Anika Therapeutics, Inc. — FY2018 Form 10-K Summary
Business context and reporting period
Anika is a global orthopedic and regenerative-medicine company focused on products based on hyaluronic acid technology. Its portfolio spans orthobiologics, dermal, surgical, ophthalmic, and veterinary products. The filing covers the fiscal year ended December 31, 2018; fourth-quarter data is presented on an unaudited basis. The company adopted ASC 606 on January 1, 2018 using the modified retrospective method, with no material effect on revenue recognition.
- Orthobiologics generated 89% of product revenue, led by ORTHOVISC, MONOVISC, CINGAL, and regenerative products.
- Five customers represented 86% of product revenue; Mitek alone represented 73% and 75% of accounts receivable at year-end.
- The company completed its domestication from Massachusetts to Delaware in June 2018.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Product revenue | $105.5 million | $107.8 million | Down 2% |
| Total revenue | $105.6 million | $113.4 million | Down 7% |
| Product gross profit | $74.3 million | $80.4 million | Down 8% |
| Product gross margin | 70% | 75% | Down 5 percentage points |
| Operating income | $21.7 million | $45.7 million | Down 52% |
| Net income | $18.7 million | $31.8 million | Down 41% |
| Diluted EPS | $1.27 | $2.11 | Down 40% |
| Cash flow from operations | $34.9 million | $40.8 million | Down 14% |
- Approximate 2018 margins were 20.6% operating margin and 17.7% net margin, based on total revenue.
- Revenue mix: orthobiologics $93.6 million, surgical $5.5 million, other $6.1 million, and dermal $0.4 million.
- Cash, cash equivalents, and investments totaled $159.0 million at December 31, 2018, including $89.0 million of cash and $70.0 million of U.S. Treasury bills.
- Working capital was $191.7 million, compared with $193.3 million in 2017. Total assets were $279.0 million and stockholders’ equity was $263.6 million.
- No borrowings were outstanding under the $50.0 million senior revolving credit facility; the company reported compliance with its covenants and $50.0 million of available capacity.
- Capital expenditures were $4.7 million. Cash used in investing activities was $50.3 million, primarily reflecting purchases of investments.
- Cash used in financing activities was $28.9 million, including a $30.0 million accelerated share repurchase and $1.8 million of tax withholding payments related to vested equity awards.
Material changes versus the prior comparable period
- Total revenue declined primarily because 2017 included a one-time $5.0 million MONOVISC milestone payment from Mitek; 2018 licensing, milestone, and contract revenue was only $24,000.
- Product revenue declined modestly despite growth in U.S. MONOVISC and international CINGAL, due to U.S. viscosupplement pricing pressure, lower ORTHOVISC revenue, and the HYAFF-product recall.
- Dermal revenue fell 86% to $0.4 million following the recall. Surgical revenue increased 5%, and other product revenue increased 2%.
- Gross margin decreased because of recall-related inventory charges, other inventory reserves and write-offs, higher production costs, and product mix and pricing effects.
- Research and development expense decreased 3% to $18.2 million as CINGAL and HYALOFAST trial spending declined, although new product and pre-commercial development costs increased.
- Selling, general, and administrative expense increased 59% to $34.3 million, driven by $6.2 million of accelerated stock-based compensation associated with the former CEO’s retirement, CINGAL pre-launch market research, personnel costs, and professional fees.
- The effective tax rate fell to 19.3% from 31.1%, reflecting the lower federal corporate tax rate under the Tax Cuts and Jobs Act and a $1.5 million windfall tax benefit from employee equity awards.
- Net income in the first quarter was a loss of $6.7 million, while second-, third-, and fourth-quarter net income was $10.1 million, $7.6 million, and $7.7 million, respectively.
Outlook, commentary, risks, and unusual items
- Management expected 2019 orthobiologics revenue to decrease modestly because of U.S. ORTHOVISC and MONOVISC pricing declines, partly offset by international CINGAL growth and the planned U.S. launch of an injectable HA-based surgical bone-repair product.
- Management expected dermal revenue to recover toward pre-recall levels, surgical revenue to increase, and other revenue to grow in 2019.
- Research and development spending was expected to increase in 2019 and beyond, while 2019 SG&A was expected to approximate 2018 levels.
- The voluntary recall of certain HYALOFAST, HYALOGRAFT C, and HYALOMATRIX lots resulted in a $1.1 million revenue reserve, a $0.8 million inventory charge, and $0.3 million of recall-related expenses. Shipment resumed in the fourth quarter, and the matter was considered resolved without a material reserve adjustment.
- The second Phase III CINGAL U.S. study did not meet its primary six-month endpoint. The FDA indicated that an additional Phase III trial would be required for potential U.S. marketing approval, delaying the pathway and increasing expected development cost and timing uncertainty.
- The company received 510(k) clearance for its injectable surgical bone-repair product and expected a U.S. commercial launch during 2019 using a hybrid direct and partner model.
- Mitek’s ORTHOVISC agreement runs through December 2023, and the company remains substantially dependent on Mitek’s purchasing, pricing, reimbursement, and commercialization decisions.
- Other key risks include regulatory approval and compliance, clinical-trial execution, competition, reimbursement and pricing pressure, manufacturing and raw-material availability, intellectual-property protection, customer concentration, foreign exchange, and potential impairment of long-lived assets.
- Contractual commitments at year-end included $8.7 million of operating lease payments and $17.6 million of purchase commitments. Management expected adequate financial resources for at least the following twelve months.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Most important facts for investors to verify
- Whether U.S. pricing pressure on ORTHOVISC and MONOVISC continues and whether international CINGAL growth offsets that pressure.
- The timing, design, cost, and outcome of the additional FDA-required CINGAL Phase III trial.
- The commercial launch, adoption, reimbursement, and profitability of the surgical bone-repair product.
- Whether dermal revenue fully recovers after the HYAFF-product recall and whether additional quality or inventory charges arise.
- The sustainability of earnings excluding the 2017 MONOVISC milestone, 2018 recall costs, and the former CEO’s one-time equity compensation expense.
- The company’s dependence on Mitek, which represented 73% of 2018 product revenue, and the terms and renewal prospects of its distribution agreements.
- Future cash deployment, including share repurchases, research and development spending, investments, and potential acquisitions.