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Executives

Kevin Quinlan - CFO

Charles Sherwood - President and CEO

Analysts

James Lieberman - Wells Fargo

Anika Therapeutics, Inc. (ANIK) Q4 2010 Earnings Call March 10, 2011 9:00 AM ET

Operator

Good day, ladies and gentlemen, and welcome to the fourth quarter 2010 Anika Therapeutics investor conference call. (Operator instructions) I would now like to turn the call over to Mr. Kevin Quinlan, Anika's Chief Financial Officer.

Kevin Quinlan

Good morning, everyone. If you have not received a copy of the Anika news release which was issued after the market closed yesterday or you would like to be added to our contact list, please contact Sharon Merril 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 illustrate some of the points we'll be covering during today's call. These slides can be found on the Investor Relation section of the website under the events, webcast and presentations tab. We invite you to take a moment to open the file and follow the presentation along with us.

Please turn the 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 as 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 turn 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. Anika concluded 2010 with a quarter of strong topline growth and continued progress on our six key goals. Driven by accelerating demand for ORTHOVISC, the fourth quarter of 2010 was our 14th consecutive quarter of product revenue growth compared with the same quarter of the previous year.

MONOVISC is selling well in Europe and nearing its U.S. launch. FAB's advanced wound care and orthopedic products are also driving growth. As the integration of the FAB business progresses, we believe FAB's operations can achieve breakeven in 2011. In addition, last month we launched our own branded ophthalmic product, ANIKAVISC. A product we hope will replace some of the Bausch & Lomb business as that activity warrants down.

Later in the call, I will cover these topics in detail, after Kevin's financial review. And then we will both be happy to take your questions, Kevin.

Kevin Quinlan

Thanks Charles. Please turn to Slide 4 on the presentation. Anika's first full year of combined operations with FAB, concluded with the solid fourth quarter. Total revenue grew 39% from the fourth quarter of 2009 to $14.7 million. For the full year, total revenue increased 38% to $55.6 million. In terms of organic growth, excluding FAB, our product revenue for the fourth quarter increased 17% from the same period last year. And for full year 2010, our organic products revenue was up 18% from 2009.

On a consolidated basis Anika's product revenue for the fourth quarter grew 43% from the same period last year. 12 months consolidated product revenue was up 41%. For both, the quarter and the year, this revenue growth was driven primarily by our joint health or by our Orthobiologics franchise, as you can see on the slide. Our surgical and dermal franchises fueled mainly by products from FAB, also performed well in the quarter.

Turning to Slide 5, revenue in our Orthobiologics franchise increased 40% from the fourth quarter of 2009 to $8.4 million. The key driver was strong domestic sales of ORTHOVISC, international sales of MONOVISC and FAB orthopedic products also contributed to the growth this quarter.

In terms of geography, Orthobiologics sales in U.S. domestic market grew 25%. International Orthobiologics sales including FAB increased 96%, and increased 41% excluding FAB, despite the impact of soft economic conditions on sales of ORTHOVISC in Greece, Italy, and Turkey. For the full year, Orthobiologics revenue was up 34% from 2009 to $30.7 million, again fueled mainly by domestic sales of ORTHOVISC, international sales of MONOVISC, and the addition of FAB Orthobiologics revenue including the tissue engineering products.

Slide 6, takes you through the highlights of our income statements for the quarter and the year. Our fourth quarter consolidated product gross margin was 53% compared with 64% a year earlier. For the full year, product gross margin was 55% compared with 63% in 2009. This largely reflected the addition of FAB products into the overall mix.

Gross margin was also negatively affected by inventory reserves for MONOVISC and for our aesthetic products, as well as duplicate manufacturing expenditures during the transition from Woburn to our Bedford, Mass. facility. I've mentioned this lot of points on previous calls, the transition of manufacturing operations to our Bedford facility has caused a decline in margins for 2010 compared with 2009. This is because we are manufacturing at both Woburn and Bedford facilities.

Operating income for the fourth quarter of 2010 increased 55% year-over-year to $2.5 million. For the full year, operating income grew 35% to $7.5 million. Net income for the fourth quarter of 2010 nearly doubled to $1.4 million or $0.10 per diluted share from $700,000 or $0.06 per diluted share in Q4 2009. For the full year, net income was up 17% to $4.3 million from $3.7 million in 2009.

On a per share basis including the nearly 2 million additional shares at Anika stock that we issued in connection with the FAB acquisition in 2009, EPS for 2010 was flat with the prior year at $0.32 per share.

Please note that our fourth quarter and full year 2010 tax rate was elevated, which is attributable to FAB losses, which is our tax at the lower Italian statutory tax rate. As well as the impact of lower R&D credits and CapEx investment tax credits in 2010 compared with 2009 that reduced our effective tax rate in 2009.

One of our six key goals for 2010 was to significantly reduce FAB's losses. We made significant progress on this goal, during the year's FAB's operating loss decreased by $1.5 million on a comparative basis versus 2009. This was despite the fact that some of the FABs customers, especially those in Southern Europe, spend much of the year coping with difficult economic conditions are working down their product inventory levels.

We believe their inventory reductions are largely behind them and we expect to see an increase in FAB product sales into 2011. Given this anticipated sales growth and the significant cost we've cut out of FABs operations during integration process over the past year, we believe FAB can achieve breakeven operating results in 2011.

Turning to Slide 7. Our total research and development expense for the fourth quarter of 2010 increased 5% to $1.4 million from $1.3 million for the fourth quarter last year, as the addition of FAB R&D expense was mostly offset by lower clinical cost. For the full year, total R&D expense was down 16%, reflecting the completion of our U.S. MONOVISC clinical trial in the fourth quarter of 2009. Partially offset by the inclusion of R&D expenses of FAB in our consolidated results.

As shown on Slide 8, selling, general and administrative expenses for the fourth quarter of 2010 were $4.2 million, up 2% from $4.1 million in the fourth quarter last year. For the full year, SG&A expense increased 36% to $17.3 million from $12.7 million in 2009. The increases for both period reflected the inclusion of SG&A of FAB, integration and infrastructure building cost, partially offset by the gradual effects of operation and streamlining during the year.

The year 2009 also included one-time cost of $2.2 million in connection with the FAB acquisition. We expect SG&A cost to increase as we prepare to launch MONOVISC in the U.S. And to a lesser degree also from the defense cost related to the claim of patent infringement against Anika.

Turning to our balance sheet highlights, on Slide 9, Anika closed the fourth quarter of 2010 with $28.2 million in cash and equivalents compared with $24.4 million on December 31, 2009. We generated more than $7 million of positive cash from operations in 2010, a significant increase over the $3 million of cash from operations generated in 2009.

And with that, I'll turn call back over to Charles.

Charles Sherwood

Slide No. 10 outlines our six key goals for 2011. The first goal is to continue growing sales of ORTHOVISC, our flagship product in Orthobiologics domestically and internationally. There are clearly a significant number of physicians who prefer a multi injection regimen for treating osteoarthritis of the knee. And we are continuing to gain share in this segment of the market.

Product revenue from domestic sales of ORTHOVISC grew 25% in the fourth quarter from the same period in 2009.

In 2010 as a whole, product revenue from US sales of ORTHOVISC was up 32%. Market conditions in Europe improved in the fourth quarter, and international ORTHOVISC sales increased 21% as a result. For the full year however, ORTHOVISC international sales were down 8%.

Looking ahead, working with Johnson & Johnson DePuy Miteck, we've completed the clinical trial of ORTHOVISC as a treatment for osteoarthritis of the shoulder. We are now working with Miteck to develop the regulatory strategy leading toward a PMA submission. We are very optimistic about the domestic market potential for ORTHOVISC going forward.

Turning to MONOVISC, our sales in the fourth quarter reflected the more positive economic environment in Europe, as well as the progress we are making in expanding our EU distribution channel and generating greater market awareness.

For full year 2010, MONOVISC product revenue in the EU market was up 126%. We are continuing to work on additional rest-of-world distribution opportunities for both ORTHOVISC and MONOVISC with the goal of continuing to build international sales momentum for both products.

Let's now turn to our second goal for 2011, which is to receive FDA 510(k) clearance and launch 3 FAB orthopedic products in the United States. One of these products is Hyaloglide, a gel used in tenolysis treatment, but with the potential to reduce adhesions from forearm tendon surgeries and in the shoulder for adhesive capsulitis. Another is Hyalonect, a woven gauze used as a graft wrap. And the third product is Hyalofast, a biodegradable support of human bone marrow and mesenchymal stem cells that has long term potential to be a cartilage regeneration product with additional clinical data. Adding these products to MONOVISC will broaden the Joint Health product portfolio we will offer in the domestic market.

As I said in our call in November, 510(k) approval timelines had never been easy to predict accurately and addition to all this, the FDA has made it even more difficult. Although we submitted 510(k) applications for Hyloglide, Hylonect and Hylofast in October of 2010, the regulatory progress since then has been slow. We continue to believe however, that all three products should receive clearance as submitted.

The next big launch of MONOVISC is the next goal, on Slide No. 10. At the time of our last conference call, the FDA was actively reviewing our MONOVISC application and we were expecting to hear shortly about next steps, including whether an advisory panel meeting would be necessary. We have been involved in an extended dialogue with the FDA since then, and have found the speed of the FDA's process to be disappointing.

We recently requested review of MONOVISC to the FDA's Orthopedic Advisory Panel, but have not yet been notified of panel meeting dates. We continue to believe that MONOVISC should receive FDA approval this year, and we expect to be well-prepared for commercial launch once we get the PMA.

Our fourth goal for 2011, on the fourth bullet on Slide No. 10 is to make further progress on expanding distribution of FAB's three currently commercialized restorative tissue technology products. These include Hyalograft C Autograft cartilage regeneration products, as well as Hyalograft 3D Autograft and Laser Skin Autograft both of which help generate skin following severe burns or serious ulcers.

All three products are currently being distributed, mainly in Italy, and our goal is to begin commercially marketing them in other European countries this year. As I mentioned on our last call, during the fourth quarter, we added a new distributor for Hyalograft C in Greece, and we expect to start generating revenue with this partner this year. We are now also in discussions with several other potential distributors, who would, if the ulcer consummated, also add revenue in 2011.

The fifth goal shown on Slide No. 10 is to reduce FAB's operating loss; and again, we believe FAB's operations can achieve breakeven in 2011. This will be a function of the progress we make on revenue growth, cost synergies and product rationalization.

Looking first at revenue growth, our most significant near-term opportunity is to sign US distribution partners and commercially launch the FAB advanced wound care products that have already been approved for sale in the United States, led by the product Hyalomatrix. We are also working to expand international distribution for FAB's advanced wound care product line. In addition, we expect to see stronger international sales of FAB's Hyalobarrier surgical products.

On the cost front, Kevin described the progress we made in reducing FAB's operating loss in 2010, and we expect to make further progress in 2011. In the fourth quarter, we reincorporated FAB as Anika Therapeutics S.r.l. and essentially completed restructuring FAB's commercial organization with the installation of new IT and ERP systems. This should enable us to continue reducing SG&A costs there.

The Anika and FAB research and development functions in the United States and Europe have now been fully integrated, creating a significantly lower cost structure in this part of the business.

One of our other priorities is to further reduce cost by improving efficiency of our manufacturing operations, in large part by moving the manufacturing of products made by FAB's former parent company to the facility at our new U.S. headquarters in Bedford, Massachusetts. This is integral to our sixth strategic goal, which is to finish transferring all of Anika's product manufacturing from Woburn, Massachusetts to Bedford.

As I mentioned on our last call, we received FDA approval to manufacture our terminally sterilized product, ELEVESS, in Bedford in the fourth quarter. As a result we concluded 2010 fully operational at Bedford for the entire Anika cross-linked product line. In addition to HYDRELLE, this includes MONOVISC, ELEVESS and INCERT, and we've been shipping both MONOVISC and INCERT from Bedford to international markets since the middle of 2010.

We also received approval from our notified body to ship aseptically sterilized products such as ORTHOVISC internationally from Bedford to countries recognized in the CE Mark. Our focus now is to obtain FDA approval to begin shipping ORTHOVISC, Ophthalmic products and HYVISC, manufactured in Bedford, into the U.S. markets.

We use critical equipment to produce these products that can't be duplicated due to timing and expense factors. We believed that we had an arrangement with the FDA to move that equipment to Bedford and validate its use there, and then our plan was to briefly return that equipment to service in Woburn while the FDA reviewed the validation data at Bedford and reports as part of the final inspection of that Bedford facility which was scheduled in December of 2010. That final inspection did not occur, and will not occur now until the equipment is permanently installed at Bedford.

In order to fill product orders and build sufficient safety stock to accommodate any further approval delays, we will continue to manufacture our Ophthalmic, Orthopedic and Veterinary products in Woburn into June of 2011. We will be managing expenses in that during this period with an eye toward minimizing impact of operating duplicate facilities. We expect to receive approval and begin shipping ORTHOVISC Ophthalmic products and HIVISC manufacturing at Bedford in the third quarter of 2011.

As announced last month, we've taken significant steps to address the December 31, 2010, expiration of our supply agreement with Bausch & Lomb and begin developing the new ophthalmic opportunities now available to us as a result.

As we've discussed in the past, for more than 20 years, Anika has been manufacturing AMVISC and AMVISC Plus on a contract basis for Bausch & Lomb, which is now transitioning its supply to a recently affiliated third party. We have negotiated a non-exclusive, two year extension of our supply agreement with B&L, which we expect to generate significantly less revenue for Anika in 2011 and future years compared with prior years. However, the non-exclusivity of the contract extension will enable us to partially offset the potential financial impact of marketing ophthalmic product ourselves on a worldwide basis for the first time.

In preparation for this opportunity, some time ago we sought for FDA approval on our own ophthalmic products, and received approval for ANIKAVISC in the fourth quarter. We've also signed a five-year, non-exclusive U.S. distribution agreement with Visco Technologies, a medical device distributor based in Kansas City, and we'll be engaging in a U.S. sales network to commercialize ANIKAVISC shortly.

In addition, to support our European expansion plans, we've partitioned our Regulatory Body in Europe for CE Mark approval of ANIKAVISC product and we expect to receive this approval in the near future.

Overall, we concluded 2010 with another quarter of strong product revenue growth and progress in all six of our key goals.

ORTHOVISC continues to gain share in the multiple injection market. We're optimistic about the prospects for FDA approval of MONOVISC and the first three orthopedic products from FAB, and we're making good progress toward expanding the distribution of FAB's restorative tissue products internationally.

Meanwhile, operational breakeven for FAB is imminent, as is the full transfer of Anika's manufacturing to Bedford. In addition, we've taken the first steps toward positioning ourselves to successfully build our ophthalmic product franchise over the long-term.

Anika's clearly off to a good start in 2011 and we look forward to reporting our progress during the year.

So with that, I'll turn the call back over to Steve so that we can take your questions.

Operator

(Operator Instructions) And we do have a question from the line of James Lieberman with Wells Fargo.

James Lieberman - Wells Fargo

Well, I think this is less of a question than a comment because you gave a thorough presentation, I was very impressed with the progress you've been making, and the way in which you've been addressing the challenges presented to the company. And on that basis, I just wanted to congratulate you for the tremendous work you're doing.

Charles Sherwood

Thank you, Jim.

Operator

At this time, there are no further questions in the queue.

Charles Sherwood

Okay. Well, I guess as a final remark I want to thank everyone for joining us today. And we look forward to reporting our progress as we go throughout 2011. Thanks.

Operator

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

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