Q3 2021 Anika Therapeutics Inc Earnings Call

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And are subject to certain risks and uncertainty 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 forward looking statements presented today. Please.

Please also see our SEC filings and our most recent 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 includes adjusted gross margin adjusted EBITDA adjusted net income and adjusted earnings per share, which are used in addition to results presented in accordance with GAAP financial measures. We believe that non-GAAP measures provide an additional way of viewing asps.

Six of our operations and performance, but when considered with GAAP financial results and a reconciliation of GAAP measures. They provide an even more complete understanding of our business are.

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 third quarter press release.

And now I'll turn the call over to our President and CEO, Dr. Cheryl Blanchard.

Thanks, Marc Good evening, everyone and thanks for joining US please turn to slide three.

Let me start by expressing my hope that everyone has been able to stay safe. During these disruptive times and that we continue to prioritize the health and safety of our employees.

I will plan to review some highlights from the quarter and then Mike will go into the financial details and review the outlook for the remainder of 2021.

I am pleased to report another solid quarter with revenue up 25% over Q3 last year.

Primarily due to some COVID-19 recovery and related timing of orders in our joint pain business.

And that we will deliver above market revenue growth in our joint preservation and restoration segment for 2021.

Adjusted gross margins for the quarter came in at 66% in line with our targets for the year translating to positive adjusted EBITDA and positive operating cash flow and we ended the quarter with $90 million of cash on the balance sheet.

Our third quarter was highlighted with progress against our key milestones that we described during our Investor day in June during the quarter, we fully launched our risk motion total risked arthroplasty system, a key advancement expanding our portfolio beyond our existing hemi risked implant product.

Our new product restores the natural risk motion for arthritis patients and provides a motion preserving solution eliminating the need for joint fusion.

The launch of this product at the American Society for surgery of the hand or the a S. S age annual meeting in September received a lot of positive interest and attention from the hand and wrist surgical community.

Also during the quarter, we received an additional five 10-K clearance for Tac to set our hydronic asset base bone void filler expanding its capability beyond treating insufficiency fractures to be used for the augmentation of hardware and support of bone fragments during surgical procedures.

This additional indication will expand <unk> addressable market further cementing our strategy in the ASC based sports medicine business by allowing surgeons to use taxes set as an adjunct to suture anchor fixation when performing soft tissue repairs.

These surgeries include rotator cuff repairs, we're anchoring sutures into fragile are low quality bone can lead to inferior mechanical fixation and clinical outcomes.

Once injected taxes that hardens and mimics the properties of normal trabecular bone initially and then remodels into healthy bone overtime.

The use of tax set in this new indication has been shown to increase the pull out strength of a suture anchor by twofold, providing for a secure suture anchor fixation construct.

This indication was launched in October and not only expands our addressable market, but it also allows us to define a new market, where one doesn't currently exist additional.

And brings over 20 years of orthopedic and biotech operational experience and will focus our attention on optimizing Anika has global operations driving improvements in supply chain management and ensuring cost targets are met.

In addition, Monday, we announced that our board of directors appointed Sheryl Conley as an independent director Cheryl comes with over 35 years of experience in orthopedics and health care with 25 of those years spent at Zimmer, where she was last group President Americas, and global brand management, and Chief marketing officer, focusing on <unk>.

Global brand management marketing sales product development and operations.

None Cheryl for many years and she brings in depth commercial and operational experience to the board to help guide our strategy.

Both Ann and Cheryl are great additions to the Anika team and I'm thrilled they've decided to join US as we continue on our transformational journey.

Over the last couple of quarters I've been discussing our investment in people processes and systems as we position anika for growth.

During the third quarter, we made significant progress on this front not only with adding new talent some of which I. Just described but also with systems as we rolled out our global ERP system SAP.

Across all Anika businesses, including the park is an Arthur surface entities.

This will give us the tools necessary to drive operational efficiency and synergy in support of our growth strategy.

As we continue to invest in the business to drive scale and grow and focus on the 2021 new product launches with training on their safe and effective use as COVID-19 lifts and we can again become more customer facing.

In the second half of 2022 and in 2023, we expect to have additional new product launches targeting the ASC call point and additional system implementations to drive commercial excellence.

We're making tremendous progress here and I've already described setting us up for the next phase of growth as we move into 2023 and 'twenty four.

In the 'twenty three 'twenty four time frame is where we expect to see the real impact of our R&D pipeline with additional five 10-K product launches and revenue growth accelerating.

Also through 'twenty 'twenty four will continue to invest in Halifax, and Cingal with ongoing clinical development to bring them to the market in the United States.

As I've said before 'twenty 'twenty four is not the end game and is truly just the beginning for Anika as we drive accelerated growth and profitability.

Now I'll turn the call over to Mike for a review of our Q3 financials, and then I'll wrap things up Mike.

Thank you Sheila.

I will now walk you through our results for the third quarter of 2021.

Turn to slide six.

Our other revenue rose to $2 2 million in the third quarter compared with $1 $5 million last year.

Our gross margin in the third quarter was 58% that's up from 55% in the same period last year.

And that includes the impact of $3 million of noncash acquisition accounting related amortization and fair value step up expenses associated with the 2020 acquisitions of Arthur surface and purpose.

Excluding these charges adjusted gross margin was 66% down from 70% in the same period last year.

Due primarily to unfavorable revenue mix and production volumes based on the timing of the impact of Covid on our results year over year.

From a spending standpoint, we continue to manage our operating expenses prudently, while also intentionally investing in product development as well as processes and systems to meet our commercial growth objectives.

Our research and development and SG&A expenses together totaled $25 2 million in the third quarter, that's up from $21 1 million in the same period of 2020, reflecting increased clinical trials expense, which had largely been curtailed last year at the outset of Covid.

Along with increased marketing and other investments in our commercial and related support organization.

Those are $2.1 million for the quarter.

We also made and earn a payment of $10 million in the quarter for achievement of the regulatory milestone we detailed in last quarter's earnings call.

Of that 10 million to $8 million was treated as a reduction in this quarter's operating cash flows.

Our balance sheet remains strong with $91 million in cash and investments at the end of the third quarter.

Please turn to slide seven.

Now I'd like to review, our full year outlook for 2021.

Due to the impact of the Delta variant limiting elective procedures marketing events and overall customer access in the third quarter and the expected impact through the remainder of the year, we're revising our revenue expectations for 2021, we.

We now expect our fiscal 2021 revenues to grow 9% to 11% over last year.

That's down from our previous guidance of 11% to 14% growth.

Are faster growth continues to come from joined preservation and restoration, where are we now expect revenue to grow in the upper teens percent over last year.

This is down from our previous expectation of high twenties to low 30% growth as that growth had assumed that the impact of COVID-19 would lift in the second half of 2021, but the emergence of the Delta variant and it's broad impact has significantly reduce the expected recovery in the second half of this year as we saw in the third quarter.

And joint Pain management, we continue to expect mid single digit revenue growth over the last year in line with our previous guidance.

As such due to the volatility in ordering patterns that we saw in the third quarter. This guidance supply sequentially lower shipments in the fourth quarter.

Apart from the volatility in quarterly ordering ordering patterns by our strategic partners are joint pain management business has stabilised on an annual basis in line with our expectations.

Lastly, we expect revenue and our other product family to grow mid single digits over 2020.

With regard to the gross margin we continue to expect adjusted gross margins for 2021 to remain consistent with 2020 and the upper 60% range.

As a reminder are adjusted gross margin excludes the impact of Arthur surface, and parkas acquisition related expenses as well as any product rationalization charges.

Please see the definition of this and other non-GAAP metrics in our earnings release and online earnings presentation.

Separates will drive real value for all of our stakeholders into the future.

Lastly, I'd like to note that this quarter was one marked by tremendous operational execution and the team's continuing to really come together.

As always I would like to thank the Annika employees for their hard work through these trying times as we continue our transformation, we're happy to take your questions now.

Ladies and gentlemen, if you wish to ask a question. Please signal by pressing star one on your telephone keypad. Please.

Please ensure that the mute function of your telephone is switched off to allow your signal to reach our quick.

Again, Please press star one to ask a question.

Oh, we can go to a young Lee of UBS.

Alright, great. Thank you uhm good evening, everyone. Thanks for taking my question.

We also get royalty revenue.

In that business based on end user sales and that was that royalty revenue was actually down low single digits somewhat consistent with what we've seen in our direct business as well so really the timing in Q3 was a function of just the timing of ordering patterns. So because that is the largest part of our business. It.

Does mean that we're going to have lower sequential shipments still larger than last year and that in the same quarter, but lower sequential shipments enjoying pain management is just due to timing.

As it relates to joint preservation, you're absolutely right based on our guidance. It implies that at the midpoint were consistent in queue for from Q3.

So as we thought about our guidance, obviously with the way that kovats working and we saw that in the third quarter.

Hard it's hard to lay all of this stuff out clearly what I will say is.

Business is solid we're not seeing losses from a competitive standpoint, it's really around what's going on in the marketplace outside of US that's really driving this dynamic.

Yeah, and I would say that.

We along with every other report you read right now are seeing.

<unk> volumes impacted surgical volumes impacted because of the health care worker shortages.

And trying to be predictive around where that goes right now, especially with the the vaccine mandates coming online I think is difficult and so we just wanted to be thoughtful about that.

Okay great.

You guys, taking the question.

Drop back in queue.

Great. Thanks Yang.

The next question comes from Jim Sidoti of Sidoti <unk> co.

Hi, good afternoon. Thanks for taking my questions. So I just wanted to be clear.

This slowdown.

Joint Preservation you think this is a relatively short term.

Domino.

It sounds like you're still.

You still think your long term goal of doubling revenue by.

2024 is intact is that correct.

This all plays out so there is a near term impact absolutely.

But in terms of the.

Values drivers to catalysts.

The are differentiated products, and our focus and joined preservation and a large and growing market. None of those dynamics have changed but definitely COVID-19 as in near term headwind.

Alright, and then on the balance sheet inventory came down.

Pretty significantly is that related to the shipments to mitek or was there something else there.

There was nothing meaningful on the on the inventory side, sometimes things will swing between.

Categories on the balance sheet, if there's long term inventory of short term inventory between current assets in long term and sometimes that can lead to swings, but there's nothing nothing meaningful changing on our inventory levels and we are watching on the supply chain side is Cheryl mentioned.

The same things that other people are seeing we also see as risks and we always try to make sure that we have enough inventories so that we don't.

We don't experience any challenges, but it's something we're watching very closely as we go into 2022.

And then our question is on Salesforce.

Has the recent pick up in Colby K too slow you down in terms of expanding the salesforce or what are your plans.

No going forward with regards to Salesforce substantial.

Good question, Canada is Cheryl I'm happy to talk about that we've talked about the fact that we really don't have.

Specific salesforce expansion plans from the point in time, where we completed the park and Arthur surface acquisitions. It was really about integrating in optimizing the salesforce the distribution network implementing.

Systems and processes to really scale that commercial execution and that's what we've been focused on it is going well.

Well, it's it's obviously been frustrating for all of US that we haven't been able to get in front of customers like we would otherwise have planned notwithstanding COVID-19.

Getting to Congress is in meetings implementing training on the safe and effective use of our products. All those opportunities have just been much made much more difficult by the Covid dynamic that said, we haven't stopped we've pushed through I think as best as as everyone has been trying to.

And I think it has a broader market dynamic but for us it it really.

These cases are lost I think it's just a matter of timing and what the recovery curve looks like.

Okay alright, thank you.

Youre welcome. Thank you.

And our next question comes from Mike Pitofsky of Barrington Research.

Hi, good evening, a few a.

A few questions Sheryl did you say I didn't quite catch it did you say the enrollment was done in November on Cingal pilot or will be done later this month.

It will be complete by the end of this month.

Okay got it okay.

Alright, and then Mike I guess on the on the pain management quarter, obviously big quarter favorable timing you have any concerns around.

Sort of another stocking issue that sort of that impacts the next couple of two or three quarters or.

What are your what are your thoughts around that.

Hi, Mike.

Answer your question, that's always something that we watch and the short answer is we do not expect that there will be stocking excess stocking at the end of the year. So one of the reasons that.

We and our partners the largest of which is J&J mitek, we're in regular contact with them and we know they need to manage their business and so if they want to buy product, they're going to buy product, but we also don't want to have excess stock and so and now today. So.

We believe that the takedown.

The lower shipments in the fourth quarter.

Is sufficient based on the demand that they expect that we will not have excess inventory going into the year, obviously with COVID-19, it's hard not just for us, but it's hard for our partners to perfectly predict things. So it's something we're watching.

Outside of the Covid dynamics things Theres a lot of positive.

Positives across our business, but it's just uncertain at this point, how COVID-19 is going to play out. So short answer is no. We do not expect excess inventory coming out of 2021.

Okay.

Can you talk can you talk about I know at times, we've talked about this before but just sort of.

Okay.

Mm not major acquisitions at this point.

We have a significant opportunity in front of us when we increase the addressable market for $1 billion to $8 billion by moving into joined preservation, We're still a very small player and.

So.

We are focused on driving the organic and inorganic investments that will that will help us in the future.

But those are because of the big opportunity in front of us the R capital deployment would be for growth first organically and secondarily would tuck ins in the near term.

Preservation and restoration piece of our business I actually.

No.

No.

Think were either in line or better than than they are.

So I don't think it was.

An outsized impact on us by any means because I think we've got we've got a lot of innovative products that you know there's interest in so I think we do find ourselves in a in an interesting position from that perspective, but it's very difficult to quantify.

Okay.

One last thing and I'll, let others get Amazon or others.

Taxes that I mean, I know you all are excited about it I'm sort of excited about what I think it could be you all not always but you always say some language around hey, great momentum great traction, we're getting somewhere with death.

Is there any way either anecdotal or.

It's sort of you know.

I actually putting numbers to the to the progress Youre, making you know either you know.

The stunning new docs have tried the product.

He was a gentleman that concludes today's conference calls you. Thank you for your participation you may now disconnect.

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