Smoothing Out the Wrinkles on Anika Therapeutics

| About: Anika Therapeutics (ANIK)
Anika Therapeutics (NASDAQ:ANIK) is a small biotech company that develops therapeutic products intended to repair, protect, and heal bone, cartilage, and soft tissue. Anika’s products are based on hyaluronic acid, a polymer naturally found in the human body that enhances joint function and protects soft tissues.

In December of 2006 Anika received FDA approval for a cosmetic tissue augmentation [CTA] product used to treat facial wrinkles, scar remediation, and lip augmentation. Anika’s CTA treatment combines a chemically modified version of hyaluronic acid with the local anesthetic lidocane. Anika expects to launch this product in the US and Europe in mid-2007.

Anika has a market cap of $141 million and a strong balance sheet with about $45 million in cash and no significant debt. Anika has a trailing P/E of 34 and a forward P/E of 25. Revenue and profit have both seen steady increases for the last three years.

Anika’s wrinkle treatment will directly compete with Allergan’s (NYSE:AGN) Botox. It is no secret that Botox has been a huge success for Allergan. Steady increases in Botox sales have been the driving force behind Allergan’s stock which has gained about 90% and increased its market cap by over $8 billion in the last two years. In Allergan’s latest quarter, Botox sales totaled $273 million, a 20% increase year over year. In short, the market for wrinkle treatments is huge and it is still growing. Medical Insight, Inc., a market research firm focusing on the aesthetic medical industry, recently predicted a consistent 25% yearly growth rate for minimally invasive aesthetic medical procedures.

Although competition in wrinkle treatments is starting to increase, Anika’s wrinkle treatment is well positioned to compete with Allergan and Medicis, the two market leaders. Medicis Pharmaceutical’s is trying to gain market share for its Restylane treatment which is a “dermal filler”. Restylane is similar to Anika’s wrinkle treatment as they both use a form of hyaluronic acid to “fill in the tissue” underneath the wrinkle.

Although Anika will not have the marketing muscle to compete with the brand awareness that Botox enjoys, Anika’s treatment can easily compete on price. The price doctors pay for Botox has risen over 50% in the last nine years and Allergan is enjoying 80+% profit margins. Recently doctors have started complaining about these prices because many potential patients have been priced out of the market. Doctor’s and patients would love to have a more reasonably priced alternative to Botox and Restylane. Anika’s product could be priced significantly less than Botox and Anika would still enjoy healthy profit margins.

Allergan recently paid $3.4 billion to buy Inamed. Although Inamed’s largest product was breast implants, some market observers felt that the impetus behind the Inamed purchase may have been Inamed’s dermal filler Juvederm. With a market cap of only $141 million and a dermal filler wrinkle treatment already approved by the FDA, Anika could become a buyout target. Although big Pharma has traditionally stayed away from cosmetic medicines and procedures, Johnson & Johnson recently bought a small Israeli company with a wrinkle-fighting product that has yet to be approved and Pfizer has expressed interest in entering the cosmetic field as they recently held a brainstorming session with cosmetic specialists in New York. Analysts believe that big Pharma had previously stayed on the sidelines with cosmetic treatments because they are not covered by insurance.

However, the success of Botox and other treatments has changed the perception of whether of or not insurance coverage is needed to make money with cosmetic medical treatments. With a promising dermal filler product already approved, and additional cosmetic products in the pipeline, Anika seems like a good acquisition target for a big drug company trying to gain a foothold in cosmetics.

Anika’s new wrinkle treatment has great potential and it could lead to a potential buyout, but it is not the only reason Anika’s shares look promising. Anika is profitable and has been increasing revenues and profits for over three years. Even if Anika has trouble selling their new wrinkle treatment (which seems highly unlikely) they are still experiencing solid growth in their OrthoVisc treatment for pain resulting from osteoarthritis. Additionally, OrthoVisc recently received a new Medicaid and Medicare reimbursement code which Anika’s says will simplify the reimbursement process and improve patient access to OrthoVisc

OrthoVisc’s revenue growth could also be helped by additional indications. On January 8th, Anika announced the initiation of a new clinical study designed to evaluate OrthoVisc to treat pain caused by osteoarthritis in the shoulder joint. Anika also planes to initiate additional OrthoVisc studies with the goal of further expanding OrthoVisc’s approved indications.

I believe that Anika is a relatively low risk company with a new wrinkle treatment that could rapidly increase revenues and profits. Even without the new dermal filler wrinkle treatment, Anika would be a good investment with solid growth expected from its OrthoVisc product and a history of consistent revenue and profit growth.

Anika’s CTA wrinkle treatment is expected to hit the market in mid-2007. I think that Anika will receive increased investor attention as this product launch nears. Analyst coverage will likely increase as well because Anika has a excellent risk/reward ratio considering the potential of the CTA wrinkle treatment and the steady growth and profits provided by OrthoVisc.

ANIK 1-yr chart

Disclosure: Author is long ANIK.