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Executives

Charles Sherwood - President & Chief Executive Officer

Kevin Quinlan - Chief Financial Officer

Analysts

Gary Siperstein - Eliot Rose Asset Management

D. Smith & Larry Anderson - Raymond James

Neil Gordon

Dill Knight

Anika Therapeutics Inc. (ANIK) Q3 2009 Earnings Call October 28, 2009 9:00 AM ET

Operator

Good day ladies and gentlemen, and welcome to the third quarter 2009, Anika Therapeutics investor conference call. My name is Francis and I will be your coordinator for today. At this time all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

I would now like to turn the call over to Mr. Kevin Quinlan, Anika’s Chief Financial Officer. Please proceed Kevin.

Kevin Quinlan

Thank you Francis 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 is also posted on Anika Therapeutics’ website at www.anikatherapeutics.com.

Also, I want to mention that we have slides posted on the Anika website that illustrate some of the financial information we’ll 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.

Please turn to slide two. Before we begin, please remember that the statements made on 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 the 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 three, as I will turn the call over to Anika’s President and Chief Executive Officer, Dr. Charles Sherwood.

Charles Sherwood

Thanks Kevin, and thank you all for joining us this morning. Anika fired on all cylinders in the third quarter and delivered solid financial performance and operational achievements. Total revenue increased by 17% year-over-year, and product revenue was up by 18%. In fact, Q3 was our ninth consecutive quarter where product revenue increased year-over-year. Earnings grew significantly by 37% to $1.5 million and EPS came in at $0.13 per share.

In addition to our strong financial performance this quarter, we continue to make progress on achieving the key milestones that we laid out this year, 2009. We made steady progress on the PMA for our single-injection osteoarthritis product, MONOVISC, in preparation for a US launch in 2010. We secured regulatory approval from MONOVISC in Canada, and began selling product through Rivex Pharma, our long term Canadian ORTHOVISC distribution partner.

We relaunched our aesthetic dermatology product in the United States through our new distributor Coapt Systems, and finally, we took additional and significant strides toward our goal of manufacturing at our Bedford facility by the end of this year. I’ll go into more detail about our achievements on each of these fronts and share some other exciting growth developments after Kevin reviews the financial results.

So with that, I’ll turn the call back over to Kevin.

Kevin Quinlan

Thanks Chuck. Please turn to slide four in the presentation. As our financial results indicate, we performed very well in the third quarter, and we remain confident that we can generate good revenue and income growth portfolio 2009, 2010 and beyond. Much of this growth will be driven by our joint health products, and we expect to deliver another record year for revenue from that franchise.

Total revenue in the third quarter grew 17% to $10.8 million. For the first nine months of 2009 total revenue increased 10% to $29.5 million. Product revenue grew at a similar rate by 18% for the quarter and 11% for the year. The quarterly increase was driven by strong performance of our Joint Health Franchise.

Looking in depth at our Joint Health Franchise, if you turn to slide five, you will see that revenue increased by 31% to $6.1 million for the third quarter. For the first nine months of 2009, Joint Health revenue was up 24% to $16.9 million. Domestic sales increased by 41% for the quarter and by 27% for the first nine months of 2009. International sales were up 12% in the quarter, and are up by 19% year-to-date.

Turning to our aesthetics dermatology franchise, with Coapt Systems ramping up their sales efforts, sales increased 63% to 623,000 in the third quarter, and are up 91% to $762,000 year-to-date, on track with our expectations.

Turning to slide six, let’s take a look at the income statement. Gross margins improved to 65% in the quarter, from 59% in the year earlier quarter. For the nine-month period gross margins were 63%, compared with 58% in 2008. The quarterly gross margin of 65% was due to two reasons: first, we had a very favorable product mix as we saw strong growth from our Joint Health franchise. In addition, we had greater overhead absorption at our Woburn facility.

Net income for the third quarter of 2009 grew 37% to $1.5 million or $0.13 per diluted share, from $1.1 million or $0.10 per diluted share in the third quarter of 2008. Net income for the first nine months of 2009 grew 18% to $3 million or $0.26 per diluted share, from $2.5 million or $0.22 per diluted share in 2008. We continue to expect an improvement in profitability for full year 2009, compared with 2008.

Turning to slide seven, our total research and development expense for the third quarter was $2.4 million, compared with $1.8 million for the third quarter of last year. For the nine month period R&D increased to $6.9 million compared with $5 million in 2008. We’re pleased that even with this challenging economic climate, we are delivering good growth while continuing to invest in the future of Anika.

The increase in R&D expense was primarily related to several items including our US based pivotal clinical trials for MONOVISC, manufacturing validation activities at our Bedford facility, and cost incurred for the Hydrelle Persons of Color study. Chuck will provide an update on these items in just a minute.

On slide eight; selling, general and administrative expense was up slightly year-over-year at $2.8 million for the third quarter, compared with $2.6 million in 2008. Year-to-date SG&A was up at $8.6 million, compared with $8.5 million in the same period in 2008. Each period includes approximately $500,000 per quarter, related to our duplicate facility carrying cost.

Turning to slide nine, we continue to have a strong balance sheet with $38.5 million of cash and equivalents. This compares with $43.2 million at year end, reflecting approximately $3.4 million spent on our new facility, principal on interest payments on the company’s debt, the previously mentioned inventory bill for the transition to the Bedford facility, and increased accounts receivable in connection with the growth in our revenue.

As we head into the final quarter of 2009, Anika was at a very sound financial position with a strong balance sheet and good growth prospects. We are encouraged with our financial performance to-date and we believe that full year 2009 will be another year of top and bottom line growth for us.

The global recession has had little if any effect on our performance in 2009, and we’re looking forward to another good year for growth in 2010. We are confident that the investments we’ve made in our making in Anika, will produce significant long term growth.

With that, let me turn the floor back to Chuck, who will discuss our progress in each one of our product franchises.

Charles Sherwood

Thanks Kevin. Let’s start with our Joint Health Franchise where we see Anika’s most significant growth prospects. Joint Health performed very well in the third quarter and year-to-date, on the back of strong domestic and international sales of ORTHOVISC.

Domestically, we are steadily increasing revenue and market share. We believe that ORTHOVISC will finish the year at approximately 12% market share, compared to 10% at year end 2008. We believe that ORTHOVISC’s differentiated therapeutic benefits will continue to win over our growing number of doctors and patients.

Looking internationally, we are continuing to expand our distribution network abroad. As an example, our distributor in France is making good progress in taking share from the competition, with both ORTHOVISC and MONOVISC.

Let’s move on to MONOVISC, which we believe has very exciting growth potential internationally, but especially in the United States. Let’s start with our progress internationally.

Some but not all of the Western European markets where we began selling MONOVISC, have not been the most attractive for a single injection product. As this became more apparent, we intensified our efforts to penetrate other geographies where we see better prospects, such as in Eastern Europe and Asia. In some of these countries, we expect to see meaningful sales in 2010.

Continuing the story of new geographies, MONOVISC was introduced to the Canadian market this quarter. We received Health Canada approval in late summer, and launched MONOVISC through our long term ORTHOVISC distribution partner, Rivex Pharma. This marks an important step forward as we expand our geographical reach and establish MONOVISC as the premier single-injection product on the market worldwide.

While selected international markets are ripe with potential for MONOVISC, we see the greatest opportunity for this product in the United States. As I mentioned last quarter, we’re taking a modular approach to the filing of the PMA for MONOVISC, to allow for the fastest approval process possible. We have received some fairly straight forward feedback from the FDA and the modules that we have filed, and are in the process of addressing their questions.

The final component to complete our FDA filing is the clinical study module. We remain on track to complete our submission, by filing that module in December. That submission will also include the data from our re-treatment study. About 250 patients were re-injected with the purpose of confirming the benefits of MONOVISC re-treatment. These patients then underwent an evaluation period.

The database for the initial and re-treatment studies has been finalized, and we are analyzing the data as we speak. Once they have been analyzed, we will be ready to complete our PMA filings. I’d like to note that a overwhelming number of patients in the original study requested to be included in the re-treatment phase. This tells us that patients wanted to make sure that the benefits they are receiving from MONOVISC continued.

As I mentioned on prior calls, I speak from personal experience about MONOVISC, and just about a month ago, I got my second MONOVISC injection while I was in Canada. The second treatment was just about one year after my initial injection in Europe, and once again I’m feeling significant pain reduction in both of my knees. We have very high expectations for MONOVISC, which we believe can be a major product for us, particularly in the United States. The US is currently the largest market for HA based physical supplementation treatments.

The next product in our Joint Health pipeline is CINGAL. As many of you know, CINGAL is our single injection treatment based on cross-linked HA, which incorporates an active therapeutic compound. We plan to file for a CE Mark in Europe before the end of the year, as well as to push this product forward into clinical evaluations late this year. This product is important by itself, but it also opens up a new technology platform wherein other active molecules can be integrated with our proprietary cross-linked hyaluronic acid.

At the outset of this global recession, we had expressed optimism that our Joint Health Franchise would not be significantly affected by the economy. Part of our reasoning was that some patients may turn to ORTHOVISC and other HA procedures to postpone expenses in debilitating knee replacement surgery.

We believe that our expectations were right on target, and looking ahead, we continue to be very excited about our prospects for this franchise and we are working hard to fulfill our vision to provide new therapeutic products that go beyond pain relief to protect and restore damaged tissue. The goal is to provide long term benefits for patients.

Let’s now turn to our ophthalmic franchise. Ophthalmics continue to be a stable component of our revenue base. Revenue for this quarter was flat year-over-year, as our partner sold out their product offerings in this changing market. We are optimistic that as this process proceeds, we will find opportunities in this franchise down the road.

Our veterinary product HYVISC, which is targeted for the treatment of equine osteoarthritis, continues to run somewhat behind last year’s sales, and we are working with our partner Boehringer Ingelheim Vetmedica on future steps. We will update you on this during the year end call.

Now let’s shift gears and discuss our aesthetics franchise where we accomplished a number of operational achievements. First, we signed our new US distribution partner, Coapt Systems and launched Hydrelle in the third quarter. One of the reasons why we chose Coapt is because of their experience in the technical sales of facial aesthetic products.

Coapt is being very methodical with the launch to ensure that their client base of physicians, dermatologists and plastic surgeons are fully trained on our products. This short-term investment and training has already yielded benefits in terms of doctor and patient satisfaction and loyalty.

In addition to our Hydrelle launch, we are expanding our aesthetic franchise with the development of a less robust version of our product to be used for the treatment of fine lines. During the last month we filed for CE Mark approval, and we are planning to launch the new product at the beginning of 2010 in Europe and in other countries that approve products based on the CE Mark. Domestically, we are in discussions with the FDA about the pathway for approval for this fine line product.

Now, a quick update on our Persons of Color study. It is progressing very well and we are on track to complete enrollment of the patients later this year. Thus far, the feedback from that trial has been very favorable.

On a final note, Hydrelle was featured by name on an episode of The Doctors, a popular daytime television show that showcases new developments in medicine and was also featured on the early show. This coverage raised Hydrelle’s visibility and generated some momentum around our products.

We’re especially pleased to see the episode highlight Hydrelle’s unique value proposition which is, “less is more” and also to see the doctors’ characterization of Hydrelle as providing a comfortable injection experience for patients due to the integration of the aesthetic lidocaine. Overall, we are very pleased with our progress in the aesthetic franchise in Q3, and believe we are starting to carve out an effective niche position for our products. That completes our franchise review.

Let me provide just a quick update on the status of our new GMP manufacturing facility at our headquarters in Bedford, Massachusetts. As Kevin mentioned, we substantially increased inventory in the last six months as part of the plan to move some of our equipment from Hoover to Bedford.

The validation of the building systems and manufacturing processes continues in high gear. We expect the US Food and Drug Administration and our European notified body to begin to inspect the Bedford facility later in the fourth quarter, and 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’ll leave you with a few final thoughts. First, Anika performed very well from a financial standpoint in the third quarter, recording a 37% increase in net income, an 18% growth in product revenue and a 31% growth in Joint Health revenue, both domestic and international demand drove the increase in Joint Health.

Second, we continue to execute against our key milestones this quarter. We signed a new partner for our aesthetics product, entered the Canadian market with MONOVISC, made good progress toward completing our PMA filing from MONOVISC approval in the US by year-end, and we continued to invest in our future.

We are expanding our worldwide presence in Joint Health and expect to increase our share in the growing market. At the same time, we have a strong balance sheet and cash generating ability that enables us to build the foundation for exciting growth opportunities, and fulfill our Joint Health vision.

So with that, I ask Francis to open the call to your questions. Francis.

Question-And-Answer-Session

Operator

Thank you. (Operator Instructions). Your first question is from the line of Gary Siperstein from Eliot Rose Asset Management. Please proceed.

Gary Siperstein - Eliot Rose Asset Management

Hi guys, good morning; great quarter and great progress. Starting on the Joint Franchise, the market share gain you guys think you are achieving, is that coming at the expense of Genzyme or others, and did the Genzyme facility problem have anything to do with it?

Charles Sherwood

This is Chuck, Gary. I think that as best we can tell, the gain is spread around across all products. I think Genzyme maybe making some headway with their single injection product in the US market, but we really don’t have a lot of good data on that at this point. The facility problem that they had was not for their hyaluronic acid based products however.

Gary Siperstein - Eliot Rose Asset Management

Okay, and a few quarters ago we also got an FDA letter about the old facility, has that all been reconciled by now?

Charles Sherwood

It’s not fully reconciled now, there will be a final inspection which we anticipate will occur any day now.

Gary Siperstein - Eliot Rose Asset Management

Okay, and you mentioned Genzyme’s single injection product, is there any guesstimate on what kind of revenues that’s generating?

Kevin Quinlan

We don’t know individually what revenue that product is generating, but they put on their website their revenues for the quarter, and worldwide they have generated about $87 million of revenue for all of their viscosupplement products, that’s a combined number worldwide.

Gary Siperstein - Eliot Rose Asset Management

Okay, and are we in the second position now with the single shot, wasn’t someone else rejected recently?

Charles Sherwood

We believe so Gary. What happened was, the FDA panel recommended disapproval for a product called Durolane which would have been distributed in the United States by Smith & Nephew. So that clearly will set them back in time. I believe, it’s likely they will have to do some more clinical work.

Gary Siperstein - Eliot Rose Asset Management

Is there anyone else out there that’s within six months of us if we file in December?

Charles Sherwood

We have heard of another product that maybe in queue to a Japanese products and I believe that potentially will be distributed in the United States by Zimmer. It’s hard to get any solid data on that product. We saw a publication, but it’s really unclear how effective it is, and what the strength of their clinical data are. So it’s really hard to tell what the timing might possibly be for PMA and FDA approval, if indeed they got it at all. So we just don’t know.

Gary Siperstein - Eliot Rose Asset Management

Okay, and I might have missed it, did you guys break out the total amount of your sales year-to-date in Canada and Europe?

Kevin Quinlan

We are taking the tact of disclosing our Joint Health product revenues in the aggregate and then the breakdown is just between domestic and international, which is on the slide presentation.

Gary Siperstein - Eliot Rose Asset Management

Okay, so you are not going to tell us. In your presentation you mentioned that MONOVISC could be a major product in the US for us. I’m just curious, how are you defining major?

Kevin Quinlan

We think it’s going to generate significant growth for the company, and Gary let me also just clarify in my last statement, we’re doing the presentation this way because, the products ORTHOVISC and MONOVISC and ORTHOVISC mini are complimentary to each other, and we feel that that’s the best way of measuring the progress that we’re making as looking at the money in the aggregate, and looking at an individual product is not going to be valuable information.

Gary Siperstein - Eliot Rose Asset Management

Okay, and just again on CINGAL, I just missed it perhaps; the European you are going to file for European CE Mark, and then later a clinical study in the USA. Did you say the CE Mark will be by year end or are these both 2010 events?

Charles Sherwood

I said we already filed.

Gary Siperstein - Eliot Rose Asset Management

Okay, great.

Charles Sherwood

I’m sorry, I’m mixing that up with Hydrelle, fine. We will file by the end of the year for CE Mark, for CINGAL, and we hope to get in the clinic for evaluation. I didn’t say however that that would be in the United States.

Gary Siperstein - Eliot Rose Asset Management

Okay, and do you have any posture on between the December PMA filing on MONOVISC, and the hopeful positive news from the FDA. I guess six months later in the summer are you going to look to partner it up between those two points, or you are going to wait to get FDA approval first, because it will be more valuable, and then try to do it subsequently?

Charles Sherwood

Well, I think we haven’t changed our position much. What we said the last time was, we wanted to see the final analysis of the clinical data to understand what the product really could do, before we add any meaningful discussions or develop any meaningful plans about the commercialization. So we are still operating on that premise, but in fact the revelation of the data analysis is very close at hand now.

Gary Siperstein - Eliot Rose Asset Management

Okay. Just moving on ophthalmics and veterinary stuff; any low hanging fruits in terms of getting those growing again. You said you’re working with partners in both cases to see what you can do there, anything you can tell us or that’s still in discussions?

Kevin Quinlan

The only thing we can say at this point is that in the ophthalmic front, we are looking at additional opportunities, we’re always looking at that, and that’s something that we are evaluating, and we hope that will have something to report on in the future on that. Then secondly on the veterinary front, we are exploring the possibility of an additional product there as well.

Gary Siperstein - Eliot Rose Asset Management

What would the new product do?

Kevin Quinlan

We haven’t described it in too much detail, but it would be a different approach to treating courses for osteoarthritis?

Gary Siperstein - Eliot Rose Asset Management

Okay, and moving on to Hydrelle, it looks like you did 623,000 in the quarter versus 383 aesthetically the year before. Can you tell us how that relationship works, was that an inventory build for Coapt or are they carrying no inventory, and you guys like dropped ship directly to the docks, or is it just in time basically, there is no inventory every time they get a sale they call you and you ship. How’s that working?

Kevin Quinlan

There was an initial order of products. I would describe it as a modest order, so they have some inventory, but I would not describe it as being a large amount of inventories, so we’ll have additional orders assuming things continue as we expect in the near future.

Charles Sherwood

Just for clarity, I’ll add a couple more thoughts here Gary, we ship to them, and they ship to the customers. One more thought; I talked about training. I’m very, very, very pleased about the way this is going, because we are doing it right this time, and so they are using a lot of product which is being used in evaluations, and those evaluations, we usually involve multiple patient injections, and it’s used to qualify the doctor or the site and to also promote the enthusiasm in that site for the product.

So a lot of product is going into people, even though the full revenue potential of some of those evaluation materials isn’t being reflected in our financials. So we think this is a great way to do it; we are a 100% in support of this and it’s really going to support long term stability of the franchise.

Gary Siperstein - Eliot Rose Asset Management

How are they moving Chuck, are they moving east to west, have they already covered the whole United States, can you talk about that?

Charles Sherwood

I think Gary, they first went to a lot of their customer base, which was in a lot of the major metropolitan areas, but I noticed my wife was injected with this stuff a while back, and she wants another injection, so I was talking to them about local Boston based practitioner, so they are going to give us a few.

But if you look on their website, they qualify doctors in sites, and a lot of them are in the major metropolitan areas, but there aren’t a lot in certain states, where they don’t have the real big presence to-date with their plastic surgery products.

But they are going across the country, they are even interested, they have a fairly extensive worldwide distribution network and they are even interested in talking with us about worldwide rights for the products. So I think the relationship is going quite well from my perspective.

Gary Siperstein - Eliot Rose Asset Management

Super and I’m glad to hear that the Sherwood family are acting as guinea pigs for our company?

Charles Sherwood

I don’t know if I like to be characterized as a guinea pig, I believe in the products and MONOVISC worked great for me. I was quite surprised it lasted so long for me, but then again, I’m in end of one.

Gary Siperstein - Eliot Rose Asset Management

I just have two questions, I’ll give someone else a chance. The fine line product and the person of color study, can you tell us what a timeline would be on each?

Charles Sherwood

The person of color study you will remember is different skin types. We expect to complete enrollment by the end of the year. Like I said, so far results are quite good. We didn’t expect otherwise, but we’re reinforced by that, and then, we need to make the filings with the Food and Drug Administration. The real key about that is it might help us with international registrations of the product in different parts of the world.

The fine line product, as I said we filed the CE Mark. We expected that will be a fairly rapid approval, so we believe that we can start marketing that product in Europe in 2010, or early 2010. We had one discussion with the FDA, we need to have some follow-on discussions as to just exactly what the pathway will be in the United States, and until we really reach some agreement there, it’s really hard to predict what it will be.

Gary Siperstein - Eliot Rose Asset Management

Okay, and the person of color study when those results come out, then we’ll do a CE mark there as well?

Charles Sherwood

Person of Color study is just looking at the existing products in people with different skin type.

Gary Siperstein - Eliot Rose Asset Management

Same product?

Charles Sherwood

Same product, yes.

Gary Siperstein - Eliot Rose Asset Management

Okay, and then last question, can you just go over the transition to Bedford, in terms of when the duplicate expenses of the 500,000 that you’ve mentioned in the slide per quarter, how we should look at that as we go through 2010. Will it be 500,000 in the first quarter or is that going to start decline sequentially?

Kevin Quinlan

Gary this is Kevin. We’ll start to see a decline in that towards the end of the second quarter of 2010. As Chuck said, we are transitioning and expect to begin manufacturing product in Bedford in the fourth quarter. So we’ll have product that potentially is shipped in the fourth quarter, sold in the fourth quarter, that potentially will come from either facility, and then that will be phased out as we move into next year. So by mid next year we should be through with the duplicate facility cost. In the second half of the year, we’ll benefit from that.

Gary Siperstein - Eliot Rose Asset Management

So for my modeling purposes Kevin, should I assume the 500,000 will be in the Q1 and then maybe 250 to 350 in Q2 and then 00?

Kevin Quinlan

Yes, probably somewhere in that vicinity of more than 50% of those 500 for Q2.

Gary Siperstein - Eliot Rose Asset Management

Okay, and then the old facility, when is that lease up?

Kevin Quinlan

That lease will expire at the end of May of next year.

Gary Siperstein - Eliot Rose Asset Management

May of next year, okay thanks guys.

Charles Sherwood

You are welcome.

Operator

Your next question is from the line of D. Smith and Larry Anderson with Raymond James. Please proceed.

D. Smith & Larry Anderson - Raymond James

Great quarter man. Could you comment on the progress of that clinical study with the few regarding the effectiveness of ORTHOVISC to treat osteoarthritis of the shoulder?

Charles Sherwood

Sure, it’s been underway for as you are all aware, a long time. I think we’re coming very close to completing the enrollment phase. So the last I heard it was going to be done at the end of October or so. I’ll just count that by two months and say, that we should complete it certainly by the end of the year, the enrollment portion, and then of course there is a follow up six months or so, and then the data can be fully analyzed.

D. Smith & Larry Anderson - Raymond James

Okay, very encouraging. Thank you.

Operator

Your next question is from the line of Neil Gordon an Investor. Please proceed.

Neil Gordon – Private Investor

Good morning. I didn’t hear too much mentioned of ORTHOVISC mini, how is that doing in Europe and do we have any plans to go forward with that domestically in the near term?

Kevin Quinlan

ORTHOVISC mini of course is simply a ORTHOVISC product in a smaller size syringe. It’s a specialty or niche type of product, and it’s really looking at that for smaller joints. As niche product, our expectations there are relatively low. So at this point, it’s just an additional opportunity to use the product in a little more convenient form for those physicians who are practicing in small joints.

As far as the US goes, at this point, given the way that the FDA is structured in terms of viscosupplement products, it would involve a major clinical trial in order to get approval for a small joint, and that’s something we’ll evaluate from time to time, but at this point, don’t have any plans to move forward with a trial for that product.

Neil Gordon – Private Investor

And relative to MONOVISC, we have not yet announced that we have the domestic partner, that would be here in the States. Do we expect that we will wait until we finish the phase three or are we working on that currently?

Kevin Quinlan

Neil this is Kevin again. I think that actually was covered earlier in the call, but we’re going to wait until we have the data fully analyzed before we make decisions on that front about the commercialization of the product.

Neil Gordon – Private Investor

Thank you.

Operator

Your next question is from the line of Bill Knight – Private Investor. (Operator Instructions)

Bill Knight – Private Investor

Thank you for taking my question gentlemen. Can you help me understand the tax rate which was certainly lower than I expected this quarter?

Kevin Quinlan

Okay, Bill this is Kevin speaking. The tax rate this year is benefiting from investment tax credit that we take on the facility, and that’s one of the major drivers to the rate that we used, and it’s a reflection of namely that as one of the main benefits to reduce the rate.

Bill Knight – Private Investor

And just from your discussion, it sounds like you are going to be moving to two major R&D programs in 2010, the Hydrelle fine line and the CINGAL. I’m wondering how that fits with your R&D budget? Are you seeing R&D expenses growing either more quickly than revenue as it has year?

Kevin Quinlan

This is Kevin, I will say in terms of R&D expenditures, we don’t see that as a major growth area in 2010, and a great deal of the expenditures on the fine line products or the lighter version of the product will be incurred this year and then, so I would say that the R&D expenditures next year will be showing less growth than what you saw this year versus 2008.

Bill Knight – Private Investor

Okay, that’s nice to hear. Probably another one for you Kevin, it has to do with your cash balance. It seems like you’ve got net cash minus the debt greater than six months worth of revenue, and that sounds like a lot for our company which is really pretty non-cyclical growing, and I’m wondering about your perspective on that?

Kevin Quinlan

We view our cash has been vital to a strong balance sheet and believe that it’s an appropriate level for a company that is growing, and I think you’d see a number of companies that are strong in growing in the technology and in the life science field that have equally strong cash balances.

Bill Knight – Private Investor

Even those that are currently possible and not really cyclical?

Kevin Quinlan

We are in a growth phase, so I’m not comparing us to non-cyclical companies.

Bill Knight – Private Investor

Okay. I’m curious also about Hydrelle, and you mentioned of it as being a niche product. Back in 2008, during the first quarter you projected some percentages you thought the market share might turn into during the initial first full year, do you see those projections as still valid or is that something that the market has moved on a little bit?

Charles Sherwood

I will take that one; this is Chuck. The growth in the market has slowed certainly with the recession. Also we are, I would say moving methodically with Coapt Systems. So I believe that much like we’ve done with our ORTHOVISC product, we try to steadily build a momentum around the product, based on its advantages and how it’s differentiated in the market place.

I think Hydrelle is off to a nice start, the television exposure that we got for the product was a very big positive; there are some plans for some more of that activity, and we will establish I think a very strong base for that product. The fine lines product could be the real wildcard, because certainly, that could be an extremely attractive product.

Now in the United States, as I said just a little while back, since we are currently in discussions with the FDA, it’s not really clear to us what the requirements will be for us to get that product approved in the States. We don’t believe it will be a full clinical study of course, but we are not sure exactly what we’ll have to do. Until we get that cleared up, the timing and the growth of that product in the US will still be just speculation.

Outside the States, I think the fine lines product would be a quite attractive possibility, and we are hoping to do a little bit of work there, and gain some sales with that product in 2010. So that was a relatively long win to the answer to say, we really can’t answer your question quantitatively at this point.

Bill Knight – Private Investor

I appreciate what you had to say, thanks for your time guys.

Operator

At this time there are no other questions. I’d like to turn the call back over to Chuck Sherwood for closing remarks.

Charles Sherwood

Thank you Francis, and thanks to all the rest of you for joining our call today. We very much look forward to updating you on our fourth quarter and year end results in the conference call sometime in the January, February timeframe. Thank you.

Operator

Ladies and gentlemen, thank you all for your participation on today’s conference call. This concludes the presentation and you may now disconnect.

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Source: Anika Therapeutics Inc. Q3 2009 Earnings Call Transcript
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