Anika Therapeutics, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2019. The unaudited results cover Anika and its subsidiaries. Anika develops, manufactures, and commercializes hyaluronic-acid-based orthopedic, regenerative medicine, surgical, dermal, ophthalmic, and veterinary products.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $24.7 million | $21.3 million | Up 16% |
| Product revenue | $24.7 million | $21.3 million | Up 16% |
| Product gross profit | $17.4 million | $13.4 million | Up 30% |
| Product gross margin | 70% | 63% | Up 7 percentage points |
| Income from operations | $5.5 million | $(7.8) million | Improved $13.3 million |
| Net income | $4.5 million | $(6.7) million | Improved $11.2 million |
| Diluted EPS | $0.31 | $(0.46) | Improved $0.77 |
| Operating cash flow | $8.5 million | $9.6 million | Down $1.1 million |
Net margin was approximately 18% in Q1 2019 versus a net loss margin of approximately 31% in Q1 2018. Operating margin was approximately 22% in Q1 2019 versus negative 37% in the prior-year quarter.
- Orthobiologics revenue increased 12% to $21.7 million, primarily from higher domestic and international viscosupplement sales.
- Surgical revenue increased 12% to $1.4 million.
- Dermal revenue increased to $0.1 million from a prior-year loss of $0.5 million, reflecting resumed HYALOMATRIX shipments after the 2018 recall.
- Other revenue increased 36% to $1.4 million, primarily from veterinary products.
- Research and development expense declined 17% to $4.3 million, while selling, general and administrative expense declined 52% to $7.7 million.
- Adjusted EBITDA, a non-GAAP measure, increased to $8.3 million from $1.2 million.
At March 31, 2019, cash and cash equivalents were $95.5 million and investments were $71.2 million, for combined cash and investments of $166.7 million. Working capital was $198.1 million. The company reported no outstanding debt and had $50.0 million available under its senior revolving credit facility. Lease liabilities totaled $22.2 million, including a $1.1 million current portion.
Cash increased by $6.5 million during the quarter. Investing activities used $1.9 million, primarily reflecting purchases of investments and $1.0 million of capital expenditures. Financing activities used $0.1 million.
Material changes versus Q1 2018
- Revenue growth and the absence of the prior-year recall-related revenue and inventory reserves materially improved gross profit and gross margin.
- Operating results benefited from an $8.4 million reduction in SG&A expense. Q1 2018 included a $6.2 million one-time stock-based compensation charge related to the former CEO’s retirement.
- Stock-based compensation declined to $1.4 million from $7.6 million.
- The tax provision was $1.5 million at a 24.6% effective rate, compared with a $1.1 million tax benefit in Q1 2018, which reflected a windfall tax benefit associated with accelerated executive equity vesting.
- The company adopted ASC 842 lease accounting on January 1, 2019, recognizing right-of-use assets of $23.7 million and lease liabilities of $22.2 million. The adoption did not materially affect the statement of operations.
- The company recorded a $0.3 million impairment charge for HYALOSPINE after deciding not to renew its CE Mark because the product was outside the core strategic focus.
Guidance, outlook, risks, and unusual items
- Management expects 2019 orthobiologics revenue to decline from 2018, primarily because of U.S. ORTHOVISC and MONOVISC pricing pressure, partly offset by international CINGAL growth and the planned U.S. launch of an injectable HA-based surgical bone repair product in the second half of 2019.
- Surgical and dermal revenue are expected to increase in 2019, while other revenue is expected to decrease modestly and licensing, milestone, and contract revenue is expected to remain approximately flat.
- Research and development spending may increase as the company advances clinical trials, post-market studies, product development, and regulatory compliance activities.
- The FDA indicated that an additional Phase III trial would be required to support potential U.S. approval of CINGAL after the prior Phase III study did not meet its primary endpoint. The company was evaluating whether and how to proceed.
- The HYALOFAST U.S. clinical program continued, but enrollment strategies were being reassessed. The company expected to commercialize its cleared surgical bone repair product in the United States during the second half of 2019.
- The 2018 voluntary recall of certain HYAFF-based products was resolved during Q4 2018, and shipments resumed. The recall involved product shelf-life specifications and was not associated with an identified safety or efficacy issue in the filing.
- Material risks include regulatory approvals, clinical-trial outcomes, product commercialization, competition and technological change, intellectual-property protection, dependence on key personnel and commercial partners, product quality, foreign currency exposure, and pricing pressure.
- Mitek accounted for 72% of total revenue in Q1 2019, indicating significant customer concentration.
- Management stated that it had adequate resources to support the business for at least twelve months from the financial statement issuance date and was in compliance with its credit agreement.
- The filing reported no material changes to previously disclosed risk factors, no material legal proceedings expected to adversely affect the company, and no material off-balance-sheet arrangements.
Investor verification checklist
- Verify the sustainability of the 70% product gross margin after the benefit from the 2018 recall-related reserves has fully lapsed.
- Assess the impact of U.S. pricing declines for ORTHOVISC and MONOVISC on full-year orthobiologics revenue.
- Monitor the timing, commercial adoption, and profitability of the planned U.S. surgical bone repair product launch.
- Track the FDA pathway and potential cost, timing, and probability of an additional CINGAL Phase III trial.
- Evaluate customer concentration, particularly the 72% revenue contribution from Mitek.
- Review future research and development spending, clinical milestones, regulatory requirements, and potential impairment risks for intangible assets.
- Confirm the use and financial impact of the $50.0 million stock repurchase program announced on May 2, 2019, after quarter-end.