Anika Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Anika is a global orthopedic and regenerative medicines company focused on hyaluronic-acid-based products, including ORTHOVISC, MONOVISC, CINGAL and HYALOFAST. This unaudited Form 10-Q covers the three and nine months ended September 30, 2018, compared with the corresponding 2017 periods.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $26.8 million | $27.2 million | $78.6 million | $84.0 million |
| Product revenue | $26.8 million | $27.2 million | $78.6 million | $78.9 million |
| Operating income | $8.6 million | $10.3 million | $12.0 million | $36.0 million |
| Net income | $7.6 million | $6.9 million | $11.0 million | $23.7 million |
| Diluted EPS | $0.53 | $0.46 | $0.74 | $1.58 |
| Product gross margin | 69% | 77% | 69% | 76% |
| Operating cash flow | Not separately provided | Not separately provided | $24.9 million | $33.8 million |
Q3 operating margin was approximately 32%, compared with 38% in the prior-year quarter. Nine-month operating margin was approximately 15%, compared with 43% in 2017. Net margin was approximately 28% in Q3 2018 versus 25% in Q3 2017, and approximately 14% for the first nine months versus 28% in the prior-year period.
- Orthobiologics revenue increased 2% for the nine-month period to $69.8 million, supported by MONOVISC and international CINGAL growth, partly offset by lower ORTHOVISC revenue.
- Nine-month surgical revenue declined 16% to $3.7 million, while dermal revenue declined 87% to $0.2 million, primarily reflecting the HYAFF-based product recall.
- Research and development expense declined 3% for the first nine months to $14.1 million, primarily following completion of the CINGAL 16-02 study.
- SG&A expense increased 90% to $28.2 million for the first nine months, reflecting former CEO retirement costs, recall-related costs, higher personnel and professional fees, and increased marketing expense.
- The effective tax rate was 16.4% for Q3 and 14.7% for the first nine months, compared with 34.6% in both 2017 periods, primarily due to the Tax Cuts and Jobs Act and a $1.6 million windfall tax benefit from employee equity-award exercises.
At September 30, 2018, cash and cash equivalents were $81.8 million and investments were $67.2 million, for combined cash and investments of approximately $149.0 million. Working capital was $186.3 million. The company reported no borrowings and had $50.0 million available under its revolving credit facility; it was in compliance with the credit agreement.
Cash declined by $51.4 million during the first nine months. Operating cash flow of $24.9 million was more than offset by $47.7 million of investing outflows and $28.8 million of financing outflows, including the $30.0 million accelerated share repurchase. Capital expenditures were $4.5 million.
Material changes versus the prior comparable period
- Total revenue declined 1% in Q3 and 6% for the first nine months. The nine-month comparison was significantly affected by the $5.0 million MONOVISC milestone recognized in 2017; 2018 licensing, milestone and contract revenue was only $18 thousand.
- Product gross margin fell to 69% from 77% in Q3 and to 69% from 76% for the first nine months, due to higher production costs, pricing and mix, inventory reserves, write-offs and recall-related charges.
- Nine-month net income fell 54%, principally because of lower operating income, higher SG&A and the absence of the prior-year milestone, partially offset by lower taxes.
- The company repurchased 806,818 shares for $30.0 million under an accelerated share repurchase agreement, reducing shares outstanding to approximately 14.2 million at October 18, 2018.
- The company completed its domestication from Massachusetts to Delaware in June 2018 and increased authorized common shares from 60 million to 90 million.
- ASC 606 revenue guidance was adopted January 1, 2018 using the modified retrospective method, with no material impact on revenue or timing of recognition.
Guidance, outlook, risks and unusual items
- Management expected 2018 orthobiologics revenue to increase, driven by MONOVISC and international CINGAL, while ORTHOVISC pricing declines and the recall would be headwinds. Surgical revenue was expected to decrease modestly, dermal revenue to decline, and other revenue to increase.
- Management expected product gross margin to improve during 2018 as remediation and mitigation activities progressed.
- The voluntary recall announced in May 2018 affected certain lots of HYALOFAST, HYALOGRAFT C and HYALOMATRIX because of shelf-life quality concerns. Management reported no indication of a safety or efficacy issue, but recorded a $1.1 million revenue reserve, $0.8 million of inventory charges and $0.6 million of future recall administration and remediation costs. The company expected to resume production and shipment by year-end 2018.
- The CINGAL 16-02 Phase III study did not meet its primary endpoint at six months against the approved steroid component, although substantial pain reduction was observed. The result could delay or increase the cost of potential U.S. approval. The company ceased additional U.S. direct-sales pre-launch activities while evaluating its regulatory pathway.
- Management expected R&D spending to increase in 2018 and thereafter as it advances CINGAL, HYALOFAST, bone repair, tennis-elbow and other regenerative medicine programs.
- Upon the former CEO’s retirement, equity awards vested immediately, producing a one-time $6.2 million stock-based compensation expense. Total nine-month stock-based compensation expense was $10.1 million versus $3.9 million in 2017.
- The company stated that available cash, investments, operating cash flow and credit capacity were adequate to support operations for at least the twelve months following issuance of the financial statements.
- Key risks include regulatory approval delays, CINGAL clinical and commercialization uncertainty, product quality and recall exposure, competition, dependence on distributors and partners, intellectual-property protection, foreign-currency exposure and the need to fund ongoing development.
Important facts for investors to verify
- Whether recall remediation was completed and products resumed production and shipment by the expected year-end 2018 target, and whether additional reserves were required.
- The FDA strategy, timing, cost and probability of a U.S. regulatory pathway for CINGAL following the failed primary endpoint.
- Whether MONOVISC, CINGAL and other orthobiologics growth can offset ORTHOVISC pricing pressure and the loss of milestone revenue.
- The sustainability of the 69% product gross margin after recall, inventory and manufacturing issues are resolved.
- The composition and maturity profile of the $67.2 million investment portfolio and the terms and availability of the $50.0 million revolving credit facility.
- The effect of the CEO retirement costs, stock-based compensation and share repurchase on future earnings and diluted share count.
- The company’s expected adoption impact from the new lease accounting standard, which management anticipated would create material additional lease assets and liabilities.