Charles Sherwood – President and CEO
Kevin Quinlan – CFO
Sean Bebic – FIG
Anika Therapeutics, Inc. (ANIK) Q2 2009 Earnings Call Transcript July 23, 2009 9:00 AM ET
Good day, ladies and gentlemen, and welcome to the second quarter 2009 Anika Therapeutics Investor Conference Call. My name is Clarissa and I will be a coordinator for today. At this time, all participants are in a listen-only mode. We will conduct a question and answer session towards the end of this conference. I would now like to turn the call over to Mr. Kevin Quinlan, Anika’s Chief Financial Officer. Please proceed.
Thank you, Clarissa; and good morning everyone. If you have not received a copy of the Anika news release, which was issued yesterday after the market closed, or would like to be added to our contact list, please contact Sharon Merrill Associates at 617-542-5300. The news release also is posted on Anika Therapeutics’ website at anikatherapeutics.com.
Also, I want to mention that we have slides posted on the Anika website that illustrate some of the financial information we will be discussing during today's call. These slides can be found on the Investor Relations section of the site, under the Events, Webcasts, and Presentations tab. We invite you to take a moment to open the file and follow the presentation along with us.
Before we begin, please remember that the statements made in this call, which are not statements of historical fact, are forward-looking statements as defined in the Securities Exchange Act of 1934. Words such as will, believe, appear, plan, expect, anticipate, forward, seek, continue, target, goals, objectives, on track, intend, pursue, outlook, as well as other expressions, which are predictions or indications of future events or trends and which do not constitute historical matters, identify forward-looking statements.
These statements are based on current beliefs and expectations of management and are subject to significant risks and uncertainties. The Company's actual results could differ materially from any anticipated future results, performance or achievements described in the forward-looking statements as a result of a number of factors, which include those set forth in last evening's press release and the Company's SEC filings.
Please move to slide 3 as I turn the call over to Anika's President and Chief Executive Officer, Dr. Charles Sherwood.
Thanks, Kevin; and thank you all for joining us today.
We reported another quarter of solid financial performance and operational achievements. We increased both product revenue and total revenue by 5% and joint health revenue grew by 17%. We also reported a 62% gross margin in the quarter. Net income grew 18% to about $1 million and EPS came in at about $0.08 per share.
We have a number of initiatives going on at Anika as we execute on our growth strategy and we achieved several of these key milestones during the quarter. For example, we are pleased to have signed Coapt Systems as our new U.S. aesthetic dermatology distribution partner.
We also completed the evaluation period for our pivotal trial in the U.S. for MONOVISC, Anika’s single injection osteoarthritis product. I will go into more detail about our progress with MONOVISC and some other exciting growth developments after Kevin reviews the financial results.
So with that, I will turn the call back over to Kevin.
Thanks, Chuck. Please turn to slide 4 in the presentation.
Based on our first half results and the outlook for the balance of the year, we continue to expect to generate good revenue growth and improved income for 2009. Leveraging our superior HA technology and products and strong trends in the joint health market, we expect that investments we're making will lead to even higher growth in 2010 and beyond.
Total revenue in the second quarter grew 5% to $9.5 million. For the first six months of 2009, total revenue increased 6% to $18.7 million.
Product revenue grew at a similar rate and the increase was driven by growth of our joint health franchise, which more than offset declines in our veterinary and ophthalmic franchises, which declined 27% and 8% year to date respectively. You may recall that our veterinary business grew 28% last year, and while we anticipate improvement over the second half of the year, we now expect overall veterinary sales to be flat or lower this year than in 2008.
Looking in-depth at our joint health franchise, if you turn to slide 5, you will see that joint health revenue increased by 17% to $5.6 million for the second quarter. For the first six months of 2009, joint health revenue was up 21% to $10.7 million. Growth was driven by demand in the U.S. markets, while international sales declined slightly in the quarter, they are up 23% year to date and still expected to do well this year. Domestic sales increased by 28% for the quarter and by 20% for the first six months of 2009.
We saw a nice year-over-year in sequential increase in MONOVISC sales in the quarter and we continue to focus on the development and expansion of the product in additional countries. We expect MONOVISC to continue gaining traction and contribute more substantially to our joint health revenue in the coming quarters. As Chuck mentioned, we are progressing on schedule with the PMA approval process for MONOVISC and look forward to introducing the product into the US market in mid-2010. That is where we see the lion’s share of the growth opportunity for this product.
Looking at our aesthetic dermatology franchise, sales were again minimal in the second quarter and represent our direct sales to existing customers. Chuck will be discussing the new distribution agreement we signed with Coapt Systems.
Turning to slide 6, let us take a look at the income statement. Gross margins improved to 62% in the quarter from 57% in the year-earlier quarter. For the six month period, gross margins were 52% compared with 58% in 2008. The improvement was due primarily to strong joint health revenue growth, resulting in a more favorable product mix.
Our Woburn facility ran at near-full capacity, as we built inventory in preparation for moving some equipment to our Bedford manufacturing facility.
Net income for the second quarter of 2009 grew 18% to $956,000 or $0.08 per diluted share, from $813,000 or $0.07 per diluted share in the second quarter of 2008. Net income for the first six months of 2009 grew 3% to $1.5 million or $0.13 per diluted share from $1.4 million or $0.12 per diluted share in 2008. We continue to expect an improvement in full-year profitability for 2009.
Turning to slide 7, our total research and development expense for the second quarter was $2.3 million compared with $1.6 million for the second quarter of last year. For the six-month period, R&D increased to $4.5 million, compared with $3.2 million in 2008. The increase of R&D expense was primarily related to several items, including our U.S.-based pivotal clinical trial for MONOVISC, manufacturing validation activities at our Bedford facility, higher production levels to build inventory in anticipation of moving equipment from Woburn to Bedford, and finally cost incurred related to the Persons of Color study. This study is designed to demonstrate the safety of our aesthetic product with the full spectrum of skin types.
On slide 8; selling, general, and administrative expense was down slightly year over year at $2.7 million for the second quarter, compared with $2.9 million for 2008. Year-to-date, SG&A was relatively flat at $5.8 million compared with $5.9 million for the same period in 2008. Each period includes approximately $500,000 related to our duplicate facility carrying costs.
Turning to slide 9, we continue to have a strong balance sheet, with $35.9 million in cash and cash equivalents, a very important aspect of our company, which is particularly relevant in these economic times. This compares with $43.2 million at year-end, reflecting approximately $2.4 million spent on our new facility, principal and interest payments on the company’s debt, the previously-mentioned inventory build for the transition to the Bedford facility, and increased Accounts Receivable in connection with the growth of our royalty revenue related to domestic ORTHOVISC sales. As of June 30, 2009, we have spent approximately $30 million of our $32 million capital budget for the facility build-out.
In summary, at the midpoint of 2009, we are pleased with our financial performance. Our expectation that we would not be significantly affected by the global recession was on target and we continue to report product revenue growth. And the continuous achievement of our strategic milestones reinforce our confidence that the investments we are making in Anika will produce significant, tangible growth, which we expect to begin to realize in the second half of next year and beyond.
Chuck will now discuss our progress in each one of our business franchises.
Thank you, Kevin.
Let us start with our primary growth engine, joint health. As Kevin mentioned, Anika’s joint health franchise performed well in the second quarter and year-to-date. Our strong domestic performance drove overall product revenue growth in the second quarter and we have strong year-to-date revenue growth both internationally and in the United States.
We continue to broaden our market presence in joint health throughout the world. For example, we recently signed a new distributor in France and they performed quite well in the second quarter. We expect international growth from Latin America as we began to sell products in the second quarter and we expect to receive approvals in Argentina, Brazil, and Venezuela late this year and in early 2010. As a reminder, we have a distribution agreement with DePuy Mitek for Latin America. We're also expecting an approval in Taiwan to allow sales of ORTHOVISC there around the same time period.
Domestically, unit sales hit an all-time quarterly high, increasing 34% over the second quarter of 2008. This gives us significant reason for optimism that our commercialization partner, DePuy Mitek, will be able to grow market share in the U.S. this year as expected.
As I mentioned at the outset of the call, we achieved an important milestone in the second quarter, when we completed the clinical segment of the pivotal U.S. trial for MONOVISC, our first osteoarthritis treatment that can be administered as a single injection. We have very high expectations for MONOVISC, which we believe can be a major product for us, particularly in the United States, the U.S. being the largest market for HA-based visco-supplementation treatments. We are very pleased to complete the six-month evaluation period on schedule, with the last patient visit in June.
During the second quarter, we also completed the treatment phase of a second clinical study for MONOVISC. In this study, we re-injected about 250 of the original patients in our pivotal trial. The purpose is to confirm the benefits of repeat treatments. Each patient goes through an evaluation period following the re-treatments and we expect to complete this second clinical study around the end of the third quarter this year.
In addition to completing our pivotal clinical trial for MONOVISC, another critical goal for us this year is the filing of a PMA for the product. We are taking a modular approach to the filing, to allow for the fastest approval process possible. We are making the submission in four modules and have already submitted two of these modules to the Food and Drug Administration. By submitting information to the FDA in this modular fashion, they are able to provide comments on the submission in real-time as they review each module. We are on track to file the remaining two modules of the PMA by the end of this year.
Next up behind MONOVISC in our pipeline is CINGAL, a single injection treatment based on cross-linked HA, which incorporates an active therapeutic compound. We hope to push this product forward into clinical evaluations late this year. The product is important by itself, but it also opens up a new technology platform, wherein other active species can be integrated with our proprietary cross-linked hyaluronic acid.
As we frequently mention, we see joint health as our most promising growth opportunity in both the near and long-term. In the near term, we are excited about the domestic and international growth prospects for ORTHOVISC and even more enthusiastic about the prospects for MONOVISC. Longer-term, as just alluded to above, our vision includes the development of new therapeutic products and the ability to repair and even restore damaged tissue. The overwriting goal is to provide true long-term patient benefits.
Turning to our ophthalmic franchise, ophthalmics continue to be a large part of our revenue base and while our revenue for the year is down slightly to date, we continue to expect it to be a significant franchise for us with some opportunities for growth.
Let us now turn to our veterinary product HYVISC, which is the gold standard for treatment of equine osteoarthritis. As Kevin mentioned in his remarks, revenues were down in Q2 and year-to-date and we expect that the record growth we saw in 2008 may be at the expense of any additional growth in 2009. We believe this is an inventory management issue, as we are hearing very positive statements from our partner sales management. Looking ahead, we see some opportunities both for geographic expansion and additional veterinary products.
Our next product franchise is anti-adhesion and we saw a small year-over-year increase in second-quarter sales. INCERT is a unique anti-adhesion barrier gel used mainly for spinal surgery procedures. Interest in these products in general is increasing, particularly internationally. We have a lot on our plates right at this time and any significant near-term efforts as a result may have to wait. But our long-term vision for INCERT includes expanding the product’s use in a diverse number of surgical areas, such as in general and laparoscopic surgeries.
Let us turn now to aesthetics. We hit a major milestone with the signing of Palo Alto-based Coapt Systems as our U.S. distribution partner. Coapt Systems’ suite of bio-absorbable implants for use in facial aesthetic and rejuvenation procedures is highly complementary to our HA-based injectable filler. In addition, their 50-person sales force is very experienced in the technical sales of facial anesthetic products, particularly to plastic surgeons. We are also very pleased that their high-energy culture is in line with our own and this is a very important aspect in such a partnership.
Coapt Systems, with Anika’s support, has completed training their sales force and the feedback has been very positive. We expect to provide them with the product in early August. The product has been rebranded as Hydrelle in the United States. We see the rebranding as a beneficial tactic, given our new partner, and the desire for a fresh, domestic launch of the product.
In marketing Hydrelle, Coapt will focus on the significant benefits of the product, such as the comfortable injection experience for patients, due to the integration of the anesthetic lidocaine. As you may remember, Anika was the first company to technically succeed in formulating an anesthetic into a dermal filler and gaining U.S. FDA approval.
In addition, Hydrelle provides a cost-effective solution for patients seeking to treat facial wrinkles. Because of our cross-linked technology, less product volume needs to be injected into the patient, and therefore the total procedure may be completed with fewer syringes. This reduces the overall cost and can be an important competitive differentiator in recessionary times.
Coapt Systems will be distributing our aesthetic dermatology product exclusively in the United States, and we will be working with them to develop line extensions for the aesthetic dermatology franchise to fill out the family of products. The first line extension is likely to be a product to treat fine line wrinkles.
Now that we have signed a U.S. distribution partner, we can devote more time and resources to signing international distributors for the product. We see good opportunities internationally, as we broaden our market presence through an expanding number of distributors and achieve regulatory approvals, many of which are now under review.
During the quarter, we also made progress in our post-marketing People of Color study. This study is designed to demonstrate the safety of our aesthetic product with a variety of skin types. We have already enrolled about half of our target population of 100 patients at seven sites. And while this study is of value in the United States, there will be quite an important factor in marketing ELEVESS in various geographies throughout the world. We expect to complete enrollment of patients later this year.
That concludes our franchise review, and now, let me provide just a quick update on the status of our new GMP manufacturing facility at our headquarters in Bedford, Massachusetts.
We substantially increased inventory in the second quarter as part of the plan to move some of our equipment from our current manufacturing facility in Woburn to our Bedford, Massachusetts facility. The validation of the building (inaudible) and manufacturing processes continues in high gear and we will be validating this equipment as part of that effort. We remain on track with our goal to begin manufacturing in Bedford by the end of the year.
Please now turn to slide 10, and I will leave you with a few thoughts.
First, we concluded the first half of the year with a solid financial performance, growing product revenue by 5% and joint health revenue by 17%. ORTHOVISC continues to perform very well and domestic unit sales hit record volumes in the second quarter. We also returned to year-over-year net income growth, reporting an 18% increase in the quarter.
Second, we are very excited about the progress we are making with the development of MONOVISC. We completed the evaluation period of our U.S. pivotal clinical trial on schedule and expect to complete the retreatment study around end of the current third-quarter. We are also on track to file a PMA for MONOVISC by the end of the year and have already submitted two of the four necessary modules for the PMA. We strongly believe in this product and expect it to be highly successful, both domestically and abroad.
Third, we have found an excellent U.S. distribution partner for our aesthetic dermal filler in Coapt Systems. With over 50 sales professionals covering all major aesthetic centers throughout the US, we expect to successfully gain market share. We are now focused on expanding our distribution channel around the world.
And finally, our execution on our key strategic initiatives has been excellent. As you know, we have been resolute in our belief that the investments we are making in long-term growth of Anika will pay significant dividends. By achieving critical milestones according to schedule, such as with the clinical and regulatory development of MONOVISC, or even to work off and to these initiatives will drive accelerated growth in 2010 and beyond.
Before we open the call for questions, I would like to thank all the investors we met with during our most recent (inaudible) road show in Boston and we are looking forward to meeting with more of you in the weeks and months ahead.
And with that, I ask Clarissa to open the call to your questions.
(Operator instructions) And your first question comes from the line of Sean Bebic (ph) of FIG. Please proceed.
Sean Bebic – FIG
Good morning, guys.
Good morning, Sean.
Sean Bebic – FIG
Can you talk little bit about your expectations for Hydrelle sales in the first couple of quarters and do you expect to see a stocking order there from Coapt?
Sure, we would be happy to give you a little bit of insight on that. Yes, there will be a modest stocking order in order to have the inventory on hand. I think our thoughts are that they are going to come out of the gate pretty well, but they are in a position where they are going to be fighting to take market share, so our overall market share expectations are fairly modest in the first year, low -- somewhere in the low single digits likely.
Sean Bebic – FIG
Okay. Are there any other dermal fillers on the market right now with lidocaine, or do you know of any that are coming soon?
There are a couple under review at the FDA right now. Certainly internationally, there are some that are being sold.
Sean Bebic – FIG
Okay. I noticed the tax rate was pretty low this quarter. Can you talk about that?
Yes, just looking at taking a closer look at the full year and the tax, permit tax items that were expected and so forth, and when we evaluated all that, we felt that we needed to drop the rate a little bit from what we had in Q1 and I think that is a good rate though, the 29%, 30% vicinity to use for the full year now.
Sean Bebic – FIG
29% or 30% for the full year, okay. I guess that is it from me for now. Thanks guys.
Okay, thanks Sean.
(Operator instructions) And there are no further questions. At this time, I would like to turn the call back over to Chuck Sherwood for closing remarks.
Thank you, Clarissa. Well, I guess we did a reasonably good job of explaining the quarter, given the relative lack of questions. So I want to particularly thank everyone for joining us today and we look forward to updating you on our progress in our third-quarter conference call. Thank you.
Thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Good day.
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