Anika Therapeutics, Inc. (ANIK) Q1 2019 Earnings Report, Transcript and Summary

Good evening, ladies and gentlemen, and welcome to the Anika Therapeutics First Quarter 2019 Earnings Conference Call. 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] As a reminder, this call may be recorded. I would now like to introduce your host for today’s conference, Sylvia Cheung, Chief Financial Officer. Please go ahead.

Thank you, Chris. Good evening, everyone, and thank you for joining our first quarter 2019 earnings call. With me on the call today is Anika’s President and Chief Executive Officer, Joseph Darling. During today’s call, Joe and I will review our first quarter 2019 financial results and key business highlights, which were summarized in our earnings release issued today. A copy of the earnings release is available in the Investor Relations section of our website at anikatherapeutics.com. In addition, a slide presentation is posted on our website in the Investor Relations section under the Events 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 number 2. Before we begin, please remember that certain statements made during this conference call constitute forward-looking statements as defined in the Securities and Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain 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. Certain financial measures we will discuss on this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a more helpful and complete understanding of our financial performance. A reconciliation of these non-GAAP financial results to the most comparable GAAP measure calculated and presented in accordance with GAAP is available in the Investor Relations section of our website. Please turn to Slide number 3, as I now turn the call over to our CEO, Joseph Darling. Joe?

Thank you, Sylvia, and good evening, everyone. Welcome to our first quarter 2019 earnings call. I am very pleased to announce that we’re off to a strong start in 2019. In the first quarter of 2019, we made progress in transforming Anika into a global commercial company positioned to deliver on a consistent and successful series of innovative product launches across the continuum of orthopedic and regenerative medicine therapies. We achieved double digit revenue growth year-over-year in all product lines, including in both our U.S. and international viscosupplement businesses, and we generated strong earnings and cash flow in the quarter. Additionally, as part of our commitment to return value to shareholders, the Anika Board of Directors has approved a $50 million share repurchase program to illustrate our belief in the future of our business and to underscore our commitment to returning value to our shareholders. Before we dive into the details for the quarter, I’d actually like to highlight three things that I hope you’ll take away from this call. First, we have taken significant steps over the last year to transform Anika into a global commercial company and position the company to accelerate growth and shareholder value creation in the coming years. Second, we are focused on delivering on the many organic and external growth opportunities for Anika. We have actively redeployed resources and added world-class talent as we leverage our strong market position to execute our growth objectives. Third, our fresh Board of Directors recognizes our progress towards delivering on these opportunities and are confident in our transformation strategy and our continued strong cash generation abilities as evidenced by the $50 million share repurchase program we announced today. As I have discussed in previous calls, our company and future growth are powered by our focus on our people, our products and our performance. Our first quarter results and recent accomplishments are a testament to our commitment to these three areas. Please turn to Slide number 4. Let me begin with the recent additions to our Executive Leadership team and Global Commercial teams as we continue to identify and recruit the right people to drive our transformation. It is very exciting to see the caliber of professionals joining Anika at all levels of the organization who understand our vision and share our enthusiasm for the growth opportunities available to Anika. We continue to enhance the depth of talent in our organization, whose energy, experience and intellect will not only differentiate us, but also serve as the key foundation from which we will execute on our strategy to drive sustained growth and enhance shareholder value. In particular, we are pleased to announce that we appointed Dr. Robert Richard to the position of Vice President of Research and Development. Bob is an R&D veteran, whose extensive orthopedic and regenerative medicine experience will help us accelerate our deep product pipeline, while leveraging the broad utility of our innovative technology platform to propel us forward. Second, we announced this week that we appointed Steve Goldy to the position of Vice President of U.S. Sales. He will oversee the development and deployment of our hybrid commercial organization. His deep understanding of the orthopedic surgery and sports medicine markets will be invaluable as we build our U.S. hybrid commercial model, launching our surgical-based orthopedic products and further strengthening our U.S. commercial infrastructure. Third, we continue to strengthen our international commercial infrastructure under the leadership of our Vice President of International Sales. We are increasing our focus on the international markets through direct interaction with all key stakeholders to drive international growth. Please turn to Slide number 5. I’d now like to provide an update on CINGAL. We received formal meeting minutes from the FDA regarding the clinical and regulatory pathway for CINGAL approval in the U.S. As previously disclosed, we will need to conduct another Phase III trial in order to gain approval in the U.S. We are currently evaluating and discussing with the FDA the most expeditious pathway to an approval in the U.S. market. We are also assessing the total cost associated with that pathway, including the clinical investment, as well as considering the dynamic landscape in the competitive marketplace when the product would be launched. We are evaluating multiple factors such as the evolving U.S. viscosupplement market, competitive landscape, pricing and the potential for the trial design to be considerably larger and more expensive than our last trial. We will be disciplined as we evaluate the potential options for CINGAL in the U.S. compared to other strategic options and investments in other areas where we have or can obtain commercially viable assets in the near term. While current demand for this innovative product in Canada and Europe remains healthy and CINGAL has proven to be a safe and efficacious non-opioid solution that provides fast and durable relief, we are committed to deploying our capital to the most value creating opportunities. We intend to complete this full assessment by the time we report our second quarter financial results and we will update you again at that time. Please turn to Slide number 6. Shifting to our near-term pipeline. We expect our surgically delivered bone repair and rotator cuff therapies to be the first two products launched under our hybrid commercial model in the U.S. We remain on track to launch our first surgically delivered regenerative therapy for bone repair procedures under our U.S.-based hybrid commercial model in the second half of this year. We recently showcased this therapy at the American Academy of Orthopedic Surgeons Annual Meeting, which is the largest gathering of orthopedic surgeons from around the world. We conducted in-depth market research meetings with 15 surgeons. The reception to the product was encouraging and the input from these influential physicians was both positive and constructive as we formulate our launch plans. Building relationships with and gaining clinical insights from thought leaders is critical to the success of our hybrid commercial model and adoption of our treatments. In the first quarter, we also completed key preclinical work for our rotator cuff repair therapy and we will be focused on the development of surgical instrumentation for the remainder of 2019. Both of these therapies possess notable differentiating elements from the current standards of care and are treatment segments that represent large and attractive near term U.S. growth opportunities for Anika. We estimate the bone repair market to be $250 million to $300 million and the rotator cuff repair market is estimated at $150 million to $200 million. Turning now to HYALOFAST on Slide number 7, please. We continued to take steps to accelerate enrollment in the ongoing Phase III trial required for U.S. approval. We have now initiated 37 sites and are looking to further accelerate the study through the inclusion of new sites outside of the U.S. We also recently held an educational symposium on HYALOFAST at the Asia Pacific Orthopaedic Association Sports Meeting, demonstrating the ease of use and clinical benefits of the procedure to the orthopedic surgeons. HYALOFAST represents another significant U.S. market opportunity, which we conservatively estimated to be greater than $0.5 billion annually. We will continue to explore and execute strategies to accelerate the HYALOFAST trial, including stepping up on the ground enrollment practices and assessing potential trial adjustments, while maintaining the power of the trial to drive approval. Please turn now to Slide number 8. Our U.S.-based hybrid commercial model will pair a small in-house team of highly skilled business development specialists with a strategic partner and/or regional distribution partnerships. This model will provide the most optionality and the ability to scale and flex as we launch products across multiple categories. We are continuing to evaluate a number of potential commercial partners with established orthopedic surgical salesforces that would fit with our organization. We also intend to structure any new partnership contracts to provide more favorable economics and greater control over market access, sales and marketing, minimum annual growth objectives and pricing than our previous commercial partnerships have had historically. We also plan to continue with our existing distribution model for all of our current U.S. and OUS franchises, and expect the development of our international commercial team to drive similar benefits, as well as a greater ability to hold our commercial partners accountable for their performance. While our strategic focus has historically been centered on our strong viscosupplement portfolio, we believe that our future lies to a growing degree in regenerative medicine and other areas, leveraging the broad utility of our HYAFF technology platform. With over 4 million sports-related injuries a year, the cartilage repair market represents a substantial growth opportunity in the U.S. We are well-positioned to meet the significant need in the global regenerative medicine market through innovation, as well as through potential synergistic acquisitions. Our goal is to become a market leader in orthopedic and regenerative medicine, with a product portfolio spanning a full continuum of care. Lastly, we expect to complete the development of our five-year strategic plan in the third quarter of this year, which will guide our continued transformation. We look forward to sharing the details with you in the third quarter during our 2019 Analyst and Investor Day this fall. We are pleased with our first quarter results and the progress we are collectively making across our organization as we evolve into a global commercial company and gain greater visibility and control of our future. I’ll now turn the call over to Sylvia to review our first quarter results. Sylvia?

Thank you, Joe. Please turn to Slide number 9. Total revenue for the first quarter increased 16% to $24.7 million compared to $21.3 million for the first quarter of last year. The increase in total revenue was primarily due to growth in both our U.S. and international viscosupplement businesses and higher sales of HYAFF-based products following our recovery from the 2018 voluntary recall. We’re very pleased to deliver double digit revenue growth year-over-year in all product lines for the first quarter. Global viscosupplement revenue in the first quarter increased 11% year-over-year, driven by double digit growth in both the U.S. and international markets. U.S. viscosupplement market increased 11% due primarily to timing of orders, and importantly, increased collaboration with our commercial partner, Mitek, regarding marketing strategies. International viscosupplement revenue also increased 11% year-over-year, driven primarily by an 18% year-over-year growth of our single injection products. Domestically, on a sequential quarter basis, ORTHOVISC end user pricing decreased in the low single-digit percentage range, while MONOVISC U.S. end user pricing increased in the mid-to-high single-digit percentage range. On a year-over-year quarterly basis, end user volume for the quarter increased slightly for ORTHOVISC and increased by 20% for MONOVISC. Product gross margin was 70% for the first quarter compared to 63% for the first quarter of 2018. The year-over-year increase in product gross margin is primarily due to certain inventory charges and the impact of the voluntary recall recorded in the first quarter of last year. Total operating expenses in the quarter were $19.2 million compared to $29.1 million in the first quarter of 2018. The year-over-year decrease in total operating expenses was due primarily to a onetime charge of $8.4 million related to the retirement of Anika’s former CEO in the first quarter of last year. Net income for the quarter was $4.5 million or $0.31 per diluted share compared to a net loss of $6.7 million or $0.46 per diluted share in the first quarter of last year. Adjusted EBITDA, earnings before interest, tax, depreciation and amortization, was $8.3 million for the quarter compared to $1.2 million for the first quarter of last year. The year-over-year increase in net income and EBITDA for the quarter was due primarily to the increase in total revenue and decrease in operating expenses previously discussed. We generated approximately $8.5 million in cash from operating activities in the first quarter and we ended the quarter with cash and investments totaling $167 million. Please turn to Slide number 10. Today, we are pleased to announce a $50 million share repurchase program. Anika plans to purchase $30 million of shares under an accelerated share repurchase or ASR program and up to $20 million of shares from time to time on the open market. We expect the ASR program to commence in the mid-May time frame and be completed prior to the end of the second quarter of next year. Our new share repurchase program reflects our commitment to a balanced and disciplined approach to capital allocation and reflects our high confidence in the long-term outlook for the company. Our cash deployment strategy remains focused on making organic investments to drive top line growth, pursuing strategic M&A to augment organic growth, and returning capital to shareholders through share repurchases. Turning to guidance. We continue to expect total revenue for the full year of 2019 to be approximately 3% to 6% below the prior year level. We’re pleased to start seeing some recent stabilization of U.S. pricing for our viscosupplement products in the quarter and we’re cautiously optimistic that this trend may continue throughout the year. While total revenue for the second quarter of 2019 is anticipated to increase on a sequential quarter basis, it is expected to be down year-over-year in a high-single to low-double digit percentage range. The anticipated year-over-year decline is due in part to expected volume of orders by our distributors and as a result of the high order volume in the first quarter of this year. We continue to expect total operating expenses to be in the high $70 million up to $80 million range for the year and adjusted EBITDA to be in the low $30 million range for the year based on a net income expectation in the mid-teens to around $20 million. I like now to turn the call back to Joe to discuss our near and long-term growth drivers.

Thank you, Sylvia. Please turn to Slide number 11. Today is a new day for Anika. We expect 2019 to be a transformational year as we evolved into a global commercial company positioned to deliver a continuum of orthopedic and regenerative medicine therapies over the next several years. While the last year brought certain challenges, we persevered with our strategic initiatives and believe we have stabilized the company’s operations and overall foundation. With an emphasis on our people, our pipeline and ultimately on maximizing financial performance, we will continue to take advantage of the multiple levers we have to drive near- and long-term growth across our business. These include the development of our hybrid commercial model and launch of our bone repair and rotator cuff therapies; international expansion of our orthobiologics franchise, specifically MONOVISC, CINGAL and HYALOFAST; advancing our deep and innovative orthopedic and regenerative medicine pipeline; looking at targeted partnerships and strategic tuck-in acquisitions; and also improving our operational efficiency and disciplined and balanced capital allocation. We are confident that we have the right people, products and strategies in place to drive long-term growth and value for our shareholders. All of us at Anika are focused on our initiatives that will support Anika’s transformation into a global commercial company. We are now happy to take your questions. Thank you.

Thank you. [Operator Instructions] Thank you. And our first question comes from the line of Mike Petusky with Barrington Research. Your line is now open.

Hey guys, good evening, and nice results. Sylvia, I guess first question I want to ask real - well, let me just say thanks so much for the adjusted EBITDA chart, that’s beautiful. Do you by any chance have the capital expenditure for the quarter?

Capital expenditure for the quarter, yes. And thank you for the comments, Mike. Capital expenditure for the quarter was roughly about $1 million.

$1 million, okay. All right, great. Okay. So then just moving to – I guess to the guidance. It sounds like it was completely reaffirmed that – there was nothing changed in that guidance versus a couple months ago, correct?

That is correct, Mike. I think the first quarter results was positive. We’re definitely pleased with the double digit growth. Having that said, it’s still early in the year. And Q1 results coming in ahead of our expectation and we discussed about the drivers there. And given the fact that we in the United States currently lack the visibility into the market and certainly don’t have pricing control, at this time we think that it’s more prudent to maintain our guidance and continue to monitor the developments in the market until we have a more certain set of data point to react to.

Okay. All right, great. So Joe, I guess on kind of the go-forward with CINGAL, obviously, you guys are going to have a more formulated plan in a few months. But given that it sounds like the Phase III is potentially much more expensive than the previous Phase III, I mean, might you to try to find out a partner to go in on this with, or some type of partnership agreement for the product? What are the range of possibilities or what are the things that you can share as far as what you guys are seriously considering there?

Yes. Mike, that’s a – first of all, that’s a great question. Thanks for asking it. Secondly, yes, we have considered partnerships to help fund the study. We are in discussions. And it’s difficult to talk about it, obviously, given the confidentiality of it, but that is one pathway we’re looking at. It would make a lot of sense, take some of the pressure off Anika itself, and allow a partner to come in and help fund it.

Okay. All right. And just one more question quick for Sylvia. The SG&A seemed like it really jumped quite a bit in Q1. Was there anything unusual in that SG&A or is that sort of the – roughly the new level going forward?

Mike, just so that I understand your question – SG&A overall year-over-year decreased largely due to the nonrecurring noncash charges in the previous year. There were some increases this year as we start to prepare for the hybrid commercial model. And during the quarter, there were some, and I would say not significant, asset write-off as we look at certain fixed assets that we have on our books. So for the most part, I would say that this would be indicative of future periods of SG&A expenses.

Okay. And just – I mean, SG&A historically has been more in the kind of the 20%, 22% of revenue range. Obviously, this is considerably higher. So you’re saying that this is more like the new normal?

Yes.

Okay, fair enough. Thank you.

Thank you, Mike.

Thank you. And our next question comes from the line of Joe Munda with First Analysis. Your line is now open.

Good evening, Joe and Sylvia. Can you hear me okay?

We sure can, Joe.

Yes, good evening.

Good evening. Congrats on the quarter. I was wondering if we can dig in a little bit to the results here. Joe, I’m curious to know – in your prepared remarks you guys talked about the timing of orders, and I’m wondering how much of this was stocking or if it was stocking to Mitek. And Sylvia, if you could give us some sense of what the breakout was U.S. visco versus international as well as CINGAL’s contribution in the quarter? Thanks.

Yes, a couple things, Joe. And then Sylvia will chime in. I think you’ve heard me say in previous calls that our relationship with J&J remains strong. They continue to invest in our business and have expressed interest in future partnership opportunities. I think they took a hard look at marketing strategy and tactics for Q1 and they executed on that. So I think that was a good boost for Q1 sales, was the refocused efforts that Mitek put on the products. In terms of the volume trends, I’ll have Sylvia address that.

Right. For the first quarter, U.S. visco is approximately low 70% of our total revenue and for international visco it’s around mid-teen from a revenue contribution standpoint – mid-teen of total revenue. I think you asked about the CINGAL contribution. CINGAL, this particular quarter we see that it’s slightly lower than last year. But overall, single injection, meaning MONOVISC and CINGAL, we saw 18% increase year-over-year. And I would like to caution you about the timing of distributor orders. Being a distributor-based company today, timing of when our distributors take products affects our quarterly results, as you know. We do still expect CINGAL to achieve double digit growth on a full year basis this year versus last year.

Okay. Then one follow-up if I may. Joe, the announcement of the buyback, $50 million; $30 million accelerated, $20 million on the back end over a course of time. I guess a key question we always get from investors is will Anika do some sort of M&A to augment the growth. And are you just – is there – are there interesting assets out there for you or the asking price is too high or you just haven’t found the right asset? Any color would be great. Thanks.

Yes, in terms of assets out there, Joe, I think you probably picked everyone in terms of – the pickings are slim, they’re overvalued. We want to be cautious about that. And clearly, we have targets that we’re still working through. So M&A is still an important part of our future and we’ve been very consistent on these earnings calls with identifying target opportunities and going after those target opportunities. As of yet, I can’t sit here today and tell you that we’re ready to close on one.

Yes, but – and I guess I wasn’t clear on my question. I’m just curious: the decision to do the buyback now, why not save that capital for M&A? Or this was the Board’s determination that this was the best use of the capital at this point?

Yes. Joe, yes, thank you for clarifying the question. So we ended the quarter with $167 million of cash, which is a pretty good position. We looked at – and this will go back to what I said earlier in terms of a balanced and disciplined approach to our capital allocation. From a cash generation standpoint, we continue to expect ourselves to be able to generate cash from operations. So setting aside $50 million is utilizing a portion of the cash, but we will continue to generate cash. And there’s still a meaningful portion on the balance sheet. And together with the line of credit capacity that we have, we believe that we’ll be able to effect any small tuck-in type M&A transactions that Joe was describing earlier.

Okay. And then, Sylvia, just one more if I may in regards to the buyback itself and the guidance that you provided, which is very helpful, I really appreciate it. How should we look at share count for the year given the mechanisms of the buyback as well as the $20 million potentially on the back end?

Yes. So we expect that the ASR program from a contract standpoint will be finalized by early next week and – to which we’ll need to file the document with the SEC. And you will see in the agreement the expected number of shares to be repurchased upfront. And from there, you can certainly factor that number into the EPS calculation. Typically, if you look at the industry – or just go back to the last two rounds of ASR that we did, we in general repurchased approximately – expected 60% to 70% of shares upfront. Obviously, the variable here is the price. But you can make assumptions on that. So I think from there with the duration of the ASR, which is expected to end prior to June of next year, I think you can run some estimated calculations to adjust the outstanding share numbers for EPS calculation standpoint.

Okay, thank you.

You’re welcome.

Thank you. And our last question comes from the line of Jim Sidoti with Sidoti & Company. Your line is now open.

Good afternoon. Can you hear me?

Sure can, Jim.

Great, great. The bone repair product that you plan to launch in the back half of the year, can you give us some sense on how quickly you think that will ramp? And have you included sales from that in the current guidance?

Yes. So the way we’re approaching the bone repair launch, Jim – and we’ve been pretty consistent on this too – is we’ll start with a soft launch where we’re starting to seed the market with KOLs, getting them up to speed, educating them and getting trial usages. Later on in the year, it will be full execution of the sales strategy, where these four BDs will be out selling directly to customers. So we do have some revenue for this year, but recognizing that we’re going to do a soft launch first and then a hard launch later in the year. I wouldn’t say it’s significant.

From a revenue contribution standpoint, we had shared previously that due to the soft launch nature of the commercialization of the bone repair product we expect that the revenue would be below $1 million in 2019 and certainly expand from there as the adoption of the product upticks in 2020.

Okay, all right. Thank you.

Thank you. And that does conclude today’s question-and-answer session. I would now like to turn the call back to Joseph Darling, CEO, for any further remarks.

Chris, thank you. Thank you for your time today. We are pleased with our first quarter results and our progress in transforming Anika into a global commercial company. We do believe that 2019 will be a transformational year for Anika, and we look forward to continuing to update you as we execute on our strategic initiatives in the year ahead. Thank you and have a great evening.

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