Anika Therapeutics, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Anika is a global joint-preservation company focused on osteoarthritis pain management, regenerative solutions, soft-tissue repair, and bone-preserving joint technologies. The company completed the acquisitions of Parcus Medical on January 24, 2020 and Arthrosurface on February 3, 2020, expanding its orthopedic joint-preservation and restoration portfolio.
Financial performance and liquidity
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $31.7 million | $29.7 million | $97.8 million | $84.8 million |
| Net income (loss) | $(6.4) million | $9.2 million | $(8.3) million | $23.1 million |
| Diluted EPS | $(0.45) | $0.64 | $(0.59) | $1.62 |
| Product gross profit | $17.3 million | $23.7 million | $52.3 million | $64.7 million |
| Product gross margin | 55% | 80% | 53% | 76% |
| Adjusted EBITDA | $4.9 million | $14.9 million | $20.0 million | $38.0 million |
- Q3 product revenue increased 7% year over year, while nine-month product revenue increased 15%. Orthopedic Joint Preservation and Restoration revenue contributed $11.7 million in Q3 and $26.2 million for nine months, compared with $0.5 million and $1.5 million, respectively, in the prior-year periods.
- Joint Pain Management revenue declined 33% in Q3 and 14% for nine months, primarily due to COVID-19-related reductions in elective procedures and customer ordering patterns.
- Operating loss was $7.9 million in Q3 and $10.4 million for nine months, compared with operating income of $12.0 million and $29.4 million, respectively, in 2019.
- Research and development expense increased 25% in Q3 and 26% for nine months. SG&A increased 111% in Q3 and 98% for nine months, primarily due to acquisitions, sales infrastructure, and incentive compensation.
- Cash provided by operating activities was $10.5 million for the nine months, down from $24.0 million in 2019. Cash used in investing activities was $88.1 million, including $93.9 million of acquisition consideration.
- At September 30, 2020, cash and cash equivalents were $104.2 million, investments were $20.5 million, and total liquidity including investments was $124.8 million. Working capital was $170.7 million.
- The company had $25.0 million outstanding under its revolving credit facility after drawing $50.0 million in April and repaying $25.0 million during Q3. The facility matures in October 2022 and permits an additional $50.0 million accordion commitment, subject to conditions.
- Contingent consideration liabilities related to the acquisitions totaled $52.9 million at September 30, 2020. Potential earn-out payments under the acquisition agreements total up to $100 million through 2022.
Material changes versus the prior comparable periods
- Revenue growth from the acquisitions was more than offset at the profit level by COVID-19 effects, unfavorable product mix, purchase-accounting charges, and higher operating expenses.
- Acquisition-related inventory fair-value step-up and acquired-intangible amortization increased cost of product revenue by approximately $4.8 million in Q3 and $11.7 million for nine months. A $1.9 million inventory reserve was also recorded for legacy products whose CE Mark renewals will not be pursued.
- The company recorded an $18.1 million non-cash goodwill impairment charge in Q1 2020 for the Parcus Medical and Arthrosurface reporting unit. No additional impairment trigger was identified through September 30.
- The fair value of contingent consideration increased $4.2 million in Q3, producing an expense, but declined $16.2 million for the nine-month period, producing a net benefit. The changes primarily reflected revised revenue expectations, COVID-19 impacts, passage of time, and discount-rate changes.
- Cash and investments declined from $184.9 million at December 31, 2019 to $124.8 million at September 30, 2020, principally because of the acquisitions and lower operating cash generation.
- The company repurchased no shares during Q3. Of the $50 million authorized repurchase program, $20 million remained available for open-market purchases at September 30, 2020.
Outlook, management commentary, risks, and unusual items
- Management reported that elective-procedure volumes partially recovered in the second and third quarters, with demand above initial COVID-19 expectations, but continued infection increases and regionally varying restrictions make future results difficult to predict.
- The company does not provide a specific full-year revenue or earnings forecast in the filing. Management expects to continue investing significant resources in research and development, clinical trials, commercial capabilities, and product launches.
- The CINGAL pilot study restarted in September 2020, with the first patient enrolled and nine active sites. HYALOFAST Phase III enrollment also resumed, with sites activated in Indonesia and planned expansion to the Philippines and Mexico.
- On October 15, 2020, after the quarter end, the FDA cleared the WRISTMOTION Total Arthroplasty System, triggering and shortly thereafter resulting in payment of a $5 million regulatory milestone under the Arthrosurface agreement.
- Key risks include renewed declines in elective procedures, clinical-trial and regulatory delays, supply-chain and manufacturing disruptions, further goodwill or intangible-asset impairments, changes in acquisition earn-out estimates, customer concentration, and dependence on key personnel.
- Mitek represented 48% of Q3 revenue and 52% of nine-month revenue, compared with 71% and 70% in the corresponding 2019 periods.
- Management stated that disclosure controls were effective. Internal-control integration for the acquired businesses remained ongoing, particularly for purchase accounting, disclosures, and goodwill impairment assessments.
Most important facts for investors to verify
- Whether elective-procedure volumes and Joint Pain Management revenue recover without renewed COVID-19 restrictions.
- The sustainability of revenue and margins from Parcus Medical and Arthrosurface after acquisition-related inventory step-up and amortization effects subside.
- The likelihood and timing of the remaining acquisition earn-out obligations, including the $5 million WRISTMOTION milestone and up to $100 million of total potential milestones.
- Whether additional goodwill or intangible-asset impairments arise if recovery assumptions, revenue forecasts, or discount rates deteriorate.
- Progress, enrollment, and regulatory prospects for the CINGAL pilot study, HYALOFAST Phase III trial, and other pipeline programs.
- Liquidity after acquisition spending, reduced operating cash flow, $25 million of outstanding debt, and ongoing commercial and research investments.
- Dependence on Mitek and the company’s ability to diversify revenue through its acquired products and expanded commercial infrastructure.