Anika Therapeutics, Inc. 2019 Q2 Form 10-Q Summary
Business Context and Reporting Period
Anika is a global orthopedic and regenerative medicines company focused on products based on hyaluronic acid technology, including ORTHOVISC, MONOVISC, CINGAL, and HYALOFAST. This unaudited Form 10-Q covers the three and six months ended June 30, 2019, filed July 26, 2019.
Financial Performance and Position
| Metric | Q2 2019 | Q2 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Total revenue | $30.4 million | $30.5 million | $55.1 million | $51.8 million |
| Product revenue | $30.4 million | $30.5 million | $55.1 million | $51.8 million |
| Income from operations | $11.9 million | $11.2 million | $17.4 million | $3.4 million |
| Net income | $9.4 million | $10.1 million | $13.9 million | $3.4 million |
| Diluted EPS | $0.67 | $0.68 | $0.98 | $0.23 |
| Operating cash flow | Not provided | Not provided | $13.9 million | $14.1 million |
| Adjusted EBITDA | $14.8 million | $14.0 million | $23.2 million | $15.2 million |
Q2 2019 product gross profit was $23.6 million, with a 77.5% product gross margin versus 73.3% in Q2 2018. Year-to-date product gross profit was $41.0 million, with a 74.3% margin versus 69.1% in the prior-year period. Approximate Q2 net margin was 31.0%; year-to-date net margin was 25.3%.
At June 30, 2019, cash and cash equivalents were $69.4 million and investments, primarily U.S. Treasury bills, were $72.0 million. Total cash, cash equivalents, and investments were $141.5 million, compared with $159.0 million at December 31, 2018. Working capital was $179.5 million versus $191.7 million at year-end 2018.
The filing does not report outstanding debt. Anika had $50.0 million available under its senior revolving credit facility and was in compliance with the credit agreement. Operating lease liabilities totaled $23.1 million, including $22.0 million classified as long-term.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue was essentially flat, while six-month revenue increased 6%, driven mainly by orthobiologics and surgical products.
- Six-month operating income increased $14.0 million, or 410%, primarily because of higher gross profit and lower operating expenses.
- Six-month net income increased $10.5 million, or 309%. The 2018 period included an approximately $6.2 million one-time stock-based compensation charge related to the former CEO’s retirement.
- SG&A increased 17% in Q2 due primarily to personnel-related costs and professional fees, but declined 33% year to date because of the prior-year one-time compensation charge.
- Research and development expense declined 12% in Q2 and 15% year to date, primarily because of lower CINGAL clinical-trial costs.
- Cash flow from operations was broadly stable year to date at $13.9 million versus $14.1 million. Investing cash flow changed to a $3.4 million use from a $7.5 million source, primarily due to increased investment purchases.
- The company repurchased $30.0 million of stock through an accelerated share repurchase agreement, receiving an initial 451,694 shares. Approximately $12.0 million remained under the ASR at June 30, 2019; up to $20.0 million was also authorized for future open-market repurchases.
- Shares outstanding declined to 13.785 million from 14.210 million at December 31, 2018.
Outlook, Commentary, Risks, and Unusual Items
- Management expected 2019 orthobiologics revenue to increase, supported by international CINGAL and MONOVISC growth and the planned third-quarter U.S. launch of its injectable HA-based surgical bone repair product.
- Surgical revenue was expected to increase in 2019, while other product revenue was expected to decline modestly due primarily to lower sales to an ophthalmic distributor.
- Management expected SG&A to decline year over year because of the nonrecurring 2018 CEO-retirement charge, partially offset by investment in commercial capabilities and business and financial technology systems.
- Anika decided to advance U.S. CINGAL development through a pilot study after the FDA indicated that an additional Phase III trial would be required. Pilot-study enrollment was expected to begin in the first half of 2020.
- The company expected to begin commercializing its U.S. surgical bone repair product in the third quarter of 2019 and expected to seek 510(k) clearance for a potential rotator cuff product during 2020.
- The 2018 voluntary recall of certain HYAFF-based products was resolved, and shipments resumed in December 2018. Management stated that the recall did not affect the HYALOFAST clinical trial.
- Anika recorded a $0.3 million impairment charge for HYALOSPINE after deciding not to renew its CE Mark, as the product no longer aligned with its core strategy.
- Key risks include regulatory approval and clinical-trial outcomes, product quality and recalls, dependence on major customers and distributors, competition, intellectual-property protection, foreign currency exposure, and reliance on key personnel.
- Mitek agreements represented 68% of Q2 revenue and 70% of year-to-date revenue, indicating significant customer concentration.
- The company adopted the new lease accounting standard on January 1, 2019, recognizing $23.5 million of operating lease right-of-use assets; management reported no material effect on operating results.
- Management stated that available financial resources were adequate to support the business for at least twelve months from the financial statement issuance date.
Most Important Facts for Investors to Verify
- Whether the planned third-quarter 2019 U.S. product launch occurred on schedule and generated the expected revenue.
- Progress, costs, enrollment, and regulatory requirements for the CINGAL pilot and subsequent Phase III program.
- Customer concentration, particularly the continuing contribution from Mitek.
- Final settlement economics of the $30.0 million ASR, expected in the first quarter of 2020, including final shares delivered or any additional cash or shares required.
- Whether product quality, recall, regulatory, or clinical-trial issues result in additional charges or delays.
- The effect of planned commercial, research, technology, lease, and capital-allocation investments on future cash flow and margins.