Anika Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; filed November 5, 2013. Anika develops, manufactures, and commercializes hyaluronic-acid-based products for tissue protection, healing, and repair, with products spanning orthobiologics, dermal, surgical, ophthalmic, and veterinary applications.
Financial Performance and Position
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $17.8 million | $14.8 million | $53.8 million | $48.8 million |
| Product revenue | $17.0 million | $14.1 million | $51.6 million | $46.6 million |
| Income from operations | $7.8 million | $2.7 million | $22.2 million | $11.9 million |
| Net income | $5.0 million | $1.6 million | $13.9 million | $7.3 million |
| Diluted EPS | $0.33 | $0.11 | $0.95 | $0.51 |
| Net cash from operations | Not separately provided | Not separately provided | $17.2 million | $5.7 million |
- Total revenue increased 20% in the quarter and 10% year to date. Product revenue increased 21% and 11%, respectively.
- Product gross profit was $11.6 million in Q3 and $35.1 million year to date. Product gross margin was 68% in both periods, compared with 49% and 53% in the comparable 2012 periods.
- Operating margin was approximately 43.7% in Q3 and 41.2% year to date, versus approximately 18.5% and 24.5% in the prior-year periods. Net margin was approximately 27.9% in Q3 and 25.9% year to date.
- Cash and cash equivalents were $64.1 million at September 30, 2013, up from $44.1 million at December 31, 2012. Working capital was approximately $84.6 million, compared with $62.9 million at year-end.
- Total debt was $8.4 million, including $1.6 million current debt, compared with $9.6 million at December 31, 2012. The debt carried a 1.43% interest rate at September 30, 2013 and matures December 31, 2015, with a final $5.2 million installment.
- Cash flow included $0.3 million from investing activities and $2.5 million from financing activities. Financing inflows primarily reflected employee stock-option exercises, partly offset by $1.2 million of debt principal payments.
Material Changes Versus Prior Comparable Period
- Orthobiologics revenue increased 39% in Q3 and 34% year to date, driven by U.S. ORTHOVISC market penetration and stronger international ORTHOVISC and MONOVISC sales.
- Ophthalmic revenue declined 25% in Q3 and 67% year to date because Bausch & Lomb purchases returned to contractually specified minimum levels after unusually high 2012 demand.
- Veterinary revenue increased 22% in Q3 and 9% year to date, while dermal revenue declined 29% in Q3 but increased 3% year to date. Surgical revenue declined 20% in Q3 and increased 2% year to date.
- Gross margin improved because of manufacturing process improvements, scale efficiencies, elimination of duplicate facility costs, favorable product mix, and discontinuation of unprofitable tissue-engineering operations.
- Research and development expense increased 33% in Q3 and 24% year to date, primarily due to the Phase III CINGAL clinical trial. SG&A declined 11% in Q3 and 5% year to date, reflecting cost reductions and the absence of prior-year Medtronic settlement-related costs.
- The Italian tissue-engineering facility closure and related restructuring were substantially completed by June 30, 2013. Asset sales generated restructuring credits of $0.2 million in Q3 and $0.4 million year to date; the remaining restructuring accrual was $0.2 million.
Outlook, Risks, and Unusual Items
- Management expected 2013 Orthobiologics, dermal, and HYVISC revenue to exceed 2012 levels, but cautioned that quarterly growth rates may be affected by order timing, distributor inventory management, and prior-year manufacturing-related revenue deferrals.
- Management expected ophthalmic revenue to be lower in 2013 under the Bausch & Lomb supply agreement. The agreement expires December 31, 2014.
- R&D spending was expected to rise with CINGAL patient enrollment and other new-product development. MONOVISC’s latest U.S. PMA amendment remained under FDA review following prior non-approvable decisions.
- The Company stated that existing cash, operating cash flow, and available resources were adequate for the next twelve months. Additional financing could be required if future resources are insufficient, and availability on acceptable terms is not assured.
- Genzyme patent litigation concerning MONOVISC remained stayed while related litigation proceeded. Genzyme appealed a judgment holding a relevant patent invalid and not infringed; no accrual was recorded because management assessed a contingent loss as not probable. DePuy Mitek had assumed certain related obligations.
- A dispute with Fidia relating to the Merogel Injectable labeling matter was settled in October 2013 for a payment to Anika; arbitration was withdrawn and escrowed shares were released.
- Key ongoing risks include FDA and foreign regulatory approvals, patent and litigation outcomes, competition, clinical-trial execution, reimbursement, manufacturing capacity, distributor dependence, foreign currency exposure, and the ability to realize expected restructuring benefits.
Investor Verification Points
- Verify the sustainability of the 68% product gross margin and the extent to which 2012 manufacturing disruptions and product mix affected the comparison.
- Track Orthobiologics growth against potential distributor inventory adjustments and monitor the continuing decline in ophthalmic revenue.
- Review the progress, costs, enrollment, and regulatory pathway for CINGAL and the U.S. MONOVISC PMA.
- Assess the impact and timing of the $5.2 million final debt installment due in December 2015, along with variable-rate exposure.
- Monitor the Genzyme appeal and any potential effect on MONOVISC commercialization in the United States.
- Confirm the settlement proceeds from Fidia and the final cash costs and savings associated with the Italian restructuring.