Anika Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2019; filed October 28, 2019. Financial statements are unaudited and presented in thousands, except per-share data. Anika develops and commercializes hyaluronic-acid-based joint preservation, orthopedic, regenerative, surgical, dermal, ophthalmic, and veterinary products.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $29.7 million | $26.8 million | $84.8 million | $78.6 million |
| Product revenue | $29.6 million | $26.8 million | $84.7 million | $78.6 million |
| Income from operations | $12.0 million | $8.6 million | $29.4 million | $12.0 million |
| Net income | $9.2 million | $7.6 million | $23.1 million | $11.0 million |
| Diluted EPS | $0.64 | $0.53 | $1.62 | $0.74 |
| Operating cash flow | Not separately provided | Not separately provided | $24.0 million | $24.9 million |
| Adjusted EBITDA | $14.9 million | $11.3 million | $38.0 million | $26.5 million |
Margins: Product gross margin was 79.9% in Q3 and 76.3% for the nine months, compared with 69.1% in both prior-year periods. Calculated total-revenue operating margin was approximately 40.6% in Q3 and 34.7% for the nine months; calculated net margin was approximately 31.0% and 27.3%, respectively.
- Orthobiologics revenue increased 11% in Q3 and 7% for the nine months, led by MONOVISC and international CINGAL.
- Q3 SG&A increased 32% to $7.5 million due primarily to the U.S. hybrid commercial model and TACTOSET launch. Nine-month SG&A decreased 19% because the 2018 period included a substantial one-time stock-based compensation charge related to the former CEO’s retirement.
- Income taxes increased to $3.3 million in Q3 and $7.8 million for the nine months, with effective tax rates of 26.6% and 25.3%, versus 16.4% and 14.7% in the comparable 2018 periods.
- At September 30, 2019, cash and cash equivalents were $103.4 million, investments were $69.8 million, and working capital was $212.6 million. The company reported no borrowings and had $50.0 million available under its senior revolving credit facility.
- Total assets were $319.6 million and stockholders’ equity was $281.7 million. Operating lease right-of-use assets and liabilities were recognized following adoption of the new lease standard.
Cash flow, capital allocation, and liquidity
- Operating cash flow was $24.0 million for the first nine months, slightly below $24.9 million in 2018, primarily because of collection timing and lower accrued expenses.
- Investing cash flow was negative $1.3 million, compared with positive $47.7 million in 2018. The change primarily reflected purchases and maturities of short-term investments and lower capital expenditures.
- Financing cash flow was negative $8.4 million, including a $30.0 million accelerated share repurchase, partly offset by $21.8 million of proceeds from equity award exercises.
- The board authorized up to $50.0 million of share repurchases. The company completed the $30.0 million accelerated repurchase and had approximately $12.0 million remaining under the related ASR contract as of September 30; no open-market repurchases had been executed.
- Management stated that available cash, investments, operating cash generation, and credit availability are adequate to support operations for at least twelve months. The company was in compliance with its credit agreement.
Material changes and unusual items
- Anika completed its U.S. hybrid commercial model and launched TACTOSET, its surgically delivered bone-repair therapy, during Q3. Initial revenue was not significant.
- The 2018 voluntary recall of certain HYAFF-based products was resolved, and shipments resumed in December 2018. The recall negatively affected the 2018 comparison, particularly gross margin and dermal revenue.
- A $0.3 million impairment charge was recorded in Q1 2019 for HYALOSPINE after the company elected not to renew its CE Mark because the product was no longer aligned with its strategic focus.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording $23.1 million of operating lease right-of-use assets and $21.6 million of operating lease liabilities at September 30. The adoption did not materially affect operating results or retained earnings.
- Revenue concentration remains significant: DePuy Synthes Mitek represented 71% of Q3 revenue and 70% of nine-month revenue.
Outlook, commentary, and risks
- Management expected 2019 orthobiologics revenue to increase, supported by international CINGAL, global MONOVISC, and the U.S. TACTOSET launch. Surgical and other revenue were expected to remain approximately flat, while dermal revenue was expected to increase following the recall recovery.
- Management expected full-year SG&A to decline from 2018 because of the prior-year CEO-related stock compensation charge, partially offset by investments in commercial capabilities and technology platforms.
- R&D spending may increase as the company prepares for a CINGAL pilot study, advances its pipeline, and conducts required post-market clinical work.
- The FDA indicated that an additional Phase III trial is required for U.S. approval of CINGAL after the prior Phase III trial failed to meet its primary endpoint. An initial pilot study was expected to begin enrolling patients in the first half of 2020, creating regulatory, timing, cost, and execution risk.
- The hybrid commercial model is unproven for Anika and may fail to generate meaningful or profitable TACTOSET sales. Risks include recruiting sales personnel, securing distributors, pricing, market access, competition, and hospital or surgeon adoption.
- Other principal risks include FDA and foreign regulatory requirements, clinical-trial enrollment and outcomes, product commercialization, intellectual-property protection, dependence on key personnel, foreign exchange exposure, product quality, and customer concentration.
- The University of Liverpool stem-cell development agreement was mutually terminated in August 2019. The company reported no material changes to its previously disclosed legal proceedings or other contractual obligations.
Investor verification points
- Verify the sustainability of the unusually large year-over-year gross-margin improvement and quantify the effects of product mix and the 2018 recall.
- Assess whether TACTOSET and the hybrid U.S. commercial model can produce material revenue and acceptable selling costs after the initial launch period.
- Monitor Mitek concentration, contract terms, renewal risk, and the potential effect of any customer ordering changes.
- Track CINGAL pilot-study enrollment, design, cost, and the probability and timing of a subsequent Phase III trial and U.S. approval.
- Reconcile the final share count and cash or share settlement of the $30.0 million ASR, expected in the first quarter of 2020.
- Evaluate inventory growth, including $5.4 million expected to remain on hand beyond one year, and the risk of future provisions or impairments.
- Review lease commitments, tax-rate normalization, foreign-currency effects, and the company’s reliance on cash and short-term investments rather than debt financing.