Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Anika Therapeutics, Inc. (NASDAQ:ANIK)

Q2 2010 Earnings Call Transcript

August 10, 2010 9:00 am ET

Executives

Kevin Quinlan – CFO

Charles Sherwood – President and CEO

Analysts

Ali Motamed – Boston Partners

Larry Anderson – Raymond James

Yan Wang [ph] – Greencoast Capital

Gary Siperstein – Eliot Rose Asset Management

Operator

Good day, ladies and gentlemen and welcome to the second quarter 2010 Anika Therapeutics earnings conference call. My name is Josh and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to our host for today's call, the Chief Financial Officer, Kevin Quinlan. You may proceed, sir.

Kevin Quinlan

Thank you, Josh 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 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 will be discussing during today's call. These slides can 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 2. 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 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 3 as I turn the call over to Anika's President and Chief Executive Officer, Dr. Charles Sherwood.

Charles Sherwood

Thank you, Kevin. Good morning, everyone and thanks for joining us today. This was a solid quarter for Anika. We made good progress executing on our key goals and driving revenue growth.

Total revenue increased 52% year-over-year, while product revenue was up 56%. On an organic basis, that is, excluding FAB, our product revenue increased 24% from the second quarter last year, extending our record to 12 consecutive quarters of product revenue growth compared with the same quarter of the previous year.

Our net income for Q2 2010 increased 12% from the second quarter last year, reflecting the dilutive effect of the FAB acquisition. One of our six goals for the year is to cut FAB operating loss in half and we made progress toward that goal in Q2. Compared with the first quarter of 2010, FAB's revenue grew 70%, that's 70%, and operating loss declined 39%.

I'll have more to say about the FAB integration and the advances we made on our other goals in the second quarter after Kevin's financial review. And then we will both be happy to take your questions at the end of this presentation. Kevin?

Kevin Quinlan

Thanks, Chuck. Please turn to Slide 4 in the presentation. Total revenue in the second quarter of 2010, including FAB, grew 52% from the second quarter last year to $14.5 million. Consolidated product revenue grew by 56% and as Chuck said, organic product revenue growth for Anika, excluding FAB, was 24%. This revenue growth was driven primarily by the continued strong performance of our joint health franchise. As you can see on the slide, FAB is also contributing to our total revenue in additional therapeutic areas including advanced wound care and surgical products.

As you can see on Slide 5, revenue in our Orthobiologics franchise, which includes our joint health products, increased 38% to $7.7 million from the second quarter of 2009, reflecting strong domestic sales of ORTHOVISC. Domestic Orthobiologics sales were up 31% and international Orthobiologics sales, including FAB, were up 58% and they were up 26% excluding FAB.

Slide 6 illustrates the impact of this revenue growth on the other lines in our income statement. Our second quarter consolidated product gross margin was 57% compared with 62% in the second quarter last year. The decline in this quarter largely reflected the addition of FAB products into the overall mix. On an organic basis, Anika's gross margin was down slightly from the second quarter last year at 60%, due largely to added inventory reserves.

As I have mentioned on previous calls, the transition of manufacturing operations to our Bedford facility will result in a slight decline in margins for 2010 compared to 2009. This is because we will be manufacturing in both our Woburn and Bedford facilities for a significant portion of the year, and as a result, experiencing some inefficiencies during the transition.

Net income for the second quarter of 2010 grew 12% to $1.1 million or $0.08 per diluted share from $956,000 or $0.08 per diluted share in the second quarter last year. We issued nearly 2 million new shares of Anika stock in connection with the FAB acquisition last year, which reduced our earnings per share. FAB's contribution was in line with our expectations and consistent with our target for the year, as I'll explain in a moment.

Turning to Slide 7, our total research and development expense for the second quarter of 2010 decreased to $1.8 million from $2.3 million for the second quarter last year. This decrease reflected the completion of our U.S. MONOVISC clinical trial in the third quarter of 2009, partially offset by the inclusion of R&D expenses at FAB in our consolidated results.

One of our priorities for the year is to rationalize our global research and development programs and pipeline. We expect to see some growth in R&D expense going forward as a result. We will be managing these costs closely with an intensive focus on commercializing what we have already developed. And Chuck will expand on this in a moment.

As shown on Slide 8, selling, general, and administrative expenses for the second quarter of 2010 increased to $4.9 million from $2.7 million in the second quarter last year. This increase was primarily driven by the inclusion of SG&A at FAB, integration costs, and reserves for bad debt related to Coapt accounts receivable. We continue to expect a modest increase in general and administrative expenses in 2010 as we prepare for direct commercialization of MONOVISC. In addition, we expect to incur defense costs related to the claim of patent infringement recently filed against Anika.

Slide 9 presents our balance sheet highlights. We closed the second quarter with $23.5 million in cash and equivalents. This compares to $24.4 million on December 31st, 2009. Over $700,000 of positive cash from operations was generated in the first half of 2010, consistent with our expectations of positive operating cash flow for the year.

Before turning the call back over to Chuck for the operational review, I want to discuss two more items. First, as you may know, Anika Therapeutics has been a contract manufacturer for Bausch & Lomb for over 20 years and the current supply agreement with them expires on December 31st, 2010.

We are currently negotiating a limited-term extension, which is expected to generate significantly less revenue from Bausch & Lomb for 2011 as they transition to a low-cost supplier, recently affiliated with the ownership of Bausch & Lomb. We are still assessing the impact on future results, but there are additional ophthalmic opportunities available to us once the Bausch & Lomb relationship has been terminated.

The second item is a quick update on FAB from a financial perspective. As we have said, one of our six key goals for this year is to significantly reduce FAB's operating loss, which exceeded $4 million in 2009 in order to position FAB to be accretive to our earnings in 2011. To get there, our plan encompasses organizational integration and product portfolio rationalization. We are working to generate operational, sales, and R&D pipeline synergies by efficiently integrating Anika and FAB, while at the same time, streamlining FAB's various product lines.

We are continuing to make good progress. For the second quarter of 2010, revenue at FAB was up 70% and operating loss declined 39% sequentially from the first quarter of 2010. And we are looking forward to reporting continued improvement on both top and bottom lines in the second half of the year.

With that, I will turn the call back over to Chuck.

Charles Sherwood

Thank you, Kevin. Slide number 10 outlines our six key goals for 2010. The first of these goals is to increase domestic and international sales of ORTHOVISC, and ORTHOVISC continued to perform well in the second quarter. Anika's revenues in United States remain particularly strong, up 31% from the second quarter of 2009. Sales in Europe remain somewhat depressed due to the slow economy in Europe and the competitive environment for this class of products there. And while international sales of ORTHOVISC were up 18% for the quarter, year-to-date, they are still off 7% from last year.

We clearly saw the impact of the expansion of our EU distribution over the past year in sales of MONOVISC, which increased 55% from Q2 of 2009. We are continuing to pursue additional rest-of-world distribution opportunities for both ORTHOVISC and MONOVISC and we anticipate further growth in international sales of these products in the second half of 2010.

Moving to the second bullet on Slide number 10, we continue to make progress towards our goal related to our U.S. launch of MONOVISC. A meeting with the FDA took place in May and focused on a discussion of our pivotal clinical study results. They raised several questions and asked us to perform some additional analyses. We expect to submit our responses to the FDA's questions in early September. Our goal remains to directly commercialize MONOVISC in the United States and we have made good progress on our infrastructure development plans.

As we announced last month, Anika has been served with the complaint alleging patent infringement with respect to MONOVISC by Genzyme Corporation. Although the patents at issue have a very short remaining life, we intend to vigorously defend the lawsuit in our MONOVISC product franchise and we believe MONOVISC does not infringe any existing patents. Also, this complaint does not have any impact on the FDA approval process for MONOVISC.

I will now turn to our third goal for 2010, which is to obtain FDA approval and launch key FAB orthopedic products in the United States. Adding these products to MONOVISC should provide us with the comprehensive joint health product portfolio we need to more effectively penetrate the domestic market.

The fact that virtually all of FAB's products come with a meaningful clinical data package should expedite the approval process. We are currently working on our 510(k) applications for three FAB products. First one in the pipeline are Hyaloglide, a gel used to reduce adhesions from tendon surgeries and in the shoulder for adhesive capsulitis; Hyalonect, a woven gauze used as a graft wrap; and a cartilage regeneration product called Hyalofast. We expect to file our first 510(k) application this month and then make further filings in subsequent months.

Despite a trend toward longer and more complicated 510(k) approval procedures, we anticipate receiving our first approval by year-end and another two approvals in the first quarter of 2011.

Turning to our fourth goal for 2010 and the fourth bullet on Slide number 10, 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 regenerating damaged tissues. FAB's restorative tissue technology will help us advance this vision.

FAB has already commercialized three regenerative products. Hyalograft 3D Autograft and Laser Skin Autograft are both 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. As I mentioned last quarter, we have clinical data available on more than 550 of the 5,000 plus patients who have been treated to date with Hyalograft C. These products are currently being distributed mainly in Italy, and we are actively working to expand their distribution into additional countries in Europe this year.

As Kevin discussed, our fifth goal for 2010 is to reduce FAB's operating loss and position the business to generate profits in 2011 by combining revenue growth with cost reduction synergies and product rationalization. Along with the role that FAB plays in our joint health franchise, FAB's products have also become the main stay of our surgical franchise. This includes products to prevent post-surgical adhesions in a number of therapeutic areas, such as spinal, abdominal, and pelvic, as well as products used in conjunction with ear, nose, and throat or ENT surgery.

FAB's ENT line consists of eight products, all covered by a global distribution partnership with Medtronic. The lead product is Merogel, a viscous hydrogel composed of cross-linked HA which reduces adhesions and creates a moist wound-healing environment. Anika's first anti-adhesion product is INCERT, a cross-linked HA therapy for prevention of post-surgical adhesions. We currently sell INCERT for spinal applications in two countries in Europe, as well as in Turkey.

With FAB, we have added two new surgical anti-adhesion products; Hyalobarrier and Hyalobarrier Endo. They are 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 have not yet been approved in the United States.

Although INCERT overlaps the FAB's Hyalobarrier products in some therapeutic areas, each product offers distinct advantages in certain applications. Because of the importance of our surgical franchise, maximizing the value of these products will remain a focus for us as we rationalize the product line.

In advanced wound care, FAB offers nine products that are commercialized through a network of distributors, primarily in Europe, the Middle East, Argentina, and Korea, led by Hyalograft 3D Autograft and Laser Skin Autograft for the regeneration of skin, and Hyalomatrix for the treatment of burns and ulcers. These products range from debridement agents to advanced skin substitutes. Several of these products are approved for sale in the United States and we are working to establish a domestic distribution partner for the – partnership for these products by the end of 2010.

Launching FAB's joint health/orthopedic products into the U.S. market and then doing the same with their advanced wound care products, we believe will significantly enhance FAB's product gross margins and advance us closer to our goal of making FAB accretive to earnings as rapidly as possible.

Achieving this goal also hinges on integrating FAB's research and development activities with those of the Anika. This integration process accelerated in the second quarter. Based on a comprehensive review of all the company's research projects, we completed our reorganization of the Anika and FAB research and development functions in the United States and Europe by uniting them under common leadership, strengthening their focus, and placing a high priority on product commercialization.

We also made significant progress in developing needed infrastructure at FAB during the second quarter. We completed an organizational restructuring at FAB and at the same time, we began installing a new network and ERP system that will enable FAB and Anika to better manage the business.

In the coming two years, we plan to move the manufacturing of products made by FAB's former parent company to our facility in the United States, where we expect to deliver significant efficiencies and cost savings. We have also identified opportunities to realize greater efficiencies in FAB's product packaging and we are starting to make improvements in this area.

Finally, our sixth strategic goal; moving forward on our GMP manufacturing facility at our headquarters in Bedford, Massachusetts remains a high priority for us this year. As an affiliated activity, we have been working to enhance quality across all of Anika's operations and have totally revamped our quality organization.

In that context, one of the highlights this quarter was the FDA's acceptance of the corrective actions we put forth to address the issues raised in the FDA's 2008 warning letter and as a result, subsequent lifting of that warning letter. We worked diligently with the FDA to develop and implement a plan that we will expect will keep Anika at an exemplary level with respect to compliance and we appreciate the cooperation we received from the Agency in this process. This cooperative relationship with the FDA has extended to the work we have been doing to validate the building systems and manufacturing processes at Bedford.

Agency personnel recently conducted an onsite inspection of HYDRELLE, one of the products in our completed cross-linked manufacturing line. This inspection went very well with all observations corrected and verified by the inspector prior to her [ph] close-out meeting.

On the aseptic fill side, which includes of course ORTHOVISC, HYVISC, and our ophthalmic products, we are continuing with our validation work and putting our documentation packages together. We expect to phase-in the various product lines over the next few months, receive FDA and CE Mark, GMP qualifications, and fully complete the manufacturing transition from our Woburn, Massachusetts facility to Bedford in the third quarter of 2010.

In addition, a successful notified body inspection of Bedford in the second quarter resulted in approval for Anika to ship CE Mark material into the EU. This CE Mark approval covers all of our cross-linked products, including MONOVISC, ELEVESS/HYDRELLE, and INCERT. And we delivered our first international shipments of MONOVISC and INCERT from Bedford during the second quarter.

Before we take your questions, I'll conclude with an update on our aesthetic dermatology franchise. We established a U.S. distribution partner for HYDRELLE with Coapt Systems in 2009, but we are disappointed to learn this quarter that Coapt had filed for bankruptcy, which terminates this relationship. Although we are currently developing alternative strategies for ELEVESS/HYDRELLE, this process will take a lower priority to work we are doing to expand our joint health franchise, which is our primary focus.

Wrapping up, we executed successfully on our strategic goals and produced solid financial results this quarter. We are clearly making progress and we believe that our expanded opportunities with the FAB acquisition position us well for earnings growth. We look forward to reporting to you on our continued progress in the second half of 2010.

So with that, I will turn it back over to Josh so that we can take your questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from the line of Yan Wang [ph] of Greencoast Capital. Yan, you may proceed. (Operator Instructions). And we will take a moment to compile questions. And our next question comes from the line of Ali Motamed of Boston Partners. Ali, you may proceed.

Ali Motamed – Boston Partners

Hi, nice quarter. I was wondering if you could talk a little bit about Bausch & Lomb. That's something that's of some concern to me and I know the contract comes up here.

Kevin Quinlan

Sure. The – as we stated, we are still actually in negotiations with this, but it's apparent that the contract will be ending sometime in 2011. We do expect a – an extension, but at this point, I can't tell you the exact financial impact, because we are – we expect that we will have revenue in 2011, but we don't know how much yet. But I guess the major point is that in the long term, it is going away as a contract for the company.

Ali Motamed – Boston Partners

So can we start talking about it and kind of straightening it out sooner rather than later, because as we start – as we start progressing into the future, there is a lot of good things in the company going on and it will be nice to be able to identify the progress that you are making against sort of the good assets of the company and not have that and for example, HYDRELLE and these things be distracting us so much? So maybe as we go forward, you guys could take a bit of a – maybe a more – I know perhaps it hurts results now, but identifying sort of what that contributes or what it maybe, just a thought there?

Kevin Quinlan

Yes. I think when – after we have come to some – to a conclusion with Bausch & Lomb in a future call, we can certainly update the situation and paint a more exact expectation as to what we think it's going to mean.

Charles Sherwood

Yes, let me make – Ali, let me make one additional point. This is Chuck Sherwood. We do have two additional ophthalmic partners and we will continue to distribute ophthalmic viscoelastics through those partners. They are very small compared to Bausch & Lomb, but the Bausch & Lomb arrangement was somewhat restrictive on us in terms of adding additional partners, in terms of potentially developing any new products. So there are some other opportunities that will become available to us once this relationship is terminated.

To a point that you made, however, our focus will continue to be in the orthopedic/joint health space and we look at some of this ophthalmic business as opportunity, but we have been in this business manufacturing and developing these products for over 20 years and this is essentially where Anika started. So we do know a lot about the space. So we will take your comments to heart and we will look forward to trying to be clear about where our focus and real opportunities are in subsequent conference calls and communications with investors.

Ali Motamed – Boston Partners

Perfect. And then one other thing. There is some amortization expense certainly on the acquisition that impacts us. What – excluding that, what kind of loss do you think that the quarter had because of the acquisition, so whether contribution loss – true contribution loss?

Kevin Quinlan

Ali, are you asking me what was the impact of amortization?

Ali Motamed – Boston Partners

No, I know what the impact of amortization was. I – my understanding was we would probably be losing a couple of million bucks even – excluding amortization related on the first couple of years. But then you also talked about the progress you are making. So I am wondering sort of where we sit with regards to that.

Kevin Quinlan

Yes. Well, I think the – in terms of the impact on FAB, they were close to breakeven, if you exclude the amortization cost on them. So we are making substantial progress on making that business more efficient, as well as looking at expanded commercial opportunities, because we need to do both; we need to increase revenue, as well as be more efficient in our spending.

Ali Motamed – Boston Partners

Thank you very much.

Operator

And our next question comes from the line of Larry Anderson of Raymond James. Larry, you may proceed.

Larry Anderson – Raymond James

Nice quarter, men. Better than I thought it would be at this point.

Charles Sherwood

Thank you.

Larry Anderson – Raymond James

Thank you for the additional comments on the patent infringement issue. I know you are limited in what you can say there, but in addition to that, could you briefly summarize what patent protection MONOVISC has been granted?

Charles Sherwood

Primarily, the MONOVISC patent or the MONOVISC product is covered under some of the other patents that we have that cover some of the basic chemistry used to make that product. So it's not specifically covered by a use patent, but more of a basic chemistry and composition of matter patent.

So I – the Genzyme – not to go too far, but the Genzyme patent goes back to really the old Biomatrix company that they acquired and it's one of the original patents that Biomatrix had, which is – as I pointed out, has very little life remaining on it. And we do not believe that it at all relates to our MONOVISC product.

Larry Anderson – Raymond James

Very good.

Operator

And our next question comes from the line of Yan Wang [ph] of Greencoast Capital. Yan, you may proceed.

Yan Wang – Greencoast Capital

Good morning, everyone. Congrats on the successful quarter.

Charles Sherwood

Thank you.

Yan Wang – Greencoast Capital

My first question, Chuck mentioned that Anika is going to move the facility – the FAB facility to U.S. I am just wondering whether this move will be to existing facility or there will be more capital expenditure.

Charles Sherwood

Okay, let me be a little clear on that. We are not going to move the FAB facility to the United States. And the FAB facility consists of R&D people, finance people, the – all the people necessary to run the operation, but it also consists of a very sophisticated laboratory and manufacturing function to make the tissue engineered products that are cell-based. We cannot move that; that will stay in Abano Terme. Many of the other FAB products are contract-manufactured by FAB's former parent Fidia Farmaceutici and it is these products that we plan to move to the United States. So then in essence, Anika will be the contract manufacturer for FAB.

Yan Wang – Greencoast Capital

Okay. I would like the – I would like to hear some estimate on the profit margin for this and next year, given the changes of R&D and SG&A expenses.

Kevin Quinlan

Yes. The – specifically, you are saying on the SG&A and the R&D expenses?

Yan Wang – Greencoast Capital

Sure.

Kevin Quinlan

Yes. So I think we – as you know, the R&D expenses are significantly down this year versus last, mainly because of the completion of the MONOVISC clinical trial. And we believe that as we are moving forward on approvals for additional products, we will have some modest increases in the R&D area relative to the levels that we are at right now.

On the SG&A front, we do have some costs that are in there related to the integration. And so as we complete the integration process, a little bit of that will go away, and I would model the SG&A only to have modest increases from the current levels and not the significant increase that you saw this year versus 2009.

Yan Wang – Greencoast Capital

Thank you. My last question is related to the product. So is it fair to say that with the FAB integration, the regenerative products likely to be the next growth driver for Anika? If so, I would like to hear some management's expectations of the timing and the magnitude of the revenue impact. And also, I would like to hear some updates on the development of CINGAL. Thank you.

Charles Sherwood

Okay. I think that the – some of the regenerative products, namely the cell-based products that I spoke about in the presentation – I'm sorry – okay, they have some real long-term potential for revenue generation. It's a challenging regulatory environment, both in Europe, in the rest of the world, and also in the United States.

And one of the things that we are trying to understand and get our heads around as we integrate our R&D product portfolio is exactly what are the hurdles to try to think about bringing some of these products into the United States through the approval process. And quite frankly, with all the things that we have going now, we have not made a huge amount of progress in that area. So our focus primarily for these cell-based products now is in Europe, where they are operating under approval status, which may change in the future, but is fine right now.

Some of the other FAB products though that we think can add some real value and that we can get approved in United States are some of the orthopedic products and also the wound care products, which – advanced wound care products, which – many of which are already approved here, but aren’t being sold here at the current time because we do not have any mechanism to sell them. We don't have any direct sales force and really don't have an intention to generate one. And we are looking for a commercial partner here in the States and possibly in some other territories for these products as well.

So that could be more of a short-term driver for revenue here in the company. But long term, we feel very positive about some of the regenerative products.

Yan Wang – Greencoast Capital

Thank you. And also – thank you, I'll jump back to the queue. Thank you.

Operator

And at this time, we are showing no further questions available. Dr. Sherwood, you may proceed.

Charles Sherwood

Is there one additional question from the –?

Kevin Quinlan

From Yan?

Charles Sherwood

Yan.

Operator

And pardon me, I am showing that we have Yan that has dialed in again. Would you like to take that question?

Charles Sherwood

Of course. Yes.

Operator

And Yan, you may proceed.

Yan Wang – Greencoast Capital

Thank you. And this question is – I think – so, I would like to hear some update on development of CINGAL.

Charles Sherwood

Okay. We strongly took a look at CINGAL in terms of our R&D portfolio rationalization and we are still going ahead to try to complete the final steps in the formulation and we are trying to develop our regulatory strategy as we speak. And it is our plan to move ahead with that product. I think things got somewhat delayed for various reasons, not the least of which was the acquisition and integration of FAB. But it is our plan to move ahead with that product.

Yan Wang – Greencoast Capital

Thank you. It's very helpful. I have one last question regarding the MONOVISC. I – do we have a time expectation on when we can hear the decision of the litigation – the complaint? Thank you.

Charles Sherwood

I don't know, it's frequently quite difficult to predict what's going to happen in any of these kinds of legal matters. I think that it's probably going to play out over time. I don't think it's going to reach a quick decision. Beyond saying that, I really can't give you any real useful time table.

Yan Wang – Greencoast Capital

Sure. Okay. Thank you.

Operator

And our next question comes from the line of Gary Siperstein of Eliot Rose Asset Management. Gary, you may proceed.

Gary Siperstein – Eliot Rose Asset Management

Hi, guys. Good morning and congratulations on a solid quarter.

Kevin Quinlan

Thank you, Gary.

Charles Sherwood

Thank you, Gary.

Gary Siperstein – Eliot Rose Asset Management

Chuck, starting out with the Orthobiologics franchise, what do you think accounted for the 31% increase in Q2 for our product? Did our distributor add salespeople or is it just getting more market share as time passes? I mean, could you – can you point to anything?

Kevin Quinlan

Gary, this is Kevin. I think they have just – they are continuing to just progress very well with the franchise and it's – they – it's not that they have added a lot of salespeople, but I think they are just getting the word out and penetrating the market further.

Charles Sherwood

I think also they are making investments, they have done some campaigns. And if you look at a lot of – this is my personal opinion, not necessarily based on fact. But if you look at Johnson & Johnson in general, they sort of are a company that continues to gain momentum as they go.

So they aren’t a company that goes out there very, very strong initially, sometimes they are cautious, but they do – if they believe in a product and a franchise, they work at it and they keep going and their goal is always to be number one or number two in the market space. So they are still very, very keen on ORTHOVISC and so far, they are doing a great job with it.

Gary Siperstein – Eliot Rose Asset Management

Okay. Moving on to MONOVISC, can you give us a little bit more color on the questions from the FDA? This additional statistical analysis – what are they looking for? Why wasn't it anticipated? Was our package not complete? And you said you would get the (inaudible) them in early September. Do you think it is of such a level of significance, this added data, that it tilts the scale one way or the other?

Charles Sherwood

No. In my experience, Gary, over however many years here, when you make a submission, typically 90-plus-percent of the time you get questions back. Almost never does it go through without questions. And they usually come depending on what kind of submission it is in the form of a deficiency letter – here's our questions. So we got a bunch of questions.

Sometimes, the questions are trivial and as a matter of fact, some percentage of them are trivial. Sometimes, the questions are already in the submission that you provided to them and you just have to point that out. So this is really a mix and we got the questions very short time frame before the meeting. So the meeting that we had was primarily trying to clarify what their questions really were rather than answering any of these questions.

We went back, took a look, and we understand what they are looking for now. And so, we want to make sure that the answers are – pretty much meet all of the needs so we don't get another round of questions. So we are not at all discouraged. Some of this is very normal and part of the process.

Gary Siperstein – Eliot Rose Asset Management

Okay. But why is the – what is the reason then for the extending of the timeline if it's part of the normal process?

Charles Sherwood

I don't quite understand your question.

Gary Siperstein – Eliot Rose Asset Management

Well, I guess, because we made a June/July filing, we thought we would have an answer from the FDA in December and it seems like the –

Charles Sherwood

No, no. We made – we sent in the clinical section, which is always the most controversial, at the very end of last year. So, they needed to get back to us within six months and we are hoping that we would have a meeting relatively early in the process; it when a little later because of scheduling concerns at their end. And now, we are addressing the issues. So maybe it's a little later than people had assumed, but it's kind of part of the process. So I – it took them a while to get through all the clinical material that we had and then get questions back to us.

Gary Siperstein – Eliot Rose Asset Management

So do you expect an answer from them by March, for example, or can you put a month on it, the further south it could go?

Charles Sherwood

It's – well, we certainly expect that we are going to get by year-end a much more definitive assessment of where we are. There is still the potential that we are going to end up being in front of the Advisory Panel. And I know there are a few meetings of the Advisory Panel, or at least one, sometime in the fall. And so we may wind up there.

And then depending on how that goes, it should be that – assuming that's a very positive meeting and the – and first of all, that we end up there and two, that it's a very positive meeting, the – and the approval should follow fairly shortly thereafter. So we are looking at probably end of year, first quarter of 2011 to mobilize.

Gary Siperstein – Eliot Rose Asset Management

Okay, good. Great, that's what I was looking for. Okay. And in terms of the FAB integration, so you are satisfied where you are now, and Kevin just mentioned that close to breakeven before amortization. Do you think you will knock into that in the second quarter or have we made a lot progress and now it's going to be slower progress to reduce the losses from here forward?

Kevin Quinlan

Yes. We think the – third quarter is typically a little bit more challenging in Europe because of the holiday situation there. So we think the fourth quarter should shape up to be a stronger quarter for them. And we are hopeful that it will be stronger than the second quarter was.

Gary Siperstein – Eliot Rose Asset Management

Oh, super. Okay. So if that's the case, then you would be sort of beyond breakeven; just part of the amortization would be the result and that would be the loss. And then as you go into the new calendar year, that would flip to a positive cash flow before breakeven?

Kevin Quinlan

Not necessarily. The pattern historically for the last three years in their business has been fourth quarter is much stronger than the first quarters. So it's a – at this point, I'm not sure I would be willing to say that they are going flip to be positive right away in the first quarter. But we are still hopeful that we are going to have an accretive company for calendar 2011.

Gary Siperstein – Eliot Rose Asset Management

And is it that seasonality, Kevin, that accounted for the 70% increase in revenue from Q1 to Q2 for FAB?

Kevin Quinlan

Certainly not all of it. But there is certainly a portion of it. I can't quantify it.

Gary Siperstein – Eliot Rose Asset Management

Why was there such a large increase quarter-to-quarter? Was it due to the uncertainty over the acquisition or were things held back? I mean, sequential plus 70% is pretty huge.

Kevin Quinlan

It is. They just had a – they had a very low first quarter. It – some of it was business that happened in the fourth quarter of 2009 perhaps. But in any event, they had a significant increase in Q2 over Q1 and I think that would be typical of what we would expect in their business.

Charles Sherwood

Also, Gary, we are getting a handle on this business, how we are going to put this business in sync with Anika. But one of the things that may not be obvious to you is a lot of companies in Europe and certainly Fidia was one of them – they don't run their business on a quarterly basis. They ran it on a yearly basis. So this whole "close the books, get the quarter results" is a new phenomenon that we are introducing over there.

Gary Siperstein – Eliot Rose Asset Management

Got you.

Charles Sherwood

So some of the – first quarter was not that great a quarter; second quarter was decent. So we are starting to try to build momentum, put some structure around the way that we do things over there, operate on a quarter-by-quarter basis and do a lot of these infrastructure development as well as we go. So it's been hard work, but – and honestly, a little harder than we thought. But fortunately, we have been able to stay on our plan despite the additional, and sometimes, unanticipated issues. So I am really pretty enthused about that.

Gary Siperstein – Eliot Rose Asset Management

Chuck, in terms of valuation for the stock – I mean, we are – for a biomedical device company, we are trading under two times sales, we are trading under book, and if earnings this year turn out to be flat with last year, 17 or so P-E. Both in the news release and in your comments earlier, you talked about earnings growth next year. You guys obviously were well aware of the Bausch & Lomb situation coming to an end.

So – I'm just curious, so if we add another $0.15 to $0.20 in the back half of the year on to a $6.05 book value and then if the company can come back and do $0.50 plus next year, we are going to have a $7 book, maybe just be one time sales, one-and-a-half time sales and 11, 12 times earnings. Is that all reasonable?

And then my second part of that question is where do we stand on IR analysts picking us up, conferences that you guys are going to be going to?

Charles Sherwood

You can address the first one. I will do the second one.

Kevin Quinlan

Okay. Well, I think the – Gary, as far as expectorations for next year, I am not sure what you meant by – we – the comments relative to Bausch & Lomb. It will have an impact on next year, but we think that MONOVISC can have a bigger impact on next year and we do think that we can increase our earnings in 2011 versus 2010.

Gary Siperstein – Eliot Rose Asset Management

Okay. Yes, that's what I'm looking for, because if we look at this most recent quarter, I mean, you guys had a stunning 50% increase in operating earnings, but obviously because of the larger denominator, it didn't reflect in EPS. So if we can get – I think that's the only thing missing from the equation. You got sales going, you got operating income going, you got a bunch of new stuff coming out, you are trading under book value and at reasonable multiple of sales for a biotech-type company.

So if that EPS starts to going the right way, seems to me there is a tremendous value here. So that goes to the second part of question, why we haven’t been able to get any visibility on the street?

Charles Sherwood

Well, there is – this is Chuck. Part of the reason that despite some of the unanticipated things that were still on our plan with regard to the integration of FAB has been some intense effort by the management team and for some of us, myself primarily, a huge amount of travel over to Italy and other places. So that's pretty much consumed us and quite frankly, we felt that that was the most important thing to keep the business progressing. And that left little time unfortunately since we are so thinly staffed to deal with the street.

So it looks like we are on a pretty good track and certainly from myself, I hope that the second half of this year is not going to be such a heavy travel burden that the first half was. We have some plans to present at Rodman & Renshaw's down in New York in – I think the middle of September. And we are looking to put – invest some more of our time in IR. But I – okay?

Gary Siperstein – Eliot Rose Asset Management

Yes, that's great. Thanks, Chuck. I appreciate it. Great job.

Charles Sherwood

Thank you.

Kevin Quinlan

Thank you.

Operator

And at this time, we are showing no further questions available. Dr. Sherwood, you may proceed.

Charles Sherwood

Thanks, Josh. And thanks to everyone for joining us today. I appreciate the questions and we will look forward to speaking with you again on our third quarter conference call.

Operator

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a great day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Anika Therapeutics, Inc. Q2 2010 Earnings Call Transcript
This Transcript
All Transcripts