Anika Therapeutics, Inc. 2013 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Anika develops, manufactures, and commercializes hyaluronic-acid-based products for tissue protection, healing, and repair, including orthobiologic, dermal, surgical, ophthalmic, and veterinary products. This unaudited Form 10-Q covers the three and six months ended June 30, 2013, compared with the corresponding 2012 periods.
The company substantially completed the restructuring and closure of its tissue-engineering facility in Abano Terme, Italy, initiated because of European Medicines Agency regulatory requirements. Anika reported one operating segment.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $20.8 million, up 6% | $36.1 million, up 6% |
| Product revenue | $20.1 million, up 6% | $34.6 million, up 6% |
| Operating income | $9.4 million, up 53% | $14.4 million, up 57% |
| Net income | $5.9 million, up 58% | $9.0 million, up 59% |
| Diluted earnings per share | $0.40 | $0.62 |
| Product gross margin | 69%, versus 57% | 68%, versus 55% |
Revenue growth was led by orthobiologics, partially offset by a substantial decline in ophthalmic revenue. Licensing, milestone, and contract revenue was $0.8 million in the quarter and $1.5 million year to date.
Six-month operating cash flow was $9.6 million, compared with $3.5 million in 2012. Investing activities provided $0.1 million, primarily from proceeds on asset sales, while financing activities provided $0.3 million, including stock-option exercise proceeds. Cash increased to $54.1 million from $44.1 million at December 31, 2012.
At June 30, 2013, working capital was approximately $74.8 million. Total debt was $8.8 million, including $1.6 million due within one year, under a variable-rate unsecured credit agreement. The debt bears interest at LIBOR plus 1.25% or the lender’s prime rate, at the company’s option, and includes a $5.2 million final installment due December 31, 2015.
Material Changes Versus the Prior Comparable Period
- Orthobiologics revenue increased 51% in the quarter and 32% year to date, driven by ORTHOVISC and MONOVISC sales, U.S. market penetration, and stronger international sales.
- Ophthalmic revenue decreased 91% in the quarter and 79% year to date because the prior-year period included approximately $5 million of unusually high Bausch & Lomb demand.
- Product gross margin expanded to 69% in the quarter and 68% year to date from 57% and 55%, respectively, due to higher volume, manufacturing efficiencies, favorable product mix, elimination of duplicate facility costs, and the discontinuation of unprofitable tissue-engineering operations.
- Research and development expense increased 41% in the quarter and 21% year to date, reflecting commencement of the Phase III CINGAL clinical trial.
- Selling, general, and administrative expense decreased 17% in the quarter and 1% year to date, primarily due to cost-reduction initiatives.
- Restructuring credits of $0.1 million in the quarter and $0.2 million year to date resulted from sales of previously impaired equipment. The remaining restructuring accrual was $0.3 million at June 30, 2013.
- Debt declined by $0.8 million from year-end 2012 following scheduled principal payments.
Guidance, Outlook, Risks, and Unusual Items
- Management expected 2013 joint-health, dermal, and HYVISC veterinary revenue to exceed 2012 levels, while expecting ophthalmic revenue to be lower under the current Bausch & Lomb supply agreement.
- Management stated that the company had adequate financial resources to support its business for the next twelve months.
- R&D spending was expected to increase as CINGAL patient enrollment progressed and new products advanced.
- MONOVISC’s U.S. premarket approval amendment, submitted in February 2013 after the FDA upheld a prior non-approvable decision, remained under FDA review.
- Anika commenced the CINGAL clinical trial during the second quarter of 2013 to support a CE Mark submission.
- The Genzyme patent litigation concerning MONOVISC remained stayed. Management considered related contingent losses not probable and recorded no accrual; DePuy Mitek had assumed certain related obligations.
- An arbitration proceeding with Fidia concerning indemnification related to the withdrawn Merogel Injectable product and escrowed shares remained unresolved. Management considered potential losses not probable and recorded no accrual.
- The company identified regulatory approval, commercialization, competition, intellectual-property protection, reimbursement, clinical-trial execution, foreign-currency exposure, variable interest rates, and litigation as significant risks.
- The filing states that product gross margin in the second quarter may not be indicative of the remainder of 2013 because of product-mix variability.
Important Facts for Investors to Verify
- Confirm the sustainability of the 68% year-to-date product gross margin after restructuring benefits and favorable mix effects.
- Monitor whether orthobiologics growth offsets the anticipated decline in ophthalmic revenue.
- Track FDA review of the MONOVISC PMA amendment and the progress, enrollment, cost, and regulatory path of the CINGAL trial.
- Review the maturity schedule and covenant requirements for the $8.8 million variable-rate debt, including the $5.2 million 2015 final installment.
- Assess potential exposure from the stayed Genzyme litigation and the Fidia arbitration, for which no loss accrual was recorded.
- Evaluate working-capital trends, particularly the increase in inventories to $10.4 million and the company’s ability to convert operating profits into cash.
- Consider the effect of foreign-currency translation, which reduced comprehensive income by $0.4 million year to date.