was $7.9 million versus $0.2 million, reflecting the acquired Parcus Medical and Arthrosurface portfolios.
- Parcus Medical contributed $2.6 million of revenue and a $0.9 million net loss from January 24 through March 31. Arthrosurface contributed $4.2 million of revenue and a $4.0 million net loss from February 3 through March 31.
- Mitek represented 54% of total revenue, creating significant customer concentration.
- The acquisitions had estimated total purchase consideration of $75.1 million for Parcus Medical and $90.3 million for Arthrosurface. Purchase accounting remained preliminary.
Profitability, Cash Flow, Liquidity and Capital Structure
- Gross margin declined because acquisition-related inventory fair-value step-ups and amortization increased cost of product revenue by approximately $3.0 million.
- Research and development expense increased 42% to $6.1 million; SG&A increased 88% to $14.4 million, reflecting acquired sales infrastructure, acquisition costs and integration activities.
- Operating cash flow declined to $1.0 million, primarily because of higher inventory and lower accrued operating expenses. Investing cash flow was $(92.5) million, principally for the acquisitions.
- Cash and cash equivalents were $65.8 million at March 31, 2020, compared with $157.5 million at December 31, 2019. Investments were $26.5 million, resulting in cash, cash equivalents and investments of $92.3 million. Working capital was $134.9 million.
- There were no outstanding borrowings under the revolving credit facility at March 31. On April 8, 2020, the Company drew $50.0 million at an initial interest rate of 2.08%; the facility matures in October 2022 and includes a potential additional $50.0 million accordion.
- Contingent consideration was $44.6 million at March 31, after a $24.5 million fair-value reduction. Earn-out milestones under the acquisition agreements total up to $100 million through 2022.
Material Changes, Unusual Items and Outlook
- COVID-19 caused a temporary suspension or delay of elective procedures, reducing near-term demand for surgical products and contributing to an $18.1 million non-cash goodwill impairment charge for the Parcus Medical and Arthrosurface reporting unit.
- The Company recorded a $24.5 million non-cash benefit from reducing the fair value of contingent consideration, based primarily on lower near-term revenue projections and higher discount rates. This benefit materially affected reported operating results.
- A $1.8 million one-time stock-based compensation benefit resulted from the forfeiture of the former CEO’s unvested awards following his unexpected death. The Company also incurred approximately $4.1 million of acquisition transaction costs.
- Management stated that product supply had not been materially disrupted as of the filing, but elective-procedure cancellations, supply-chain interruptions, remote work, customer demand, clinical-trial enrollment and acquisition integration remained significant uncertainties.
- The COVID-19 pandemic delayed the expected start of the CINGAL pilot study; the Company no longer expected to begin it in the first half of 2020. No quantitative full-year revenue or earnings guidance was provided.
- Management implemented short-term expense controls, prioritized initiatives to conserve cash and explored additional funding sources. The Company expects continued investment in research and development and commercial expansion.
Risks and Contingencies
- Further declines or delayed recovery in elective procedures could reduce revenue, cash flow and asset valuations and trigger additional goodwill or intangible-asset impairments.
- Acquisition integration, preliminary purchase-price allocations, contingent consideration estimates and earn-out assumptions could produce material future adjustments.
- Clinical-trial enrollment, regulatory approvals and product-development timelines may be delayed by COVID-19, including the additional Phase III work required for U.S. approval of CINGAL.
- The Company faces medical-device and biotechnology risks, including regulatory compliance, intellectual-property protection, competition, dependence on key personnel, supply-chain disruption and cybersecurity risks associated with remote work.
- The revolving credit facility contains leverage, interest-coverage and other restrictive covenants and is secured by substantially all assets except certain intangible assets.
Investor Verification Priorities
- Verify the pace of recovery in elective procedures and the resulting revenue performance of Parcus Medical and Arthrosurface.
- Reconcile reported earnings with adjusted EBITDA and adjusted EPS, particularly the goodwill impairment, contingent-consideration benefit, acquisition costs and purchase-accounting effects.
- Review post-quarter liquidity after the $50.0 million borrowing, including interest expense, covenant compliance and cash usage.
- Monitor final purchase-price allocations, acquired intangible-asset valuations and potential additional goodwill or intangible impairments.
- Assess customer concentration, especially the 54% revenue contribution from Mitek.
- Track CINGAL and HYALOFAST clinical and regulatory milestones and the effect of COVID-19 on trial timelines.