Anika Therapeutics, Inc. — FY2012 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2012; filed March 13, 2013. The filing is an annual report, with fourth-quarter information presented in unaudited quarterly data. Anika develops, manufactures, and commercializes hyaluronic-acid-based products for tissue protection, healing, and repair, including orthobiologics, dermal, ophthalmic, surgical, and veterinary products.
Financial performance and position
| Metric | FY2012 | FY2011 | Change |
|---|
| Total revenue | $71.36 million | $64.78 million | Up 10.2% |
| Product revenue | $68.01 million | $61.96 million | Up 9.8% |
| Licensing, milestone and contract revenue | $3.35 million | $2.82 million | Up 18.6% |
| Product gross profit | $39.02 million | $35.17 million | Up 10.9% |
| Product gross margin | 57.4% | 56.8% | Improved modestly |
| Income from operations | $19.72 million | $13.97 million | Up 41.2% |
| Net income | $11.76 million | $8.47 million | Up 38.9% |
| Diluted earnings per share | $0.82 | $0.62 | Up $0.20 |
| Cash flow from operations | $10.55 million | $10.17 million | Up $0.38 million |
- Net margin was approximately 16.5%, compared with approximately 13.1% in 2011.
- Cash and cash equivalents were $44.07 million at year-end, compared with $35.78 million in 2011. Working capital increased to $62.93 million from $49.60 million.
- Total debt was $9.60 million, including $1.60 million due within one year. The company made $1.60 million of principal repayments during 2012 and reported compliance with all debt covenants.
- Capital expenditures were approximately $1.50 million. Total contractual obligations were $23.22 million, including operating leases, purchase commitments, and debt payments.
- Total assets were $142.07 million and stockholders’ equity was $108.93 million at December 31, 2012.
Revenue mix and material changes
| Product group | FY2012 revenue | Change versus FY2011 | Share of product revenue |
|---|
| Orthobiologics | $49.95 million | Up 25% | 73.5% |
| Ophthalmic | $8.78 million | Down 20% | 12.9% |
| Surgical | $5.02 million | Up 1% | 7.4% |
| Veterinary | $2.87 million | Up 16% | 4.2% |
| Dermal | $1.38 million | Down 62% | 2.0% |
- Growth was led by domestic ORTHOVISC and broader orthobiologics sales. U.S. joint-health revenue increased 42%, while international orthobiologics revenue declined 21%, primarily because of economic weakness in Europe.
- Ophthalmic revenue declined mainly because Bausch & Lomb was transitioning AMVISC and AMVISC Plus production to another supplier. Bausch & Lomb represented 11% of product revenue in 2012, and management expects revenue from the account to fall significantly in 2013.
- Dermal revenue declined because of lower advanced wound-care sales in Italy, a shift to a distributor-based model, and weak U.S. distributor performance.
- Five customers represented approximately 82% of product revenue. DePuy Mitek alone represented 61.2%, compared with 47.1% in 2011.
- U.S. revenue represented 81.1% of total revenue, up from 74.7% in 2011; European revenue declined to 8.8% from 16.9%.
Operating changes, outlook, and unusual items
- The company closed its tissue-engineering facility in Abano Terme, Italy because it could not meet new European Medicines Agency standards for advanced therapy medicinal products. The plan included eliminating 12 positions and abandoning related assets and activities.
- Anika recorded approximately $2.5 million of fourth-quarter restructuring and impairment charges, including approximately $1.6 million of non-cash asset charges and $0.9 million of expected cash costs, primarily severance. Annualized savings are expected to be approximately $0.5 million, with completion targeted within the first six months of 2013.
- Research and development expense declined 13% to $5.4 million in 2012 because of clinical-trial timing. Management expects R&D expense to increase significantly in 2013 because of CINGAL clinical studies and other product-development programs.
- Management expects 2013 orthobiologics revenue to increase, surgical revenue to rise moderately, and HYVISC revenue to remain relatively flat. Gross margins may benefit from transferring additional Anika S.r.l. manufacturing to the Bedford facility, but U.S. margins remain subject to healthcare cost-control pressure.
- MONOVISC received a non-approvable decision from the FDA in December 2012 following the company’s appeal. Anika submitted a new PMA amendment in January 2013, which remained under FDA review at filing.
- Anika expected to begin a CINGAL clinical trial in the first half of 2013 to support a CE Mark submission. U.S. clearance efforts for Hyalofast and Hyalonect require additional data.
- The JNJ/DePuy Mitek ORTHOVISC agreement was extended through December 2018. Recognition of the original $27 million of upfront and milestone payments will end in 2013. The separate MONOVISC agreement provides for potential future regulatory, clinical, and sales milestones and royalties, subject to approval and launch.
- Merogel Injectable, withdrawn in 2011 because of a labeling error, resumed shipments in December 2012 after settlement with Medtronic. Anika is pursuing indemnification from Fidia through arbitration.
Risks and contingencies
- Regulatory approval risk is significant, particularly for MONOVISC, CINGAL, Hyalofast, Hyalonect, and other products requiring FDA or foreign approvals.
- Revenue concentration creates material customer risk, especially dependence on DePuy Mitek, Bausch & Lomb, and other large distributors. Loss, delay, or renegotiation of major customer orders could materially affect results.
- The company faces competition from larger pharmaceutical and medical-device companies with greater resources, established products, and regulatory experience.
- Manufacturing depends on key suppliers and regulatory compliance. Production interruptions, quality issues, raw-material shortages, or additional facility requirements could adversely affect results.
- International operations expose Anika to European economic weakness, government-funded healthcare receivable delays, labor issues, foreign exchange fluctuations, and changing reimbursement and regulatory requirements.
- The Genzyme patent litigation concerning MONOVISC was stayed pending related litigation; no loss accrual was recorded because management determined a contingent loss was not probable. DePuy Mitek assumed certain obligations under the MONOVISC agreement.
- The Fidia arbitration concerning Merogel Injectable losses and escrowed shares also had no recorded accrual because management determined a contingent loss was not probable.
- The company has variable-rate debt, with estimated annual cash-flow sensitivity of approximately $88,000 for each 1% change in interest rates on the $9.6 million outstanding balance.
Investor verification points
- Verify the sustainability of orthobiologics growth and whether the company can offset declining Bausch & Lomb ophthalmic revenue.
- Track FDA developments for MONOVISC and regulatory progress for CINGAL, Hyalofast, and Hyalonect.
- Assess customer concentration, particularly DePuy Mitek’s 61.2% share of product revenue and the terms of the Bausch & Lomb supply agreement.
- Confirm whether the Italian restructuring delivers the projected $0.5 million of annual savings without additional impairment or closure costs.
- Review cash conversion, accounts receivable collection in Italy, inventory levels, and the ability to fund increased R&D while repaying debt.
- Monitor the Genzyme litigation stay, Fidia arbitration, and any related indemnification or settlement exposure.
- Evaluate the effect of manufacturing transfers to Bedford on product gross margins and regulatory compliance.
