Anika Therapeutics' (ANIK) CEO Charles Sherwood on Q2 2014 Results - Earnings Call Transcript

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 |  About: Anika Therapeutics Inc. (ANIK)
by: SA Transcripts

Anika Therapeutics, Inc. (NASDAQ:ANIK)

Q2 2014 Earnings Conference Call

July 31, 2014 9:00 AM ET

Executives

Sylvia Cheung – CFO

Charles Sherwood – President and CEO

Analysts

Mark Landy – Summer Street

Joe Munda – Sidoti & Company

William Plovanic – Canaccord Genuity

John Curti – Singular Research

Neil Gore

Operator

Good day, ladies and gentlemen and welcome to the Q2 2014 Anika Therapeutics Earnings Conference. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]

I would now like to turn the call over to Sylvia Cheung, you may begin.

Sylvia Cheung

Thank you, Michelle. Good morning, everyone and thank you for joining us. If you have not received a copy of the Anika news release, which was issued yesterday after the market closed or you would like to be added to our distribution list, please contact Sharon Merrill Associates at 617-542-5300. The news release is also posted in the Investor Relations section of our website at anikatherapeutics.com.

In addition, a slide presentation is posted on the Anika website. It illustrates many of the key points we will be covering during today’s call. The slides can be found in the Investor Relations section, under the Events, Webcasts & Presentations tab. We invite you to take a moment to open the file and follow the presentation along with us.

Please now turn to slide number 2. Before we begin, please remember that the statements made in this call, which are not statements of historical facts, are forward-looking statements as defined in the Securities and Exchange Act of 1934. These statements are based on current beliefs and expectations of management and are subject to significant risks and uncertainties.

The company’s actual results could differ materially from any anticipated future results, performance, or achievements. Please see our SEC filings for more information about factors that could affect our results.

Please turn to slide number 3 and I will begin our second quarter financial review and franchise review. Anika performed well in the second quarter of 2014 total revenue increased 26% from the second quarter of last year to $26.3 million. The U.S. commercial launch of Monovisc took place in April. As a result of the launch revenue for the quarter included a $5 million milestone revenue associated with our U.S. license agreement from Monovisc.

Product revenue increased $1.2 million of 6% for the quarter as compared to the same period last year. This quarter’s result was in line with our expectation as discussed in previous conference calls.

In our largest franchise, Orthobiologics product revenue increased by 11% from the second quarter of last year. This was driven by product and royalty revenues associated with our U.S. commercial launch activities for Monovisc. With both Orthovisc and Monovisc and our U.S. portfolio Anika is the only company that offers both a high performance multi-injection product and a novel single injection product.

This flexibility positions us well to accelerate our growth in Orthobiologics both domestically and internationally. For the ophthalmic franchise revenues in the second quarter of 2014 decreased 22% from the same period last year.

As we have previously reported our major ophthalmic partner Bausch & Lomb has delayed its 2014 orders approximately $2 million until the fourth quarter of this year. The announced current contract expires at the end of this year as we anticipated they have decided during this past quarter not to renew the contract beyond 2014.

Given that the low margin ophthalmic franchise strategically is not part of our core business. And our business with B&L has been steadily diminishing for the past few years. We don’t expect this decision to have a material impact on our results going forward. We have solid partnerships with our remaining ophthalmic customers. Those relationships currently generate revenue in a low single-digit millions of dollars.

Anika’s total product revenue was up 6% year-over-year in the second quarter led by the growth of the Orthobiologics franchise as discussed earlier. The decline in dermal and surgical franchises during the second quarter were timing related and reflected planned turnovers in some of our international distribution partnerships.

We continue to expect product revenue to grow significantly higher during the second half of this year. We expect to achieve product revenue growth for 2014 in the high-teens range and more details on the revenue outlook will be provided later on this call.

Please now turn to slide number 4 for the income statement highlights. Anika’s product gross margin increased to 75% up 6 percentage points from the second quarter of last year. In addition to favorable product mix our gross margin this quarter also reflected a lower raw material cost for a key product component as part of our ongoing cost reduction initiatives.

This was a project we have been working on for some time. And we’re pleased to see the positive results starting in the second quarter. Please keep in mind that our product gross margin is affected by product mix amount other internal and external factors.

You’ll see some inapt of the mix in the fourth quarter due to the expected annual purchase from B&L which is that lower margin. We anticipate product gross margin for the dull year to be around the high 60 percentage range.

Moving down the P&L total operating expenses for the second quarter decreased 3% from the same period last year primarily due to lower cost of product revenue. Research and development expense which is essentially flat year-over-year.

Our research and development spending is primarily focused on our Cingal’s clinical trial. The trial continues to make good progress and we’re on track to wrap up the clinical work and lock the database by the end of the third quarter with announced and regulatory submission for CE mark prepared by the end of 2014.

Selling, general and administrative expense for the second quarter was up 14% year-over-year due to an increase in headcount related costs, higher external professional fees and increased corporate governance costs.

Operating income for the second quarter of 2014 was $15.2 million up 62% from the $9.4 million we recorded in Q2 of 2013. Net income was $9.3 million or $0.60 per diluted share compared with $5.9 million or $0.40 per diluted share a year-ago.

Our growth in both operating income and net income for the quarter was driven by $5 million of milestone revenue from our Monovisc contract in the United States as well as product gross margin and operating efficiency improvements.

Turning to slide number 5, Anika’s cash and cash equivalents position grew to $85 million at June 30th 2014 from the $63 million held at the end of last year. The increase was driven by U.S. Monovisc milestone payments, increased profits and proceeds from stock option exercises during the period.

This concludes our financial review. Please turn to slide number 6. Dr. Charles Sherwood would now review the business highlights.

Charles Sherwood

Thank you Sylvia. I will begin the business discussion this morning with the Orthobiologics franchise which continues to be Anika’s primary growth driver for the near term. Our highlight this quarter was the U.S. commercial launch and first domestic sale of our single injection product Monovisc.

Monovisc has been well received by the orthopedic physician community. We believe the majority of our U.S. sales thus far reflect conversions to Monovisc by physicians and patients who previously used competing single injection products.

With regard to reimbursement in the United States let me provide an update on our progress in the cheating a unique reimbursement code. We started the planning and reimbursement application for Monovisc last year.

Currently we have a general J-Code which is having some impact on the uptick of revenue due to the more cumbersant administration process in the physician office. Using a general code means that practice is starting with Monovisc need to know this code and amend their systems to add.

All of this is typical and was expected. In May this year we successfully completed a review meeting with CMS. We anticipate CMS will announce new J-Codes in November. And if approved we expect to have an active, unique reimbursement code starting in January of 2015.

We believe that Monovisc is on track to achieve our goal of the 2% to 3% U.S. market share at the end of this year with a potential reach of 5% share in the initial 12 months. Anticipating the frequently asked question about cannibalization between Orthovisc and Monovisc we’re watching it very closely but to date we have not seen evidence of cannibalization taking place in the U.S. market.

Our distribution partner [indiscernible] is committed to a sales and marketing strategy designed to maintain the strong position we’ve established for Orthovisc in the multi-injection market while at the same time rapidly capturing single-injection market share with Monovisc. Although it is still in the early days we believe this strategy is working very well.

Please turn now to slide number 7. Broadening the picture to the viscosupplementation market as a whole our revenue goal is to reach a 15% global market share by the end of 2018. We have a three part strategy to achieve this goal and we may progress on executing this strategy in the second quarter.

The first leg of the strategy is to leverage our leadership in the United States as the only branded viscosupplementation offering with both single and multi-injection options. The greater brand awareness associated with the U.S. approval and commercialization of Monovisc should enable us to gain market share for both products and accelerate our growth in 2015 and beyond in the U.S. and internationally.

International Monovisc sales this quarter up 27% from the second quarter of 2013 and are on track to meet our growth target for this year.

The second part of the strategy is to expand our viscosupplementation distribution network into growth markets in the Middle East, Asia and Latin America where we will lead with Monovisc.

In the second quarter we established new distribution relationships for this fiscal supplementation products in Sweden, Jordon, Iraq and South Africa.

At the same time we continue to advance our search for distribution partners in the Asia-pacific region most notably in India, in Japan.

Strategic initiative number three is to bring two new viscosupplementation products to the market in late 2015 or early 2015. The first of these products is Cingal. As previously discussed Cingal is our patented HA plus steroid single injection offering.

It’s designed to provide the convenience relief of Monovisc with the added early symptom relief benefits of the commonly used steroid.

The second product is a value priced offering for select international markets where we can effectively cash our larger shares with an enhanced value proposition.

We made excellent clinical progress on Cingal during the second quarter and I’ll talk about that in a moment.

Looking first at our commercialization plan, we will start with Cingal in markets outside the United States with particular focus on Europe, South America and Asia.

Market growth in those regions is expected to remain robust for the foreseeable future. Now that Monovisc is been launched in the U.S. and Cingal is moving forward, we’ve enabled to increase our focus on developing a new value oriented viscosupplementation product. It’s quite frankly been in our pipeline for some time.

In certain international markets there is a high level of physician and payer interest in Anika’s potential to avoid quality viscosupplementation products at more competitive price points than in the past.

Our recent operational efficiency improvements and new raw material supply source have driven down our manufacturing costs. As a result we’re well positioned to capitalize on this demand. And we believe we can create a significant revenue opportunity with this new product in the next two to three years.

Moving on from Orthobiologics and turning to slide number 8. Our advanced wound care focused dermal franchise remains on track towards becoming a double-digit million dollar business in the next two to three years.

We are making good progress and strengthening our established international distribution network in Europe, the Middle East and Latin America. At the same time we are working to expand our advancement care distribution footprint into new geographic markets, primarily the United States and South America.

The decline this quarter in dermal franchise revenue reflected planned turnover in some of our international distribution partnerships in line with the strategy. As a further example we received the approval for four of our advancement care products in Latin America returning to first half of 2014. And we anticipate several Latin America product approvals in the second half of 2014. This should help fuel dermal franchise product revenue growth in Latin America in the fourth quarter and into 2015.

We recently achieved a milestone in the United States by signing a new distribution agreement in Hyalomatrix our naval scalpel product for the treatment of severe skin burns and ulcers. Hyalomatrix will now be exclusively commercialized in the United States by Medline industries, which as you probably know is the largest privately held manufacturer and distributor of health care supplies in the country. Most importantly they have a solid history in position in the field of wound care.

With roughly 100 of their U.S. sales reps focused in this area, Medline is number two in the wound care market and an excellent partner for Anika. With an important distribution contract recently signed and strong momentum in product approvals we believe that our advanced wound care franchise is well positioned to deliver solid high double-digit annual growth in 2015.

I will now turn to the pipeline discussion and please focus on slide number 9. And we will be talking about two major near term products Cingal and Hyalofast. Starting with Cingal we made good progresses this quarter for the goal of completing our ongoing multinational clinical trial and submitting our CE mark application for Cingal by the end of 2014 or shortly thereafter. The patient follow-up phase is on track to be completed in the third quarter and we expect to have the clinical results for full bio statistical analysis completed by the end of the year.

In addition, we are commencing an open label extension study of the current Cingal study. This extension study is designed to examine the safety of re-treatment of approximately 240 patients with Cingal to support a re-treatment labeling indication. Follow-up of patients in this study is expected to be completed in January of 2015 with resulting data to be utilized in both FDA and CE submissions.

From a regulatory standpoint, we’re working to arrange preliminary discussions regarding Cingal with the FDA. We hope to have these discussions followed by a formal FDA meeting with the Cingal European clinical data in hand by the end of the year.

Turning now to Hyalofast, our goal is to make the product available as a one step heart repair solution in the United States. Hyalofast delivers proven value as a regenerative medicine for the knee in the sports medicine setting. It’s easy to use an economical to deliver and has been demonstrated as safe and effective in hundreds of orthopedic clinics internationally.

During the second quarter we completed the design of our randomized placebo controlled human clinical trial protocol for Hyalofast and filed the synopsis of protocol in a pre-submission with the FDA. We are scheduled to meet with the FDA in the fall to discuss Hyalofast regulatory pathway.

Turning now to slide number 10, we maintain our belief that Anika is well positioned for continued revenue growth and profitability in 2014.

We are focused and successively executing our strategy to expand our global presence in fiscal supplementation. Demand for our products continues to grow, Monovisc is off to a great start in United States and we are making good progress in expanding our distribution network internationally for Monovisc and also for Orthovisc.

We have two new products, Cingal and Hyalofast advancing toward commercialization. We are continuing to add the organizational and operational capabilities, we need to expand beyond physical supplementation and deliver on Anika’s growth potential in the years ahead.

In addition, our early stage product pipeline is the strongest it’s been in many years.

We continue to be very encouraged by Anika’s business prospects. We expect Anika to achieve product revenue for 2014 probably in the high teens range with at least equivalent net income in EPS growth for the year.

This expectation excludes milestone revenue. We continue to expect that our product revenue in the second half of 2014 will be more robust, due to seasonality as well as order timing.

As always, we will continue to focus on effectively deploying the cash currently on our balance sheet with a bias toward remaining conservative or generating the highest possible returns, concurrently our board will continue to consider and explore the full range of options for maximizing value in total return for Anika’s shareholders.

We look forward to reporting our progress to you in next quarter’s conference call. And with that for now turn the call back over to Michelle to take any question that you may have. Michelle?

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Mark Landy of Summer Street. Your line is open.

Mark Landy – Summer Street

Good Morning folks and thanks for taking my question.

Sylvia Cheung

Good Morning Mark.

Mark Landy – Summer Street

Sylvia I’m just right at the vast number regarding some emails from some folk regarding the guidance comments, product sales comments. I think that’s now is that correct we hear a high-teens and from I think the low 20s. So can you maybe just dig into that? And if I’ve got my, if I’ve got that right if you can please explain to us kind of robust changed since you laid out that guidance may be three months ago on the first quarter call.

Sylvia Cheung

Sure the numbers that you stated are correct, we are currently expecting solid high-teens product revenue growth for 2014. And the small tightening of the product revenue guidance is primarily due to timing of realizing the revenue growth. One example would be in the advancement care area that we have previously expected the partnership to come online sooner.

I think the outcome is very good outcome in terms of having a great U.S. partner to launch Hyalomatrix. We are very pleased with the partnership and the quality of the partner, from a timing standpoint it is slightly behind the original schedule as a result this year’s number is being impacted.

Internationally for viscosupplementation we are seeing similar effects in terms of the newer partners that we have signed on as well as adding to our portfolio, additional partners from some of the targeted territories.

Mark Landy – Summer Street

If you add discounting and just and – that a little bit, I think that when we first started talking about this we said mid-teens to low 20’s and then we kind of get everybody got focused on low 20’s but I want to put a stake in the sense to say that I think a lot of the things that we have underway that wound care, that some of the partners, partners for viscosupplementation where we had approvals getting into the marketplace.

A lot of that kind of happened a little bit more slowly than we had hoped or maybe we were a little aggressive in looking at that but certainly a lot of that is well underway. As Sylvia pointed out we couldn’t be happier with the Medline partnership, and so it’s a little bit of delay, maybe according to what we had hoped but things are still quite on track on.

I would also point to the fact that while it took quite some time to get to Monovisc approved in the United States, about three years, when it ended and when we finally got going, we are starting to have some really excellent results. So I am not discouraged by – I am a little discouraged I wish things went a little faster but they are developing and we’re going to see the results.

Operator

Our next question comes from Joe Munda of Sidoti & Company. Your line is open.

Joe Munda – Sidoti & Company

Good morning, Chuck and Sylvia. Thank you for taking the question.

Sylvia Cheung

Good morning, Joe.

Joe Munda – Sidoti & Company

Sylvia and Chuck, you guys talked in your prepared remarks about Hyalomatrix, the distribution agreement, I just want to know what’s different this time around from the prior agreement that you had with Misonix and what attracted the company to you guys and we’re able to work out something there?

Charles Sherwood

Of course this is a bias comment, so I will lay it out there, however. We believe that one, Hyalomatrix is a excellent product. I think that and we believe that it should do very well. What I believe that we Medline recognized that fact, and I’ll come back to them in one second. I think I don’t want to say anything necessarily about Misonix in their performance, I think Misonix however had – was trying to work a couple of different strategies.

They were developing some instrumentation. They didn’t necessarily have the expertise in products like ours but they thought it could complement, some of their instrumentation of bone scalpel product, and when it really came down to it they ended up putting a lot more focus on the bone scalpel then they did on Hyalomatrix, and it’s worked out for them.

But, it wasn’t necessarily the best solution for us. And, we took a while after that agreement terminated to go out and try to find a real solid partner who would be very active in the wound care market, and there’s some potential with a company like Medline to start with Hyalomatrix but, maybe we can even expand beyond that to some of the other products we have in our bag, and who knows, down the line, if we are very successful maybe there is some joint product development that goes on.

So, they have the resources, they are much bigger. They are in solidly in advanced wound care market. So they turn out to be – we’ve talked to a lot of people and this turned out to be a really good solution for us.

Operator

Our next question comes from William Plovanic of Canaccord Genuity. Your line is open.

William Plovanic – Canaccord Genuity

Great. Thanks. Good morning. Can you hear me, okay?

Charles Sherwood

Yes, we can.

Sylvia Cheung

Good morning, Bill.

William Plovanic – Canaccord Genuity

Good morning. So, two questions, one is the distribution changes you made internationally, how many quarters do you expect that to impact the business? And then my second question is on Cingal, in the data if you run the European trials do you think you can use that European international data to drive US approval or do you think you will need US specific trials and data?

Charles Sherwood

I will address number two, Bill, I will let Sylvia tackle number one. So, the true answer to your question about using the data in the European trial, to gain US approval, the real answer is, also the protocol was designed and executed just like we would do so in the United States, and consistent with the way that we have approached viscosupplementation product approval in the past. It’s sized appropriately 360 patients or so.

A lot of it, I guess I depends on how well we perform in the protocol. It seems to make logical sense that on even though we didn’t pursue an IDE and go that way, that bringing back a properly executed clinical study that meets the ten points should go pretty far with the FDA particularly in light of the fact that other companies in this space have done in the same fit. But we’ll have to see, and a lot will, of course depend on the results. But, I think that we believe we are in a good position and I think it’s a testament to that, that we’ve decided to continue on with the re-treatment trial. So now you can answer the –

Sylvia Cheung

With regards to the international distribution network turnover, it really depends on the region and the status that we are in, in those particular countries or regions. In some areas we had available new partners, already lined up. So, for those situations the changeover is relatively quick.

In others, it takes, it’s going to take a little bit longer time, so for the quicker territory, I would say a quarter or so, some other countries may take a couple of quarters, maybe longer, depending on what stage we’re in, in terms of finding the quality upgrade or replacement. So it really varies depending on the country that we’re talking about.

Operator

[Operator Instructions] Our next question comes from John Curti of Singular Research. Your line is open.

John Curti – Singular Research

My question has to do with the comments that you made earlier in the presentation about some improvements at gross margin, and as a result of the reduction in some of your raw material costs, can you may be give us a little more information on that – in terms of the annualized cost savings, and are there are other opportunities for additional cost savings and other raw material?

Sylvia Cheung

Sure. This cost reduction item is our key component for our gel products and the cost saving that we have achieved is in the double-digit percentage range, and we are seeing the best – a portion of the benefit this quarter because the approval – the regulatory approval to make the switch which received in some times during the second quarter and will see a bigger impact in the second half of the year.

However on a kind of macro basis, product mix continues to be a bigger driver for our product gross margin. This cost reduction is an important one. It took us some time to achieve, and we have continued to look at other cost reduction opportunities whether the raw materials cost reduction, yield improvements or profit efficiencies, but again let me reiterate product gross margin has been impacted by a number of factors, pricing, product mix, cost of product and others. So, while we continue to expect that we will make good improvement in those areas, there are other factors that would impact the overall product gross margin and we expect that too – that being the product gross margin to be in the high 60 percentage range.

Charles Sherwood

Yeah, I would just follow on with one comment on we have an active cost reduction – there are many active cost reduction initiatives both particularly when you change components of the product, you have to do a qualification validation stability studies, and then you have to work through the regulatory approval process. So, the time of this can be – can span over a couple of years and because the regulatory approvals involved and some other things it’s not always predictable. So we’re working on these things all the time. And when we’ve got other initiatives underway in the factory, but it’s hard for us to predict the future and when we can realize those benefits because of all the factors that I just stated.

Operator

[Operator Instructions] Our next question comes from Neil Gore. Your line is open.

Neil Gore

Hi – one of your remarks was that you were not cannibalizing Orthovisc with Monovisc, you’re taking market share from your competitors. That’s wonderful to hear. Do we expect to end up with a 5% share, is that a conservative number for next year in view of the fact that we are taking share from our competitors?

Charles Sherwood

I think that the expectation in the first 12 months, yeah, whether it’s conservative, I think it’s the target. I think we have a good chance of reaching that on – it will be easier to reach that and maybe even do a little better if we do get that unique reimbursement code grant to us in November, affective January.

Neil Gore

I see. And do our competitors have that unique reimbursement code as yet?

Charles Sherwood

Well, one of our competitors is – in this one, and we know of course they have it. I am pretty sure that the Gel-One product guided [ph] but I’m not totally clear on that. But that product has been on the market for a while. Typically what happens is that you, you give in six months course of data and then that supports the reimbursement application. And then, if the timing is right they rule up once a year at the end of the year and then you go forward, and you get your code.

I think it’s pretty clear that we’ll get a unique code. We got – try to get well ahead of the process by submitting an application before we even have approval. And so, we’re in – we’re in pretty good shape, the hearing went well. We just don’t exactly know what’s going to happen in November.

Operator

I’m showing no further questions. At this time, I would like to turn the call back over to Mr. Sherwood for any further remarks.

Charles Sherwood

I want to thank everybody for being interested and participating on the call, and for your support for Anika. May be there were some follow-on questions. I hope the call went appropriately. And as I said before, I think these are exciting times for us and we are looking forward to reporting back to you in another quarter with our more robust third quarter results. Thank you very much. And thank you, Michelle.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program and you may all disconnect. Everyone have a great day.

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