Anika Therapeutics, Inc. — Q3 2017 Form 10-Q Summary
Business context and reporting period
Anika is a global orthopedic medicines company focused on hyaluronic-acid technologies and products including ORTHOVISC, MONOVISC, CINGAL, and HYALOFAST. The filing covers the three and nine months ended September 30, 2017, with comparative periods ended September 30, 2016. Results are unaudited and presented under U.S. GAAP.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $27.2 million | $25.8 million | $84.0 million | $74.7 million |
| Product revenue | $27.2 million | $25.8 million | $78.9 million | $74.6 million |
| Licensing, milestone and contract revenue | $0.006 million | $0.006 million | $5.1 million | $0.017 million |
| Income from operations | $10.3 million | $13.7 million | $36.0 million | $37.9 million |
| Net income | $6.9 million | $9.0 million | $23.7 million | $24.5 million |
| Diluted EPS | $0.46 | $0.59 | $1.58 | $1.61 |
| Operating cash flow | Not separately provided | Not separately provided | $33.8 million | $18.4 million |
Product gross profit was $20.9 million in Q3 and $60.3 million for the first nine months. Product gross margin declined to 77% in Q3 from 81% and to 76% year to date from 78%, primarily because of lower production volume relative to the prior year and 2017 inventory write-offs. Calculated net margins were approximately 25% in Q3 and 28% year to date; calculated operating margins were approximately 38% and 43%, respectively.
At September 30, 2017, cash and cash equivalents were $127.0 million, investments were $25.8 million, and working capital was approximately $187.3 million. Total assets were $273.1 million and stockholders’ equity was $253.3 million. The balance sheet showed no outstanding debt. On October 24, 2017, after quarter-end, the company entered into a $50.0 million senior revolving credit facility, with potential expansion to $100.0 million subject to lender approval.
Material changes versus the prior comparable period
- Q3 product revenue increased 5%; nine-month product revenue increased 6%, driven mainly by orthobiologics and surgical products.
- Orthobiologics revenue increased 7% in Q3 and 5% year to date, led by MONOVISC and contributions from CINGAL and ORTHOVISC-T.
- Surgical revenue increased 50% in Q3 and 12% year to date, primarily from higher sales to the worldwide ENT commercial partner.
- Dermal revenue declined 40% in Q3 and 21% year to date, reflecting order timing by distribution partners.
- Year-to-date licensing, milestone and contract revenue included a $5.0 million MONOVISC milestone payment after U.S. end-user sales exceeded $100.0 million over a consecutive 12-month period.
- Research and development expense increased 107% in Q3 and 87% year to date, primarily because of CINGAL and HYALOFAST clinical and regulatory activities and increased preclinical development.
- SG&A expense increased 13% in Q3 and 19% year to date, reflecting personnel costs, professional fees, marketing, and commercial support for CINGAL and ORTHOVISC-T.
- Despite higher revenue, operating income declined 25% in Q3 and 5% year to date, while net income declined 23% and 3%, respectively, because expense growth outpaced revenue growth.
- Operating cash flow increased to $33.8 million from $18.4 million, primarily due to favorable accounts receivable, accounts payable, and income-tax payment timing, partially offset by higher inventories.
- Financing cash flow was positive $0.3 million versus negative $24.0 million in the prior-year period, when the company repurchased $25.0 million of common stock.
Guidance, outlook, risks, and unusual items
- Management expected orthobiologics revenue to continue growing through the remainder of 2017, supported by MONOVISC growth, international approvals, and CINGAL availability in Canada and Europe.
- Management expected modest 2017 growth in surgical revenue, increased dermal revenue versus 2016, and higher other revenue primarily from veterinary products.
- Research and development and SG&A spending were expected to increase in 2017 and thereafter as the company expanded clinical, regulatory, commercial, and technology-platform activities.
- The approximately $25.0 million HYAFF manufacturing-transfer project was approximately 91% incurred through September 30, 2017, with full operational capability expected before year-end 2017.
- A second CINGAL Phase III U.S. clinical trial began in 2017; enrollment was completed in October 2017. The company continued preparing for a future U.S. NDA submission.
- The company submitted an FDA 510(k) application during Q3 for an injectable HA-based bone-repair treatment derived from prior HYALOBONE-related development.
- Management believed available cash, investments, operating cash flow, and the new credit facility were adequate for at least the next twelve months.
- Key risks include regulatory approval and clinical-trial outcomes, product commercialization, competition and technological innovation, intellectual-property protection, dependence on distributors and key personnel, manufacturing execution, and foreign-exchange exposure.
- Ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
- The company adopted stock-compensation guidance in 2017, recognized forfeitures as incurred, and recorded a $0.5 million reduction to beginning retained earnings. It had not determined the impact of the new revenue-recognition standard expected to be adopted January 1, 2018.
Important facts for investors to verify
- Whether MONOVISC, CINGAL, and other orthobiologics products sustain the reported growth and offset continued dermal weakness.
- The timing, cost, and operational performance of the HYAFF manufacturing transfer and Bedford facility validation.
- Progress, results, and regulatory timing for the second CINGAL Phase III trial, HYALOFAST program, and 510(k) submission.
- The recurring earnings impact after excluding the non-recurring $5.0 million MONOVISC milestone payment.
- Whether higher R&D and SG&A spending produces sufficient revenue growth and whether gross margins recover from 2017 levels.
- Terms, covenant compliance, collateral requirements, and actual utilization of the post-quarter-end revolving credit facility.
- The eventual financial impact of adopting the new revenue-recognition standard and other pending accounting standards.