Anika Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Global orthopedic medicines company focused on hyaluronic-acid-based products, including ORTHOVISC, MONOVISC, CINGAL and HYALOFAST. The unaudited report covers the three and six months ended June 30, 2017, compared with the same periods in 2016.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | $33.5 million | $26.6 million | $56.8 million | $48.9 million |
| Product revenue | $28.3 million | $26.6 million | $51.7 million | $48.9 million |
| Operating income | $17.7 million | $13.5 million | $25.7 million | $24.2 million |
| Net income | $11.4 million | $8.6 million | $16.9 million | $15.5 million |
| Diluted EPS | $0.76 | $0.57 | $1.12 | $1.02 |
| Operating cash flow | Not separately provided | Not separately provided | $21.7 million | $7.1 million |
Q2 operating margin was approximately 53.0% and net margin approximately 34.0%. Six-month operating margin was approximately 45.3% and net margin approximately 29.7%. Product gross margin was 78% in Q2 and 77% for the six-month period, compared with 77% in both comparable 2016 periods.
At June 30, 2017, cash and cash equivalents were $117.9 million, investments were $25.0 million, and total liquidity including both was $142.9 million. Working capital was $179.4 million. The balance sheet reports no debt; total liabilities were $20.9 million and stockholders’ equity was $244.1 million. Total assets were $265.0 million.
Material changes versus the prior comparable period
- Q2 total revenue increased 26%; six-month revenue increased 16%. Product revenue increased 7% and 6%, respectively.
- The increase in total revenue was principally driven by a $5.0 million MONOVISC milestone payment from DePuy Synthes Mitek after U.S. end-user sales exceeded $100.0 million over a consecutive 12-month period. Licensing, milestone and contract revenue was $5.1 million in the first half of 2017 versus $11 thousand in the prior-year period.
- Orthobiologics revenue increased 5% in Q2 and 4% for the first six months, led by MONOVISC. Other product revenue increased 66% in Q2 and 56% year to date, primarily reflecting veterinary product growth. Surgical and dermal revenue declined.
- Research and development expense increased 59% in Q2 and 75% year to date, reflecting CINGAL and HYALOFAST clinical activity and additional preclinical development. SG&A increased 17% and 22%, respectively, due primarily to personnel, professional fees and international launch support.
- Net income increased 32% in Q2 and 9% year to date. The six-month effective tax rate declined to 34.7% from 36.2%, partly because of higher research and development and state investment tax credits and tax benefits from stock compensation.
- Operating cash flow increased to $21.7 million from $7.1 million, mainly due to payment timing affecting accounts payable and income taxes. Investing cash outflow was $8.4 million, while financing cash flow was $0.2 million versus a $24.1 million outflow in 2016 that primarily reflected share repurchases.
Guidance, outlook, risks and unusual items
- Management expects orthobiologics revenue to continue growing during 2017, supported by MONOVISC, CINGAL and ORTHOVISC-T. Management expects modest surgical growth, higher dermal revenue and increased other revenue, particularly from veterinary products.
- R&D and SG&A expenses are expected to increase in 2017 and thereafter as clinical trials, product development, international launches and operational technology investments expand.
- The Bedford manufacturing project is expected to cost approximately $25.0 million in total; approximately $22.5 million had been spent through June 30, 2017, with completion expected before year-end 2017.
- A second U.S. Phase III CINGAL trial began in the first quarter of 2017, with the first patient treated in Q2; enrollment is expected to be completed by year-end 2017. Regulatory approval and commercialization remain subject to FDA requirements and clinical results.
- The company believes its cash and investments are sufficient to support operations for at least the next twelve months. It has a 15-year operating lease for its new Italian facility, with initial annual rent of approximately $0.3 million and specified withdrawal penalties after year six.
- Key risks include regulatory approvals, clinical and product-development execution, competition, intellectual-property protection, dependence on distributors and key personnel, commercialization strategy, foreign currency exposure and biotechnology and medical-device industry risks.
- Routine legal proceedings are not expected to have a material adverse effect. Management reported no material changes to previously disclosed risk factors, contractual obligations or market risks.
- The filing states that the financial statements are unaudited and that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Separate recurring product revenue growth from the non-recurring $5.0 million MONOVISC milestone.
- Monitor MONOVISC, CINGAL and ORTHOVISC-T sales, regulatory milestones and distributor order timing.
- Verify enrollment, completion and regulatory progress for the additional CINGAL Phase III trial and the HYALOFAST program.
- Track completion and remaining spending on the Bedford manufacturing transfer project.
- Assess whether elevated R&D and SG&A spending is translating into sustainable revenue growth and margins.
- Review the company’s adoption plans and potential financial effects for the new revenue-recognition and lease accounting standards.