Q4 2020 Anika Therapeutics Inc Earnings Call
Good evening, ladies and gentlemen, and welcome to Anika S fourth quarter and full year, 2020 earnings Conference call.
As a reminder, all participants are in listen only mode and the conference is being recorded.
After the presentation, there will be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad.
Should you need assistance during the conference call you may signal, an operator by pressing star and zero.
I will now turn the call over to Mark and Nemeroff Executive director of Investor Relations and corporate Communications. Please go ahead.
Thank you Julie.
And everyone.
And thank you for joining us for Anika as fourth quarter and year end conference call and webcast.
Our Q4 and year end earnings press release was issued after the close of the market today and is available on our Investor Relations website, located at Www Dot Anika dot com as well as the supplementary Powerpoint slides on the used for the discussion today.
So with me on the call today is Dr. Cheryl Blanchard, President and Chief Executive Officer, and Mike <unk>, Executive Vice President and Chief Financial Officer and Treasurer.
During today's call Cheryl and Mike will review and it gets fourth quarter and year end 2020 financial results with key business highlights as well as discussed on our view of 2021, and then we'll have time for questions.
Please take a moment to open the slide presentation and my first slide number two.
Before we begin please understand that certain statements made during the call today constitute forward looking statements as defined by the Securities Exchange Act of 19 and 34. These statements are based on our current beliefs and expectations, including statements with respect to the impact of the Covid Covid pandemic on Anika and are subject to start and risk.
And uncertainties.
The companys 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 SEC filings and our most recent form 10-K and 10-Q for.
For more information about risk factors that could affect our performance.
In addition, during the call we may refer to a number of adjusted or non-GAAP financial measures, which are used in addition to results presented in accordance with GAAP or generally accepted accounting principles. We believe that non-GAAP measures provide an additional way of viewing aspects of our operation and performance and why.
And considered with GAAP financial measures and a reconciliation of GAAP. They provided even more complete understanding of our business.
A reconciliation of these adjusted non-GAAP financial results to the most comparable GAAP measurements are available at the end of the presentation slides and on our fourth quarter press release and.
And now I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard Cheryl.
Thanks, Mark and good evening everyone.
And when he 'twenty was a critical year and Anika as transformation from largely a single technology and customer company.
And to a global joint preservation company that creates and delivers truly meaningful advancements in early intervention and orthopedic care.
Starting with the late 2019 launch of our innovative how ironic acid or H E based regenerative solution cactus, yet, which is a differentiated product designed to treat insufficiency fractures that is gaining real momentum.
And early 2020 with the acquisitions of Arthur surface and park guests within days of one another and the tremendous work integrating our business in 2020 true Covid Anika is positioned to become a leader in high opportunity spaces within orthopedics, including osteoarthritis pain management regenerative solutions soft tissue repair and <unk>.
So on preserving joy technology.
We're still on the midst of this transformation and are very excited about our future plans for value creation for all of our stakeholders.
Let's dive into the quarter and 2020 highlights please turn to slide three.
We successfully navigated the year through Covid ending with revenue in the quarter up 10 per cent compared with 2019, driven by our joint preservation and restoration business. Following the acquisitions of Arthur surface and park is medical that closed in Q1 of 2020 we.
We saw continued momentum and joint preservation and restoration true our commercial efforts and delivered sequential growth as well. Despite further COVID-19 headwinds from the post holiday Covid surge that attenuated electric procedures and late Q4.
We see strong demand for our joint preservation products and believe we have a right to win and orthopedic surgeons view, our minimally invasive and regenerative portfolio is favorably, particularly in the ambulatory surgical center setting.
Our joint pain management business had lower revenue for the quarter as a result of Covid dynamics impacting J&J mitek ordering patterns in the second half of 2020 as we stated and our last couple of earnings calls.
As well as the impact and the fourth quarter of the post holiday Covid increase on in office injection procedures.
We see this business stabilizing into 2020 one.
On the bottom line, we delivered positive adjusted EBITDA and positive operating cash flow as we continue to invest and the businesses we acquired last year.
We continue to make investments and integrating and implementing back office systems, and commercial operations and infrastructure to structure the business for efficient scaling over the coming years.
We also see greater potential for growth of the sports medicine, and soft tissue repair and bone preserving joint technologies businesses, and we plan to continue to invest and them throughout this year.
I'm pleased to say that we are debt free as we were able to pay down the remaining $25 million outstanding under our line of credit and and the quarter with $98 million of cash and investments Mike will take you through the details of the financials shortly.
It's clear that Covid had a significant impact to our business like so many other orthopedic companies and businesses that serve elected procedures in general.
Post holiday surge and Covid cases during the latter half of the fourth quarter was especially challenging to our joint preservation and restoration business as elective procedures were delayed but there are signs that things are beginning to improve.
Note that we are still seeing softness into the first quarter of 2021 due to COVID-19 and the recent winter storms that most significantly impacted the southern states like Texas.
In the fourth quarter elective surgical procedures in our estimates we're approaching pre COVID-19 levels and we expect that we should see a return to pre COVID-19 procedure level in the second half of the year, if the predictions with the vaccine rollout continue to hold true.
We also estimate that clinic capacity for elective injection procedures was between 70 to 85 per cent.
Now turn to slide four for our full year review.
We were able to accomplish so much during such a challenging year. Following the unexpected passing of Anika is former CEO, Joe Darling and January of 2020, we successfully navigated the business through one of the worst pandemics and our collective history with minimal operational disruption at.
At the same time, we acquired and then integrated two new businesses and strengthened our management team, while delivering 14% revenue growth for the year I'd like to spend a few minutes reviewing how these accomplishments inform our new strategy.
The acquisitions of Arthur surface, and park, and Q1 of 2020 enabled anika to enter the faster growing spaces of joint preservation and restoration, including sports medicine, and bone preserving joint technologies, which in combination with Anika synergistic regenerative solutions expanded our global market opportunity to over 8 billion.
Yeah.
Our focus will now encompass four areas in the early orthopedic continuum of care osteoarthritis pain management regenerative solutions soft tissue repair and bone preserving joint technologies, we have made substantial progress with integrating that business into one anika.
The next phase of integration in 2020, one will focus on systems integration and implementation that will facilitate scaling the business over the coming years.
As part of the acquisitions, we also integrated our global commercial channels, which include a large network of dedicated distributors focused on our targeted surgical call points.
This hybrid commercial model and the expansion of our market presence beyond our partnership with J&J Mitek will allow anika to achieve its growth goals.
We strengthened our senior management team and our board of directors with a combined nine new additions, adding tremendous experience and leadership from some of the world's top orthopedic and med Tech companies.
For example, Mike has 18 years of financial leadership at Med Tech companies, such as Hologic and most recently Insulet that are executed successful transformational growth stories are.
G C. He comes to us for medical device and drug delivery firms, including Insulet and Medtronic.
Our three CS and commercial leaders come to us with experience from leading orthopedic companies, including Biomet Zimmer Biomet and Smith <unk> nephew in sports Medicine, and extremities leadership roles with a focus on delivering innovation and commercial excellence and building out successful sales and marketing teams.
And it goes head of R&D was a co founder of and led Arthur surface and has over 30 years of experience and orthopedic product development focused on sports medicine, extremities and developing truly innovative minimally invasive solutions.
Our two new board members bring significant health care experience from Becton Dickinson and Integra Lifesciences.
And you can see in 2020, we've been focused on building out a top notch team that has the right experience knowledge and energy to execute our transformational growth strategy.
During the year as we discussed during our Q3 call. We launched seven new joint preservation products, mainly for the sports medicine, and extremities markets further expanding our portfolio and these spaces. These.
These products include several new suture anchor solutions for rotator cuff repair notwithstanding most this repair solutions for the ankle a device to treat arthritis, and the C and C joint in the hand, as well as ligament retention devices for ACL reconstruction.
Our total arthroplasty system for the risk called risk motion received five 10-K clearance and Q4 and we are planning for and initial release of this product and the second half of 2021.
Its unique design is intended to preserve as much natural risk joint motion as possible and ideally has the potential to begin to shift surgeon treatments away from risk fusion, thus expanding the risked implant market.
Lastly, I'd like to stress that many companies of our size would have struggled to complete even a portion of this list and at the same time, we delivered our products to our customers and their patients with a continued high level the level of quality, they expect allowing us to exit the year with strong financial footing for 2020 one.
Before I hand, the call over to make to review the financial details I'd like to walk you through our strategic direction and how we see the business performing over the coming years, Please turn to slide five.
We set a course and are focused on achieving our stated goal from our 2019 investor day of doubling the revenue of the company by 'twenty 'twenty four with double digit adjusted EBITDA growth.
How are we going to do this our market opportunity today is eight times larger than it was one year ago. We now have an $8 billion global market opportunity beyond the legacy Anika osteoarthritis pain management business, including regenerative solutions soft tissue repair and bone preserving joint technologies.
He's joint preservation solutions position us well in the faster growing areas of sports medicine, and extremities compared with the more traditional total joint replacement orthopedic markets well.
We'll continue to leverage our strength with orthopedic and Monovisc remaining as the number one and combined choice for osteoarthritis pain management in the U S with our marketing partner J&J Mitek.
Our worldwide commercial organization is notwithstanding wished to low to deliver our innovative minimally invasive surgical solutions to clinicians. So their patients can resume active living faster and will continue to invest and developing meaningful products, including new products using our differentiated H E based regenerative platform.
Further leveraging our commercial organization.
Please refer to slide six.
We've already touched on the over 1 billion market opportunity and osteoarthritis pain management, continuing to sell our market, leading orthopedic and Monovisc H, a injectables through J&J might check and the United States and true global distributors outside the United States.
In addition, we remain excited about the new opportunities with our next generation combination steroid close fiscal supplement injectable cingal and our H E based regenerative solution for cartilage repair pilot fast both currently being sold outside the United States.
We initiated enrollment and our pilot study for Cingal towards U S. FDA approval and resumed enrollment and our clinical trial for hail a fast U S approval.
Enrollment and both of these studies is proceeding but has been flow due to COVID-19.
As we are currently projecting them Covid has pushed these U S launch timelines past 'twenty 'twenty four.
That said I would like to point out that even though we currently sell both cingal and Halo fast outside the United States in over 30 countries incremental revenue following approval for Cingal and high low fast and the U S is not currently in our model or necessary to support achievement of our stated 2024 goals of doubling the.
Our revenue of the company.
We will continue to provide updates on these clinical studies during our upcoming calls and during our Investor Day, We're planning for late spring.
We view both of these product has tremendous upside after 'twenty 'twenty four as we believe we're just getting started and driving value creation over the long term.
In the more than $1 billion regenerative solutions market and our current product portfolio includes our single stage H a base cartilage repair solution Halo fast and our H E based solution to treat insufficiency fractures tack to set which was released in late 2019.
Is that is showing real traction by offering advantages over currently available treatments and is highly competitive in the isn't insufficiency fracture treatment space.
Leveraging our H, a technology to develop new products for rotator cuffs and other soft tissue repair represents another example of how anika plans to bring together its expertise and H E with new regenerative surgical products.
The intersection and synergy of H, eight and our joint preservation products will be a key catalyst for growth for anika over the coming years.
The over $2 billion soft tissue repair market and sports medicine represents a fast growing opportunity as I. Previously mentioned, we have a growing portfolio of products for soft tissue fixation, including suture anchors and instrumentation for rotator cuff repair and kits to treat upper and lower extremities.
Lastly, the over $4 billion bone preserving joint solution space and dresses areas of unmet need where the osteoarthritis disease processes further progressed and and implant as needed. These.
These specialized implant street, progressive arthritis, and multiple joints, including the shoulder hand, wrist and elbow and the foot and ankle. This.
And this technology includes partial joint and joint resurfacing and plants that are minimally invasive and bone Sperry and is intended to allow patients with further OE progression the ability to live actively.
This year in this category, we're excited to be launching our risk motion product with additional products and development.
Now I'd like to turn the call over to Mike to review the financials for the quarter and the year and talk about how we're seeing 'twenty 'twenty, one and then I'll provide some closing comments Mike.
Thank you Phil.
I will now walk you through our results for the fourth quarter and full year 2020.
Please turn to slide seven.
Total revenue from the fourth quarter of 2020 increased to $32 $7 million.
Up 10% year over year and up 3% from the third quarter.
Primarily to the growing joint preservation and restoration revenue streams legacy Arthur surface and park, which we acquired in early 2020.
Offset by lower joint pain management revenue.
And the negative impact of Covid and related ordering patterns of J&J mitek, our largest customer.
Joint preservation, and restoration revenues totaled $13 $1 million and the quarter.
$12 6 million year over year, primarily due to the acquisitions Barker surface and park is medical.
On a sequential basis, our joint preservation and restoration revenues increased 12% from the third quarter.
Spite of incremental post holiday Covid and headwind and <unk>.
Continued strong recovery from the initial COVID-19 impact earlier and quick one.
Despite those headwinds and the latter half of the fourth quarter and into early 'twenty 'twenty, one associated with the Covid spikes winter storms.
The momentum on this business and it's.
Part of our business remains strong.
And the fourth quarter before the Covid spike underlying demand approach pre COVID-19 pro forma level as procedure volumes recovered and our integrated sales team continued to gain traction.
Joint pain management revenue totaled $16 $9 million and the fourth quarter down.
Around 36 per cent year over year and down 9% sequentially from the third quarter.
As we mentioned in previous earnings calls, we expected the product shipments the Johnson and Johnson, Mitek, who markets and distributes our monovisc and I want to this product and the United States.
Would be lower and the second half of 2020 than and the first half as a result of Covid and my tax related ordering pattern.
Which pushed a significant portion of the initial COVID-19 impact on the second quarter into the second half of 2020.
This second half the impact was greater and the fourth quarter, then and the third quarter for a number of reasons include.
Including Mitek and order timing between Q3 and Q4.
Lowered derived product transfer pricing to mitek, and the fourth quarter, which I'll explain in a moment.
And lastly, lower mitek and user sale, and therefore, and thereby lower royalties to us.
Down both year over year and to a lesser extent sequentially.
Due to the impact of Covid spikes and I'll, let the procedure.
As a reminder, our revenue from Mitek is based on both a royalty on their end user sales of orthopedics and monovisc and the quarter.
As well as the product shipments, we make to mitek to supply those end user sales.
The transfer pricing of our shipments is derived from mitek and user average selling price to quarters earlier.
And therefore, the significant initial COVID-19 impact and the second quarter, which included lower end user average selling price on the low volumes and a quarter at a trailing incremental negative impact on our fourth quarter product revenue.
Overall, while our pricing and volume and joint pain management are both down from pre COVID-19 levels.
Reflecting both COVID-19 and changing market dynamics.
Based on our discussions with our commercial partner Mitek. The belief is that both pricing and volume have now largely stabilized out at the end of 2020 and we are pleased to together remain the market leader and U S visco supplements with Monovisc and away from us.
As a result of the acquisitions of Arca and surface and park is the continued growth of joint preservation and restoration.
And on lower joint pain management revenue.
Our overall revenue mix diversification increased from the fourth quarter.
And with joint pain management revenue decreasing to 50 per cent of Atlantic is total revenue.
Down from eight and 9% of revenue and the same period last year.
Further revenue from J&J Mitek decreased to 40 per cent for total revenue and the fourth quarter down from 72 per cent from the same period last year.
For the full year on total revenue reached $135 million, that's an increase of 14 per cent compared to a $114 5 million in 2019.
And the joint preservation and restoration revenue largely from the addition of Argo surface and Parker.
Which offset lower joint pain management and other revenue due primarily to COVID-19.
Our gross margin and the fourth quarter was 51 per cent compared to 71% from the fourth quarter of 2019.
And primarily to the unfavorable 16 point impact on <unk>.
One $2 million of non cash acquisition accounting related expenses and.
And the unfavorable COVID-19 impact on revenue mix and volume.
With regards to operating expenses, our research and development and SG&A expenses, together totaled $22 $8 million and the fourth quarter up from $16 3 million and the same period of 2019, reflecting the acquisitions of ocular surface and Argus as well as expenses to support future growth such as clinical trials.
Costs incentive compensation and investments and our commercial and related support organizations.
During the fourth quarter, we also recorded a certain fair value adjustments.
And to reduce the goodwill associated with the acquisitions at the beginning of 2020 gilbarco surface and pockets.
And to reduce and expected contingent consideration payments due in future periods for those acquisitions.
Specifically, we reduced goodwill by $24 $4 million and the fourth quarter.
And we reduced the fair value of contingent consideration by 12, four and $5 million.
As a reminder, and a previously reduced both good will and the value of contingent consideration and the first quarter of 2020 at the beginning of Covid based on the estimated impact of Covid at that time.
And the fourth quarter, we revised our estimate based on the continued impact of Covid as well as our planned incremental investments to support the strong growth we expect out of these legacy businesses.
Our net loss for the quarter was $15 $7 million.
Or dollar 10 loss per share.
Compared to net income of $4 $1 million or 28 cents per diluted share and the fourth quarter of last year.
Excluding the noncash charges discussed earlier and other adjustments described both on our earnings release and our online earnings presentation. We achieved adjusted net income of $1 7 million or 12 cents per diluted share.
Compared to $6 $3 million or 43 cents per diluted share on the same period last year.
Despite the impact of Covid, we generated adjusted EBITDA and the fourth quarter of $4 million.
That was down from $11 1 million for the fourth quarter of last year.
Decrease in profitability was primarily due to the unfavorable COVID-19 impact as well as the addition of Arthur surface and parkas and incremental investments supporting our future growth.
On a full year 2020 on net loss was $24 million or $1 69 loss per share.
Balance and net income of $27 2 million or $1 89 per diluted share in 2019.
This included a number of acquisition related expenses and adjustments.
Our adjusted net income for 'twenty, and 'twenty was $10 $1 million or 71 per share.
And our adjusted EBITDA was $23 9 million both down from 2019, due primarily to the unfavorable COVID-19 impact as well as investments supporting our future growth.
As a reminder, adjusted net income adjusted net income per share and adjusted EBITDA are non-GAAP measures.
Please refer to the reconciliations of those measures and the corresponding GAAP reported figures and either our fourth quarter press release or our fourth quarter earnings presentation, and the investors section of our website.
Lastly, with regards to our financial position and balance sheet remained strong with $98 $3 million and cash and investments at the end of the year.
And as a reminder, and April out of an abundance of caution we drew down $50 million on our outstanding credit facility, the strength and liquidity in light of COVID-19.
Based on performance recovery and stabilization of our business through the pandemic, thus far we repaid the $50 million and pool with the final $25 million repaid during the fourth quarter.
While we remain focused on controlling costs. We're also balancing that with reinvesting to support growth and long term profitability consistent with our strategic index.
Please turn to slide.
We would now like to walk you through our directional outlook for 2021.
Due to the continued uncertainty associated with COVID-19, we will not be providing detailed financial guidance for the full year and the first quarter of 2021 at this time.
At the same time, we would like to share with you more qualitative and directionally quantitative insights into our current expectation.
We believe that market trends are pointing to a second half of 2021 recovery, depending on the timing and nature and the United States and globally a vaccine roll.
Additional COVID-19 spike and other dynamics, such as variance of the Covid disease.
These dynamics remain very fluid and could have a material impact on our results and expectations.
For example on the latter half of the fourth quarter of 2020, and thus far into early 'twenty 'twenty, one elective procedures have been significantly impacted by both increased COVID-19 spikes across the U S and globally.
As well as by recent storms, most recently and most prominently in the southern United States.
This has impacted our results and the first quarter and we expect there to be continued uncertainty through the remainder of 2021 as the timing and extent of the recovery remains unclear.
That being said.
Despite the impact of Covid Spike and our joint preservation and restoration business, we are seeing strengthening demand for our Arthur surface and park is product and extremities and sports medicine.
As well as our H, a base regenerative products, including taxes that the United States and pile up and outside United States.
Based on this growing demand, we expect strong growth, that's COVID-19 lifts in 2020 one.
And overall for the full year 2020 one.
We expect joint preservation and restoration revenue growth and the upper Twenty's to low 30 per cent range over 2020.
Continued strong growth and joint preservation and restoration is an important element of our multiyear growth strategy and we look forward to updating you on progress through the year as Covid lifts.
We also believe our joint pain management business has stabilized and most of the order timing that impacted us between the first and second half of 2020 is behind it.
Well the COVID-19 impact to remain more common for a longer period, and the joint pain management injections area as compared to surgical procedures and joint preservation and restoration, we do expect low single digit growth in 2020 one.
A joint pain management revenues over 2020.
We also expect our other revenues.
Outside of our main product families to decrease mid single digits, primarily as a result of increased competition for long standing mature product lines.
On a total company basis, we therefore expect revenues in 2020, one to grow between the high single digits and low double digits as compared to 2020.
Moving down the P&L.
Directionally, we expect gross margins to remain fairly consistent between 'twenty, and 2020 'twenty, one and excluding the impact of parking and Arthur surface and acquisition related expenses, which continue into 2020 one.
Specifically on addition to approximately $6 million and annual amortization of Parker and Arthur surface acquisition related intangibles net flows through cost of revenue.
Remains approximately $7 million of acquisition related inventory step up costs, which we expect to be charged to cost of revenue through 2021.
With regards to spending and <unk>.
Daryl mentioned in 2020, one we are increasing our investment and commercial infrastructure and capabilities, including people systems and processes that support our transformation and will enable us to scale as we grow.
We also will continue to invest and research and development, including the clinical trials that Sheryl described required to ultimately bring our existing outside the U S product.
To the U S.
Further as Covid lifts, and we expect marketing and sales related expenses to increase accordingly.
Overall, as we invest and ahead of growth and support of our longer term growth and profitability targets.
We expect operating expenses to increase over 2020 as a percentage of revenue.
With the continued weight of Covid during the year and our incremental investments for growth. We expect our adjusted EBITDA remained positive and healthy start to decrease as a percentage of revenue in 2020 one.
We remain laser focused on our multiyear targets of doubling 2019 revenues by 2024 and delivering double digit adjusted EBITDA growth as.
As well as continued strong growth beyond 2024.
We believe there is significant opportunity for anika with and large and faster growing segments of early intervention orthopedics comprise our now over 8 billion dollar addressable market.
We are and the early stages of Anika transformation and are laying the groundwork for an exciting future.
I'll now turn the call back over to share.
Yeah.
Thank you Mike.
And if everyone could please turn to slide nine.
I would like to let you know that we plan to host a virtual investor day in late spring, where we'll outline our strategy technologies and new product development roadmap and introduce you to our new management team. Please stay tuned for more details from Mark Nemerov, our head of Investor Relations.
As we all know 2020 was a challenging year on many fronts for all of US both personally and professionally I've now been CEO and the CEO role for a year with the work from home order implemented just a couple of weeks after I started.
I'd like to wrap up the call today by thanking the team members at Anika and you just heard the Anika team truly accomplished many great things during this transformational year for the company and.
I'm very proud of our employees working through adversity from most of the year, while accomplishing so much to transform our business into a focused orthopedic solutions company.
The health and safety of our team remains our top priority at Anika. Our employees are our greatest asset and while we continue to work remotely across most of our business locations. We are taking the necessary precautions to keep our employees safe and healthy.
For those who have continued to be on site or traveling to support our customers I'd like to extend and extra thank you.
In closing.
We're a passionate team we're closely working closely with key clinicians who are equally passionate to bring solutions to their patients were.
And we're energized to create truly meaningful advancements in early intervention orthopedic care.
Quality and compliance are core values as we do this important work.
And our team is driven to develop and deliver solutions that restore active living for people around the world.
Thank you all very much for your attention and support of Anika and we can take your questions now.
We will now begin the question and answer session to.
And to join the question queue. You May Press Star then one on your telephone keypad and you will hear a tone acknowledging your request if.
If you were using a speakerphone please pick up your handset before pressing and Ts.
To withdraw your question. Please press star and then too.
We will pause for a moment as callers join the queue.
And so first question comes from Jim Sidoti with Sidoti and company. Please go ahead.
Hi, Good afternoon, and can you hear me.
We can hi, Jim how are you.
Well I'm on I hope everyone is.
Healthy there it sounds like you're doing well.
Hum.
And as one.
And with J J do you have any and <unk>.
And to where their inventory is now do you see I know you said low single digit growth for the year is that something you think starts out right away.
Eric and back half of the year, where you really see that growth.
Hi, Jim This is Mike.
We expect that the growth is go on to increase through the year, given COVID-19 lifting and how that all plays out there is still we believe that they got through most of the inventory through the end of the year, but COVID-19 spike at the end of around the holidays didn't help so theres a little bit coming in but I think the important thing and sorry.
Modeling is that we believe that business is really not stabilized there have been a number of dynamics at play with Covid and everything else and and that really as you know, we really believe that from our conversations with with J&J Mitek that that has stabilized. So I think in terms of modeling it.
Generally I think historically their business tends to strengthen and the second quarter and but with Covid.
Little harder to look at normal seasonality and as you go forward here.
Okay and.
With regard to seasonality you typically for Oh.
And with PT companies Q4 is the strongest quarter of the year and.
M Q1, consumer book, a little bit low or would you think and it'll be the case for you guys as well should we expect a Q.
Q1 to be down from Q4 'twenty.
Yeah.
Yeah, Jim on giving specific guidelines for for Q1, but I think what you're saying is absolutely. What we typically see you're right is a strong Q4 lower Q1, we're seeing that we will see that more and the joint preservation business I think generally than we've seen and the mitek business, just because J&J tends to.
You know they manage their own inventory levels throughout the year. So it may not follow a normal seasonality.
On the transfer products, but yeah, I think that's definitely true also with COVID-19 lifting through the year I think youre going to see the businesses continue to strength and we hit we've seen a lot of demand and our joint preservation business, but as we saw at the end of Q4 and even into the beginning of Q1.
Procedures are just getting just getting postponed.
And.
Have a COVID-19 lockdown, where people may be quarantine and then they push off the procedure for a couple of weeks. So we saw that dynamic and the latter half of Q4, we see that we expect to see that here and the beginnings of of 2021, but the demand remains very strong and our team is very energized about the opportunity there this year.
And I guess, one thing that I'll sit there and a little bit too is for Q1, 2020, one and you'll have the full quarter.
For park and throw off yourself and tours and the 2000.
'twenty you always had we only had I think about six or eight weeks ago.
Thanks.
And.
Yeah. That's correct Yeah, we had one of the acquisitions closed at the end of January and the other at the beginning of February last year, we had about two months of activity for the acquired companies and now will have the full three months, so that will definitely help yourself.
And <unk> dynamics and the in the first half obviously cause COVID-19 hit and Q2.
But then as we saw growing pain management business that impact really came into the third and fourth quarter. So theres going to be some interesting dynamics as we as we go through the year, but I think what we were trying to communicate is we while we may not that book, it's like you're on a quarterly basis.
The business remains very strong and our team is as excited about we're about where we go on and how it's all coming together.
Okay and then two more from me can you can you talk about the sales force.
It was when you ended the year and what are your plans for 2020 one.
Yeah, Let me, let me talk about that Jim I first of all I would tell you that we are really excited with where we landed in the year from an integration perspective, we were we've talked in the past about the fact that we effectively accelerated our integration activities on the sales force the commercial team.
Side, and so we really have especially and in the U S. A fully integrated hybrid model, where we've got over 30 direct employees and then over 100 independent distributors that they also worked through so.
So you know we continue to do work on the integration side around commercial and sales operations implementing systems and processes that are going to allow us to efficiently scale that business and well be working on those things into this year into 2020 one and.
But we're really happy with where we landed on sales force integration and the strength of the sales force they've all been cross trained theyre selling the full bag across the legacy Park guests legacy Arthur surface and legacy Anika businesses. So we have a dedicated sales force that's focused on them on the soft tissue space on the regenerative space.
And on the bone preserving joined technologies focused on that surgical call point with a full bag. So we're pretty excited about where we landed with that sales force.
I guess, what I'm trying to.
Get to us.
Do you expect a significant increase in the sales force and 2021.
No. We don't you know, we we feel really good about the fact that we were able to bring three legacy sales forces together and.
And we feel like we've got a really strong team of people that are ready to to drive all of the cross selling opportunities, especially over the next couple of years as we launch new products into their hands.
Okay and then.
One from me is low.
Sorry.
Go ahead, Mike and Jim just on the only thing I would add is.
And as it relates to my comments around the sales and marketing spend and we do expect that to increase through the year, because we've suspended a lot of the marketing efforts last year with Covid.
Trade shows and the like and so as things open up we do expect those those cost to increase and then also you know commissions are going to be increasing as the sales grow and that's something that and the old Anika Mala you wouldn't have seen but now that we've moved to more of a direct commercial model, you'll be seeing that coming through.
And as the revenues grow and we're also surrounding that commercial team with more infrastructure support and addition to the marketing side, just commercial operations and the other things because we see it we see going from the.
And the historic business model to this larger $8 billion market opportunity with the kind of products that we're bringing to market. We want to make sure. We can capture that value and so that's where and when I made comments about the incremental investment it's not in the number of salespeople. We believe that the combination of the direct team and the distributor force that we have is.
Entirely appropriate, but it's the rest of the support piece and the market and that goes with it.
Okay Alright.
And then Oh, that's one from me.
And a couple of times during the call that you are you still.
And on track to double your revenue by 2024.
And some money and is that and does that include acquisitions and.
At this point I mean on the acquisition is something that you would play an even more and more of a two or three years from now.
Well it seems like you have quite a bit on your plate for 2020 one at least.
Yeah, Jim specifically when.
Joe Darling laid out our former CEO laid out that target in 2019 two.
2019, and what's the baseline year, so we got $115 million roughly in 2019, so doubling the revenue by 'twenty 'twenty four would simply be $230 million.
And in terms of how we get from where we are where we just closed the year on that $130 5 million to the $230 million or model behind.
And that is entirely organic and we are not banking on any one particular product to get there. We have a number of products is sure I'll walk you through our cross extremities and sports Medicine and.
The the exciting parts, we sell outside the United.
I'd say, it's like Cingal and <unk> and US are also not and that model because they will be growth drivers beyond 2024, they won't be on the U S market necessarily at that time.
And so on our model is based entirely on an organic growth trajectory driven by.
And my sales force execution first and then also by the exciting new products that we have that leverage the regenerative capabilities into sports medicine, and extremities and that being said, we recognize we have a big opportunity here and and so we we and we have a strong balance sheet. So we are being opportunistic if they're on bolt on acquisitions that.
It makes sense and support our strategy for growth of both the top and the bottom line than we are definitely open to to M&A, where it makes sense on a bolt on basis.
The key point is the targets that we've laid out are not dependent upon any home runs with any individual product nor are they dependent on acquisitions and those would all be upside.
But it really is.
He is from 2019 just to be clear Jim.
Okay, alright, but.
Based on on what you've said, so far for 2020 one.
But it seems pretty clear that you think 2020, two 2020 three.
And going to see a pretty significant acceleration in topline growth and she is COVID-19 subsides and it.
As these new products starting from Charles.
Yeah, I mean, I think you know one of the things that just doing the math, obviously is going and acceleration stuff, given we're making investments and those investments and then we'll take time to pay off but that being said you know to get there. It takes you know mid teens.
Hager and and if you look at what we're doing you know we closed last year over 10% here, we've got a target even with Covid and through a good portion of the year, we've got it at a double digit growth at the midpoint.
And that's driven by growth and joint preservation and restoration of you know and mid twenties and you get to 30 per cent range and so we've got very robust growth, there and where we really believe there's a lot of opportunity ahead of us and now that the R.
Our larger business the joint pain management business has stabilized.
And that's a very good business for us as well, especially on the profitability side as you can see from the legacy business model. So we're excited about how this all fits together.
Okay alright, thank you.
Thank you.
The next question comes from Mike <unk> with Barrington Research. Please go ahead.
Good evening.
And so Mike.
Mike I guess.
On the expense.
Expense and the quarter was quite a bit higher than I was anticipating I mean is that is that sort of the new the new level or were there sort of one more sort.
And one off things and there that sort of took it sort of a $30 million run rate per.
A year.
Yeah.
Hi, Mike a couple of things. So there there were some items in there one and one of which we called out and and our non-GAAP reconciliation and there was a write off of I T. R and D. In process research and development from the legacy S. R. L acquisition, a number of years ago and that was about $1 $4 million, but there were some.
Offsetting items and there is a call that were onetime in nature. So in terms of thinking about how that lays out in the coming year.
You know Charles gave them and update a bit on what we're seeing on the clinical trials, obviously things are delayed because of COVID-19, but we do expect them to open up as COVID-19 lifts up and so as enrollment.
10 years for the Cingal pilot trial and for the pilot fast a clinical trial.
We'll see potential lumpiness and the R&D line in 2020 one.
There are a number of investments that are laid out on that page that on that sure I'll walk through in terms of from a development standpoint and so.
So we're really trying to be thoughtful about making the investments now to leverage the commercial opportunity that we have and so so yeah. I think it's fair to expect that R&D is going to be higher and in 2020, one as I described and higher as a percentage of revenue, but a lot of that is you know you've got clinical trials and the.
Timing of those clinical trials really will play and what will impact that.
Okay can I ask since that's a you know both cingal and highway faster and now pushed out to beyond 2024, what do you. What do you guys anticipate spending in terms of R&D between now and 'twenty four on on those on those.
Efforts.
Just those two.
Yeah.
Yeah, I mean, I don't believe we've called that out before and Mike.
All right.
I think it's true.
Yeah.
So.
Yeah, I don't know that I'm prepared to walk through how much we're gonna be spending on those theres a number of different ways. We were looking at approaching those opportunities and the other thing that I would say just to help understand how we're thinking about it. There's a couple of things I think if you kind of go back a couple of years I think they were really the predominant.
The conversation on the R&D front was really on Cingal, and how fast thinking and understanding how we're thinking about it now there are a number of other opportunities that are that we're excited about them across these bigger market and so you know.
We're working through you know, what's the what's the best and driver of our future value and and how we lay out that spend so we're cognizant.
And that's not just to driving the top line, but also bottom line.
And that's why we are 'twenty 'twenty four targets and we keep reiterating and not just about the doubling the revenue, but also about double digit EBIT growth.
But the phasing of that timing between now and 2024 and we will our plan is to give you more clarity around how we're thinking about all of this at our Investor day and so.
And so that you can see how you know how we get from here and there.
Right and there are there and I'm not necessarily calling out these two products, but were there any were there any products or are there any products that are sort of have been on the drawing board.
And for a while that you know.
As you guys and look at this with fresh eyes of the fresh management team and you say Wow maybe longer term.
We we can get a return on investment and other places and and maybe some of this doesn't make sense longer term, even though maybe youre down the track I mean are there projects like that.
Well, it's a really good question and it's it's a you know with the new management team coming and you might imagine we've done a lot of detailed analysis around that and I will tell you that we remain very bullish after a pretty detailed market assessment of the OA pain management space of Cingal in the U S.
And we also are a remaining to be very excited about how fast and in the U S and we've got experience with those two products outside the U S. We sell them, both and over 30 countries.
And you know, we we see what they do relative to things that they may be competing with coming up and the U S and why.
While that landscape has certainly changed over the time period that these have been in development those areas remain very exciting to us that said and you know the strategy of the company has really taken us and a different direction, where the strategy isn't all about how fast and cingal as it was and it is a more comprehensive built out strategy.
And <unk> across the really the continuum of care in the early intervention and orthopedic space, while we like those two products in the U S. They are a part of the story and they are not needed they're not in our model for doubling the the revenue by 2024 and you know we continue to take a look at where.
We make investments and we feel like were structured to be able to invest and other high opportunity spaces in the U S and globally notwithstanding what we continue to do with how fast and cingal to get them into the U S. We just think and general there are so many opportunities in these areas and continuing to leverage the H M technology and.
Rotator cuff and other soft tissue areas additional sports med products additional bone preserving joint technologies, you're going to see a good cadence of product launches in the near term. So you know the company is not waiting around for high low fast and Cingal and the U S.
Okay.
Right.
Hum.
Clarity do Mike is we are deciding what we're not going to do so there was a charge I just described to Jim and the fourth quarter, Oh, maybe I described to cheat and forgive me I have one.
$1.4 million of writing off of in process research and development costs and that's specifically associated with some historic programs that we decided we're no longer going to pursue other company and also wrote off a certain cost and the second quarter are what we refer to as product rationalization for certain programs and things that we.
And we're no longer going to pursue we are very cognizant of our size.
And the importance of focus and so and <unk>.
We are we are being very thoughtful in terms of where we're spending our time and our resources.
And we're looking at it based upon what drives the most value and as Sheryl said.
This tie in of H, a regenerative capability with sports Medicine extremities is an important aspect of the different programs, we're focused on and so.
We're in the early stages of that as you know there's been a lot of change and the management team and the team is really gelling together and I've been here about six months and we've got a really solid team that are really looking hard at these questions of where we deploy our resources to deliver topline growth, but also to be very cognizant of the bottom line.
Gotcha.
So I guess and in terms of just general capital allocation.
Could you guys sort of lay out the priorities I mean, certainly you're investing in your and your business and and and.
R&D and or from a commercial capabilities, but but beyond that I mean is.
For the 100 million on the balance sheet and any cash flow you generate I mean, it is is M&A a 2021 possibility is share repurchase.
And now if you've ever considered a dividend just curious about capital allocation priorities. How you would how you would rank them. Thanks.
Sure My colleagues on.
So our artwork and everything else.
And comments.
Great. Thank you our opportunity I think to drive the most value.
And all of the platform net where we're establishing here and now that we have parks and Arthur surface.
And is organically and that's why we're making the investments that we are and we're sacrificing some of the profitability and the short term to do that.
That being said as we build this platform of capabilities. There are a number of things we'd like to bolt on and add to this and acquisitions are definitely an area that could make a lot of sense for us and we've got a big market out there that we wanted to be able to address them now the timing of that is it in 'twenty one is it.
You know how quickly you know that remains to be seen we're focusing a lot of 'twenty. One is on building these capabilities systems and processes other things and that's the right opportunity comes along would definitely openly considering those things, but it needs to make sense and and you could be something we can execute on them.
Not just in acquiring them and integrating and and driving value from it. So I think as we go forward into the future years, you're going to see more of that conversation and but we're not we're not ignoring opportunities as they arise this year.
Yeah, Thanks, Mike and I would just add on we are still very focused on completing a successful integration of the two deals that we did last year, but we continue to look for bolt on opportunities and other potential transformational opportunities, but still consider.
During the right level of financial discipline, and you know really aligning now that we have a commercial team aligning to our commercial fit. So I do think there are opportunities there and we continue to be out looking.
Gotcha and just one.
One other quick one.
Oh, sorry.
I'm sorry, Mike just one last point is you know I think you know we're focused obviously on value creation for our shareholders and we're looking at how do we deliver that that greatest value creation. We've got you know.
Some very fast growing revenue streams, and we've got gross margins and the approaching 70% range and and opportunities to expand that and so as we think about what's going to drive value.
That's why we're looking at you know M&A and there's other things on top of the platforms. We're creating because we believe we are building a very strong foundation here and we and and it's really on value creation for shareholders that we're looking at that capital allocation.
Gotcha Gotcha, Okay. Just one last quick one Sheryl you you made an allusion to hate tactics that you know we've had it had it sort of in the bag for about a year at this point.
Term debt you know, we're getting traction and are getting good traction something along those lines.
Are you willing to quantify I mean has that product on a million dollars I mean, what what kind of contribution as it actually making at this point.
Yeah, we haven't quantified it, especially since we we withdrew guidance, but it is gaining significant traction and.
And we like where it's headed I I don't know if at some point, we're going to be willing to break it out but right now we're not but I you know I like what that product is doing it also gives me.
Continued confidence in our current pipeline as we continue to leverage the H a technology platform.
And what we see are doing with Halifax outside the United States and with taxis that as we currently Havent launched and the U S.
Okay alright, thank you.
Yeah.
Thank you very much.
This concludes the question answer session I.
I would like to turn the conference back over to Cheryl Blanchard for any closing remarks.
Great. Thanks, Theresa and I just want to thank everybody for your attention today and wish everybody to stay safe and healthy and we will talk soon thanks again.
Yeah.
This concludes today's conference call you may disconnect. Your lines. Thank you for participating and have a pleasant day.
[music].
And.
[music].
Okay.
Yeah.
Yeah.
Hum.
Mhm.