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Anika Therapeutics, Inc. (NASDAQ:ANIK)

Q4 2009 Earnings Call Transcript

March 17, 2010 9:00 am ET

Executives

Kevin Quinlan – CFO

Charles Sherwood – President and CEO

Analysts

Ross Gordon [ph] – RGA [ph]

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter and year-end 2009 Anika Therapeutics investors' conference call. My name is Clarissa, and I'll be your 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.

Kevin Quinlan

Thank you, Clarissa, and good morning, everyone. If you have not received a copy of Anika's news release, which was issued yesterday after the market closed, or would like to be added to our contact list, please contact Sharon Merill Associates at 617-542-5300. The news release is also posted on Anika Therapeutics' Web site at anikatherapeutics.com.

Also, I want to mention that we have slides posted on the Anika Web site that illustrates 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 in this call, which are not statements of historical fact are forward-looking statements as defined in the Securities and Exchange Act of 1934. Words such will, believe, appear, plan, expect, anticipate, forward, seek, continued target, goals, objectives, on track, intent, 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 now to slide three as I turn the call over to Anika's President and Chief Executive Officer, Dr. Charles Sherwood.

Charles Sherwood

Thank you, Kevin. We're happy to have all of you with us this morning on our fourth quarter and year-end conference call. We ended a successful year with strong fourth quarter financial results and a major acquisition that has very exciting growth implications for Anika.

Total revenue in the fourth quarter increased by 18% year-over-year, while product revenue was up 20% marking the fourth consecutive year of growth in product revenue.

We also reported $0.06 per diluted share for the quarter. Excluding the costs associated with the FAB acquisition, Q4 EPS was $0.17, compared with $0.10 in the fourth quarter a year ago.

In addition to reporting another quarter of solid financial results, we completed two major milestones. First, we filed the final module of our PMA for MONOVISC, Anika's single injection osteoarthritis product, with the FDA. And second, we acquired Fidia Advanced Biopolymers or FAB, which provides us with a robust new growth engine through a suite of complementary products, R&D pipeline products, and two new innovative HA technologies. That advances our vision to provide therapeutic products that go beyond pain relief to protect and restore damaged tissue. We also announced our decision to go to direct commercialization in the United States with MONOVISC, a decision that fits nicely with our acquisition of FAB.

I'll go into more detail about our achievements in the fourth quarter and discuss our goals for 2010 after Kevin reviews the financial results. So with that, I'll turn it back over to you, Kevin.

Kevin Quinlan

Thanks, Chuck. Please turn to slide four in the presentation. We completed what was a year of accomplishments with strong financial results as we grew both revenues and earnings for 2009. Total revenue in the fourth quarter grew 18% to $10.6 million. For the full year of 2009, total revenue increased 12% to $40.1 million. Product revenue grew by 20% for the quarter and 13% for the year. The quarterly and annual increases were driven primarily by a strong performance of our joint health franchise.

Looking in depth at our joint health franchise, if you turn to slide five, you'll see that revenue increased by 17% to $6 million for the fourth quarter. For the full year 2009, joint health revenue was up 22% to $22.9 million. Domestic joint health sales increased by 32% for the quarter and 28% for the year. International joint health sales were down by 18% in the quarter, but up by 8% for the year.

Turning to our aesthetic dermatology franchise, with Coapt Systems continuing their efforts, sales increased six-fold to $710,000 in the fourth quarter, and are up 191% to $1.5 million for the year. As you might remember, Coapt launched Hydrelle during the third quarter.

Turning to slide six, let's take a look at the income statement. Gross margins were 64% in the quarter, compared with 66% in last year's fourth quarter. The decline was due to higher manufacturing activity in the fourth quarter of 2008 as a result of the transition throughout – of operations to our Bedford facility. This transition is taking place by product line and will result in manufacturing activities occurring in both facilities for a significant portion of 2010. As a result of this activity, we expect a slight decline in margins this year.

For the full year, gross margins were 63%, compared with 60% in 2008. The full year increase in gross margin was due to increased sales of our more profitable joint health products resulting in a favorable product mix, compared to 2008; and, increased manufacturing activity in our Woburn facility to build inventory in preparation for the move of operations to the Bedford facility.

Net income for the fourth quarter of 2009 was $697,000 or $0.06 per diluted share in the fourth quarter of 2008. For the full year of 2009, net income was $3.7 million or $0.32 per diluted share. Excluding $1.2 million in acquisition-related expenses, non-GAAP net income for the fourth quarter of 2009 was $2 million or $0.17 per diluted share. This represents an 85% increase from $1.1 million or $0.10 per diluted share last year. Non-GAAP net income for the full year of 2009 was $5.5 million or $0.48 per diluted share, an increase of 50% from $3.6 million or $0.32 per share for 2008.

Turning to slide seven, our total research and development expense for the fourth quarter was $1.3 million, compared with $2.4 million for the fourth quarter of last year. The decrease in the quarter was due to completion of the MONOVISC clinical trial in the third quarter. For the full year, R&D increased to $8.2 million from $7.4 million, driven by the recently completed clinical trials for MONOVISC, the post-marketing aesthetic dermatology people of color study as well as new product development. We expect research and development expenses will increase at a slower rate even as we evaluate and rationalize our worldwide R&D activities and pipeline. Our goal is to put more emphasis on commercializing what we have already developed.

On slide eight, selling, general, and administrative expenses increased to $4.1 million for the quarter, compared to $2.5 million in Q4 2008. This included $1.2 million of the FAB-related acquisition costs. For the full year, selling, general, and administrative expenses were up to $12.7 million, from $11 million in 2008, and included $2.2 million in acquisition costs. We expect that general and administrative expenses will increase modestly in 2010, but selling expenses to significantly increase as we prepare for the direct commercialization of MONOVISC in the US.

Turning to slide nine, we have $24.4 million in cash and equivalents. This compares to $43.2 million at the end of 2008 reflecting the acquisition of FAB as well as approximately $6 million spent on capital equipment and facilities, principal and interest payments on the company's debt, the previously mentioned inventory bills for the transition to the Bedford facility, and increased accounts receivable.

Before I turn the call back to Chuck, I’d like to touch upon the FAB acquisition. From a near term financial perspective, we are seeking to reduce FAB’s net loss from $4 million in 2009 to less than $2 million in 2010, positioning it to be accretive to our earnings in 2011. The key to this will be both increasing revenue as well as reducing costs.

On the cost reduction side, we plan to achieve this in three ways. First, we plan to rationalize FAB’s extensive commercialized product line as well as its developed pipeline – development pipeline. Second, we plan to integrate FAB’s R&D activities with our own. And third, we’ll be realizing other cost synergies through redundancies as we proceed through the year. As Chuck will discuss in more detail, we also expect to realize significant sales synergies with this acquisition, the first step in gaining an FDA approval of – for three of FAB’s joint health products in the US.

We ended 2010 with a strong balance sheet and maintaining a very solid financial position. Our acquisition of FAB adds to our significant growth prospects and should lead to accelerated earnings in the long term. We expect another year of growth in 2010, and look forward to reporting our progress to you. And with that, let me turn the floor back to Chuck.

Charles Sherwood

Thank you, Kevin. I’d like to begin by discussing our joint health franchise, which is where we see our greatest opportunities for growth going forward. I’ll then discuss the FAB acquisition because FAB adds much value to Anika in joint health, but also in other areas. I’ll then provide a brief update on Anika’s other product franchises as usual. And finally, I will discuss our goals for 2010.

So let’s get started with out joint health franchise. The fourth quarter of 2009 capped another very successful year for joint health. ORTHOVISC continued to perform in line with our high expectations, both in the US and abroad. In fact, this was the fourth consecutive year that we grew revenues by 20% year-over-year. Domestically, we increased our market share position. And we believe we're at approximately 12% as of year-end. This compares with 10% at the end of 2008. Internationally, we continued to expand our distribution network, advancing registration and commercialization in new territories.

During the fourth quarter, we signed a two-year extension with our French distributor, who has been performing very well with both ORTHOVISC and MONOVISC. In addition to France, key international performers for the year were Austria, Hungary, and Egypt. We are hopeful that the publications of clinical data from our MONOVISC trial, around mid-year, should accelerate international sales of this product.

One very important highlight for the quarter as I mentioned in my introduction, was the filing of our PMA for MONOVISC with the FDA. We have taken a modular approach with the PMA to allow for the fastest approval process possible. In December, we completed and submitted the clinical study module, including data from our re-treatment study. We had been receiving feedback from the FDA as we filed the modules throughout the year. And we are addressing their straightforward questions.

We continue to expect to launch this breakthrough product in the second half of 2010. When we launched MONOVISC, we will be dong so through our own direct US sales capability. We made this decision in order to gain greater control of our product success in the market and a significantly greater share of the profits generated. By the expected launch of the product in the second half of the year, we plan to have approximately 10 direct sales people in place to focus on the major domestic geographic markets. These sales people will be complemented by a combination of distributors and agents who will expand our market reach. We have very high expectations for MONOVISC, which we believe can be a major product for us, particularly in the United States. And as all of you are aware, the US is currently the largest market for HA-based viscosupplementation treatments.

One reason we are excited about the FAB acquisition is that its orthopedic portfolio will add to the critical mass of products to sell into the US market, along with MONOVISC, upon its approval. While FAB does not have any US joint health product approvals to date, we believe that many of their currently marketed products will only need FDA 510(k) clearance to begin US commercialization. Now, while the 510(k) process is undergoing a change right now at the FDA and that process is beginning to look more like a PMA, virtually all of FAB’s products come with a meaningful clinical data package. And considering this, we should experience an expedited approval process.

Our immediate goal is to obtain FDA clearance for three key orthopedic products around the end of 2010. These products include Hyaloglide, a gel used in surgery to remove adhesions from tendons and in the shoulder for adhesive capsulitis; Hyalonect, a woven gauze used as a graft wrap; and, Hyalofast, which is a cartilage regeneration product.

Since we’re discussing our joint health pipeline, I’d like to note that the schedule for CINGAL to enter the clinic has been delayed. CINGAL is Anika’s single injection viscosupplementation product with a therapeutic agent. The delay was primarily due to our focus on the FAB acquisition in the fourth quarter as well as some minor technical issues. In light of the FAB acquisition, we’ll be evaluating how CINGAL now fits into our overall joint health strategy.

In addition to products in orthopedics, FAB also has a number of commercialized products in the advanced wound care; surgical applications; and, ear, nose, and throat or ENT areas. These products are mostly marketed in Europe, with some in Asia, and in the United States. It’s our plan to continue to use and expand FAB's international distributor network.

In advanced wound care, FAB offers eight products for the treatment of skin wounds ranging from birth to diabetic ulcers. The products cover a variety of wound treatments solutions for debridement agents to more advanced treatment such as advanced therapies and skin substitutes. FAB’s leading products include Hyalograft 3D, for the regeneration of skin; and, Hyalomatrix, for the treatment of burns and ulcers. FAB’s products are commercialized in Italy, and through a network of distributors, primarily in Egypt, Middle East, and Korea. Several of the products are approved for sale in the United States. And we are exploring distribution opportunities there.

FAB also brings us a broad product and pipeline portfolio in surgical applications. Just to give you a few examples, Hyalobarrier gel is a clinically proven barrier to prevent post-operative adhesions in general in pelvic surgery. This product has been quite successful in Europe. And we are evaluating what it would take to commercialize it in the United States. In addition, Hyalospine, which takes a very novel approach as a post-operative adhesion implant for spinal surgery has been through pre-clinical testing, and we have began a pilot study in Europe. There is some overlap between FAB’s surgical applications product line and Anika’s own INCERT anti-adhesion products. We’ll be rationalizing this produce line in order to present the best possible portfolio to the worldwide market.

FAB also has an expanding array of eight ENT or ear, nose, and throat products. The lead product is Merogel, a viscous hydrogel composed of cross-linked hyaluronic acid, a biocompatible agent that creates moist wound healing environments. And Medtronic is our distribution partner in this area.

That brings us to FAB's innovative, regenerative tissue technology, which I referred to earlier. Through a patented process, FAB has developed a solid fibrous fabric structure that promotes the attachment and growth of cells. This innovative tissue technology, which has been applied to the growth of skin and cartilage tissues, advances our vision to offer therapeutic products that go beyond pain relief to protect and restore damages tissue. The paradigm is to cover the complete continuum of care, from palliative, to protective, to restorative.

Already, FAB has two products commercialized in Europe for cartilage regeneration, including Hyalofast, which I mentioned earlier; and, Hyalograft C, the first bioengineered cartilage designed for minimally invasive surgical procedures. More than 5,000 patients have been treated today with Hyalograft C. And long term follow-up clinical data is available on more than 515 of these patients.

While FAB’s tissue technology is currently sold in Italy, we expect to expand distribution into additional Europe countries in 2010. We then intend to develop and commercialize other restorative products tailored for specific market needs.

FAB also has a very robust pipeline of preclinical projects based on its pioneering HA-based technologies. As we’ve discussed, FAB has a very strong research expertise that complements Anika’s excellent mid and late-stage development capabilities and manufacturing expertise. We’ll be integrating FAB’s R&D activities with Anika’s as we proceed through the year. As part of the integration, we’ll be rationalizing the pipeline projects between Anika and FAB, and determine the most promising ones to move forward into the clinic and commercialization.

Let’s snow turn to our opthalmics franchise. Opthalmics continues to be a stable component of our revenue base. Revenue for this quarter was up 14%, compared with the fourth quarter of 2008. But on a yearly basis, revenue was essentially flat, reflecting order timing in Q4.

Our veterinary product HYVISC, which is targeted for the treatment of equine osteoarthritis, continues to run as expected behind last year's sales.

Our aesthetics franchise was up significantly from a year ago driven by sales from our US distribution partner Coapt Systems. Coapt launched HYDRELLE in the US in Q3. On our last call, we discussed the expansion of our aesthetic franchise with the development of a version of our product to be used for the treatment of fine lines. We have received CE Mark approval for that product, and expect to launch it in Europe around mid-year. During the quarter, we also completed enrollment of our people of color study on schedule. Thus far, the feedback has been very favorable. Overall, we were pleased with our progress in the aesthetic franchise in Q4.

That completes our franchise review. Now, let me provide just a quick update on the status of our GNP manufacturing facility at our headquarters in Bedford, Massachusetts. The validation of building systems and manufacturing processes continues at a strong pace. The European notified body for our CE Mark products completed its evaluation in the fourth quarter, and we continue to work through the process with the US FDA. We will phase then the manufacturing of product lines throughout the year and expect the complete polar move for mover [ph] in the third quarter.

And now, please turn to the last slide, slide 10, and I’ll discuss our key objectives for 2010. First, we plan to achieve PMA approval for MONOVISC here in the United States. Second, we expect to launch MONOVISC domestically via direct commercialization. Third, we plan to continue the worldwide expansion of ORTHOVISC and MONOVISC through new partnerships and regulator approvals.

Fourth, we plan to complete the integration of FAB into Anika. And this involves several key initiatives, achieving approval of FAB products in the US, increasing the sales of FAB cell-based tissue technology in Europe, establishing a worldwide strategy for the wound care product portfolio, rationalizing and expanding the commercialization of FAB at Anika’s product offerings in surgical applications, and establishing an integrated research and develop strategy.

Fifth, we plan to achieve final regulatory approvals and begin full manufacturing in our Bedford facility. And finally, we intend to accomplish all of these while increasing revenue and at least maintaining existing levels of profitability. So with that, I’ll ask Clarissa to open the call to your questions.

Question-and-Answer Session

Operator

(Operator Instructions) And we will pause for a moment to see if we have a list of names. And your question comes from the line of Ross Gordon [ph] of RGA [ph]. Please proceed.

Ross Gordon – RGA

Good morning.

Kevin Quinlan

Good morning.

Ross Gordon – RGA

I’d like to know how the – what’s going to happen with ORTHOVISC considering you’re using a different sales force for MONOVISC?

Kevin Quinlan

We think that that’s going to be an advantage. The partners on the ORTHOVISC product have a significant investment into that product line. And it’s a very high quality product. There's room in the market for multiple injection products as well as single injection products. And we think that there’s every reason to believe that they’ll continue to do well with it.

Ross Gordon – RGA

But they will not be selling MONOVISC?

Kevin Quinlan

That is correct.

Ross Gordon – RGA

Okay. Thank you.

Kevin Quinlan

You're welcome.

Operator

And there are no further questions. As this time I like to turn the call back over to management for closing remarks.

Charles Sherwood

Thank you, Clarissa, and thanks to everyone for joining us today. These are exciting times at Anika, and we look forward to updating you on our progress in our next Q1 conference call. Thank you.

Operator

Ladies and gentlemen, this concludes the conference for today. You may now disconnect. Good day.

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Source: Anika Therapeutics, Inc. Q4 2009 Earnings Call Transcript
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