Anika Therapeutics, Inc.
Q1 2016 Earnings Call Transcript

Published: 29 Apr 2016

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Anika Therapeutics first quarter 2016 earnings conference call. [Operator Instructions] I will now turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

[Sylvia Cheung:]

Thank you, Brian. Good morning, everyone, and thank you for joining our first quarter earnings call. With me on the call today is Anika's President and Chief Executive Officer, Dr. Charles Sherwood. During today's call, we will review our first quarter 2016 financial results and key business highlights, which were summarized in our earnings release issued yesterday and available in the Investor Relations section on our website at anikatherapeutics.com. In addition, a slide presentation is posted on our website in the Investor Relations section under the Event, Webcast 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 the 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. I'll now pass the call over to our President and CEO, Dr. Charles Sherwood.

[Charles Sherwood:]

Thank you, Sylvia, and good morning, everyone. We are off to a strong start in 2016 with exceptional top and bottomline growth year-over-year, driven by our legacy viscosupplements, ORTHOVISC and MONOVISC. I'll begin by sharing some exciting updates on our growth strategy, and then turn it over to Sylvia to review our first quarter financial results. So now, please turn to Slide number 3. To remind everyone, our long-term growth strategy is based on four pillars

[Sylvia Cheung:]

Thank you, Chuck. Anika delivered strong financial results, continuing the momentum generated in 2015 into the first quarter, and we remain in an excellent financial position to fuel our growth for the balance of the year. Please turn to Slide number 6. Total revenue increased 44% year-over-year to $22.3 million for the first quarter. Orthobiologics revenue increased 64% year-over-year in the quarter, due primarily to an increase of approximately $6 million in ORTHOVISC and MONOVISC product sales to our U.S. commercial partner Mitek. As discussed on our prior earnings call, first quarter 2015 orthobiologics revenue was negatively impacted by Mitek's inventory rebalancing activities. U.S. ORTHOVISC and MONOVISC end-user revenue grew 11% year-over-year in the first quarter of 2016, which reflects the continued solid growth of end-user demand for our effective and differentiated products. We delivered a strong gross margin of 76% in the first quarter, driven primarily by a more favorable product mix. Total operating expenses in the quarter was $11.6 million compared to $10 million in the first quarter of 2015. Income from operations increased $5.2 million to $10.7 million in the first quarter compared to $5.5 million for the first quarter of last year. Net income in quarter grew by $3.4 million to $6.9 million compared to $3.5 million in the first quarter of 2015. Diluted EPS per share was $0.45 in this quarter, up $0.22 from the first quarter of last year. The strong financial performance was primarily due to robust revenue and timing of operating expenses in the R&D and SG&A areas. We expect operating expenses to increase during the remaining quarters of 2016, as a result of our planned product development and marketing initiative. We ended the quarter with approximately $116 million in cash and investments on our balance sheet. The sequential decrease in cash from the end of 2015 was primarily due to the commencement of our $25 million accelerated share repurchase program or ASR, and the investments that we made to strengthen our infrastructure to support the future growth. During the first quarter we repurchased approximately 377,000 shares under the ASR program. This represented approximately 70% of the shares we expect to be repurchased under the ASR program. We expect the program to be completed in August of this year. We also continue to invest in the integration of our manufacturing operations at our Bedford headquarters, and began the build-out of our European headquarters in Italy to support sustained growth. As Chuck discussed, strategic M&A is also an integral part of our cash deployment strategy, and we plan to be highly disciplined and very selective in how we engage on that front. Lastly, turning to guidance. We expect product revenue growth for the full year of 2016 to be in the mid-teen percentage range. We do not expect to recognize any milestone revenue in 2016. Total revenue growth for the full year 2016 is expected to be in the high-single to low double-digit percentage range. Based on the expected timing of orders by our commercial partners, total revenue growth for the second quarter of 2016 is expected to be in the low double-digits on a sequential basis. In conclusion, we are proud of our financial results for the first quarter and we are well-positioned for the continued growth throughout the year. The market for our commercialized products is growing, we are expanding globally, we have a deep and advancing product pipeline and we have a very clear strategy to achieve our objective. We're now happy to take your questions. Thank you.

[Operator:]

[Operator Instructions] Our first question comes from the line of Mark Landy with Northland Capital.

[Mark Landy:]

Sylvia, as a first-up, there was a pretty big decrease in accounts receivable, I think around $7 million. Can you just give us some clarity around that?

[Sylvia Cheung:]

At the end of last year accounts receivable reflected the $5 million of milestones that we achieved in the fourth quarter of last year as well as royalty, the quarterly royalty, both of which were reflected during the first quarter. So those were the primary reasons for the decrease.

[Mark Landy:]

And then, Chuck, just focusing on single, and I don't know how much you can give us in the discussions with the FDA, but when do you plan on filing your IND? And should we be thinking more along the lines of randomized clinical trials or do you think you'll be able to convince them to do something like an open registry and open label?

[Charles Sherwood:]

Well, we are still, as I said in the prepared script, we are still in some active discussions with the FDA. I think one thing to keep in mind, which gets forgotten, is that this product concept is a combination of an approved viscosupplementation device with a steroid, which is also approved. Neither of the components interact with one another. As a consequence, this is a very unique situation for the FDA and that is not a new molecular entity. So our discussions now center around how and what needs to be done in addition to the already highly successful Phase III trial that we have and the repeat study. So until we come to some agreement on this, there will be no IND, because there is nothing to file. But, I want to differentiate that, and I think it's important that people understand. This is not like some of the other products that are being developed that potentially could be competitive, it's a special and unique situation. And the reason it's taking so long in discussions with the FDA is initially they just didn't understand the perspective. I think we are getting close to them understanding exactly what this product is. And I am optimistic that we we'll get to sit down fairly soon and have a meaningful discussion about how to get this product approved. As soon as we reach an agreement upon any additional work to be done, we will be totally forthcoming in communicating that.

[Operator:]

Our next question comes from the line of Joe Munda with First Analysis.

[Joe Munda:]

Chuck or Sylvia, could you talk a little bit about the delta between the growth in orthobiologics and the end-user demand? I mean that's a pretty substantial delta there and any help in kind of understanding that would be extremely helpful.

[Charles Sherwood:]

We get a little or more clarification, Joe, on --

[Joe Munda:]

The Orthobiologics.

[Charles Sherwood:]

Could you rephrase that a little?

[Joe Munda:]

Sure. Revenue growth for orthobiologics was up 64%, but end-user demand growth was up 11%. So there's a little bit of a delta there. Are we looking at large stocking orders at J&J?

[Sylvia Cheung:]

Not large stocking orders. This is really a year-over-year comp issue, if you will. If you recall, in the first quarter of last year we got hit with the early stage of the inventory reset at Mitek to bring their number of weeks of inventory on hand from a certain level to a lower level, which was roughly about a 50% cut. So as a result, Q1's product sales in 2015 from us to Mitek was very low, and the year-over-year approximately $6 million increase in product shipment is the result of we exited Q3 of last year with normal inventory purchase patterns with Mitek. And the end-user revenue, 11% is really a reflection of the -- is really a calculation of the royalty revenue that we earn as a result of Mitek's end-user revenue and that grew year over year at 11%.

[Charles Sherwood:]

Also, Joe, you threw out a number of 64% or 60% in the script, that was the international orthobiologics revenue growth, up 64%. So our international viscosupplementation business is actually growing much faster than the business in United States, albeit on a much smaller basis.

[Joe Munda:]

It says that on Page 6 of your presentation, orthobiologics revenue grew 64% year-over-year.

[Sylvia Cheung:]

Yes, that is correct. If you look at the press release, the product revenue by franchise table, that's what the numbers are derived from.

[Joe Munda:]

So Sylvia, taking your last comment of, saying, the 50% down, so a 50% cut in last year. So can we assume on an apples-to-apples basis, if everything was normalized, you take 64% minus the 50%, you get really 14% growth, if it was all normalized. Is that the way to look at this?

[Sylvia Cheung:]

I understand what you're saying, but I'm not sure if that is also -- I am not sure if that is the right way of describing it, because there are a couple of other changing factors. One, the MONOVISC franchise has been growing at a higher rate. So from an inventory standpoint, the growth rate between ORTHOVISC and MONOVISC are different. I think the best way of looking at this is really from Q1 through Q3 of this year, the collective three quarters will have good year-over-year comparison, because of the obvious inventory reset situation that took place last year. For the full year, we are expecting overall a good growth from orthobiologics contributing to the mid-teen percentage growth for our overall business from a product revenue standpoint. So I think we should keep our focus to the combined franchise as well as the full year growth rate.

[Charles Sherwood:]

And let me throw in a qualitative point, not a quantitative point. I was trying to make the point that, first of all, the Mitek does a phenomenal job of marketing our products in the United States, and we participate in that process, but not in a fully direct way. However, our international revenue is fully our responsibility, reporting a lot of effort in there. It is much smaller than our revenue from the United States. However, we've seen really good growth there and we saw a lot of demand being generated for MONOVISC as an innovative product. And we think that the same thing will happen with CINGAL. So again, small, but growing.

[Joe Munda:]

And I guess the follow-up, Chuck, you talked about the new pipeline of products. The injectable product that you are talking about, I mean, are we looking at stuff like tennis elbow, tendonitis, torn rotator cuff? Is that the type of injuries you're talking about? And then, the second part of that, the demineralized bone matrix market is pretty entrenched with a lot of large players in there. I know you said the timeline is a little bit out a ways here, but it is a pretty competitive and entrenched market. Any thoughts there would be great.

[Charles Sherwood:]

On the first one, the answer to your first question is yes. And then now on the bone situation, I was being a little bit -- we promised we'd put out information on the pipeline. And so I wanted to give some visibility into what we are working on. On purpose, I was not totally forthcoming about the bone graft, because we think we have some unique concepts, which we are working on some IP. So I didn't want to be too specific about what our aims were there. If we can't do something innovative and unique, I don't think that that's going to be an area where we're just going to jump in with the me too product, if that helps you at all. I think as we move forward and as we develop more, I could be a little bit more open about what we are try to do there.

[Operator:]

Our next question comes from the line of Greg Garner from Millennium Asset Management.

[Greg Garner:]

So in any event, a couple of questions just on the Phase III. I came in a little delay, so I was just in the queue for a long time to get registered. So you might have mentioned this, but I wanted to ask you about the Phase III for the HYALOFAST and the MONOVISC. Can you just give us some rough parameters as to number of patients, primary endpoint, length of time for the Phase III for what you might know today?

[Charles Sherwood:]

For the two, which is HYALOFAST, and what was the second one?

[Greg Garner:]

For the MONOVISC, for the hip?

[Charles Sherwood:]

MONOVISC hip?

[Greg Garner:]

Yes.

[Charles Sherwood:]

You want to take that, Sylvia?

[Sylvia Cheung:]

Sure. The HYALOFAST FastTRACK study is a Phase III study. We are targeting approximately 200 patients at roughly about 30 sites in the U.S. and in Europe, and the study is a prospective randomized controlled study to establish superiority of our HA scaffold. And it's going to be used in conjunction with BMAC or bone marrow aspirate concentrate. So we're currently in the early stages in enrolling patients. We have a few sites up, a few patients in the study. We'll be using two-year data to start the FDA submission process, but the trial is a three year follow-up trial. So that is roughly the trial timeline that we are looking at. Does that answer your question?

[Greg Garner:]

Yes. A three year follow-up study after this initial enrollment. So we're talking a couple years before this is going to be done. I just wanted to get --

[Charles Sherwood:]

Yes, quite a few. I would throw one thing about that trial, so as long as it is in the spirit of full disclosure. So this product is approved in Europe. And actually there is an upcoming meeting of the Cartilage Repair Society in September in Italy, and at that meeting we'll have a lot of, well, at least a couple and maybe several papers being presented on HYALOFAST and its effectiveness in this particular treatment and used in other ways. So the trial that we're running in the state, we're very confident that we'll be successful, since so much work has been done commercially and before that in pilot studies. It's just a matter of -- the biggest hurdle we have, I think, is patient recruitment and getting those patients into the trial on a good pace. I know we'll run a good trial. And, of course, the timeframe is the timeframe. We can't slow down the follow-up time. And I think that based on the negotiations we've had with the FDA to get this trial started. And if this run properly, which I totally assume it will, I believe on the backend in terms of actually getting this approved, once they have all the data, might not be such a long and arduous process. But, it is, as you point out, still several years out.

[Greg Garner:]

And then for the MONOVISC?

[Sylvia Cheung:]

Yes, for the hip. This particular study is sponsored by our commercial partner, DePuy Synthes Mitek Sports Medicine, so they are paying for the study and executing the trial.

[Charles Sherwood:]

The clinical portion. We still own the regulatory portion.

[Sylvia Cheung:]

Exactly. And the trial's current status is it started at the end of last year. We have approximately about half a dozen sites initiated with some patients enrolled. It's rather a large trial, I think over 500 patients, and we'll be following the patients for six months. Currently, we are looking at last patient follow-up completed in the Q3, Q4 timeframe of 2019.

[Greg Garner:]

So it looks like the mid-2017. Well, the IND probably wouldn't take too long to put together, I wouldn't think.

[Charles Sherwood:]

They restarted the trial, so it's an IDE and it is finished.

[Greg Garner:]

I mean, the final FDA process.

[Charles Sherwood:]

It's PMA. It's PMA supplement, right? No, that won't take too long. Just like I said in HYALOFAST, I mean, this is a big trial. And so getting all the patients enrolled and follow it up is probably going to be -- it is a variable time, but it's going to be a fairly long time. We could put the data together and file the application pretty quickly. And if the data are very strong, as we hope they will be, I think the approval process, since it's a PMA supplement and the product is already approved for another indication, it shouldn't take that long either. So it's all about how fast we get the patients into the trial.

[Greg Garner:]

From the hip to the knee, it seems like there is very similar articular cartilage issues that this MONOVISC addresses. Are there any real physiological differences between those two joints that you think there might be anything that slow it down? I mean, I'm trying to think that there would be. I just can't. My medical knowledge is a bit old.

[Charles Sherwood:]

Certainly, injection into the knee is more difficult than -- in the hip is more difficult than in the knee. As with other things, this product is already used in the hip outside the United States, we have data. And we sell for this indication. So again, I think that the protocol was designed on all of the information we had, both from our work and what we could garner from other people who have tried to do this and have not been successful. And so we think there is a high probability we will, because of the number of patients, because of the way we decided trial, that we're going to achieve success here.

[Greg Garner:]

I'm surprised that the practitioners weren't naturally using it as a secondary indication on their own, which is typically done for, well, different drugs and such. But it's great that you're going through the Phase III, but maybe it's the fact that the needle needs to be longer, so you really can't or there is a reluctance to use it on [multiple speakers].

[Charles Sherwood:]

They do, do it, Greg, but [multiple speakers] and certainly so then we can't promote it. And because we can't promote it, we can't provide the training and all of the other things that would really -- and position the product, which would really have it take off in this use. And then the FDA requires that you go into every single joint and run a study separately, so we wanted to next transition into shoulder, we'd have to do yet another trial.

[Greg Garner:]

Yes, I understand that aspect from the FDA.

[Operator:]

Our next question comes from the line of Mike Petusky with Barrington Research.

[Mike Petusky:]

I may have missed this, but did you guys give an estimate of the current market share between the -- in aggregate, the MONOVISC and ORTHOVISC?

[Sylvia Cheung:]

Do you mean our products current market share exiting Q1 of 2016?

[Mike Petusky:]

Yes.

[Sylvia Cheung:]

No, we have not. We did not give one. At the end of last year, we were at 25%, 26%. The competitor information will never be all publicly available, but the key competitor information will be available later this week, so at this point, we have some estimates. But we're waiting for some new data.

[Charles Sherwood:]

Mike, it's difficult to piece this together because there is no one source that you can go to get all the information, so you patch data from various sources and coordinate it to get these estimates. So we have what we think are some pretty good estimates exiting 2015, which show us that 25%, 26% market share, as Sylvia said. And, basically, I guess that's about 6% MONOVISC and 19%, 20% ORTHOVISC. We are growing. That keeps going up. And the market leader keeps going down, so that's a good thing as we try to become the market leader. But it's really tough to get accurate market share numbers we can -- because it's to tough to piece the data together.

[Mike Petusky:]

Do you have enough to go on that you believe that you took market share in the first quarter from Synvisc?

[Sylvia Cheung:]

We would, I think, be in a better position to comment when they come out with their Q1 results later this week.

[Mike Petusky:]

I guess I also wanted to ask, in kind of broad terms, is your expectation for the commercial launches in Europe, for CINGAL, as well as the Canadian launch, I mean, is that in incremental maybe $1 million, $2 million hitting '16, something like that? Is that in the ballpark or are you more bullish on what kind of revenue contribution you could get there?

[Sylvia Cheung:]

Do you mean $1 million up to $2 million from international?

[Mike Petusky:]

Yes, the commercial launches as well as the launch in Canada?

[Sylvia Cheung:]

I think that is a reasonable expectation. I think it's also consistent with our commentary during the last call.

[Charles Sherwood:]

One of the things, though, that we're doing and we learned that it's very important is we are spending a lot of time trying to make sure that we have key opinion leaders' support for the use of the product, so in addition to the revenue that is a very important thing to do right out of the box to build a sound foundation for the development of the product.

[Mike Petusky:]

And I guess quickly on Sylvia's comment around operating expenses. This is an area that we've had a difficult time. We always hit you guys too hard and then you guys -- the expenses don't ramp like we estimated they would. Obviously they are going to, though, and I guess my question is would you expect that to be, essentially I guess the operating expenses being higher in the fourth quarter then maybe in the second quarter. In other words, then truly ramping throughout the rest of the year or are they going to escalate pretty quickly here?

[Sylvia Cheung:]

I think it's the former scenario that you mentioned. I think fourth quarter will be the quarter with pretty significant expenses based on the timing of the activities, both in the product development as well as in the marketing and other corporate areas.

[Charles Sherwood:]

If I had my way, I would spend a ton of money in Q2 and try to completely enroll the HYALOFAST patients, which would represent a pretty significant expense outlay. Unfortunately, that's not under my control.

[Mike Petusky:]

Real quick, last question, being out of your control, I guess this is hopefully within your control, but in terms of the commentary around M&A, do you believe there are true front burner M&A candidates that we could hear about fairly soon, or are you guys still in the fairly early stages of having maybe exploration and discussions with in regards to M&A candidates?

[Charles Sherwood:]

I would say it's probably the latter. We're not close to consummating anything. The surveying of what's out there, it's more difficult than it might have been a couple years ago, because some of the things that might have been of interest to us now, companies got purchased a couple years ago. So, the pool isn't as rich as it was. And because we want to be prudent and it is very important to us, we're not taking our time, but we're being very thorough.

[Operator:]

We have follow-up questions from line of Joe Munda with First Analysis.

[Joe Munda:]

Just two, actually, real quick follow-ups here. Chuck, I guess the question is, I mean, as far as CINGAL goes, how incremental is that to the future growth of the company? I mea, you have a lot of interesting pipeline products here. Timeline might be a little variable, but how incremental is CINGAL to the story going forward? And if the FDA were to come back and require data that makes you guys spend anywhere, let's call it $30 million, is that something you guys are willing to digest to get CINGAL to market? And then on the second part, the new facility in Padova, any color on what the potential cost would be there would be great.

[Charles Sherwood:]

Well, CINGAL is important to our future. And we think it represents a fairly substantial revenue opportunity for us and it will be a pivotal product and a good portion of the reason why we're establishing our commercialization capability. So that's the answer to the first one. The second one is like it is pretty inconceivable to me that we could spend $30 million, since we spent a fraction of that to run the two studies that already ran. So I don't know where that number came from, but it seems quite, quite high. And since CINGAL is very important to us, we are definitely willing to invest as long as there is reasonable justification as to why we have to invest from the FDA. And if we don't think that's reasonable, we will continue our dialogue and discussions with them until we wind up at a point that makes sense for the patients in the U.S., and also, Anika as a company.

[Sylvia Cheung:]

In terms of your question about the Padova, Italy office build out cost, it's actually a build-to-suit lease arrangement for us. So the cost of building the facility is borne by the landlord and we will be incurring a smaller amount for just the office outfit portion of the build out work. And net-net, the new lease is much more space, a lot more technologically advanced, and it's at a lower rental expense comparing to the existing lease. So it's a pretty nice set-up for us for the future.

[Charles Sherwood:]

Also, another benefit of that is it will certainly be our European and highly likely international training center for cartilage regeneration, first HYALOFAST and then other products. So part of the reason to build this was to establish that training center. And that will be very, very important and we are already lining up KOLs as instructors and we think this will really catalyze the HYALOFAST business, certainly internationally. And then when the U.S. comes online, it will be an important component as well. As a matter of fact, we may end up -- there's a fair number of doctors, surprisingly, who practice in the United States, also practice outside the United States in other facilities, quite often Abu Dhabi and places like that. So having, even training U.S. physicians for procedures that they can't necessarily practice in the United States at this time will be useful from this facility.

[Joe Munda:]

Chuck, I mean the $30 million that I came up with is my number. I'm saying that I took a look at trials and that's a number that I was coming up with. So it's not like I was pulling it from somewhere. But I was just wondering, is there a threshold where it's just not worth your, the time or the money?

[Charles Sherwood:]

First, let me make a comment, Joe. If you had any aspirations of running our clinical department, please don't continue with both.

[Joe Munda:]

I am good where I am, thank you.

[Charles Sherwood:]

Second, at this juncture, I can't conceive of a threshold that is reasonably negotiated that is too much for us.

[Operator:]

Ladies and gentlemen, this is all the time we have today for questions-and-answers. I would now like to hand the call back to Dr. Charles Sherwood, President and Chief Executive Officer. Please proceed, sir. End of Q&A

[Charles Sherwood:]

Thank you, Brian. And I would like to thank everyone once again for participating on this call. Again, I think the questions were excellent, and allowed everyone to understand what we're trying to do a little bit better. And we look forward to the next quarterly call and updating our progress. So thanks for your interest and thanks for being on the call today.

[Operator:]

Ladies and gentlemen, this does conclude today's program and you may all disconnect. Everybody, have a wonderful day.