Anika Therapeutics, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Anika Therapeutics is an orthopedic joint preservation, restoration and regenerative solutions company. The unaudited filing covers the three and six months ended June 30, 2020, compared with the same periods in 2019. The company operates as one reportable segment and had 14.2 million shares outstanding as of July 27, 2020.
In January and February 2020, Anika acquired Parcus Medical and Arthrosurface for estimated total purchase consideration of $75.1 million and $90.3 million, respectively. The acquisitions expanded the company into sports medicine, surgical repair, joint implants and joint preservation.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $30.7 million, versus $30.4 million | $66.1 million, versus $55.1 million |
| Product revenue | $30.7 million, up 1% | $66.1 million, up 20% |
| Net income (loss) | $(7.7) million, versus $9.4 million | $(1.9) million, versus $13.9 million |
| Diluted EPS | $(0.54), versus $0.67 | $(0.13), versus $0.98 |
| Product gross margin | 45%, versus 78% | 53%, versus 74% |
| Adjusted EBITDA | $5.6 million, versus $14.8 million | $15.1 million, versus $23.2 million |
| Adjusted diluted EPS | $0.09, versus $0.67 | $0.56, versus $0.98 |
- Second-quarter revenue was approximately flat year over year. Joint Pain Management revenue declined 16% to $22.2 million, primarily due to COVID-19, while Orthopedic Joint Preservation and Restoration revenue increased to $6.6 million from $0.8 million because of the acquisitions.
- Six-month revenue growth was driven by $14.5 million from Orthopedic Joint Preservation and Restoration products, compared with $1.0 million in the prior-year period.
- Gross margin declined because of acquisition-related inventory fair-value step-up, acquired-intangible amortization and a $1.9 million inventory reserve associated with products for which the company will not pursue CE Mark renewals.
- Research and development expense increased to $4.5 million in the quarter and $10.6 million year to date. Selling, general and administrative expense increased to $14.6 million and $29.0 million, respectively, primarily reflecting acquired commercial infrastructure, acquisition costs and product rationalization.
- The company recorded an $18.1 million non-cash goodwill impairment charge in the first quarter related to the Parcus Medical and Arthrosurface reporting unit.
- Contingent consideration liabilities totaled $48.8 million at June 30, 2020. The company recorded a $4.2 million expense in the second quarter and a $20.3 million year-to-date benefit from changes in fair value.
Cash Flow, Liquidity and Capital Structure
| Metric | June 30, 2020 | December 31, 2019 |
|---|---|---|
| Cash and cash equivalents | $116.7 million | $157.5 million |
| Investments | $27.6 million | $27.5 million |
| Cash, cash equivalents and investments | $144.4 million | $184.9 million |
| Working capital | $193.4 million | $218.0 million |
| Long-term debt | $50.0 million | None |
- Six-month operating cash flow was $4.6 million, down from $13.9 million in 2019.
- Investing cash flow was $(94.8) million, principally reflecting $93.9 million of cash paid for the two acquisitions.
- Financing cash flow was $49.5 million, including a $50.0 million draw on the revolving credit facility on April 8, 2020.
- The revolving facility matures in October 2022, bears interest based on LIBOR or an alternative base rate plus an applicable margin, and includes a potential $50.0 million accordion feature. The filing states that the company was in compliance with the facility’s covenants.
- Lease liabilities totaled $21.4 million for operating leases and $0.4 million for finance leases at June 30, 2020.
Material Changes, Outlook and Risks
- COVID-19 reduced elective procedure volumes, negatively affecting Joint Pain Management revenue, acquired-business forecasts, clinical enrollment and research timelines. Procedure volumes partially recovered late in the second quarter, but remained below pre-pandemic levels and future trends were uncertain.
- Management stated that it did not anticipate a current disruption to product supply, but warned that renewed restrictions, infection increases, supply-chain interruptions, employee disruptions or further procedure declines could materially affect results.
- The company implemented remote work, increased forecasting and board oversight, and short-term expense controls to preserve liquidity. Management was exploring additional funding sources.
- Management expects the Parcus Medical and Arthrosurface acquisitions to broaden the product portfolio, diversify revenue and expand commercial capabilities. Integration of the U.S. commercial organization was completed, and six recently FDA-cleared sports medicine products were scheduled for commercialization during the third quarter of 2020.
- No formal quantitative financial guidance is provided in the filing. Management cautions that full-year results cannot be predicted reliably because of COVID-19 uncertainty.
- CINGAL’s U.S. approval pathway requires an additional Phase III trial. The timing of a planned pilot study was uncertain because of the pandemic. Other clinical programs, including HYALOFAST, also faced enrollment and timing risks.
- Key unusual items include acquisition accounting, preliminary fair-value estimates, goodwill impairment, contingent consideration remeasurement, product rationalization charges and a $1.8 million first-quarter benefit from forfeited equity awards following the former CEO’s death.
- Revenue concentration is significant: Mitek represented 54% of total revenue in both the quarter and six-month period. The company also faces regulatory, product development, intellectual-property, personnel, integration, impairment and financing risks.
Important Facts for Investors to Verify
- Whether elective procedure volumes and Joint Pain Management demand recover without renewed COVID-19 disruption.
- The final purchase-price accounting for Parcus Medical and Arthrosurface, including acquired intangible assets, goodwill and deferred tax liabilities.
- The probability and timing of up to $100 million of acquisition-related earn-out payments and the sensitivity of the $48.8 million contingent consideration liability.
- Whether additional goodwill or intangible-asset impairments will be required if revenue recovery or operating performance weakens.
- The company’s ability to maintain liquidity after the acquisitions, the $50.0 million borrowing and continuing operating cash requirements.
- Progress, cost and regulatory timing for the CINGAL pilot and subsequent Phase III trial, HYALOFAST and other development programs.
- Dependence on Mitek and the sustainability of the expanded direct and distributor-based commercial model.
- Management and finance leadership continuity, including the transition of the chief financial officer position and integration of acquired-business controls.