Anika Therapeutics, Inc. — Fiscal 2019 Form 10-K Summary
Business context and reporting period
Anika Therapeutics is a global joint preservation and regenerative therapies company using hyaluronic acid and HYAFF technologies. Its portfolio includes viscosupplementation, bone repair, regenerative medicine, wound care, ENT, ophthalmic, veterinary, and other products. The filing covers the fiscal year ended December 31, 2019, with audited comparisons for 2018 and 2017. Anika operated as one reportable segment.
In 2019, Anika began implementing a hybrid U.S. commercial model and launched TACTOSET. The company subsequently agreed to acquire Parcus Medical and Arthrosurface; both transactions closed in the first quarter of 2020 and therefore were not included in 2019 operating results.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $114.6 million | $105.6 million | Up 9% |
| Product revenue | $114.5 million | $105.5 million | Up 9% |
| Product gross profit | $85.8 million | $74.3 million | Up 16% |
| Product gross margin | 75% | 70% | Up 5 percentage points |
| Operating income | $34.2 million | $21.7 million | Up 57% |
| Net income | $27.2 million | $18.7 million | Up 45% |
| Diluted EPS | $1.89 | $1.27 | Up $0.62 |
| Adjusted EBITDA | $49.2 million | $38.7 million | Up $10.5 million |
| Cash flow from operations | $37.0 million | $34.9 million | Up $2.1 million |
Joint Pain Management Therapy revenue was $103.5 million, up 7%, primarily reflecting higher MONOVISC revenue in domestic and international markets and higher international CINGAL revenue. Orthopedic Joint Preservation and Restoration Care revenue was $2.1 million, up 84%, mainly due to recovery from the 2018 product recall and the TACTOSET U.S. launch. Other product revenue was $9.0 million, up 17%.
Research and development expense declined 8% to $16.7 million, while selling, general and administrative expense increased 2% to $35.0 million. SG&A included $2.9 million of acquisition-related expenses. The effective tax rate was 24.7%, compared with 19.3% in 2018, primarily because 2018 benefited from a $1.5 million windfall tax benefit related to employee equity awards.
At December 31, 2019, cash, cash equivalents and investments totaled $184.9 million, including $157.5 million of cash and cash equivalents and $27.5 million of U.S. Treasury bills. Working capital was $218.0 million. The company had no borrowings under its $50.0 million revolving credit facility and stated that it had adequate resources for at least the next twelve months. Total assets were $330.7 million and stockholders’ equity was $288.4 million.
Cash provided by investing activities was $39.7 million, primarily because investment maturities exceeded purchases. Capital expenditures were $2.8 million. Financing activities used $8.1 million, including a $30.0 million accelerated share repurchase, partially offset by $22.2 million of proceeds from equity award exercises.
Material changes versus prior comparable periods
- Revenue recovered from the 2018 voluntary recall of certain HYAFF-based products and benefited from stronger global viscosupplement sales.
- Gross margin improved from 70% to 75%, driven by revenue mix, increased domestic viscosupplement royalty revenue, and recovery from the recall-related impact.
- Operating income and net income increased substantially as revenue and gross profit improved, while R&D expense and recall-related and other one-time costs declined.
- Product revenue concentration remained high: Mitek represented 71% of product revenue in 2019, compared with 73% in 2018; five customers represented 82% of 2019 product revenue.
- The company repurchased $30.0 million of common stock under an accelerated share repurchase agreement. Final settlement in January 2020 resulted in 590,751 shares repurchased at an average price of approximately $50.78.
- Anika adopted ASC 842 lease accounting in 2019, recording $22.9 million of right-of-use assets and $21.4 million of lease liabilities at year-end.
Guidance, outlook, risks and unusual items
Management expected 2020 Joint Pain Management Therapy revenue to increase, primarily from domestic MONOVISC and international CINGAL. It expected a significant increase in Orthopedic Joint Preservation and Restoration Care revenue from the TACTOSET commercial model and the Parcus Medical and Arthrosurface acquisitions. Other revenue was expected to remain broadly flat. Management also expected R&D and SG&A expenses to increase in 2020 due to clinical programs, TACTOSET commercialization, EU regulatory requirements, and expanded commercial infrastructure.
The FDA indicated that an additional Phase III trial would be required for U.S. approval of CINGAL after prior clinical results did not meet the primary endpoint. Anika planned to begin a CINGAL pilot study in the first half of 2020. It also expected to complete patient enrollment in the HYALOFAST Phase III study by the end of 2020. These programs remain subject to clinical, regulatory, timing, and funding risks.
Subsequent events were significant. Parcus Medical was acquired on January 24, 2020 for preliminary estimated consideration of approximately $76.2 million, including contingent consideration. Arthrosurface was acquired on February 3, 2020 for preliminary estimated consideration of approximately $89.6 million, including contingent consideration. Purchase accounting was preliminary at the filing date.
Joseph Darling, the former President and Chief Executive Officer, died unexpectedly on January 29, 2020. Cheryl Blanchard was appointed Interim Chief Executive Officer while the board conducted a search for a permanent successor. The filing also identified potential COVID-19-related disruption to the company’s Italian operations, supply chain, shipments, and customer payments.
Key continuing risks include dependence on Mitek and other large distributors, competition from substantially larger medical device and pharmaceutical companies, regulatory approval delays, reimbursement and pricing pressure, product liability, supply-chain dependence, acquisition integration, impairment of goodwill or other long-lived assets, foreign currency exposure, and the need to attract and retain qualified personnel.
The company reported $39.98 million of contractual obligations at year-end, consisting of $31.29 million of operating lease commitments and $8.68 million of purchase commitments. It reported no material off-balance-sheet arrangements other than operating leases and did not expect existing legal proceedings to have a material adverse effect.
Most important facts for investors to verify
- Whether the 2020 Parcus Medical and Arthrosurface acquisitions generate the expected revenue growth, margins, synergies, and commercial diversification.
- The final purchase accounting, contingent consideration obligations, acquired intangible assets, goodwill, amortization, and potential impairment exposure from the acquisitions.
- Mitek’s ongoing purchasing levels and contract terms, given that it represented 71% of 2019 product revenue and 70% of year-end accounts receivable.
- Progress, cost, enrollment, and regulatory outcomes for the CINGAL pilot and additional Phase III trial and the HYALOFAST Phase III program.
- The success and profitability of Anika’s hybrid U.S. sales model and TACTOSET commercialization.
- The effect of COVID-19, EU Medical Device Regulation compliance, supply constraints, reimbursement changes, and healthcare pricing pressure on future results.
- The company’s cash usage following the acquisitions, share repurchases, expanded operating infrastructure, and expected increases in R&D and SG&A spending.