Q1 2021 Anika Therapeutics Inc Earnings Call
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Executive Vice President and Chief Financial Officer and Treasurer.
Joined today's call Charlotte, Mike will review Anika first quarter of 2021 financial results with key business highlights as well as discuss our view of of 2021.
So please take a moment and opened up the slide presentation and refer to slide number two.
Before we begin please understand that certain statements made during the call today constitute forward looking statements as defined by the Security Exchange Act of 1930 for the.
These statements are based on current beliefs and expectations, including statements with respect to the impact of COVID-19 on Anika hour of subject to certain risks and uncertainties.
The company's actual results could differ materially from any anticipated future results performance. Our achievements, we make no obligation to update the statements should future financial data or events occur of the differ from are forward looking statements presented today. Please.
Please also see our SEC filings in our most recent forms of 10-K and 10-Q 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 included which includes adjusted net income adjusted EBITDA and adjusted earnings per share, which are used in addition to the results presented in accordance with GAAP or generally accepted accounting principles.
We believe the non-GAAP measures for provide an additional way of viewing aspects of our operations in performance, but when considered with GAAP financial measures and.
And the reconciliation of GAAP measures they provide an 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 available presentation slides and in our first quarter press release.
And now I'd like to turn the call over to our President and CEO, Dr share Blanchett, Charles a smart good evening everyone.
The hills get to start off 2020 line with the promise that vaccines and continued safety measures will start to enable clinicians to perform elective procedures more freely, albeit with COVID-19 restrictions.
We continue to recognize there is some ongoing uncertainty as the recent history has shown us at People's behavior that scene rates and variance will likely continue to cause of COVID-19 spike globally.
That said now of the 2020 is in the rearview mirror I'm excited and we're positioned for high single digits of low double digit revenue growth in 2021.
And are on track to achieve are longer range goal of doubling our revenue by 2024 of the mid teens compounded growth rate.
We're viewing 2021 of the year, where we continue our transformational growth strategy, making investments in new products processes and systems to support the scaling of the business as we continue to emerge from the COVID-19 environment.
Today in the every day, we're focused on our vision and ultimate goal to be the leading joint preservation company, helping patients restore active living.
Let me start with the highlight of the first quarter. If you can turn to slide three.
We began as the procedure right improve as we progressed through the first quarter. The we did experienced some headwinds in Q1 due to the post holiday COVID-19 Serge and the series of winter storms in February that impact of the country and industry as a whole.
On the Joy for preservation and restoration surgical side of the business revenue increased over 50% from last year with the addition of art the surface and parked of medical which along with organic growth continue to drive the transformative revenue mix shift.
In fact joint preservation and restoration represented 36% of total revenues for the quarter, increasing significantly from 22% last year.
We're very excited about the progress in our joint preservation business and the integration of art and the surface and pockets into Anika and we continue to for you joined preservation and restoration is the key growth driver.
We see strong global demand for our joint preservation products and believe we have a right to win as orthopedic surgeons view are minimally invasive and regenerative portfolio favorably, particularly in the ambulatory surgical centers setting.
Our joint pain management business was down 24% from last year's pre COVID-19 levels, primarily due to ongoing inventory management by our sales and marketing partner J&J Mitek, which continues from 2020 as expected.
We are pleased to have a strong partnership with Jane J Mitek with the market, leading physical supplement products in the U S and the position for continued recovery through 2021 of.
Overall, our revenue decreased 3% from last year due to the impact of COVID-19.
On the bottom line, we delivered positive adjusted EBITDA growth for the quarter lower than last year due primarily to COVID-19 impact on volume the acquisitions of Pargas and Arthur surface and the related investments, we're making to accelerate our growth and doing preservation.
We continued to show a strong financial position with almost $95 million in cash and investments.
Before I hand, the call over to my to review the financial details I'd like to walk you through how we see the remainder of 2021 is shaping up.
Please turn to slide for.
As we look ahead and the remains focused on achieving our stated goal from our 2019 Investor day of doubling the revenue of the company by 2024 with double digit adjusted EBITDA growth. We're currently in the process of planning or 2021 virtual Investor day scheduled for June 3rd where we plan to discuss our product portfolio.
Commercial strategy, R&D pipeline and financial objectives in more detail and with some additional members of our management team also presenting alongside me in mind.
We'll also provide you with more specifics on how we will achieve our 2024 goals.
As a reminder, we now have an $8 billion global market opportunity that goes well beyond the legacy Anika osteoarthritis pain management business.
And includes regenerative solutions soft tissue repair for sports Medicine, and bowl of preserving joint technologies the.
These joined preservation solutions position us well in the faster growing and higher opportunity areas of early intervention orthopedic care when compared with the more traditional total joint replacement orthopedic markets.
We will continue to leverage our strength with or at the visit and monitor Fisk remaining at the number one combined choice for osteoarthritis pain management in the U S. As these products provide strong positive cash flow the support our commercial and innovation investments to grow our business.
Our worldwide commercial organization is now established to deliver are innovative minimally invasive surgical solutions to clinicians. So the patients that rely on our technologies can resume active living faster and.
And we will continue to invest in developing meaningful products, including products using our differentiated Haa based regenerative platform to further leverage our commercial organization and joint preservation surgical call point.
With respect to our clinical study efforts enrollment continues for both of the Cingal and how fast you S studies with COVID-19, having an ongoing impact, especially outside the U S where travel restrictions prevent of our clinical team from traveling for the sport surgeries in other aspects of the clinical trials of those sites.
We will continue to give the regular updates on these trials and planned to provide more detail during our investor day in June.
Please refer to slide pie as I previously mentioned with the acquisitions of Arthur surface from Parkas, our market opportunities now expanded to over $8 billion over the course of the last 16 months.
Let me provide you with some additional detail.
The 1 billion dollar market opportunity and the osteoarthritis pain management that is addressed by the legacy Anika of fiscal products is the foundation of the business as we continue to sell our market leading worth of this skin Monovisc Haa injectables through J&J mitek in the United States and through distributors internationally Cingal our second.
Generation combination ha's steroids, OA pain management products that we sell in over 35 countries outside the U S will be a larger growth driver once approved for sale in the us outside of the 2020 for planning period.
In the more than $1 billion regenerative solutions market. Our portfolio is also comprised of legacy Anika products. It includes our single stage Haa based cartilage repair solutions, how fast that is sold in over 30 countries outside of the us today and our HJ enhanced solution to treat insufficiency for.
<unk> tack of set released in late 2019, we're very pleased with the progress for making both of US with respect to interest in in sales of taxes that and and how it is supporting and driving or broad joint preservation portfolio with the surgeons already in our call point.
Leveraging our HJ technology and expertise in the future of Joique preservation products in our R&D pipeline will be of key catalyst for growth for Anika in the coming years. This includes hail of fast once approved for sale in the US which is also outside of the 2020 for planning period.
The over $2 billion soft tissue repair market in sports Medicine, which we entered with our acquisition of Pargas represents the faster growing opportunity that is focused on and Leverages. The ambulatory surgical center call point as I previously mentioned and lastly, the over $4 billion total of preserving joint solution space.
Which we entered with our acquisition of Arthur surface and the innovator in bone sparing Joique technologies for more than 20 years includes the dressing areas of unmet need where the after arthritic disease process is further progressed and an implant is needed.
Or specialized minimally invasive and bone preserving implants treat progressive arthritis of multiple joints, including the shoulder hand risks an elbow in the foot and ankle.
The opportunities in this large addressable market are significant and highlight while we're focused on the early intervention joint preservation spaces within that larger orthopedic market.
With that I'd like to turn the call over to Mike to review, our first quarter financial and provide some color about the remainder of 2021, and then I'll provide from closing comments Mike.
Thank you Cheryl.
I will now walk you through our results for the first quarter of 2021, if you would please turn to slide six.
Revenue for the first quarter of 2021 was 30 for $3 million of.
Decreased 3% from the first quarter last year.
The year over year decrease was due primarily for the impact of COVID-19 on sales volumes of struck by the increase in revenue due to the acquisitions of Arthur surface from purchase which both of occurred around the end of January of last year.
Drawing preservation of restoration revenues rose, 55% to $12 $2 million from the quarter from Q1 of the last year pre.
Primarily due to the full quarter results from Arocho surfaced in pockets and 3% organic growth over the last year's pre cogan numbers as the impact of COVID-19 begin to lift and reflective of the early progress we are making of the market.
Joint pain management revenues decreased 24% to $19.3 million in the quarter.
Primarily on the impact of COVID-19 for an office injectables and associated ordering patterns.
As a reminder, J&J my ticket purchased the pre COVID-19 levels through the second quarter of last year.
I would have expected to Wiener inventory of down to historic levels by the end of the fourth quarter of.
Or wherever due to the post holiday COVID-19 headwinds, they still have higher than normal inventory of year end.
And this continue to impact for purchases from us through the first quarter of this year.
At the same time or royalties this quarter from J&J Mitek, which are based on their end users fails. We're back in line with the first quarter of 2020.
Consistent with our expectation the USPS go supplements are stabilized.
Is Cheryl mentioned as a result of the acquisitions of Arocho surface embargoes and continued momentum for our joined preservation of restoration products are overall revenue mix continue to shift in the first quarter withdrawing from observation revenue increasing to 36% of Anika total revenue of significantly from the same period of last year.
Other product revenue of $2.8 million was up compared to $2 million last year due to the sale of political C wound care products as.
As a reminder of of or product family sales are through distributors and can be lumpy on the quarterly basis.
Our gross margin in the first quarter was 61%, which includes an unfavorable 12 point impact of for $1 million of non-cash acquisition accounting related amortization in fair value step up expenses that are associated with Arthur serve for some parts.
Gross margins improved one point compared to Q1 of last year based on favorable cost variances as both periods included the non-cash acquisition accounting related expenses.
From of spending standpoint.
While we continue to manage our operating expenses prudently, we are intentionally investing in product development processes and systems to meet our growth objectives.
For a research and development and SG&A expenses together totaled 24 $5 million from the first quarter up from 20 $25 million in the same period of 2020 per.
Primarily reflecting the acquisitions of Arthur surfacing parkas increased incentive based compensation as well as additional spending for support future growth such as investments in our commercial and related support organizations.
During the first the first quarter. We also recorded a net benefit of for $8 million to reduce the pure value of of our contingent consideration liability associated with the acquisitions of Arthur surface and purchase due primarily to of decreased likelihood that certain milestones will be met.
As a reminder of of.
<unk> for the estimated fair value of contingent consideration every quarter and in the first quarter of last year Anika recorded of benefit of 24.5 million based.
Based on it the initial reduction an estimated contingent consideration as COVID-19 was controlling.
Are effective tax rate for the quarter for the benefit of 134% compared to an effective tax rate of 21% in the same period of last year.
Primarily due to the effect of the change in the estimated fair value of of contingent consideration.
Our net income for the quarter was $2.8 million or 20 per diluted share.
Compared to net income of of $5 million for 40 per diluted share in the first quarter of last year.
Excluding the non-cash charges discussed earlier and other adjustments described both in our earnings for at least and our online earnings presentation. We achieved adjusted net income of $800000 worth of six cents per diluted share compared to $6.5 million for 45 cents per diluted share in the same period of last year.
We generated adjusted EBITDA in the first quarter of for $8 million compared with nine $5 million for the first quarter of last year.
Similar to the last quarter of the decrease in profitability was primarily due to the unfavorable COVID-19 impact.
As well as the addition of article the surface and pockets and incremental investment supporting our future growth.
Lastly, with regards to our cash flow and capital structure.
Our balance sheet remains strong with $94 $6 million in cash and investments at the end of the first quarter.
We have the remaining contingent consideration liability value to $36 million associated with the acquisition of Arthur surface and pockets.
Of which $24.8 million is included within current liabilities.
We had net cash used for operating activities of $2.4 million during the quarter due primarily the timing of customer collections in certain tax payments.
Please turn to slides of it.
Now I would like to review our directional outlook for 2021.
As we discussed last quarter due to the continued of uncertainty associated with COVID-19 in the global market, we're not providing full detailed financial guidance for the quarter and year at this time at the same time, we would like to share with your qualitative and directionally quantitative insights into our expectations for the year.
We continue to believe the market trends of pointing to of recovery in the second half of 2021 depend.
Depending on the timing of nature of the United States and globally of vaccine Rollouts the potential for additional COVID-19 spike and other dynamics such as the COVID-19 variance.
These dynamics remain very fluid and could have of material impact on a result of an expectation.
The first quarter demonstrated organic growth in our joint preservation of restoration revenues as compared to our free COVID-19 results in the first quarter of last year.
As a result of of growing momentum as the impact of COVID-19 lifts for the full year 2021, we expect joined preservation and restoration revenue growth and the upper 20% to low 30% growth over 2020.
We also continue to believe our joint pain management of businesses stabilizing and the market is showing gradual signs of recovery.
The therefore expect low single digit percent growth in 2021 joint pain management revenues over 2020.
And other revenues outside of our main problem product families. We have seen better performance. During the first quarter. Then we expect for the rest of the year due to the timing of sales of some legacy products.
And we continue to expect the other revenue for the year to decline mid single digits of compared to 2020.
On the total company basis based.
Based on the strong double digit growth enjoying preservation gradual recovery and joint pain management and lower other legacy product revenues. We therefore expect revenues in 2021 to grow between the high single digits and low double digits per cent as compared to 2020 consistent with the directional guidance. We provided on our last earnings call in March.
With regards to gross margin consistent with what we laid out on the March call. We expect gross margins to remain fairly consistent between 2020 of 2021, excluding the impact of Arkarow surface and purpose acquisition related expenses, which continue into 2021 and.
And non recurring charges such as those we incurred in the second quarter of last year.
With regards to spending as we've mentioned in 2021, we are increasing our investment in commercial infrastructure and capabilities, including people systems and processes that support our transformation and we will enable us the scale is we growth.
We also will continue to invest in the research and development. According to the product pipeline, we've discussed and we will discuss further out of our Investor day in June.
Further as the restrictions associated with COVID-19 lift, we expect marketing and sales related expenses to increase accordingly.
Overall as we invest ahead of growth in support of our longer term growth and profitability targets. We expect the operating expenses to increase over 2020 as a percentage of revenue.
We remain laser focused on our multiyear transformative growth targets and are on track for doubling our 2019 revenues by 2024 and delivering double digit adjusted EBITDA growth off of our of 2019 base of profitability.
I will now turn the call back over to share.
Thanks, Mike Please turn to slide AIDS.
In closing, we continue to execute on our strategy and investing infrastructure that will allow us to efficiently scale business.
We believe that we have unique growth opportunities in the early intervention orthopedic space and the ability to leverage our proprietary haa technology into the new and innovative products for doing preservation and regenerative solutions.
As of Nice described we view the progress, we're making and will continue to make in 2021 as the first step in the process to grow the company beyond the legacy Ha's physical supplement franchise.
Anika now has the product the sales channel the people and the new product pipeline to continue to generate substantial shareholder value of in the years to come.
Before I take questions I'd like to take the opportunity to think of the team and Anika. We have a very dedicated group of folks that of work diligently to bring are great products to customers during COVID-19 through hard work and my carefully following safety protocols of.
Big Thank you for the Anika team.
Thank you all very much for your attention and support of Anika. We look forward to seeing you at our Investor Day on June 3rd for happy to take your questions now.
If you would like to ask a question. Please take multi pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your mute function as turned off till Irish that the modern reach our equipment again the star one to ask a question and we'll pause for just a moment to allow everyone an opportunity the signal.
Our first question comes from Jim Sidoti with Sidoti <unk> Company.
Hi, good evening grabbed the here.
You do well.
The first question I had was on Jay J, you mentioned in your script, the inventory with high of going into the queue, one because the COVID-19.
Any update of where that is the sort of cute too.
Hi, Jen it's Mike.
Yes, we did we did see inventories continuing into the first quarter, but.
It wasn't.
That big of a surprise for you alluded to that a bit as we were coming out of the last year given the storms in the.
And the the COVID-19 spike at the end of the year.
Does not as you noticed we didn't change our expectations for the year and so.
We continue to expect low single digit growth.
We don't expect the the inventories are going to be.
As big of an impact as we go forward here. So we're not giving guidance as I said for the quarters gears, just given COVID-19 and the uncertainty related to it but from a full year perspective, absolutely nothing has changed from your end.
And the guidance has remained the same.
Alright, and I know you don't want to get too specific that I am not going to.
Push your for full year, but historically Q2 generally up from Q World I know you said you had some.
The other product sales of might not be coming in.
Hi, and the rest of the year.
The data.
Enough to to change the trend with the Eugene for.
True.
The 2021 Q2 should be at least as high as cure.
Yeah during the strike again so.
One of the things that.
That we've tried to do here is recognized the COVID-19 dynamics and signal, but we do expect the second half to be bigger than the first half.
Just as COVID-19 is expected to lift further in the second half that being said there are normal dynamics, where the second quarter is generally bigger than the first quarter and that's been the historic pattern, we don't expect that to be different this year.
Okay.
The the operating expenses.
Argue.
Bell.
I would expect it to be <unk> with the little bit higher is that the new baby for level.
The $2 million is that what we should assume going forward.
I'm sorry, Jim could you repeat the question.
Was there any one time expense and the generic Thursday 2 million of good baseline for excuse me the experience going forward.
Oh, I'm, sorry, I didn't hear that thank you in terms of the Kunai spending.
One of the things we saw from from Q3 of the queue for the queue for was a little bit lighter than Q3.
And there was just from timing of year and the based upon incentive compensation accruals and so if you look at the trend from going forward to Q1.
There was generally normal growth there was one item in the first quarter the Joseph.
You'll see also in our 10-Q.
Related to a write off of.
Legacy system impairment of about $800000 that impacted G&A of the first quarter.
So apart from that when you start to look at the trend through last year I think it's fairly straightforward the things that are in their driving SG&A growth are the things we talked about the investment in the team.
Last year with COVID-19 incentive compensation was not of 100% in.
And so there was a lot of adjustments as Kobe was evolving last year and so but I think if you pull those things the side, there's really nothing different than what we've been saying in terms of these travels I did just want to clarify something I wanted to make sure I answered your last question and for.
That quickly because I think you were referring to specifically J&J between the first quarter in the second quarter.
And we do expect that to be up.
On an overall basis of one of the things we called out in our prepared remarks is that other revenue was unusually high in the first quarter. We do expect that to go back down we sold.
A good amount of legacy products in the quarter and so we expect that to go down in line with our full year guidance. So Q1 was unusually high as it relates to the other but for the rest of the business the <unk>.
Normal seasonality applies subject of course the COVID-19.
Although the lower for one for me of that inventory.
Down about $2 million in the quarter of sales were up.
Is that a function of of the Ya Ya.
Quired inventory being told off for some other diagnostic there.
There's really there's really nothing unusual going on in inventory.
There's really nothing unusual there from a trend perspective.
One of the things that we've been trying to do is just.
Make sure that we have adequate inventory of to meet demand, but there's a different mix and different things that have happened from quarter to quarter. So nothing nothing unusual on the inventory.
Thank you.
Okay.
It looks like the next question for Mike <unk> with Barrington Research.
Hi, guys.
Hi, My period of today doing great. Thanks for your questions I guess share I made of Mississippi at the outset, but did did you speak at all to your.
In terms of patient volumes for sort of of the key part of their business, what you're hearing out there working of what you're estimating in terms of relative to the free COVID-19 levels.
You're just talking about.
Certain activity purchasing products flag itself both of them both on the pain management and sort of on the 30th.
Yeah, let me speak of that so look for seeing a definite recovery globally, but.
Kind of.
Moderated by COVID-19 and especially.
A different countries and different regions, where we are seeing COVID-19 spice happened over time.
I think if I can speak to the U S for a second I think that there's of.
Pretty strong trend of both surgeries and injections that we see coming back and that's why we say we feel better about seeing increases in the second half of the year pending any any different COVID-19 dynamics.
We do see that the surgical side of the business is recovering.
A bit more quickly than the injection site I think the surgeons are focused on there more urgent patients and.
Getting their surgical activities back and so they tend to be more focused on that and the injections, but there's definitely.
Solid return on both fronts. So I think we are very optimistic about seeing.
Results continuing to improve into the second half of the year again sort of.
With the COVID-19.
Moderation not knowing what could happen going forward.
And one of the dynamics that we saw in the numbers.
It was very encouraging to see the organic growth and joined preservation of restoration.
And so that was that was nice to see those numbers out or above free COVID-19 levels.
And on the management side as.
As I mentioned in my in my prepared remarks that the royalties were in line with where we were in Q1 of last year. So it's hard to say, whether what the trend is with some of that pent up from the last quarter or not or of how's that going to go but it's definitely an encouraging sign.
To see these things moving in this direction and it's consistent with what we've laid out for the year.
When you talk.
Talk about the.
The longer term goal towards the 24.
Talk about sort of mid teen.
Top line growth to get there.
How much of that mid teens top line growth.
Sort of of new product go for it.
Production and revenue coming from from sort of that channel because I mean, you guys got.
Alright, Thank you want something like seven new products and the joint preservation area of 20, obviously, you're going to continue to launch.
Launch new products between now and 2000 for me.
I guess, what's the assumption are of general range of assumption around how much sort of from what you've already got in the and how much of it.
Stuff that's the development.
Yeah, that's a great question.
The tell you if you look first of all of the first couple of years here. We've gone ahead of us that that's going to be primarily around commercial execution and commercial excellence of products that we already have.
Some of which we've only just recently launched so they haven't really hit the the.
Sweet spot of their growth curve yet.
And then we will continue to launch products on the joint preservation side with regenerative solutions with sports medicine with bone preserving implants, and so that I would say new products.
That we haven't launched GAAP will probably start to show up more of the numbers in the out years towards 2024, but you'll recall, we just launched tack of set in late 2019, and then COVID-19.
And we launched the number of products last year, we've talked about launching the risk product. This year, because we have received type of thing K clearance last year. So we do have some recent product launches and.
And of great portfolio of existing products that are really going to drive. The next couple of years of growth and then as we continue to launch products those are going to definitely have Ah.
A significant impact in sort of 2023 of 2020 for timeframe and.
And the only thing I would add to that it's just I think it's fair for folks to recognize weeks of noticed the change now that we're in sports medicine, where there's just a different cadence of.
Of an increase cadence of smaller product launches I think of in the past we've talked about these big new products and how big the contribution of you're going to have the the sixth new products, we launched in the.
The latter half of last year, I think is more indicative of.
They may not have individually as large of an impact, but they really demonstrate the innovation debt, where where that we're focused on that state of tend to have shorter innovation cycle times.
And so you tend to have quicker turns on new product development with those the regenerative solutions.
And those get lost they tend to have the different.
Product life cycle curve and take a little bit more time for adoption with with the potentially greater upside.
So at the mix that will see through 2024.
I guess the question for Mike.
Cash flow from AB basically.
Round numbers, you guys sort of at about two and a half million of positive free.
Of the of cash.
Both of them ops, Illinois for two $2 million of free cash flow of in the first quarter and then for that.
<unk> sort of gave all of that back.
I guess my question is what's what's your feeling about generating.
Positive free cash of free cash flow and the second half.
Yeah, I think we demonstrated last year that we even during the challenges over the last two that we generated positive free cash flow and we expect to do the same this year.
You saw it in the first quarter, we had the positive adjusted EBITDA of for $8 million and I think that's a pretty good indicator.
There was some timing in the first quarter, we had some tax payments and some some other payments and timing collections, but.
We definitely expect to continue to be generating positive cash flow and caused the free cash flow.
What we have said is that we are reinvesting some of that this year and incremental amount to fund the growth for the future and so as we make that transformation 2021 is really a key year for us in in.
Continuing what the company started last year in this pivot.
Towards the joined preservation space. So we are making incruental investments, we are taking some of the some of that free cash flow reinvesting it but we still are in the position, where we expect positive positive free cash flow for the year.
All right very good thanks.
Mike.
And we have no further questions at this time I'd like to turn the conference back to Cheryl plan trick for any additional are closing remarks.
I'd like to thank everybody for your interest in Anika and for joining today and have a great evening.
That does conclude today's conference. We thank you for your participation you may now disconnect.
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