ANIK

Business Context and Reporting Period

Anika Therapeutics, Inc. filed its Form 10-Q for the quarterly period ended June 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 period was the integration of its December 2009 acquisition of Fidia Advanced Biopolymers S.r.l. ("FAB"), an Italian subsidiary, which expanded the company's product portfolio into orthobiologics, dermal wound care, and surgical products.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 44% year-over-year for the six-month period, driven primarily by a 47% increase in product revenue. This growth was fueled by the inclusion of FAB's products (orthobiologics, dermal, and surgical) and increased sales of joint health products (ORTHOVISC and MONOVISC).
• Gross Margin Compression: Product gross margin declined from 62% to 57%. Management attributed this to the lower volume and outsourced manufacturing costs associated with the newly acquired FAB subsidiary, as well as increased inventory reserves.
• Operating Expenses: Selling, general, and administrative (SG&A) expenses rose significantly (60% increase for the six months) due to FAB integration costs, marketing for MONOVISC, and a $270,000 reserve increase for receivables from the bankrupt former distributor, Coapt Systems. Conversely, R&D expenses decreased 17% due to the completion of major clinical trials in 2009.
• Tax Rate: The effective tax rate increased from 24.8% to 38.0%, primarily due to the expiration of the federal R&D tax credit and lower investment tax credits in 2010.
• Cash Position: Cash and cash equivalents decreased by approximately $778,000 during the period, despite positive operating cash flow, due to capital expenditures for the Bedford, MA facility and debt principal payments.

Guidance, Outlook, and Risks

• MONOVISC Approval: The FDA requested additional statistical data regarding the Premarket Approval (PMA) for MONOVISC. The company expects to submit responses in September 2010, likely delaying the U.S. launch into 2011.
• Manufacturing Transition: The company is transitioning manufacturing from Woburn, MA, to a new facility in Bedford, MA. This transition is expected to add over $2.2 million in annual depreciation once fully operational and may cause a temporary decline in U.S. gross margins.
• Distributor Issues: The distribution agreement for the aesthetic product HYDRELLE was terminated following the bankruptcy of Coapt Systems. Anika plans to distribute the product directly in the interim while seeking a new partner.
• Legal Proceedings:
  • Genzyme Litigation: Genzyme Corporation filed a patent infringement lawsuit regarding MONOVISC. Anika intends to defend against the claims.
  • Artes Medical Bankruptcy: The trustee for Artes Medical (former HYDRELLE distributor) is seeking to recover $359,768 in payments made prior to bankruptcy as preferences. Anika disputes this claim.
• Outlook: Management expects joint health product sales to increase in 2010. However, they anticipate a decline in revenue from the Bausch & Lomb ophthalmic supply agreement in 2011 as the contract expires and Bausch & Lomb transitions to a lower-cost supplier.

Investor Verification Checklist

• Verify the timeline for the FDA's response to the MONOVISC PMA data request and the likelihood of a 2011 U.S. launch.
• Monitor the status of the Genzyme patent infringement lawsuit and potential defense costs.
• Assess the progress of the new Bedford, MA facility validation and the impact on gross margins during the transition.
• Track the identification of a new distribution partner for HYDRELLE and the performance of direct sales efforts.
• Review the integration progress of FAB, specifically the shift from outsourced manufacturing to internal production to improve margins.