ANIK

Business Context and Reporting Period

Anika Therapeutics, Inc. filed its Form 10-Q for the quarterly period ended September 30, 2010. The Company develops, manufactures, and commercializes therapeutic products based on hyaluronic acid (HA) for tissue protection, healing, and repair. A significant business event during the reporting year was the acquisition of Fidia Advanced Biopolymers S.r.l. ("FAB") on December 30, 2009, which expanded the Company's product portfolio into orthobiologics, advanced wound care, and aesthetic dermatology, primarily in Europe.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 29% for the quarter and 38% for the nine-month period compared to 2009. Product revenue grew 31% (quarter) and 41% (nine months), driven largely by the inclusion of FAB products and growth in orthobiologics.
• Profitability: Net income decreased 22% for the quarter ($1.18M vs. $1.51M) and remained flat for the nine months ($2.97M vs. $2.99M) despite revenue growth. This was due to increased operating expenses and a higher effective tax rate.
• Gross Margin Compression: Product gross margin declined from 63% in the prior nine-month period to 56%. Management attributed this to the lower volume and outsourced manufacturing costs associated with the newly acquired FAB subsidiary.
• Expense Increases: Selling, general, and administrative (SG&A) expenses rose significantly (50% for the quarter, 53% for nine months) due to FAB integration costs and marketing preparations for MONOVISC. R&D expenses decreased year-over-year as major clinical trials for MONOVISC concluded in 2009.
• Tax Rate: The effective tax rate increased to 39.6% for the nine months ended September 30, 2010, compared to 24.1% in 2009, primarily due to the expiration of the U.S. federal R&D tax credit and lower investment tax credits.

Guidance, Outlook, and Risks

• MONOVISC Approval: The FDA requested additional statistical data regarding the MONOVISC premarket approval (PMA) application. Management expects this will delay the U.S. launch into 2011.
• Contract Expirations: The supply agreement with Bausch & Lomb for ophthalmic products expires December 31, 2010. Negotiations for a limited-term extension are ongoing, but future revenue from this source is expected to decline significantly as Bausch & Lomb transitions to a lower-cost supplier.
• Facility Transition: The Company is transitioning manufacturing from Woburn, MA, to a new facility in Bedford, MA. This transition is expected to increase depreciation expenses by over $2.2 million annually starting in 2011 and may temporarily impact gross margins.
• Legal Proceedings:
  • Genzyme Litigation: Genzyme Corporation sued Anika alleging patent infringement regarding MONOVISC. Anika denies liability, but defense costs could be significant.
  • Bankruptcy Preference: The former distributor of HYDRELLE (Artes Medical/Coapt Systems) filed for bankruptcy. The trustee is seeking to recover $359,768 in payments made within 90 days of filing. Management believes the risk of loss is remote.
• Outlook: Management expects joint health product sales to increase in 2010. However, they anticipate increased operating expenses in the fourth quarter related to direct commercialization preparations for MONOVISC.

Investor Verification Checklist

• MONOVISC Timeline: Verify the status of the FDA response and the likelihood of a 2011 U.S. launch given the additional data request.
• Bausch & Lomb Contract: Confirm the terms of the potential extension and the projected revenue impact of the supplier transition in 2011.
• FAB Integration: Monitor the timeline for transferring FAB manufacturing to the Bedford facility to assess when gross margins might stabilize or improve.
• Legal Exposure: Track developments in the Genzyme patent infringement lawsuit and the Artes Medical bankruptcy preference claim.
• Capital Expenditures: Review the completion status of the Bedford facility and the associated increase in depreciation expenses starting in 2011.