Q2 2021 Anika Therapeutics Inc Earnings Call
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Please standby we're about to begin.
Good day, everyone and welcome to Ana cause second quarter 2021earnings conference calls as the reminder of this call is being recorded I would now like to turn the call over to Mr. Mark Nemeroff Executive director of Investor Relations and corporate Communications. Please go ahead Sir.
Thank you good evening, everyone and welcome welcome to Anika of second quarter conference call and webcast.
Our Q2 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 our supplementary Powerpoint slides that will be used for the discussion today.
With me on the call today are 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 Anika second quarter 2021 financial results with key business highlights as well as discuss our outlook for 2021.
Please take a moment and open up the slide presentation refer to slide number 2.
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 $19.30 for these.
Even in light of the challenges we've all face during the pandemic.
It's starting to feel like things can begin to return to a more normal dynamic even as COVID-19 continues to throw assaults from curve balls.
As COVID-19 restrictions began to ease during the quarter, our sales and marketing teams continue to ramp up efforts to promote anika is growing product portfolio and brand at trade shows and conferences.
Our teams of also been engaging surgeons directly as we have increased in person training on the safe and effective use of our products.
We're seeing the first signs that this is paying off as surgeons, who were previously unaware of Anika focus on joint preservation now see that our portfolio provides meaningful solutions for them to treat their patients. So they can return to active living.
I view this direct engagement is a tremendous opportunity as we communicate the new and transforming Anika story and describe our value proposition in the early intervention orthopedic continuum of care.
We are however, remaining cautious with respect to COVID-19, especially with the spike of the Delta variant and it's rolling impact on the health care systems in the us and around the world.
Just this week is being reported that certain U S Hospital systems are shutting down elect the procedures temporarily.
Adjusted gross margins of 70% in the quarter at or above our targets for the year translating to positive adjusted EBITDA and positive operating cash flow and we ended the quarter with over $97 million of cash on the balance sheet.
As we described in June during our Investor day, and because of double digit revenue growth along with healthy profitability will set us apart from our peers and provide tremendous opportunity for shareholder value creation.
The second quarter was also marked by some significant milestones for the business.
At the end of the quarter, we initiated the limited market launch of our risk motion total risked implant with Dr. Arnold Peter Weiss of University Orthopedics in Rhode Island successfully completing the first surgery on June 30th.
As a reminder of the total risk system was cleared by the FDA last October and as of modular joint preservation system that replaces both the radio and carpal sides of the risk joint to preserve more natural motion and to mimic native patient anatomy.
Risked arthritis can be incredibly debilitating and painful and restoring pain free motion is at the core of who we are considering.
Considering that most risked arthritis is still treated with fusion, meaning patients have very limited risk motion post operatively, we think they deserve better with the differentiated motion preserving solution.
We're excited about the early interest in this product as we March towards full market launch in September.
We also received 5.10-K clearance for a reverse shoulder system during the quarter. This foundational clearance sets the stage for the development and expansion of our shoulder implant portfolio in the future and in the first step for anika towards entering the large and fast growing reverse shoulder market.
As a result of achieving this regulatory milestone subsequent to quarter end, we paid an earn out of $10 million in accordance with the Arthur surface acquisition agreement.
After the close of the quarter. We attended in person. The first major trade event of the year at the combined meeting of the American Orthopedic Society for Sports Medicine, and Arthroscopy Association of North America in Nashville.
I was personally thrilled to be able to attend to be at our booth and to see surgeons engaged in our product specific training the.
The conference and Tradeshow were well attended and enabled anika to begin increasing its awareness and presence within the orthopedic surgeon community highlighting our expanded product portfolio in sports medicine, as well as regenerative and bone preserving joint solutions.
Also recently been able to meet with the number of surgeons and I'm seeing in person their excitement around the Anika story and how important our focus on joint preservation and addressing unmet needs with the meaningful solutions is for them and their patients.
The next industry conference at the end of the summer is pass the American Academy of orthopedic surgeons, which will be of great coming out party opportunity for Anika, assuming COVID-19 dynamics don't further delay the conference as happened in 2020.
Some of our plans include surgeon training as well as key product highlights and promotional events around core brands, such as tax asset and over motion plus inlay glenoid, our stimulus anatomic shoulder implant.
Before I turn the call over to Mike to review, our financials for the quarter I'd like to take a few more minutes to review our product development progress on slide 4.
Continue to strengthen our commercial capabilities and launched new products that are focused on joint preservation and the ambulatory surgery Center call point.
And will continue to expand into additional geographic areas.
We will also in this time period and through 2020 for continue our clinical trials and investing in hail of fast and cingal to bring them to market in the United States.
I would add that by no means is 2020 for the end game and is truly just the beginning for Anika as we drive accelerated growth and profitability through the expansion of the existing product portfolio.
So on slide 6 you can see why we remained very excited about the future and we remain confident that we have the right talent and technology to drive shareholder value.
<unk> will be a company that is 2 times larger on the top line by 2024 with strong gross margins and profitability.
We're keenly focused on our strategy with an $8 billion market opportunity number 1 position in the U S. Viscosupplement market with J&J Mitek as our use of marketing partner strong commercial organization for our joint preservation and restoration business and a robust pipeline of innovative product to help people around the world.
<unk> restore active living <unk>.
Now I'll turn the call over to Mike to review the details of the quarter Mike.
Thanks for sharing please turn to slide 7.
Total revenue for the second quarter of 2021 was $31 million, an increase of over 24% from the second quarter last year.
The year over year increase was due primarily to recovery from the initial impact of Covid on prior year sales volume.
This was most pronounced of our joint preservation of restoration product family, where revenues rose, 79% to $11.9 million in the quarter.
This recovery also drove growth year over year, and our joint pain management revenues, which increased 9% from Q2 of last year to $24.3 million in the quarter.
These results also reflects from favorable timing globally in the second quarter.
And as a reminder for year over year comparisons customer ordering patterns last year delay the portion of the initial impact of the Covid pandemic on this product family from the second quarter into the the second half of 2020.
With the strong recovery from the initial impact of Covid and organic growth in our joint preservation of restoration product are overall revenue mix increase in the second quarter. We're joined preservation of restoration revenue, increasing the 31% of anarchist total revenue up significantly from 22% of the same period last year.
Other revenue rose slightly the $1.9 million compared to $1.8 million last year.
Our gross margin in the second quarter was 55% up from 45% of the same period of last year.
And includes the impact of $3.8 million of non-cash acquisition accounting related amortization and fair value step of expenses associated with Arthur surface in parkers.
And $2.1 million of product rationalization charges.
Excluding these charges adjusted gross margin was 70% up from 64% of the same period last year.
The year over year improvement is primarily the result of the recovery from the initial COVID-19 impact as reflected in both higher royalty revenue and higher sales volumes.
The product rationalization charges quarter was associated with the inventory reserve for legacy products for which we decided in the quarter not to incur additional costs to re sterilize based on current assessments of demand for those products.
As a reminder, we had a 1.9 million dollar charge in the second quarter of last year related product rationalization of ancillary products and our other product standard.
From of spending standpoint, while we continue to manage our operating expenses prudently. We are intentionally investing in product development as well as processes and systems to meet our commercial growth objectives.
A research and development and SG&A expenses together totaled $25.3 million in the second quarter, that's up from $19.1 million of the same period of last year, and reflecting expenses to support future growth such as increased clinical trial costs and investments in our commercial and related support organizations as.
As well as higher incentive compensation on growing sales at.
Net increased spending in areas just trade shows and medical education.
Are spending last year had been largely curtailed at the outset of Covid and the growth in spending this year is in line with our strategic growth objectives.
During the second quarter. We also recorded of net benefit of $13.7 million or $9.8 million net of tax resolving from the reduction of fair value of our contingent consideration liability associated with the acquisition of Arco surface in pockets.
As a quarter and the fair value of of our remaining contingent consideration liability was $16.9 million of.
Of which we paid 10 million subsequent quarter and associated with the achievement of of regulatory milestones.
As a reminder, we evaluate the estimated fair value of contingent consideration every quarter based on the Monte Carlo evaluation approach and therefore of this value can change from quarter to quarter.
Our net income for the quarter was $6.5 million or 45 cents per diluted share that's compared to of net loss last year of $7.7 million or 54 cents per diluted share.
The net income in the period reflected the benefit associated with the change in fair value of contingent consideration.
Excluding the benefit and excluding the non-cash charges discussed earlier and the other standard adjustments described in our earnings release and online presentation. We achieved adjusted net income of $1.4 million or 9 cents per diluted share of slightly from the $1.2 million or 9 cents per diluted share. We had in the same period of last year.
We generated adjusted EBITDA in the second quarter of $6.1 million up from $5.6 million in the second quarter of last year.
The increase was primarily due to the recovery from the initial impact of Covid offset by the incremental investments of supporting our future growth and our business transformation initiatives.
Lastly, we of positive operating cash flows of for $3 million for the quarter and our balance sheet remains strong with $97.2 million in cash at the end of the second quarter.
Please know turn to slide 8.
With regards to spending in 2021, we are on track with our increased investments in commercial infrastructure and capabilities, including people systems and processes that support our transformation and will enable us to scale as we growth.
The investment continues in research and development. According to the product pipeline outlined during our June Investor Day presentation.
Further as the restrictions associated with the Covid have begun to ease we've seen higher marketing and sales related expenses, including the ability to attend trade shows and other industry events in person.
Overall, we are investing ahead of growth in support of our longer term growth and profitability targets and therefore, we expect the operating expenses to increase over 2020 as a percentage of revenue.
As we laid out during our recent Investor day, we expect adjusted EBITDA margin in 2021 to be in the low to mid teens as we invest in this exciting business transformation.
We remain focused on our multi year accelerated profitable growth targets and are on track for doubling our 2019 revenues with an over 20% adjusted EBITDA margin by 2024.
I will now turn the call back over to share.
Thanks, Mike Please turn to slide 9.
Anika has finally been able to begin to get out there with our exciting joint preservation transformation story.
Our focus since the acquisitions early last year has remained on building out the processes team and tools that we need to scale. This business in ways that will drive real value for all of our stakeholders with patients at the center of everything we do.
This team is laser focused on becoming the leader in joint preservation with a differentiated product portfolio, new product development pipeline and commercial team to drive access along the early intervention continuum of care, we're happy to take your questions now.
Those procedures can still be done in hospitals, and we have seen just this week. The various hospital systems that are delaying elective surgeries or temporarily suspending them or however, they are describing it.
And we have seen cases get cancelled as a result of that it's I think it's difficult to predict to what extent that will impact us in the third quarter, but I think we have done.
A good job of kind of sizing that up in our numbers that we're projecting out for you are taking all of that dynamic into consideration.
Like I don't know if you have anything to add to that.
I think it's it's important to note I mean this is a difficult time to to make these types of of estimates by the.
They're sort of historic seasonality that stronger in the fourth quarter and I think it will be interesting to see we see more and more people getting vaccinated I think things are moving in the positive direction overall and it feels like doctors are in a much better position to to handle COVID-19 and keep the practices going so.
We've weighed all of that is we think about our our guidance in our direction and we're we're really excited.
Sighted frankly about where this business is going.
There is a short term impact of this we'll see how that plays out.
But.
We're also seeing some really good dynamics out there in the field. So we're watching it closely.
Okay, Great that's very helpful. Maybe.
Maybe it's just the follow up a little bit on the seasonality.
To validate comments.
Consensus currently has around.
36.37 million.
Out of range.
Comfortable with.
Just a little bit lower than the Q2 numbers and.
And I was also wondering if you can talk a little bit about the the seasonality for the joint.
True I pay management business as far as preservation and restoration of businesses.
Uhm.
Yes, it's a great question so we.
We raised our guidance for the full year.
2 mid single digit in the joint pain management business based on where we are year to date.
1 of the things that we've seen historically in the joint pain management business is that Q2 tends to be the strongest quarter of the year as I look back I mean, I'm new to the business been here a year now, but as I look at the last several years I think that's been from fairly consistent apart from Covid last year.
So there is potentially some normal seasonality, but with COVID-19, it's a little bit hard to really.
There's not a whole lot that's normal.
And during this time of Covid I mean that said things are becoming much more normal this year than last year thankfully. So I think of joint pain management Q2 tends to be the strongest quarter of the year.
And that's reflected in our guidance I think as you look at.
What we said for the full year and the other thing that I think is relevant for the second quarter for joining the management as we had some favorable timing of international sales and that's just we sell through distributors outside the United States and.
Q3 tends to be slower in Europe.
The way that that works so.
So there was some favorite the timing and the second quarter.
So as it relates to the joint preservation.
Think that's the traditional orthopedics the fourth quarter tends to be the strongest quarter of the year and I mentioned that in my earlier remarks that we expect the growth to be weighted towards the fourth quarter. This year again for the dynamics do play into that.
But I think there's just somewhat of some normal seasonality in there, but we'll see how it goes this year.
As I say things are moving more to normal, but they are not fully back to normal.
Okay, great very helpful. Okay back in queue. Thank you.
Thank you.
And next we'll hear from Jim Sidoti of Cydonia Company.
Good afternoon, thanks for taking the questions.
So.
It sounds like you're expecting from.
For some pretty significant growth on the drawing preservation sorry, you said you wanted 6 soft tissue products the shoulder the risks.
So I assume that's really what's fueling the growth in 2021, but as we look towards towards the 2023.
No is the pipeline for will the next couple of years have similar new product blowouts.
Yeah. So.
We've talked also about the fact that we had launched tack to set in late 2019, just before Covid hit so.
<unk> said as another product that contributing to to a lot of that joined preservation growth driver the soft tissue repair products are part of it.
The total risks that we just launched and we'll be moving into full launch in September those things will start to.
To contribute meaningfully, especially in the next year, we also talked about continuing expanding the taxes that franchise and we're making investments in moving those expansion plans forward with the 5.10-K moving forward here in this year.
And then as you look into 2022 back to the we didn't put those slides in this deck, but if you go back to the Investor Day Dec, we kind of showed the the.
The more detailed new product development pipeline from 2022% of 2020 for where we have a number of projects listed around soft tissue repair regenerative solutions and some additional bone preserving implants. So there's really a steady cadence of new product launches and that really kind of plays into also the fact that we continue.
The new to make investments in our commercial infrastructure to drive all of those R&D projects and those commercial launches as we move into the out years. So it's really rolling all of that up together.
Jim just as we talked about it the Investor day of June.
Aly is Cheryl said and equally.
An equal contribution from commercial execution and for the product innovation.
I was just I just had the opportunity for out in the field.
Last few weeks and 1 of the things that I saw was that this combined portfolio and this focus on joint preservation really is resonating the surgeons and so I think when you put some of the pieces together you hope 1 plus 1 is more than 2 and and I think that's really.
What we see and what we're expecting and so I think I wouldn't want to understate the value of of the commercial execution now that we have this for auto portfolio with the regenerative solutions. The Anna brings to the table the soft tissue repair and the bone sparing technologies. So I think it really is both of those and we tried to deliver.
How that accelerates as we go through the next few years with the new product innovation on top of the.
And then.
The order of the balance sheet.
For 100 moving cash.
You're going to have to you.
You made a payment it sounds like early the smoke, but you're still going to have quite a bit of cash from the balance sheet.
Sorry, No acquisition garden in the 22000 for target of double of revenue, but.
Acquisition of on the table, that's something that you're looking at or do you think you have enough on your plate right now with all of the new product. So you're really not focus of Americans Ocean.
Yeah, you're right the doubling the revenues target is really based on.
It is.
Where we see additional opportunities from clinical unmet need perspective, where are we.
We think tact of set is a great fit and so we're going through that development process and regulatory process right now but.
We have yet to be public about what that looks like but we look to be yet this year.
Okay. So maybe for me.
Maybe.
More about that.
A quarter or 2 something like that net.
Quarter, 2 I would say yes.
Alright Thats fair.
Would you guys be willing to give an update.
On the slide deck I see the estimate on the on the <unk>.
Last patient out on highway fast and Cingal.
If you wanted to give an update on sort of where enrollment is.
Currently on the the Cingal pilot and on the <unk>.
The first trial like what percentage of enrolled you are at this point on both of those.
Yeah again.
Havent, we havent been that specific with our updates, but you know, we we announced those dates in June at our Investor day based on a lot of detailed planning around understanding what the dynamics are as we try to run clinical trials in this COVID-19 environment, and especially with how the fast where we have.
[noise] of O U S sites that we can't even travel too. So we took all of those things into consideration and those dates are still holding according to our executing on those plans and so I would just use those data as your north star as Youre thinking about timing on those products and again, we will continue to update progress on the.
The things if anything changes, but everything continues to hold according to those dates we put out there in June.
Okay, Alright, and then on.
On the.
On sort of the the.
Pain management business and Mitek I like I want to understand is is.
Was.
Is it sort of inventory at mitek.
Don.
The intelligence is that sort of normalized at this point or is there a bit of stocking of you sort of alluded to favorable timing, but I wasn't entirely sure it was directly.
Related to 2 Mitek can you can you just clarify for me is it.
To the best of your knowledge is in our inventory levels at Mitek normalized right now or possibly a little stocked or whatever whatever you can say there.
Yeah, absolutely I'm happy to answer that question.
So what I was alluding to on timing is.
A couple of elements of 1.
There is general seasonality in the in the.
The U S.
The.
Right and so and then outside the U S. There was favorable timing that we don't expect here in the coming quarters.
In terms of the timing there.
With those distributors as it relates to mitek inventory the <unk>.
Good news is that that there was an issue with that in the first quarter and then as we said they were eating into that last year. After the COVID-19 impact they didn't finish and they've really gotten much closer to normal so there.
There is really not a.
They are much closer to normal on the level of inventory from the visibility we have.
So would you say theres still a little bit the b.
A little bit of ex us to be work for yourself at this point or no.
I don't view of their inventory levels as being a driver of what our results are going to be.
From as far as I can tell there.
That's non issue.
I think that's all I've got thank you.
Thanks, Mike.
And there are no further questions at this time I will turn the conference back over to Dr. Blanchard for any additional or closing remarks.
Great. Thanks, Thanks, everyone for your attention today your support of Anika.
And we look forward to speaking next on our Q3 call. This fall and have a great night. Thanks a lot.
Thank you Doctor. This does conclude today's conference. We thank you for your participation you may now disconnect.
Yeah.
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Hmm.
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