Anika Therapeutics, Inc. quarterly report, Q3 FY2011

Anika Therapeutics, Inc. — Form 10-Q Summary

Business context and reporting period

Anika develops, manufactures, and commercializes hyaluronic-acid-based products for tissue protection, healing, and repair across orthobiologics, dermal, ophthalmic, surgical, and veterinary markets. This unaudited Form 10-Q covers the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods.

Key financial metrics

Metric	Q3 2011	Q3 2010	9M 2011	9M 2010
Total revenue	$18.5 million	$13.9 million	$46.3 million	$40.8 million
Product revenue	$17.8 million	$13.2 million	$44.2 million	$38.5 million
Income from operations	$4.8 million	$2.1 million	$9.1 million	$5.1 million
Net income	$3.0 million	$1.2 million	$5.6 million	$3.0 million
Diluted EPS	$0.22	$0.09	$0.41	$0.22
Operating cash flow	Not separately provided	Not separately provided	$2.9 million	$4.1 million

Product gross margin was 58% in the third quarter and 56% for the first nine months, compared with 54% and 56%, respectively, in the prior-year periods.
Q3 operating margin was approximately 26%; nine-month operating margin was approximately 20%. Q3 net margin was approximately 16%; nine-month net margin was approximately 12%.
Cash and cash equivalents were $29.0 million at September 30, 2011, compared with $28.2 million at December 31, 2010. Working capital was approximately $43.5 million.
Total debt was $11.6 million, including $1.6 million current debt, at a stated interest rate of 1.60%. The credit agreement requires quarterly principal payments and includes a $5.2 million final installment due December 31, 2015.
Capital expenditures were $954,000 during the first nine months, and cash used in financing activities was $1.0 million, primarily for debt repayment.

Material changes versus the prior comparable period

Q3 total revenue increased 33%, while nine-month revenue increased 13%. Product revenue increased 35% and 15%, respectively.
Orthobiologics revenue increased 35% in Q3 and 26% year to date, led by ORTHOVISC, MONOVISC outside the United States, and Anika S.r.l. orthopedic products.
Ophthalmic revenue increased 37% in Q3 because of higher Bausch & Lomb sales, but declined 8% year to date as Bausch & Lomb transitioned AMVISC and AMVISC Plus manufacturing to another supplier.
Dermal revenue increased 197% in Q3, primarily due to order timing, but remained 3% below the prior-year level for the first nine months.
Operating income increased 132% in Q3 and 79% for the first nine months. Net income increased 151% and 88%, respectively.
Research and development expense declined 14% in Q3 and 15% year to date, while selling, general, and administrative expense increased 21% in Q3 and declined 1% year to date.
Operating cash flow declined to $2.9 million from $4.1 million, primarily because higher accounts receivable and vendor payments increased working-capital requirements.
The March 2011 equipment problem at the Woburn facility caused an approximately $450,000 inventory write-down and delayed shipments. The ORTHOVISC backorder had been resolved by September 30, 2011.

Guidance, outlook, risks, contingencies, and unusual items

Management expected 2011 joint-health revenue to exceed 2010 levels and HYVISC revenue to be comparable with 2010. Ophthalmic revenue was expected to be approximately $2 million below 2010 because of the Bausch & Lomb transition.
The company received approximately $6 million of additional Bausch & Lomb ophthalmic purchase orders in May 2011 and received additional orders in October for delivery during the first half of 2012.
Anika expected FDA approval to manufacture aseptic products at its Bedford, Massachusetts facility in the first quarter of 2012. The company expected approximately $1.8 million of additional annual depreciation after approval and anticipated continued gross-margin pressure during the manufacturing transition.
Research and development spending was expected to increase for CINGAL, Hyalograft C Autograft, Anika S.r.l. pipeline programs, and other clinical and product-development activities.
The FDA continued to review the U.S. MONOVISC application. Deficiencies remained, and the company had requested an FDA Advisory Panel review but had not received a meeting date.
Genzyme sued Anika alleging patent infringement relating to MONOVISC and added a newly issued patent to the litigation. Anika denied liability and recorded no loss contingency because management concluded that a loss was not probable.
The former HYDRELLE distributor, Artes, entered bankruptcy. Anika settled the trustee’s $359,768 payment demand for $30,000, and the matter was closed in August 2011.
Approximately 14.5% of Anika’s outstanding shares were held by Fidia, which also had an approximately $1.2 million net payable from Anika S.r.l. for products and services. Claims remained pending under the Anika S.r.l. acquisition, and 800,000 shares remained in escrow.
Italian accounts receivable totaled approximately $3.3 million, including approximately $2.5 million due from public hospitals and government-funded agencies. Collection timing may be variable.
The company stated that it had adequate resources for the foreseeable future, but noted that additional debt, equity, or strategic financing could be required if operating cash and existing resources prove insufficient.
Management reported effective disclosure controls and no material changes to internal control over financial reporting.

Important facts for investors to verify

Progress and timing of FDA approval for Bedford aseptic manufacturing and the related manufacturing-transfer costs and depreciation.
Resolution and potential financial impact of the Genzyme MONOVISC patent litigation.
Timing and outcome of the FDA review and any Advisory Panel process for U.S. MONOVISC approval.
Impact of the Bausch & Lomb supplier transition on ophthalmic revenue, margins, and future purchase orders.
Collection performance of Italian public-hospital receivables and the effect on operating cash flow.
Future R&D, litigation, commercialization, and facility-transition spending relative to the company’s $29.0 million cash balance and $11.6 million debt.
Whether the filing’s forward-looking expectations for joint-health revenue, HYVISC revenue, gross margins, and 2012 facility approval are achieved.