Anika Therapeutics, Inc.
Q1 2020 Earnings Call Transcript

Published: 9 May 2020

[Operator:]

Good evening, ladies and gentlemen, and welcome to the Anika Therapeutics First Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]I will now like to turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

[Sylvia Cheung:]

Thank you, Sadie. Good evening, everyone, and thank you for joining us. With me on the call today is Dr. Cheryl Blanchard, who was recently appointed President and Chief Executive Officer of Anika. I have worked with Cheryl for almost two years and closely alongside her over the past several months, during this highly unusual time externally and internally. I look forward to continuing to work with her and the rest of our management team to deliver progress towards our strategic plan.During today's call, Cheryl and I will review our first quarter 2020 financial results and key business highlights, which were summarized in our earnings release issued today. A copy of the earnings release is available on the Investor Relations section of our website at anikatherapeutics.com.In addition, a slide presentation is posted on our website in the Investors Relations section under the Events and Presentations tab. We invite you to take a moment now to open the file and follow the presentation along with us.Please turn to Slide #2. Before we begin, please remember that certain statements made during this conference call constitute forward-looking statements as defined in the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations, including statements with respect to impacts of the COVID-19 pandemic on Anika. These statements are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results, performance or achievements. Please also 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 by providing these measures, helps investors gain a more complete understanding of our results and is consistent with how management views our financial performance. A reconciliation of these non-GAAP financial results to the most comparable GAAP measurement, calculated and presented in accordance with U.S. GAAP is available in the Investor Relations section of our website.Finally, due to circumstances and disruptions related to the COVID-19 pandemic, we have estimated the amounts related to goodwill impairment, a reduction to the fair value of contingent consideration related to the Arthrosurface and Parcus Medical acquisitions. These noncash amounts should be considered provisional subject to the completion of related accounting work.Specifically, in order to assure accurate and transparent reporting to our stakeholders, the company with its advisers, is determining the impact of the evolving COVID-19 situation on these amounts as they relate to the recent acquisitions completed during the first quarter. The amounts associated with these U.S. GAAP measures are reasonable estimates based on the information available in our assumptions and judgment to date. Due to the fluidity of the situation, final results could differ from those presented today.Anika does not expect changes with respect to other reported results, except as a result of changes that may be made to the provisional amounts. With respect to the financial results presented on this call that are not related to goodwill or fair value of contingent consideration, we do not expect any material changes unless results are impacted by events between today and the date we submit our SEC Form 10-Q for the first quarter.We intend to use the extra time provided by the recent COVID-19 SEC filing release measures to determine these acquisition accounting matters. We plan to file our Form 10-Q on or before May 22, 2020, but no later than June 25, which is 45 days from the Form 10-Q's original filing due date of May 11. For additional information, please see the section captioned Clarifying Note about Financial Results in our earnings press release we issued this afternoon.I'll now turn the call over to our CEO, Dr. Cheryl Blanchard. Cheryl?

[Cheryl Blanchard:]

Thank you, Sylvia, and good evening. We hope that everyone joining us on this call remains safe and in good health during this difficult and unprecedented time. Whether at home or in the workplace, we have all been impacted by the effects of the COVID-19 pandemic and our hearts go out to everyone who has suffered personal hardship or loss. Our hearts also go out to the health care workers around the world, who are on the front lines selflessly fighting this global pandemic.As this is my first quarterly call since being named President and CEO, I would like to thank the Board of Directors for their support during the last several months and for their confidence in my leadership. As a Board member and then as interim CEO, I realized that I had a unique opportunity to leverage my past experiences to help guide Anika through its continued evolution.I have successfully led operational and commercial businesses through periods of significant growth, scaling, integration and even disruption. I am very excited and humbled to have been chosen to continue working with the Anika leadership team to drive the company's momentum and growth.As I considered taking on the CEO role permanently, I thought about Anika's tremendous opportunity

[Sylvia Cheung:]

Thank you, Cheryl. Please turn to Slide #6. I'd like to begin by reviewing our 3 new product categories for which we are reporting revenue, following the expansion of our product portfolio into therapies for joint preservation and restoration.First is the joint pain management family, which includes the human and animal viscosupplement products, including MONOVISC, CINGAL and ORTHOVISC. Second is the orthopedic joint preservation and restoration family, including TACTOSET, HYALOFAST and sports medicine surgical products from Parcus and Arthrosurface. And lastly, the other category, which includes legacy products, such as ophthalmology, advanced wound care and anti-adhesion surgical products.Please turn to Slide #7. Anika achieved record Q1 revenue despite the COVID-19 pandemic, which impacted our first quarter results. Total revenue for the first quarter of 2020 increased 43% year-over-year to $35.4 million compared to $24.7 million in the prior year. Revenue growth for the quarter was driven primarily by orthopedic joint preservation and restoration products due to the acquisitions of Parcus and Arthrosurface, which contributed a combined $6.8 million of revenue during the quarter.Further, our joint pain management portfolio delivered worldwide growth of 12% year-over-year. Domestic joint pain management revenue increased 7% year-over-year for the quarter, and international joint pain management revenue increased 36% year-over-year for the quarter.Cost of product revenue, R&D and SG&A expenses in the quarter were $34.7 million compared to $19.2 million in the first quarter of 2019. The cost of product revenue increased $6.9 million due to robust top line growth. It included $3 million of acquisition-related amortization expense.Selling, general and administrative expenses increased $6.8 million, which reflected $4.2 million of acquisition-related expenses in the first quarter. In addition, SG&A expenses also included increased selling and marketing expenses related to the two newly acquired companies, Parcus and Arthrosurface, that broad expanded sales commercial infrastructure to Anika.As I noted earlier, we're consulting with our external advisers to determine the impact of the evolving COVID-19 situation on the impairment of the goodwill, and reduction to the fair value of contingent consideration associated with the recent acquisitions of Parcus and Arthrosurface. The estimated impact of the COVID-19 pandemic on the recently acquired companies resulted in a provisional $20 million of noncash goodwill impairment charge.Total operating expenses for the first quarter of 2020 also included $24.3 million of reduction in fair value related to acquisition contingent consideration liabilities, which was recorded as a benefit in the first quarter. The amounts discussed are provisional in nature. We believe these estimates are reasonable based on the information available and judgments made to date and are subject to potential changes.Based on these provisional estimates, net income for the quarter was $3.5 million or $0.24 per diluted share compared to $4.5 million or $0.31 per diluted share in the first quarter of 2019. Non-GAAP adjusted net income for the first quarter of 2020 increased by $2 million year-over-year to $6.5 million or $0.45 per diluted share.Adjusted EBITDA was $9.5 million for the quarter compared to $8.3 million for the first quarter of last year. The increase in adjusted EBITDA was primarily due to total revenue growth partially offset by increases in cost of product revenue and selling and marketing expenses.Adjusted EBITDA is defined by the company as U.S. GAAP net income, excluding depreciation and amortization, interest and other income or expense, income taxes, share-based compensation expense, acquisition-related expenses, noncash charge related to goodwill impairment, and change in fair value of contingent consideration associated with our recent acquisitions as a result of the COVID-19 pandemic.In 2020, acquisition-related expenses consisted of professional service fees as well as amortization expenses associated with the Parcus and Arthrosurface transactions. These are costs that the company would not have incurred, except as the direct result of the acquisitions.In the first quarter, we used $93 million from existing cash on our balance sheet to fund the upfront payments for the acquisitions of Parcus and Arthrosurface. We ended the quarter with a solid $92 million in cash and investments on our balance sheet.In April, we drew down $50 million on our existing credit facility to strengthen liquidity in light of COVID-19. We have also implemented a number of short-term expense controls and are prioritizing business initiatives to conserve cash flow and continue selected investments in critical strategic initiatives for future growth.The credit facility matures in October 2022, and we can make prepayments without penalty. The applicable initial interest rate is approximately 2% for the $50 million drawdown. The credit facility also has a $50 million accordion, which is a feature that we can potentially access in the future.As Cheryl mentioned, we are withdrawing our financial guidance for the full year of 2020 until our visibility into revenue trends improves. Importantly, the long-term fundamentals of our business remains strong, and Anika is well positioned to successfully navigate this period of uncertainty.We're now ready to take your questions.

[Operator:]

[Operator Instructions] I am showing no questions at this time. I would like to turn the conference back over to Sylvia Cheung.

[Sylvia Cheung:]

Cheryl, we'll turn the call over to you for closing remarks.

[Cheryl Blanchard:]

Great, thanks, Sylvia. As you heard today and from merely all companies in recent weeks, this is certainly not a business-as-usual moment in time. There is simply no playbook for how to emerge safely and effectively from a global pandemic. However, I can assure you that Anika is positioned very well to weather the impact and emerge stronger than before, with renewed purpose and vision and an enhanced organizational structure that will enable us to deliver meaningful therapies to patients and value to shareholders.Thank you for your time today. We look forward to updating you as we continue to deliver progress on our strategic initiatives. Have a great evening, and please stay well.

[Operator:]

Ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect.