Anika Therapeutics, Inc. (NASDAQ:ANIK) Q1 2023 Earnings Call Transcript

Anika Therapeutics, Inc. (NASDAQ:ANIK) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon, ladies and gentlemen, and welcome to Anika’s First Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, May 9, 2023. I will now turn the call over to Mr. Mark Namaroff, Vice President, Investor Relations, ESG and Corp Communications. Please go ahead.

Mark Namaroff: Thank you. Good afternoon, everyone. Thank you for joining us for Anika’s first quarter conference call and webcast. Our Q1 earnings press release was issued after the close of the market today and is available on our Investor Relations website located at anika.com as our supplementary PowerPoint slides that we used for the discussion today. With me on the call today are Dr. Cheryl Blanchard, President and Chief Executive Officer; and Mike Levitz, Executive Vice President, Chief Financial Officer and Treasurer. Please take a moment and open the slide presentation and refer to Slide #2. Before we begin, please understand that certain statements made today during the call constitute forward-looking statements as defined in the Securities 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. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. Please also see our most recent SEC filings for more information about risk factors that could affect our performance. In addition, during the call, we may refer to several adjusted or non-GAAP financial measures, which includes adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted earnings per share, which are used in addition to results presented in accordance with GAAP financial measures.

We believe that non-GAAP measures provide an additional way of viewing aspects of our operation and performance. But when considered with GAAP financial measures, the reconciliation of GAAP measures, they provide an even more complete understanding of our business. The reconciliation of these adjusted non-GAAP financial measures to the most comparable GAAP measurements are available at the end of the presentation slide deck and our first quarter 2023 press release. And now I’d like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Cheryl Blanchard: Thanks, Mark. Good afternoon, everyone, and thanks for joining us. Please turn to Slide 3. We’re pleased to report that Anika had a positive start to the year. While our reported revenue showed growth of 3%, the core parts of our business were up 9% in Q1 as we’ve seen the environment for some orthopedic elective procedures improving. Osteoarthritis Pain Management revenue was stronger than expected in the quarter and remains a market-leading business that continues to win globally. We were excited to see double-digit growth in Joint Preservation and Restoration in the quarter, which included early traction from our recent product launches with X-Twist and RevoMotion and international growth, driven by geographic expansion and timing.

Our OA Pain Business, including our sales and marketing partnership with J&J Mitek for Monovisc and Orthovisc in the U.S. continues to provide a healthy financial foundation to support the investments driving our growth strategy. In addition to our market-leading products in the U.S., we’re also particularly pleased with our strong international performance as we grow market share of our OA pain products, especially Cingal as more and more clinicians and their osteoarthritis patients realize the benefits of this truly next-generation non-opioid OA pain product. With respect to Cingal, we are actively engaging with the FDA regarding next steps for U.S. regulatory approval and exploring commercial partnerships to advance Cingal in the U.S. and select Asian markets.

We’re excited about our continued progress and momentum in our Joint Preservation and Restoration portfolio. We had great traffic and training opportunities at our booth at the American Academy of Orthopedic Surgeons meeting in March, with a lot of interest across our full Joint Preservation portfolio. We’re building traction and adoption as we continue to hear great feedback from surgeons following the Q1 full market release of X-Twist, Anika’s cornerstone suture anchor system as we increase awareness and educate surgeons about its flexibility and surgical versatility across procedures in the shoulder and the foot and ankle. We’re receiving great early clinical feedback following the successful limited launch of our new RevoMotion reverse shoulder system, which significantly expands our shoulder arthroplasty portfolio.

Patients are doing well in their early post-op visits, some now out to 4 months, and surgeons are extremely pleased with the post-op X-rays. We look forward to build momentum ahead of a full launch, which we’re continuing to target towards the end of this year. Tactoset, Anika’s regenerative solution for insufficiency fractures and hardware augmentation received an additional 510(k) clearance, further building the Tactoset franchise. Tactoset is now cleared for use with autologous bone marrow aspirate, a key component in regenerative healing. I’m also happy to welcome Gary Fischetti, who is appointed as a new independent director in April. Gary brings decades of relevant experience in the medical device industry, including more than 35 years at Johnson & Johnson with both domestic and international leadership responsibilities.

And we look forward to leveraging his expertise as we advance our strategy and capture the significant opportunities ahead. Now moving on to Slide 4. Over the past 3 years, we’ve been investing with purpose to fundamentally reposition Anika to be a global leader in joint preservation with a focus on early intervention orthopedics, leveraging our core expertise in hyaluronic acid and our design heritage of early intervention bone-sparing devices. Our efforts have successfully expanded Anika’s market opportunity from $1 billion to more than $8 billion today and created a powerful growth engine for years to come as we remain focused on launching new products in the high opportunity spaces and faster-growing segments within orthopedics. The first update is for Tactoset.

As a reminder, Tactoset is an important franchise we’re building and a product we continue to get great clinical feedback on. We’re now in the process of launching the new indication for use with bone marrow aspirate as we continue to expand our portfolio for regenerative healing with an additional 510(k) planned. Moving on to X-Twist. Now that we’re in full market release, we are also developing a biocomposite version as we continue to expand on our differentiated suture anchor platform. As we announced last quarter, we’ve developed a new hyaluronic acid-based arthroscopic regenerative rotator cuff patch system which will further strengthen Anika’s growing and differentiated shoulder portfolio. We’ve initially designed the patch for the shoulder to provide augmentation to the tendon to support healing for rotator cuff tears.

Anika’s patch is mechanically stronger and further improves regenerative capacity compared with the first-generation collagen patches on the market. We completed multiple 510(k) submissions at the end of 2022 ahead of a planned launch next year. We’ll share additional details about the product once the entire system has been cleared, and we’re gearing up for first surgeries. In short, we believe our regenerative patch will be a game changer for patients and Anika as it helps complete an innovative and highly differentiated shoulder portfolio. We are also advancing our longer-term opportunities, which will further augment and reinforce Anika’s growth once they’re available in the U.S. In addition to our active engagement with the FDA regarding next steps for Cingal approval, which we believe could potentially double our $1 billion addressable market in OA Pain, we’re working to enroll the final subject in the pivotal Phase III clinical trial for HYALOFAST, our highly differentiated single-stage off-the-shelf cartilage repair product.

Last quarter, we announced that HYALOFAST was designated as a breakthrough device by the FDA, allowing for prioritized interaction and review to enable patients faster access to new therapies. We remain on track to file a PMA for HYALOFAST in 2025. And given its differentiation as a single-stage off-the-shelf solution, we believe that HYALOFAST has significant market-expanding potential. As you can see on Slide 5, we’re focused on building a robust and differentiated shoulder portfolio by providing solutions for the full spectrum of rotator cuff pathologies that brings a unique value proposition to surgeons across the ASC and hospital settings. This positions Anika for continued growth as we capitalize on the approximately $2 billion market opportunity across the shoulder continuum of care.

Prevalence and progression of rotator cuff disease needs multiple strategies and solutions, which Anika is addressing through our comprehensive portfolio of products across sports medicine, regenerative solutions and Arthrosurface joint solutions. RevoMotion is a highly differentiated reverse shoulder system that now gives Anika access to the full shoulder replacement market with a focus on a bone-sparing design and a streamlined 2-instrument tray system. The launch of RevoMotion has dramatically enhanced the opportunity to drive our Arthrosurface Joint Solutions products specifically OVOMotion and Inlay Glenoid, our total shoulder system. In sports medicine, our X-Twist design facilitates soft tissue repairs that other systems are unable to accommodate.

We’re adding new surgeon accounts and surgery centers as the product gains acceptance and we drive deeper penetration into those accounts. On the regenerative side, we offer the innovative solution of Tactoset to augment hardware, specifically with suture anchors when surgeons encounter poor quality bone. This provides a truly meaningful solution to achieve a strong repair. With the recent launch of X-Twist, we now have the opportunity to cross-sell Tactoset for augmentation, providing an additional growth driver as Anika products are used in more rotator cuff procedures. Finally, as we look to its planned launch in 2024, our HA-based arthroscopic regenerative rotator cuff patch system provides a strong foundation in regeneration alongside Tactoset.

Given the attractive market for regenerative patches, we believe this arthroscopic system has expansion opportunities beyond the shoulder and will also be a key driver for growth. With that overview, I will now turn it over to Mike for a review of our first quarter 2023 financial performance. Mike?

Michael Levitz: Thank you, Cheryl. Please turn to Slide 6. I will now walk you through our financial results for the first quarter of 2023. . I’d like to remind everyone that beginning in the first quarter, veterinary sales historically reported within OA Pain Management are now included in the non-orthopedic product family for all periods presented. Total revenue for the quarter was $37.9 million, an increase of 3% over the prior year as continued growth in OA Pain Management and accelerated double-digit growth in Joint Preservation and Restoration were partially offset by lower ancillary nonorthopedic revenues. The lower nonorthopedic revenues reduced total company growth in the quarter by approximately 6 percentage points.

Revenue in our largest product family, OA Pain Management, increased 8% to $22.6 million due primarily to favorable ordering patterns from J&J Mitek and sales growth on increasing customer demand. As a reminder, revenues can vary significantly on a quarterly basis based on ordering patterns by our partner in the U.S. and distributors internationally. However, that quarterly volatility generally stabilizes on an annual basis. Our Joint Preservation and Restoration revenue in the quarter increased 11% to $13.5 million on growth from our new products as well as geographic expansion and favorable order timing internationally. Our nonorthopedic revenue declined 49% to $1.8 million primarily reflecting unfavorable order timing by our veterinary distributor as well as our exit from legacy product lines that do not support our growth and profitability objectives.

Our gross margin in the first quarter was 60% and includes the impact of $1.6 million of noncash acquisition-related expense amortization from the 2020 acquisitions of Arthrosurface and Parcus Medical. Our adjusted gross margin, which excludes the acquisition-related amortization, was 64% in the quarter, in line with the same quarter last year. From a spending standpoint, our operating expenses totaled $35.4 million in the first quarter, up from $25.4 million in the same period of 2022. Our operating expenses in the quarter included $5.8 million of nonrecurring corporate costs, including a charge for $3.25 million related to our arbitration settlement in April to close any further claims from the 2020 acquisition of Parcus Medical; $800,000 of costs related to shareholder activism, which was also resolved in April as well as $1.7 million of other nonrecurring corporate costs.

Apart from these nonrecurring costs, our operating expense growth in the quarter reflects increased cost to comply with expanded global regulatory requirements and investments in operational capabilities to support our sustainable growth, the majority of which are associated with our OA Pain Management and other legacy products as well as new product development and expanded marketing in support of key product launches. Our net loss for the quarter was $10.4 million or $0.71 per share compared to net loss of $2.9 million or $0.20 per share in the first quarter of last year. Our adjusted net loss was $5.3 million or $0.36 per share compared to our adjusted net loss of $1.6 million or $0.11 per share in the prior year. Again, our lower bottom line reflects the impact of the significant nonrecurring expenses incurred in the quarter as well as the increased spending to support the continued sustainable growth of our legacy product lines as well as our growth acceleration initiatives.

Our adjusted EBITDA in the quarter was a negative $1.2 million, down from adjusted EBITDA generated of $2.6 million in the first quarter of last year. The decrease in adjusted EBITDA was primarily due to $1.7 million of nonrecurring corporate costs, as well as the cost to comply with expanded global regulatory requirements and expansion of our operational capabilities to support our continued growth. Lastly, with regards to our cash flow and capital structure. Anika’s balance sheet remains strong with $79.7 million in cash and no outstanding debt as of March 31. We had operating cash outflows of $3.6 million during the first quarter compared to outflows of $1.9 million in the prior year period. And our capital expenditures in the quarter totaled $1.4 million, up slightly from $1.3 million last year, reflecting investments in support of our new product launches and overall business growth.

We also recently announced that in April, our Board of Directors authorized a new stock repurchase program of $20 million, with the first $10 million split between an accelerated stock repurchase program and an open market program and the second $10 million through an open market program subject to positive cash flows. Please turn to Slide 7. Now I’d like to review our full year financial outlook for fiscal year 2023. Based on our progress to date, we are reiterating our full year 2023 total company revenue outlook of $158 million to $163 million, representing growth of 1% to 4% compared to 2022 and reiterating our outlook by product family as continued growth in OA Pain Management and accelerated double-digit growth in Joint Preservation and Restoration are partially offset by lower ancillary nonorthopedic revenues.

The lower nonorthopedic revenues reduced total company growth by approximately 3 to 4 percentage points. In OA Pain Management, we expect revenue of $93.5 million to $96 million, up 2% to 4% over 2022 as our market-leading products continue to gain adoption globally, but also reflects favorable international timing last year from a comparative standpoint. With the timing of multiple product launches this year in Joint Preservation and Restoration, we expect full year 2023 revenue growth to accelerate to $55.5 million to $58 million, up 10% to 15% over last year, with that growth weighted more towards the second half of the year. We expect nonorthopedic revenue to decrease approximately 35% to $9 million as we anniversary out of revenues in the prior year from last time buys of legacy products we exited and reflecting order timing in veterinary sales last year.

With regard to gross margin, we continue to expect adjusted gross margin for the year to be roughly in line with last year’s gross margin as we remain focused on driving margin expansion, but also anticipate the ongoing headwinds from the global trends in supply chain and staffing challenges will likely continue. With regards to spending, while spending will be higher in the first half of the year due to a number of nonrecurring situations such as the Parcus Medical arbitration and shareholder activism, now that we have settled both of those in the second quarter, we expect operating expenses to normalize in the second half of 2023. We continue to expect operating expenses for fiscal 2023 to increase over 2022 as a percentage of revenue as we self-fund our growth strategy, including both the cost to comply with expanded regulations globally and investments in operational capabilities, the majority of which are associated with our OA Pain Management and legacy products as well as our product development and launch initiatives to drive accelerated growth.

We continue to expect our adjusted EBITDA margin for the year to be in the low single digits and capital expenditures to increase in 2023 above historic depreciation to support the rollout of key new product introductions and equipment to support our legacy business. Our team remains focused on both Anika’s mission to restore active living and on driving value creation for our stakeholders, and we look forward to updating you on our continued execution of this strategy. I will now turn the call back over to Cheryl.

Cheryl Blanchard: Thanks, Mike. Please turn to Slide 8. Before we open the call up for Q&A, I want to reiterate our excitement for the coming year. As our first quarter results demonstrate, we’re just starting to realize the significant potential of our comprehensive and expanding portfolio. Our targeted investments have helped us build a uniquely focused joint preservation portfolio across the continuum of care and regenerative solutions, sports medicine and Arthrosurface joint solutions. Anika is well positioned to continue to execute on our growth strategy with multiple near-term value drivers, including the full market release of X-Twist now underway and of RevoMotion later this year, and the launch of our HA-based arthroscopic regenerative rotator cuff patch system in 2024.

And finally, we have a healthy balance sheet with a solid cash position and no debt, positioning Anika to drive significant shareholder value. . I would like to take a moment to thank all of our employees for their continued hard work and dedication to supporting our efforts. We’re building momentum as we work to achieve our mission of restoring active living for people around the world. And with that, we’ll open up the line for questions.

Q&A Session

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Operator: [Operator Instructions] Your first question comes from the line of George Sellers from Stephens, Inc.

Operator: And your next question comes from the line of Mike Petusky from Barrington Research.

Operator: And your next question comes from the line of Jim Sidoti from Sidoti.

Operator: Thank you. There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.

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