Anika Therapeutics Inc. (NASDAQ:ANIK)
Q1 2010 Earnings Call
May 11, 2010 09:00 a.m. ET
Kevin Quinlan - CFO
Charles Sherwood - President and CEO
Good day, ladies and gentlemen, and welcome to the first quarter 2010 Anika Therapeutics investors' conference call. (Operator Instructions)
I would now like to turn the call over to Mr. Kevin Quinlan, Chief Financial Officer. Please proceed.
Thank you, (Francine), 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 Merill Associates at 617-542-5300. The news release is also posted in the Investor Relations section of Anika Therapeutics' website at anikatherapeutics.com.
Also, I want to mention that we have slides posted on the Anika website that illustrates some of the financial information we'll be discussing during today's call. These slides could be found on the Investor Relations section of the website, 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 Exchange Act of 1934. Words such as will, believe, appear, plan, expect, anticipate, forward, seek, continued 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 includes those set forth in last evening's press release and the company's SEC filings.
Please move to slide three as I turn the call over to Anika's President and Chief Executive Officer, Dr. Charles Sherwood.
Thank you, Kevin, and good morning everyone, and thanks for joining us today. This was a great start to a year that promises to be full of milestones for Anika. Total revenue increased 35% year-over-year, while total product revenue was up 37%.
On an organic basis, that is, excluding FAB, Fidia Advanced Biopolymers, our product revenue increased to 18% from the first quarter last year, extending our record to 11 consecutive quarters of product revenue growth compared to the previous year's same quarter.
Net income increased 37%, in line with the revenue increase.
I concluded our call last quarter by outlining our key goals for 2010. My comments this morning will focus on the progress we made on those objectives in the first quarter and the advances we expect to report as we move through the rest of the year.
We'll start however, with the financial review, so now I'll turn the call back over to you, Kevin.
Thanks, Chuck. Please turn to slide four in the presentation. Total revenue in the first quarter of 2010, including FAB, grew 35% from the first quarter last year to $12.5 million. Consolidated product revenue grew by 37%, and as Chuck said, organic product revenue growth for Anika excluding FAB was 18%. This was driven primarily by the continuing strong performance of our joint health franchise.
You can also see on this slide, the additional therapeutic areas where FAB is contributing to revenue, including Advanced Wound Care and Post Surgical Products.
Turning to slide five, which looks at Orthopedics/Joint Health products in detail, you'll see that revenue increased 34% to $6.9 million from the first quarter of 2009. Revenue growth was driven by strong domestic performance of ORTHOVISC. Domestic Joint Health sales were up 44%. International sales, including FAB were up 9.6 %.
Turning to slide six, you can see the impact of this revenue growth on the other lines in our income statement. Our first quarter consolidated gross margin was 56% compared with 62% in the first quarter last year. The decline this quarter largely reflected the addition of FAB products into the overall mix. On an organic basis, Anika's gross margin was essentially level with first quarter last year.
Looking forward, as I mentioned last quarter, the transition of manufacturing operations to our Bedford facility will be taking place on an incremental basis by product line as we move through the year. This means we'll be manufacturing both at our Woburn and Bedford facilities for a significant portion of 2010, accompanied by some inventory build in preparation for the transition. We expect this to result in a slight decline in margins for 2010 compared with 2009.
Net income for the first quarter of 2010 was $714,000 compared to $523,000 in last year's first quarter, a solid 37% increase, just slightly better than the total revenue increase of 35%. As you know, we issued almost 2 million new shares of Anika's stock in connection with the FAB acquisition on December 30, 2009. So the fully diluted earnings per share for the quarter was $0.05 per share, level with the $0.05 we reported for the first quarter last year.
Anika's standalone contributions were about $0.12 for the quarter, significantly improved over last year, and the FAB results for the quarter were in line with our expectations, and consistent with our goal for FAB this year. I'll expand on this point in a moment.
Turning to slide 7, our total research and development expense for the first quarter of 2010 decreased to $1.9 million from $2.2 million for the first quarter last year. R&D spending was down year-over-year due to the completion of our U.S. MONOVISC clinical trial in the third quarter of 2009.
This decrease was partially offset by the inclusion of R&D expenses at FAB in our consolidated results. We expect some growth in research and development expenses going forward as we rationalize our global R&D programs and pipeline, but we'll be managing them closely with a more intensive focus on commercializing what we have already developed.
Chuck will add some color on our first quarter R&D activity in a moment.
As you can see on slide 8, selling, general, and administrative expenses for the first quarter of 2010 increased to $4.3 million from $3 million in the first quarter last year, primarily driven by the inclusion of SG&A at FAB.
Excluding FAB, our first quarter SG&A expenses were essentially level with the year-earlier quarter. We continue to expect a modest increase in general and administrative expenses in 2010.
Turning to slide 9 for the balance sheet highlights, we closed the first quarter with $23.2 million in cash and cash equivalents. This compares with $24.4 million on December 31, 2009. I'd like to point out that the first quarter's cash from operations was positive, a big improvement over last year.
I'll conclude with an update on our financial expectations for FAB. One of our five key goals for 2010 is to reduce FAB's net loss, which exceeded $4 million in 2009 to less than $2 million in 2010, positioning FAB to be accretive to our earnings in 2011.
Our plans for achieving this goal focuses on efficiently and quickly integrating Anika and FAB to generate operational, sales, and R&D pipeline synergies, while at the same time rationalizing FAB's portfolio of products.
We're making good progress in all of these areas and believe we are on track to accomplish this goal. Those of you who have been following Anika for a while, know that the first quarter is usually our weakest of the year. And we're encouraged by the first quarter's results.
With that said, I'll turn the floor back to Chuck for the operational details on FAB and other parts of the business in the first quarter.
Thank you, Kevin. Slide number 10 outlines our five key goals for 2010. And as you can see, three of these goals are focused on our joint health/orthopedic franchise. Joint health is where we see Anika's greatest growth potential, so I'll start there.
The first of our goals is to grow sales of ORTHOVISC and MONOVISC in the United States and internationally. And ORTHOVISC continued to perform well in the first quarter of 2010, particularly in the United States, where sales were up 44% from the first quarter last year.
International sales of ORTHOVISC were down 30% year-over-year, mainly reflecting order timing with some weakness in Europe due to the challenging economic conditions in that region. It should be noted that last year's first quarter international sales increased 62% over Q1 2008, favorably impacted by order timing.
Given the expansion of our EU distribution over the past year, we're optimistic that international ORTHOVISC and MONOVISC sales will pick up in the second half of the year. We continue to work on additional rest-of-world distribution opportunities, which should begin to impact revenue as early as late 2010.
This brings us to the second group of goals for 2010, mainly, developing our hybrid direct sales model, receiving FDA marketing approval, and launching MONOVISC in the United States.
As I said in discussing MONOVISC on our call last quarter, we took a modular approach with the FDA to allow for the fastest approval process possible. We completed our PMA filing at the end of 2009 when we submitted the clinical study module in late December, and we continue to expect to launch this exciting product in the second half of 2010.
We'll be implementing our MONOVISC product launch through our own direct U.S. sales capability as a means of better controlling the commercialization process and capturing a larger share of the profits. Our plan is to have a cadre of direct sales people in place when MONOVISC is launched. We'll focus on the major U.S. geographic markets, while contract sales organizations and agents will handle the secondary markets.
Out third goal for 2010 is to receive FDA approval and launch key FAB orthopedic products in the U.S. market. FAB has a broad orthopedic product portfolio, that added to ORTHOVISC and MONOVISC should provide us with the critical mass of products we need to more effectively penetrate the domestic market. FAB has already commercialized a number of these orthopedic/joint health products, mainly in Europe.
Although none of these products have received FDA approval at this point, we believe that many of them will only need FDA 510(k) clearance. Virtually all of the FAB products come with a meaningful clinical data package, which should expedite the approval process for us despite the trend toward longer 510(k) review cycles.
Our near term focus is on the three FAB orthopedic products that appear to be most immediately applicable for the U.S. market. These are 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 a cartilage regeneration HA matrix product called Hyalofast.
Our vision for Anika is to offer therapeutic products that span the full continuum of care - from palliative, to protective, to restorative; or in other words, from pain relief to protecting and restoring damaged tissues. FAB's restorative tissue technology will help us advance this vision.
Hyalograft 3D Autograft and Laser Skin Autograft are two restorative products that FAB has already commercialized. Both are aimed at skin regeneration following severe burns or serious ulcers.
A third product is Hyalograft C Autograft, which is the first bioengineered cartilage designed for minimally invasive surgical procedures. More than 5,000 patients have been treated to-date with Hyalograft C, and clinical data are available on more than 550 of these patients. These products are currently being distributed mainly in Italy, and it is our plan to expand their distribution into additional countries in Europe later this year.
Finally, as Kevin discussed, our fifth goal for 2010 is to reduce FAB's operating loss through cost synergies and product rationalization, positioning FAB to generate profits in 2011. Along with the role that FAB plays in our orthopedic/joint health portfolio, FAB's products have also become part of our post-surgical products' franchise. This includes products to prevent post-surgical adhesions in a number of therapeutic areas, such as spinal, abdominal, pelvic, and ear, nose and throat or ENT surgery.
The ENT line consists of eight products. The lead product is Merogel, a viscous hydrogel composed of cross-linked HA which reduces adhesions and creates a moist wound-healing environment. FAB has partnered with Metronic for global distribution of Merogel and the other ENT products.
Anika's first anti-adhesion product was INCERT, a cross-linked HA therapy for prevention of post-surgical adhesions that we currently sell in two countries in Europe and also in Turkey.
With FAB, we've added two new surgical anti-adhesion products; Hyalobarrier and Hyalobarrier Endo, clinically proven post-operative adhesion barriers approved for abdominal and pelvic indications. These products are currently commercialized by FAB in Europe, the Middle East and some countries in Asia, but they are not approved in the United States.
Although there is some therapeutic overlap between INCERT and FAB Hyalobarrier products, each product does offer distinct advantages in certain applications. The anti-adhesion franchise is clearly important to us, as we work to rationalize the FAB product line, and will remain focused on this as we proceed throughout the year.
In advanced wound care, FAB offers nine products for treatment of skin wounds, ranging from burns to diabetic ulcers. The products cover a variety of wound treatment solutions from debridement agents to more advanced therapies, up to skin substitutes.
FAB's leading wound care products are Hyalograft 3D Autograft and Laser Skin Autograft for the regeneration of skin, and Hyalomatrix for treatment of burns and ulcers. FAB's wound care products are commercialized directly in Italy, and through a network of distributors, primarily in Europe, the Middle East, Argentina, and Korea.
Several of the products are also approved for sale in the United States, and the development of an effective domestic distribution for these products is a high priority for the company.
In terms of research and development, as we said previously, FAB has a strong pipeline of HA-based pre-clinical products and research expertise that compliment Anika and it's mid to late stage development capabilities and manufacturing expertise. Our efforts to make FAB accretive to earnings as rapidly as possible are in part centered on integrating FAB's R&D activities with goals of the Anika.
We made excellent progress on this integration in the first quarter. We initiated a comprehensive review of all research projects across the entire company, which we expect to complete in the current second quarter. In connection with this review, we began reorganizing the Anika and FAB research and development functions on both sides of the Atlantic, providing focus and commercialization emphasis.
Our drive to generate cost synergies is also going well. Eventually, we expect to move the manufacture of products currently made by FAB's former parent company to our facility in the United States, where we can deliver significant efficiencies in cost savings. We've also identified opportunities to realize greater efficiencies in FAB's product packaging, and we are now making improvements in this area.
Looking ahead near term, launching FAB's joint health/orthopedic products in the U.S. market and slightly further ahead, doing the same with their advanced wound care products, we believe we will significantly enhance FAB's product gross margins and advance the business to profitability.
Now let me give you a quick update on the status of our GMP manufacturing facility at our headquarters in Bedford, Massachusetts. We continue to make progress in validating the building systems and manufacturing processes at Bedford in the first quarter, actively working with the FDA. We are now awaiting the FDA's arrival for an onsite inspection of our terminally sterilized manufacturing line.
On the aseptic fill side, which includes ORTHOVISC, HYVISC, and our ophthalmic products, we continue with our validation work and putting our documentation packages together. We are expecting to be phasing in these various product lines over the next few months, receive our FDA and CE Mark, GMP qualifications, and fully complete the manufacturing transition from our Woburn facility to Bedford in the third quarter of 2010.
To summarize, this was good quarter for Anika. We're successfully executing on our key goals and driving revenue growth while leveraging our HA research and manufacturing expertise, and our solid financial position. FAB advances our vision to provide therapeutic products that go beyond pain relief, expanding our growth opportunities, and positioning us for accelerated earnings in the longer term.
We look forward to reporting to you on our continued progress in 2010. So with that I will turn the call back over to (Francine) to take your questions.
(Operator Instructions) We have a question from the line of (Ross Gordon).
Could you please give an update on the status of Hydrelle?
The product is currently being sold both internationally and in the U.S. In the first quarter, as you probably notice, we had a small increase in the revenue for the first quarter versus first quarter of 2009. An important product is the ELEVESS Light product that has been approved in Europe, and that we're looking at in terms of being able to also offer here in the U.S.
And we have no further questions. I'd like to turn the call back over to management.
Okay (Francine), thank you very much. And again, thanks to everyone for joining us on the call today and your support of Anika, and we look forward to updating you on our second quarter conference call.
Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.
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