Anika Therapeutics, Inc. — FY2011 Form 10-K Summary
Business context and reporting period
Anika develops, manufactures and commercializes hyaluronic-acid-based products for tissue protection, healing and repair. Products serve orthobiologics, dermal, ophthalmic, surgical and veterinary markets. The filing covers the fiscal year ended December 31, 2011, with quarterly information provided for the fourth quarter and full year. Anika Therapeutics S.r.l., acquired in December 2009, contributed products and operations primarily in Europe.
Financial performance and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Product revenue | $62.0 million | $52.7 million | Up 17% |
| Licensing, milestone and contract revenue | $2.8 million | $2.8 million | Flat |
| Total revenue | $64.8 million | $55.6 million | Up 17% |
| Product gross profit | $35.2 million | $28.9 million | Up 22% |
| Product gross margin | 57% | 55% | Up 2 percentage points |
| Income from operations | $14.0 million | $7.5 million | Up 85% |
| Net income | $8.5 million | $4.3 million | Up 96% |
| Diluted EPS | $0.62 | $0.32 | Up $0.30 |
| Cash flow from operations | $10.2 million | $7.9 million | Up $2.3 million |
- Fourth-quarter 2011 total revenue was $18.4 million and net income was $2.9 million, compared with $14.7 million and $1.4 million, respectively, in the fourth quarter of 2010.
- Orthobiologics generated $39.9 million, or 64.3% of product revenue, and increased 30%. Ophthalmic revenue declined 8% to $11.0 million, primarily because Bausch & Lomb began shifting AMVISC production to another supplier.
- Research and development expense decreased 10% to $6.2 million, while selling, general and administrative expense increased 3% to $17.9 million.
- The effective tax rate declined to 38.6% from 41.2%, supported by lower state tax expense, domestic production deductions and improved Italian subsidiary results.
- Cash and cash equivalents were $35.8 million at year-end, versus $28.2 million in 2010. Working capital was $49.6 million, versus $37.0 million.
- Total debt was $11.2 million, consisting of $1.6 million current debt and $9.6 million long-term debt. The company reported compliance with its debt covenants.
- Capital expenditures were $1.4 million in 2011. Total Bedford facility build-out expenditures were approximately $34.9 million through year-end.
Material changes versus the prior comparable period
- Revenue growth was led by domestic ORTHOVISC, international MONOVISC, and Anika S.r.l. orthopedic products. U.S. joint health revenue increased 30%, and Anika S.r.l. orthopedic revenue increased 40%.
- Product mix improved as higher-margin orthobiologics represented a larger portion of sales, raising product gross margin from 55% to 57%.
- Results continued to be affected by the transition from the Woburn facility to Bedford, including duplicate manufacturing costs and approximately $750,000 of 2011 inventory write-downs related to Woburn equipment problems.
- Bausch & Lomb represented 15.8% of product revenue in 2011, down from 21.2% in 2010. A new three-year supply agreement beginning January 1, 2012 provides for lower committed volumes in 2013 and 2014, and management expects moderately lower ophthalmic revenue in 2012.
- On December 21, 2011, Anika entered into a 15-year U.S. MONOVISC license, supply and distribution agreement with DePuy Mitek and received a $2.5 million upfront payment. The payment is deferred and recognized ratably over the agreement term; additional regulatory, clinical and sales milestones and royalties may be payable.
- Customer concentration remained significant: five customers accounted for 76% of product revenue, with DePuy Mitek representing 47.1% and Bausch & Lomb 15.8%.
Guidance, outlook, risks and unusual items
- Management expects orthobiologics revenue to increase in 2012, surgical revenue to increase moderately, veterinary revenue to remain relatively flat, and ophthalmic revenue to decline moderately under the new Bausch & Lomb contract.
- Research and development expense is expected to increase significantly in 2012 and future years because of planned clinical studies for Hyalograft C Autograft and CINGAL and additional development programs. General and administrative expense is expected to increase modestly.
- The Bedford facility received FDA approval in January 2012 for products including ORTHOVISC, HYVISC and INCERT. Approval to manufacture ophthalmic products was expected in the first half of 2012, after which the company expected to close the Woburn facility. Once fully operational, Bedford is expected to add more than $1.9 million of annual depreciation expense.
- MONOVISC had received European, Canadian and other international approvals, but the U.S. PMA remained unresolved. The FDA had identified deficiencies, denied an Orthopedic Advisory Panel review request, and Anika was pursuing the next level of the FDA appeal process.
- U.S. 510(k) applications for Hyalofast, Hyaloglide and Hyalonect remained subject to additional data requests and uncertain clearance timing. Certain tissue-engineered products also faced new European regulatory requirements effective January 1, 2013.
- Merogel Injectable was withdrawn in 2011 because of a packaging labeling error. Anika reported a potential dispute with Medtronic and indemnification claims against Fidia; management determined that a loss was not probable and recorded no accrual.
- Genzyme asserted patent infringement claims concerning MONOVISC. Anika denied liability, had not accrued a loss, and reported that DePuy Mitek agreed to assume certain related obligations under the MONOVISC agreement.
- The company had $13.7 million of operating lease obligations, $2.1 million of purchase commitments and $11.8 million of debt-related contractual payments at December 31, 2011.
- International operations expose the company to European economic conditions, government-funded hospital collections, foreign exchange movements, reimbursement changes, labor issues and regulatory risks. Italian public hospital and agency receivables totaled approximately $2.4 million of the $3.1 million owed by Italian customers.
- The company’s independent auditor issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management and the auditor concluded that internal controls were effective.
Most important facts for investors to verify
- Confirm the timing and conditions of U.S. FDA approval, commercialization and milestone economics for MONOVISC.
- Monitor the effect of lower Bausch & Lomb volumes on ophthalmic revenue, margins and manufacturing utilization.
- Assess whether the Bedford transition is completed without further supply disruption, inventory charges or unexpected depreciation and duplicate-facility costs.
- Evaluate customer concentration, particularly dependence on DePuy Mitek and the five largest customers.
- Track regulatory progress for Hyalofast, Hyaloglide, Hyalonect, Hyalograft C Autograft and CINGAL.
- Review the potential financial impact of the Genzyme patent litigation and the Medtronic/Fidia dispute, neither of which had an accrued loss at year-end.
- Confirm collection trends for Italian public-sector receivables and the adequacy of the allowance for doubtful accounts, which increased to $334,473 from $30,000.
- Consider the impact of planned R&D increases, future clinical spending and the company’s $11.2 million variable-rate debt on cash generation and liquidity.