Anika Therapeutics, Inc. Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014; filed November 5, 2014. The unaudited consolidated statements cover Anika and its subsidiaries. Anika develops, manufactures, and commercializes hyaluronic-acid-based products for tissue protection, healing, and repair across orthobiologic, dermal, surgical, ophthalmic, and veterinary markets.
Financial Performance and Position
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Total revenue | $22.1 million | $17.8 million | $82.3 million | $53.8 million |
| Product revenue | $22.0 million | $17.0 million | $57.6 million | $51.6 million |
| Licensing, milestone and contract revenue | $0.1 million | $0.7 million | $24.7 million | $2.2 million |
| Income from operations | $10.3 million | $7.8 million | $49.4 million | $22.2 million |
| Net income | $6.2 million | $5.0 million | $30.5 million | $13.9 million |
| Diluted EPS | $0.40 | $0.33 | $1.97 | $0.95 |
| Product gross margin | 74% | 68% | 73% | 68% |
Cash flow and liquidity: Nine-month operating cash flow was $25.2 million versus $17.2 million in the prior-year period. Investing cash flow was negative $20.9 million, primarily due to approximately $20.0 million of marketable-securities purchases and $0.9 million of capital expenditures. Financing cash flow was positive $4.3 million, including stock-option exercise proceeds and related tax benefits, partially offset by $6.3 million of minimum tax withholding on share-based awards.
At September 30, 2014, cash and cash equivalents were $71.8 million, marketable securities were $20.0 million, and total cash, cash equivalents, and investments were approximately $91.8 million. Working capital was approximately $122.2 million. The filing reports no debt principal payments during the 2014 period and states that existing resources are adequate for at least the next twelve months.
Total assets were $185.5 million compared with $156.0 million at December 31, 2013. Stockholders’ equity was $169.7 million versus $135.6 million. Inventory increased to $13.6 million from $11.0 million, reflecting anticipated future demand. Accumulated other comprehensive loss increased primarily because of a $1.9 million unfavorable foreign-currency translation adjustment for the nine-month period.
Material Changes Versus the Prior Comparable Period
- Q3 total revenue increased 24%; nine-month revenue increased 53%. Product revenue increased 29% in Q3 and 12% year to date.
- Orthobiologics revenue increased 47% in Q3 and 20% year to date, primarily from MONOVISC, including the U.S. launch in April 2014.
- Nine-month licensing, milestone, and contract revenue included a $17.5 million MONOVISC milestone, approximately $2.2 million of previously deferred upfront consideration, and a $5.0 million milestone recognized in Q2 upon the first U.S. commercial sale.
- Operating income increased 32% in Q3 and 123% year to date; net income increased 24% and 119%, respectively. Year-to-date results benefited materially from MONOVISC-related revenue.
- Product gross margin improved to 74% in Q3 and 73% year to date from 68% in both prior-year periods, attributed to product mix, materials-cost reductions, and manufacturing efficiencies.
- R&D expense increased 24% in Q3 and 22% year to date. SG&A expense increased 27% in Q3 and 8% year to date.
- Ophthalmic revenue declined 74% in Q3 and 67% year to date because Bausch & Lomb delayed contractual minimum purchases. The supply agreement expires at year-end 2014 and will not be renewed.
- Veterinary revenue declined 37% in Q3 and 24% year to date, reflecting order timing and a slight decline in the number of U.S. performance horses.
Outlook, Commentary, Risks, and Unusual Items
- Management expected 2014 orthobiologics and surgical revenue to exceed 2013 levels and expected fourth-quarter dermal revenue to improve from Q3. Veterinary revenue was expected to be slightly lower, while ophthalmic revenue was expected to decline.
- Management expected R&D spending to increase as new products are developed and expected general and administrative expenses to increase to support domestic and international growth. The filing does not provide quantified full-year revenue or earnings guidance.
- CINGAL Phase III enrollment was completed in February 2014 and final patient follow-up was completed in September 2014. Management expected to submit a CE Mark application by December 31, 2014, or shortly thereafter.
- HYALOFAST received a proposed FDA investigational-device protocol submission in Q2 2014; management planned to begin a Phase III trial in 2015.
- The Genzyme patent litigation concerning MONOVISC was dismissed with prejudice on March 10, 2014. The case is terminated.
- The company completed its prior Italian tissue-engineering restructuring. No restructuring credits were recorded in 2014, compared with credits of $0.2 million in Q3 2013 and $0.4 million in the first nine months of 2013.
- Key risks include regulatory approvals and compliance, product development and clinical-trial execution, commercialization and reimbursement, competition, intellectual-property protection, dependence on distribution and licensing partners, foreign-currency exposure, and potential litigation.
- The company identified no material changes to previously disclosed risk factors, no material changes to contractual obligations outside the ordinary course, and no material off-balance-sheet arrangements other than operating leases.
- The filing notes that the federal R&D tax credit was unavailable in 2014, contributing to higher effective tax rates of 40% in Q3 and 38% year to date versus 36% and 37% in the comparable 2013 periods.
- The company disclosed a nonmaterial revision to the prior six-month cash-flow presentation, reclassifying $2.5 million of tax benefits from operating to financing activities without changing net cash or the statement of operations.
Investor Verification Items
- Verify the sustainability of MONOVISC sales and distinguish recurring product revenue from the $24.7 million of 2014 licensing and milestone revenue.
- Assess the effect of the Bausch & Lomb contract expiration on ophthalmic revenue and future manufacturing utilization.
- Review CINGAL regulatory submission timing, clinical results, and potential commercialization requirements.
- Monitor orthobiologics growth, product mix, and whether the 73% year-to-date product gross margin is sustainable.
- Reconcile liquidity using cash, marketable securities, working capital, inventory growth, and expected R&D and capital expenditures.
- Evaluate foreign-currency effects, particularly the $1.9 million year-to-date translation loss and the company’s Italian operations.
- Review the outstanding tax examinations, indemnification obligations, product warranties, and other legal proceedings.
- Consider the impact of stock-based compensation, option exercises, share dilution, and approximately $4.2 million of unrecognized equity-compensation cost.