This is one in a series of articles examining Joel Greenblatt's Magic Formula for picking value stocks. Today's stock: Anika Therapeutics (NASDAQ:ANIK).
Anika Therapeutics develops, manufactures and commercializes therapeutic products and devices to promote the protection and healing of bone, cartilage and soft tissue. Its products are based on hyaluronic acid (NASDAQ:HA), a naturally occurring, biocompatible polymer found throughout the body. A useful FAQ on Anika Therapeutics'‘ website indicates that it currently has 61 employees and was founded in 1983.
I quickly reviewed the 5 primary factors that I use to help indicate whether a company has a wide competitive moat. These factors include ROIC, equity growth, earnings per share growth, sales growth, and free cash flow growth over the past five years.
According to the ADFVN’s financials for Anika Therapeutics, current ROIC is 36.9 percent. However, average ROIC over the past five years is only 2.1 percent.
Looking at the equity numbers for ANIK, at the end of 2000 total equity was $26.7 million. By the end of 2005, that number has grown to $30.4 million. I estimate growth in equity has averaged about 3 percent over the past five years. Both ROIC and equity growth are both below 10 percent over the past five years.
Earnings, sales and free cash flow recently spiked. However, over the past five years these factors have not grown by an average of 10 percent.
Strickly looking at the numbers over the past five years, it does not look like Anika Therapeutics has a sustainable competitive advantage. However, it is also important to look ahead.
The FDA approval of Anika Therapeutics cosmetic tissue augmentation product has had a major impact on its current financials. Anika appears to have unique capabilities in researching and developing hyaluronic acid based products. According to their 10-K, their patents expire between 2009 and 2022. I’m not clear on exactly what these patents are and it appear that some of their technology is licensed from Tufts. The 10-K also notes:
We are aware of several companies that are developing and/or marketing products utilizing HA for a variety of human applications. In some cases, competitors have already obtained product approvals, submitted applications for approval or have commenced human clinical studies, either in the U.S. or in certain foreign countries. There exists major competing products for the use of HA in ophthalmic surgery. In addition, certain HA products for the treatment of osteoarthritis in the knee have received FDA approval and have been marketed in the U.S. since 1997, as well as select markets in Canada, Europe and other countries. In December 2003, the FDA approved an HA product for the treatment of facial wrinkles which has been marketed internationally since 1996.
That doesn’t sound like a wide moat to me. I think I will be passing on this stock for now. In time, it could become clearer whether or not Anika Therapeutics has a wide moat. Continued development of their products could result in some positive developments in the future and may expand their moat. For now, the best that could be said is that Anika Therapeutics could be developing and emerging moat.