Anika Therapeutics, Inc. — FY2017 Form 10-K Summary
Business context and reporting period
Anika is a global orthopedic medicines company focused on hyaluronic acid-based products for osteoarthritis, cartilage repair, wound care, surgical adhesion prevention, ENT, ophthalmic, and veterinary applications. The filing covers the fiscal year ended December 31, 2017; the reported fourth quarter is included in the annual results.
Orthobiologics remained the core business, representing 87% of product revenue. The company primarily uses distributor and strategic-partner channels, with a planned direct-sales model for U.S. CINGAL if FDA approval is obtained.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $113.4 million | $103.4 million | 10% |
| Product revenue | $107.8 million | $102.9 million | 5% |
| Licensing, milestone and contract revenue | $5.6 million | $0.4 million | Increase of $5.2 million |
| Product gross profit | $80.4 million | $78.9 million | 2% |
| Product gross margin | 75% | 77% | Down 2 percentage points |
| Income from operations | $45.7 million | $50.6 million | Down 10% |
| Net income | $31.8 million | $32.5 million | Down 2% |
| Diluted EPS | $2.11 | $2.15 | Down 2% |
| Cash flow from operations | $40.8 million | $24.4 million | Increase of $16.4 million |
| Cash, cash equivalents and investments | $157.3 million | $124.8 million | Increase of $32.5 million |
Research and development expense rose 75% to $18.8 million, primarily due to CINGAL and HYALOFAST clinical trials. Selling, general and administrative expense increased 20% to $21.5 million. The effective tax rate declined to 31.1% from 36.0%, primarily reflecting the Tax Cuts and Jobs Act and related deferred-tax revaluation.
At December 31, 2017, working capital was $193.3 million and total stockholders’ equity was $263.5 million. The company had no outstanding borrowings under its $50.0 million senior revolving credit facility. Total long-term liabilities were $6.1 million.
Material changes versus the prior comparable period
- Product revenue growth was led by MONOVISC and increased international CINGAL sales. Orthobiologics revenue increased 5% to $93.8 million.
- The company recognized a $5.0 million milestone payment under the Mitek MONOVISC agreement after U.S. end-user sales exceeded $100 million over a consecutive 12-month period.
- Gross margin declined because of inventory write-offs and start-up costs associated with manufacturing insourcing.
- Operating income and net income declined despite higher revenue because clinical-development, personnel, professional-fee, and doubtful-account expenses increased.
- Operating cash flow improved substantially, while investing cash use increased to $12.5 million. Capital expenditures were $9.0 million.
- The company completed its HYAFF manufacturing insourcing project in the fourth quarter. Total project costs were $23.0 million; products were previously manufactured by a third-party contractor in Italy.
- Cash provided by financing activities was $0.3 million in 2017, compared with $24.0 million of cash used in 2016 for the completed accelerated share repurchase program.
Guidance, outlook, commentary and unusual items
- Management expected 2018 orthobiologics revenue to increase, driven by MONOVISC growth, new or expanded international launches, and increased international CINGAL sales.
- Management expected 2018 licensing, milestone and contract revenue to be approximately equal to 2017, although the amount remains dependent on contractual milestones.
- Management expected modest 2018 growth in dermal, surgical, and other product revenue.
- Management expected gross margin in 2018 to remain at similar levels, with potential improvement from higher volume and manufacturing efficiencies.
- Research and development and SG&A expenses were expected to increase in 2018 as clinical trials, product development, CINGAL pre-launch activities, and technology-platform implementation continued.
- The second U.S. Phase III CINGAL trial enrolled 576 patients by October 2017. Six-month follow-up was expected in the second quarter of 2018, followed by an NDA submission to the FDA as expeditiously as possible.
- The FDA granted 510(k) clearance in December 2017 for an injectable HA-based bone-repair treatment.
- The Tax Cuts and Jobs Act generated a $2.3 million deferred-tax benefit and contributed to the lower 2017 effective tax rate. The reported tax effects were provisional under SAB 118.
- Quarterly product revenue was $28.9 million in the fourth quarter of 2017, compared with $28.3 million in the fourth quarter of 2016; quarterly net income was $8.1 million versus $8.1 million.
Principal risks and contingencies
- Customer concentration is substantial: Mitek accounted for 73% of 2017 product revenue and 68% of year-end accounts receivable; five customers accounted for 83% of product revenue.
- Regulatory approval remains a key risk, particularly for U.S. CINGAL and other products under clinical development. Delays, unfavorable labeling, additional studies, or withdrawal of approvals could materially affect results.
- The company faces intense competition from larger pharmaceutical and medical-device companies with greater financial, commercial, and regulatory resources.
- Manufacturing disruption, dependence on key raw-material suppliers, inventory obsolescence, and execution risks from the new ERP system could affect operations.
- Revenue and earnings are subject to quarterly sales volatility, third-party reimbursement pressures, healthcare-industry consolidation, foreign exchange movements, and reliance on distributors.
- Outstanding contractual commitments included $10.6 million of operating-lease obligations and $22.1 million of purchase commitments as of December 31, 2017.
- Routine legal proceedings were not expected to have a material effect. Product-liability insurance was $5.0 million per occurrence and $5.0 million in the aggregate.
- The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the timing, clinical results, FDA review, and commercial implications of the CINGAL NDA submission.
- Assess whether MONOVISC and international CINGAL growth can offset the absence or variability of milestone revenue.
- Monitor Mitek’s purchasing levels, agreement terms, and the December 2023 expiration of the ORTHOVISC agreement.
- Evaluate whether the Bedford manufacturing transition produces the expected cost efficiencies and whether gross margin recovers.
- Track the cash impact of rising clinical-trial, R&D, SG&A, ERP, and facility costs.
- Review the collectability of receivables and the increase in the doubtful-account allowance from $0.2 million to $1.9 million.
- Verify future regulatory, reimbursement, patent, supply-chain, and product-liability developments that could materially alter the outlook.