Anika Therapeutics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Anika Therapeutics is a global orthopedic and regenerative medicines company focused on hyaluronic acid-based products, including ORTHOVISC, MONOVISC, CINGAL, and HYALOFAST. The filing covers the three months ended March 31, 2018, with comparative results for the first quarter of 2017. Financial statements are unaudited.
Financial Performance and Position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $21.3 million | $23.4 million | Down 9% |
| Product revenue | $21.3 million | $23.4 million | Down 9% |
| Operating income (loss) | $(7.8) million | $8.0 million | Declined $15.8 million |
| Net income (loss) | $(6.7) million | $5.5 million | Declined $12.2 million |
| Basic and diluted EPS | $(0.46) | $0.38 basic; $0.37 diluted | Turned negative |
| Product gross profit | $13.4 million | $17.3 million | Down 22% |
| Product gross margin | 63% | 74% | Down 11 percentage points |
| Cash flow from operations | $9.6 million | $15.5 million | Down $5.9 million |
SG&A expense increased 218% to $16.1 million, primarily reflecting $6.2 million of accelerated stock-based compensation associated with the former CEO’s retirement, CEO-related costs, CINGAL U.S. prelaunch activities, recall-related expenses, and higher personnel costs. Research and development expense increased 22% to $5.2 million.
Cash and cash equivalents were $141.8 million at March 31, 2018, compared with $133.3 million at December 31, 2017. Cash, cash equivalents, and investments totaled $163.0 million, and working capital was $194.1 million. The company reported $50.0 million of available capacity under its senior revolving credit facility and stated that it was in compliance with the credit agreement. The filing does not provide a clear outstanding debt balance.
Total assets were $284.3 million and stockholders’ equity was $263.8 million at March 31, 2018. Capital expenditures were $2.5 million. Cash increased $8.5 million during the quarter after operating, investing, financing, and foreign-exchange effects.
Material Changes Versus the Prior Comparable Period
- Revenue decreased primarily because of lower ORTHOVISC sales, HYAFF-based product recall effects, and the timing of distributor orders.
- Orthobiologics revenue declined 4% to $19.5 million; MONOVISC revenue increased 29% and international CINGAL demand remained strong, partially offsetting ORTHOVISC declines.
- Dermal product revenue was $(0.5) million versus $0.4 million, reflecting the voluntary recall and related revenue reserves.
- Gross margin fell because of raw-material reserves, recall-related inventory write-offs, higher HYAFF production costs, and product mix and pricing pressures.
- Stock-based compensation increased to $7.6 million from $1.2 million, including the $6.2 million one-time charge related to the former CEO’s retirement.
- The company adopted ASC 606 revenue recognition on January 1, 2018 using the modified retrospective method. Adoption had no material impact and produced no cumulative-effect adjustment.
Outlook, Risks, and Unusual Items
- Management expects 2018 orthobiologics revenue to remain at a level similar to 2017, with ORTHOVISC declines offset by MONOVISC and international CINGAL growth.
- Surgical revenue is expected to increase modestly, while dermal revenue is expected to decline because of the HYAFF-based product recall. Other revenue is expected to increase, primarily from ophthalmic products.
- Management expects product gross margin to improve during 2018 as production and inventory issues are addressed, although the first-quarter margin may not represent the remainder of the year.
- Research and development spending and SG&A are expected to increase in 2018, including spending on CINGAL, HYALOFAST, clinical programs, and U.S. commercial capabilities.
- The company completed six-month follow-up for its second CINGAL Phase III trial in April 2018 and expects to submit a U.S. NDA as expeditiously as possible. Regulatory approval timing remains uncertain.
- The notified body suspended the MONOVISC CE Mark effective March 27, 2018 because of regulatory and administrative issues, not safety or efficacy concerns. Management expected resolution in the second quarter, but disclosed that reinstatement is not guaranteed.
- On May 2, 2018, the company announced a voluntary recall of certain lots of HYALOFAST, HYALOGRAFT C, and HYALOMATRIX after quality testing indicated that certain measures might not be maintained throughout shelf life. No safety or efficacy issue had been identified at the filing date.
- The recall resulted in a $1.1 million revenue reserve, a $0.6 million inventory charge, and a $0.4 million accrual for future recall administration costs. Management expected production and shipments to resume by the end of 2018, but stated that the ultimate financial impact could vary materially.
- The former CEO retired on March 9, 2018. The company accrued $1.7 million of severance benefits over 18 months and entered into a $0.3 million one-year consulting agreement.
- Management stated that existing cash, investments, operating cash flow, and available credit should fund operations for at least the next twelve months. Future financing could nevertheless be required if internal resources are insufficient.
Most Important Facts for Investors to Verify
- Progress and total cost of the HYAFF-based product recall, including the timing of resumed production and shipments.
- Status and reinstatement timing of the MONOVISC CE Mark in Europe.
- Whether MONOVISC and CINGAL growth can offset continued ORTHOVISC declines and distributor order variability.
- Whether product gross margin improves from the reported 63% as manufacturing and inventory issues are remediated.
- Actual future SG&A, research and development, CEO-related, and recall-related cash expenditures.
- Timing and outcome of the CINGAL U.S. NDA submission and FDA review.
- Outstanding borrowings and covenant capacity under the senior revolving credit facility, which are not clearly quantified in the filing.