Anika Therapeutics, Inc. annual report, FY2014

Anika Therapeutics, Inc. — FY2014 Form 10-K Summary

Business context and reporting period

Anika develops, manufactures, and commercializes hyaluronic-acid-based products for tissue protection, healing, and repair. Its principal franchises are orthobiologics, dermal, surgical, ophthalmic, and veterinary products. The filing covers the fiscal year ended December 31, 2014; fourth-quarter results are included in the unaudited quarterly data.

MONOVISC received FDA approval in February 2014 and launched in the United States in April 2014 through DePuy Synthes Mitek.
Orthobiologics represented 82% of product revenue, up from 78% in 2013.
Anika had 105 employees at December 31, 2014 and operated facilities in Bedford, Massachusetts and Abano Terme, Italy.

Financial performance and key metrics

Metric	FY2014	FY2013	Change
Total revenue	$105.6 million	$75.1 million	+41%
Product revenue	$75.5 million	$71.8 million	+5%
Licensing, milestone and contract revenue	$30.1 million	$3.3 million	+811%
Product gross profit	$54.5 million	$49.0 million	+11%
Product gross margin	72%	68%	+4 percentage points
Operating income	$61.4 million	$32.6 million	+88%
Net income	$38.3 million	$20.6 million	+86%
Diluted EPS	$2.51	$1.39	+81%
Cash provided by operating activities	$40.0 million	$25.2 million	+59%

Approximate total-revenue operating margin was 58%; net margin was 36%.
MONOVISC-related milestone revenue totaled approximately $29.7 million, including payments tied to FDA approval, patent-litigation resolution, first U.S. commercial sale, and CMS J-Code assignment.
Product revenue by franchise: orthobiologics $62.0 million, surgical $5.9 million, veterinary $3.2 million, ophthalmic $3.2 million, and dermal $1.3 million.
Research and development expense increased 15% to $8.1 million; selling, general, and administrative expense increased 17% to $15.1 million.

Cash, liquidity, debt, and capital resources

Cash, cash equivalents, and investments were $106.9 million at year-end, compared with $63.3 million in 2013.
Working capital was $133.1 million, compared with $85.3 million in 2013.
The company had no outstanding debt at December 31, 2014 after repaying its $8.4 million credit facility in November 2013.
Cash used in investing activities was $8.3 million, including investment purchases and $1.6 million of property and equipment purchases.
Management stated that existing resources and expected operating cash flow were sufficient for at least the next twelve months.
Management expected approximately $8 million of 2015 spending to expand manufacturing capabilities at the Bedford facility.

Material changes versus the prior comparable period

Revenue growth was driven primarily by MONOVISC commercialization and related milestone recognition rather than by product sales alone.
Product gross margin improved from 68% to 72%, reflecting manufacturing efficiencies and a greater mix of higher-margin orthobiologics products.
Orthobiologics product revenue increased 11%, while international viscosupplementation revenue declined 23% because of increased price competition.
Dermal, ophthalmic, and veterinary product revenue declined 27%, 32%, and 19%, respectively. Ophthalmic revenue was affected by the expiration of the Bausch & Lomb supply arrangement at year-end.
Net interest expense in 2013 shifted to net interest income in 2014 because the company had no debt.
The 2012 Italian restructuring was completed in 2013; 2014 contained no restructuring charge or credit.
Foreign currency translation produced a $2.8 million comprehensive-income loss in 2014, compared with a $1.0 million gain in 2013.

Fourth-quarter 2014 results

Product revenue was $17.9 million, compared with $20.2 million in fourth-quarter 2013.
Total revenue was $23.3 million, compared with $21.3 million in fourth-quarter 2013.
Net income was $7.8 million, or $0.51 diluted EPS, compared with $6.7 million, or $0.44 diluted EPS, in fourth-quarter 2013.
Fourth-quarter results included $5.0 million of MONOVISC milestone revenue associated with the CMS J-Code assignment.

Guidance, outlook, commentary, and risks

Management expected orthobiologics revenue to increase in 2015, led by U.S. MONOVISC and broader viscosupplementation growth.
Management expected higher 2015 revenue from advanced wound care, surgical products, and veterinary products, but lower ophthalmic revenue following expiration of the Bausch & Lomb arrangement.
Research and development and selling, general, and administrative expenses were expected to increase in 2015, particularly for CINGAL, HYALOFAST, new products, clinical trials, and expanded commercial support.
The CINGAL Phase III trial and statistical analysis were completed in fourth-quarter 2014. A CE Mark application was submitted in December 2014 and an FDA PMA was submitted in February 2015. Approval and commercialization remained uncertain.
HYALOFAST development was progressing toward a planned U.S. Phase III trial in 2015. HYALOSPINE received CE Mark approval in January 2015.
Key risks include dependence on Mitek, which accounted for 72% of 2014 product revenue, and concentration among five customers representing 85% of product revenue.
Additional risks include regulatory delays or failures, reimbursement and pricing pressure, competition, reliance on suppliers and manufacturing facilities, clinical-trial execution, intellectual-property disputes, foreign-exchange exposure, product liability, and potential impairment of goodwill or acquired intangible assets.
The Genzyme patent litigation relating to MONOVISC was dismissed with prejudice in March 2014. Other ordinary-course legal proceedings were not expected to have a material adverse effect.

Most important facts for investors to verify

How much of future earnings and cash flow is recurring product revenue versus nonrecurring MONOVISC milestones.
Mitek’s ongoing order volumes, contract economics, renewal terms, and the company’s progress diversifying its customer base.
U.S. MONOVISC adoption, reimbursement following the January 2015 J-Code effective date, pricing, and competitive conditions.
The regulatory status, remaining costs, and expected launch timing for CINGAL and HYALOFAST.
Whether planned Bedford manufacturing investments produce the expected capacity and efficiency benefits.
Trends in international pricing, foreign exchange, inventory levels, and the declining ophthalmic business.
Future impairment testing for goodwill, acquired intangibles, and in-process research and development.