Q2 2022 Anika Therapeutics Inc Earnings Call
Good evening, ladies and gentlemen, and welcome to Anika as second quarter 2022 earnings Conference call. If you would like to ask a question on today's call. You may do so by pressing star one on your Touchtone telephone start one for questions.
I will now turn the call over to Mark Nemerov, Vice President of Investor Relations ESG and corporate Communications. Please proceed.
Thank you.
Everyone. Thank you for joining us for Anika 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 are the 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 Chief Financial Officer and Treasurer.
Please take a moment and opened the slide presentation refer to slide number two.
Before we begin please understand that certain statements made during the call today constitute forward looking statements as defined in the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. The company's actual so could differ materially from or any.
Anticipating 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.
Please also see our most recent SEC filings for more information about risk factors that could affect our performance.
In addition, during the call we may refer to several adjusted or non-GAAP financial measures, which include adjusted gross margin adjusted EBITDA adjusted net income.
And adjusted earnings per share, which are used in a just in addition to results presented in accordance with GAAP financial measures. We believe that non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with GAAP financial results and the reconciliation of GAAP measures. They provide an even more complete understanding of our business a.
These adjusted non-GAAP financial results to the most comparable GAAP measures are available at the end of the presentation slide deck and our second quarter 2022 press release.
And now I'd like to turn the call over to our President and CEO , Dr. Cheryl Blanchard Cheryl.
Thanks, Marc Good evening, everyone and thanks for joining US please turn to slide three.
We're halfway through the year now, we're making strong progress to meet our financial objectives for the full year as we execute on our transformational strategy even in the face of the continued macroeconomic challenges that the industry is working through.
The second quarter top line was solid with 4% revenue growth driven by 6% growth in OA pain management, while our joint preservation and restoration business grew 2% our staffing shortages remain a headwind on certain elective orthopedic procedures across our industry.
We continue to be laser focused on execution to accelerate growth in our joint preservation business.
During the quarter, we experienced some distributor disruption as can happen with a hybrid sales model that uses independent distributors.
At the same time, we generated great excitement when we held our first in person U S. National sales meeting in Nashville, just a few weeks ago with anecdotes commercial team and our distributors.
The combined hybrid sales organization is energized about the opportunities that are robust and growing product portfolio brings to our customers.
And they feel we have the product mix, we need to give us the right to win in both the ASC and hospital settings.
Lastly, our new VP of U S sales, Rob Dell has been on board for a quarter now and has already led great work with the team to streamline our regions and bring the right mix to our hybrid sales force as we look to increase focus on the one anika portfolio of joint preservation products.
I'm pleased to say that during Q2, we continued to execute our strategy to expand our product portfolio and joint preservation, which along with commercial execution positions anika for accelerated growth as we enter 2023.
Extra west our new fixation system received five 10-K clearance during the quarter and we're on track for a limited market release in the second half of this year.
Yep switched fixation system is a platform of sports medicine soft tissue suture anchors designed to be strong easy to use and support healing for a broad range of soft tissue repair procedures.
System afford surgeons, a variety of not listen nodded soft tissue fixation options in a single anchor platform with the ability to support the surgeons preferred combination of multiple sliding suture or Cape configurations.
The extra system also deploys Anika has unique explain drives technology, which provides for much easier anchor insertion relative to competitive systems.
Actually it will be a cornerstone product in our sports medicine portfolio further establishing our presence in the ASC and hospital settings, where procedures, including rotator cuff repair in the shoulder and Achilles tendon repair in the foot and ankle are performed.
During the quarter. We also continued to increase exposure to the Anika story and product portfolio within the orthopedic surgeon community at industry Congresses, and meetings and as our medical education activities increased.
We have now trained 270 surgeons year to date in person on the safe and effective use of our products. This will continue to be a strategic focus area for anika as we introduce new products to new and existing customers.
Lastly in joint preservation I'm excited to say the tactics that are H, a enhanced bone void filler for insufficiency fractures and hardware augmentation.
The coveted Ace award for cutting edge innovation from the American Orthopedic Society of sports medicine, or the E. O S. S M last month.
This award from such a prestigious sports Medicine Society provides independent external validation and undercut underscores the innovation and value of using tax set for augmentation.
And our innovation regenerative platform more broadly.
When augmented with taxes that the pull out strength of suture anchors was shown to increase two folds in an osteoporotic bone model compared to suture anchor alone.
Well theres often interior bone quality that may complicate for example, a rotator cuff repair procedure and negatively impact outcomes are higher suture anchor pullout strike can help surgeons feel more confident in their soft tissue repairs.
Also during the quarter, we achieved a significant clinical trial milestone with the last patient in the Cingal pilot trial completing their final follow up.
As a reminder, cingal is our combination just go supplement and steroid injectable for both short and long term OA pain relief.
Sold in over 30 countries outside the U S. Today.
Anika embarked on this pilot study to help provide the necessary information to adequately designed a phase III pivotal trial, our clinical team is analyzing the data and we plan to do a data read out in the fall.
Now please turn to slide four for an update on our new product pipeline.
Our differentiated product portfolio continues to expand with new product launches planned for the remainder of the year and exciting products in development that include expansion of our regenerative platform that builds on Anika established technology, and which gives me anika the right to win and joint preservation that will result in revenue acceleration.
That has significant value creation runway.
I've already highlighted the progress, we're making with taxes that in the regenerative space on past calls, but I'd like to mention that the continued expansion of the taxes that franchise will enable us to increase the addressable market to well beyond $100 million by creating a new market for hardware augmentation and expanding our existing insufficiency fractures captisol.
Franchise with new products.
New indications and additions to the taxes that portfolio are now in development.
For our growing shoulder portfolio, you'll recall, we previously discussed three shoulder product imperatives that are driving our NPD focus with new products for sports medicine soft tissue fixation bone preserving implants, and regenerative rotator cuff repair.
In sports Medicine, the X twist fixation system received five 10-K clearance in Q2 as I mentioned earlier and we're on track for a limited market release this year.
Our regenerative rotator cuff repair system is also on track for five 10-K submission later this year.
This system will further build and establish anika shoulder portfolio, which as an innovative and winning offering in the a S. C will drive the growth. We are so excited about into next year and beyond.
Rotator cuff repair procedures represent one of the highest volume soft tissue procedures in the ASC setting, allowing us to access even more of this exciting market.
The extra a suture anchor offering in combination with the recently launched tactics that indication for augmenting suture anchor fixation, new shoulder implants, and the rotator cuff repair system are all positioned to build strength in synergy in our joint preservation portfolio, providing additional growth opportunities in the over 1 billion.
Shoulder market in the U S.
We also continue to be excited about our longer term opportunities to bring our highly fast single stage cartilage repair solution and cingal for short and long term knee OA pain relief to the U S with the timeline consistent with what we've stated previously.
This quarter, we made progress on both of these clinical development projects completing the last patient follow up in the Cingal trial and with continued enrollment in the Hyatt fast trial.
Please turn to slide five.
We're executing on our strategy to accelerate growth beyond 2022.
We have five key areas of focus for Anika. This year and I'm pleased to say that we're hitting our key 2022 milestones.
First we continue our U S market leadership position.
And the H E based OA pain management market with Monovisc in north of us generating cashflow for investment to grow.
We've made significant progress to strengthen our commercial organization to grow our sports medicine soft tissue repair bone preserving joined technologies and regenerative products on the market with an increasing focus on the ASC setting.
We streamlined our U S territories as we continue to develop a deeper understanding of strengths and opportunities with our hybrid U S sales organization and to drive focus.
We continue to advance our product portfolio. This year with additional 510 case to be filed new product introductions and enhancements of our existing products targeting tactics had expansion and shoulder solutions.
We have accelerated our in person medical education programs to train on a safe and effective use of our products and our increasing anecdotes presence in New York compete at community.
Lastly, we'll report out on the Cingal pilot trial in the fall.
Now I'll turn the call over to Mike for a review of our second quarter results along with our outlook for 2022, and then I'll wrap things up and we'll take questions Mike.
Thank you Cheryl.
Please turn to slide six.
I will now walk you through our financial results for the second quarter of 2022.
Total revenue for the quarter was $39 $7 million, an increase of 4% over the prior year.
Oh, 18 management revenues rose, 6% to $25 $7 million due primarily to growth internationally due both to procedural rebound as well as favorable order timing.
As a reminder, revenues in OA pain management can vary significantly on a quarterly basis based on ordering patterns by our partners and distributors in the United States and internationally more so over the last couple of years.
But that quarterly volatility generally stabilizes on an annual basis.
Our joint preservation and restoration revenue increased 2% from $11.9 million to $12 1 million as the business saw some recovery in procedure volume.
But that recovery was limited in the period due to continued staffing shortages and other market dynamics.
Our non orthopedic revenue was down slightly to $1.8 million compared to $1 9 million last year.
Our gross margin in the second quarter was 63% and includes the impact of $1.6 million of noncash acquisition related expenses from the 2020 acquisitions of Arthur surface and partners.
Our adjusted gross margin, which excludes the acquisition related expenses was 67% in the second quarter down.
Down from 70% last year, due primarily to unfavorable revenue mix year over year as well as the impact of operational inefficiencies from staffing and supply chain challenges.
From a spending standpoint, our research and development and SG&A expenses together totaled $28 $2 million in the second quarter, that's up 12% from $25 $3 million in the same period of 2021 as we continue investment in development of key products and expand our internal capabilities in support of.
Our growth objectives.
The growth in the quarter included increased sales related travel and medical education, which were largely largely curtailed last year as we emerge from restrictions on in person activities.
Spending in the quarter also included higher stock based compensation driven by the growth in personnel to support Anika strategic transformation.
Our net loss for the quarter was $2 $8 million or <unk> 20 per share compared to net income of $6 $5 million or <unk> 45 per share in the second quarter of last year.
Our prior year results included a noncash tax effected benefit of $98 million or <unk> 67 per share associated with the reduction in fair value of contingent consideration associated with our 2020 acquisitions.
Our adjusted net loss was $1 $6 million or 12 cents per share down compared to adjusted net income of $1 $4 million or nine cents per diluted share in the prior year.
And our adjusted EBITDA in the quarter was $4 $4 million down from $6 $1 million in the second quarter of last year.
The year over year decrease was primarily due to the lower adjusted gross margin in the quarter from unfavorable revenue mix and supply chain and staffing challenges and from our incremental investments to support our growth acceleration initiatives.
Lastly, with regards to our cash flow and capital structure, we generated operating cash of $3 $1 million for the quarter compared to $4 $3 million in the second quarter of last year.
And our capital expenditures in the quarter totaled $2 million.
Down from $2 $3 million last year.
Our balance sheet remained strong with $91 $4 million in cash and no outstanding debt at the end of the second quarter.
Please turn to slide seven.
Now I'd like to review, our financial outlook for fiscal year 2022.
We continue to expect full year 2022 total revenue growth toward the upper end of the guidance range of low to mid single digit percentage growth over 2021.
As a reminder, we raised our outlook toward the upper end of the range last quarter based on the favorable performance in OA pain management and non orthopedic revenues.
In line with our previous guidance, we expect joint preservation and restoration to be our fastest growing product family with full year revenue growth in the mid single to low double digit percent range over last year.
We continue to expect growth to accelerate in the second half of the year weighted largely to the fourth quarter, reflecting normal seasonality the expansion of our product portfolio, including the limited market release of <unk> and our focus on distributor optimization and overall sales execution.
Our guidance range also reflects the ongoing risks we mentioned previously associated with supply chain challenges staffing shortages and other market dynamics.
In OA pain management, we continue to expect low single digit percent growth over last year. We are encouraged by our first half performance in this more mature part of our business and we expect lower revenues in the second half of the year due to the favorable order timing from our partners and distributors in the U S and internationally that occurred in the first half of the year.
And our much smaller non orthopedic product family. We continue to expect revenues to decrease approximately 20% as compared to last year due primarily to higher results last year from last time buys of legacy products and order timing.
With regard to gross margin, we continue to expect adjusted gross margin for the year to be in the low to mid 60% range, reflecting ongoing risks associated with supply chain and staffing challenges.
With regard to spending we are continuing to fund critical growth investments in research and development programs, including those show outlined earlier, such as the key product launches supporting our accelerated growth.
And at the same time, we were funding investments in our commercial transformation, such as medical education industry events building, Anika brand and product awareness and system and process enhancements.
As a result of these targeted spending investments as well as the supply chain staffing challenges impacting gross margin. We continue to expect full year adjusted EBITDA margin to be in the low to mid single digits.
In summary in 2022, we are making the investments in new products and commercial execution to accelerate our growth in support of our multiyear targets of mid teens revenue growth, 70% adjusted gross margin and 20% adjusted EBITDA margin and at the same time, we're maintaining our strong financial position.
As our team remains laser focused on both our mission to restore active living and driving value creation for our stakeholders I will now turn the call back over to Joe.
Thanks, Mike.
Please turn to slide eight where I'll wrap up and then we'll take questions.
We're pleased to be reporting out with a solid financial and operational quarter, while still in the midst of a challenging macroeconomic environment.
Our commercial focus is increasing and our new product pipeline is on schedule as we remain excited to transform the business incur.
The increased in person engagement with customers at meetings and through training on the safe and effective use of our products.
To provide expanded access to our growing joint preservation portfolio as we live our mission to restore active living for people around the world.
And finally I can't end the call without thanking me Anika employees for their hard work and dedication as we continue our transformation, we're happy to take your questions now.
Ladies and gentlemen on the phones, if you would like to ask a question you may do so by pressing star one on your telephone keypad using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment.
Dar one for questions, we'll pause a moment to assemble the phone queue.
We'll take our first question from Jim Sidoti with Sidoti <unk> Company. Please go ahead.
Good afternoon, and thanks for taking the questions.
On the current quarter our SG&A.
SG&A workshops up by.
About $2 million.
That because of the increased travel or the increased.
Stock based compensation or combination of both.
Hi, Jim its Mike.
It is a combination of both of those things as I as I mentioned.
We're now seeing.
The medical education spending coming in the travel is picking up now that we can resume in person meetings, which is great news. We you know we also as.
As Sheryl mentioned, we now have our in person national sales meeting that occurred in July but.
Things are opening up which is good news, but we're starting to see that coming into SG&A expense. The other thing.
As you mentioned was the increased stock based compensation as you know over the last few years, there's been a lot of transition in leadership and putting in place the different people to.
To support the transformation of the company and so this quarter there weren't any forfeitures or other major things and offsetting some of the cost and so this is really a clean quarter to see those costs in the P&L and.
And that's what's reflected in the increased SG&A.
So is it reasonable to assume SG&A savings.
Sure.
At this level or maybe up slightly as John .
The quarters progress.
Yeah, I would expect SG&A will increase as I said.
When we look at the second half of the year, we are expecting acceleration in our joint preservation business.
And as you know that's our that's our direct part of our business where commissions are.
Part of that business, where you wouldnt see that to the same extent knee OA pain management and so as the sales are going up you'll see the SG&A going up in part so that as well as like I say things are opening up we're really laser focused on getting ready for the acceleration coming into 'twenty, three and beyond with these new products and.
And so yes, you will see an increase in spending.
Consistent with the guidance that we've given is it's no change in guidance.
Okay. So your your EBITDA goals long term include SG&A at or above the current level.
Absolutely, there's no change to our targets or trajectory or guidance in the quarter. Yes. This is al as we expected.
And your long term goal to double 2019 revenue.
I think it's now you know sometime around 2024 is that still.
Is that still in place.
Yeah, Jim the timing.
Timing that we talked about towards our multiyear targets has not changed at all so as we've said in the past the company had laid out those goals in 2019, originally planning to double the revenue from 2019 by within five years to 2024 at the beginning of this year. We said we were about three to four quarters behind that that Hasnt changed at all.
So we're right on track to where we expect it to be you know this was a very solid quarter for us right on par and that's why we didn't make any changes to our guidance and there is no change to our multiyear targets.
Yeah.
And so as things open up is it reasonable to expect the Detroit preservation business to start to accelerate over the next three or four quarters.
Yeah, Hi, Jim This is sheryl thanks for the question.
Yeah, we look at the you know the second half of this year to certainly let's start to show some acceleration there on the joint preservation side, primarily because you know we're we're continuing to look to to see things opening up although they didn't open up as much relative to the early.
Intervention in extremities space this quarter, but there's no doubt that that things are starting to tick up.
But we've also got you know increased training going on face to face, we see that going forward, making a difference and you know increased our sales execution and also a limited release of a new product here. This year that that's going to start to show up in the numbers too.
That's the <unk> product.
That is the ex twist products.
The extra week, Okay, Yep, alright, good guy.
Additional sorry go ahead.
No no I'm, sorry, how you're going to have to do.
I was going to say, we did get that additional indication protect us that so you know that in combination with X twist is something that we're really excited because those two those two products will be used together.
So there's good synergy there.
And you know.
Despite the investments you may continue.
To generate cash.
Or are you happy with the portfolio now or do you think you'd use some of that cash to add to it over the next three or four quarters.
Yeah, I mean, I think you know in terms of our organic investments that we're making.
You'll see what those look like on our new product development slide in our slide four in the deck in terms of any inorganic investments. We certainly have a strong balance sheet. We think that's a very positive thing in the current dynamic in which we all exist from a from an economic perspective, but we do continue to look.
For tuck in acquisitions, where we think there's a good fit with our portfolio, where we think you could add to the bag for our sales team and so yes. We you know we continue to look for those opportunities when when we think the financials and the valuations would make sense for us.
Okay.
Alright that was it for me thank you.
Great. Thanks, Jim.
We will take our next question from Mike Pitofsky with Barrington Research. Please go ahead.
Hi.
I guess the question I didn't quite catch the nuance of the distributor disruption that you all alluded to can you can you drill down on that a little bit.
Sure Hi, Mike It's Sheryl. Thanks for the question Yeah, you know as as can happen with a hybrid sales force that uses independent distributors as as we've talked about is the composition of our U S sales force.
From time to time, you can see some district distributor disruption you know, there's an advantage to that structure, because you're you're not carrying the significant fixed costs that it would take the disadvantages mixed from time to time, you can see a little disruption and we saw that from an acquisition by a major competitor of.
<unk> of another competitor back in the 2020 timeframe and that started to flow through this quarter are the good news is that you know we anticipated. It we saw it coming we signed a new distributors and we look to have them continuing to increase their productivity throughout the rest of this year.
Okay, and then I think Mike May have made.
Two distributor optimization.
That to me.
Like.
You rationalize some of these.
Groups Youre working with or maybe not I don't can you can you sort of define what that means.
Sure I mean, I think there's always opportunity again with a with a hybrid sales force like this to make sure that we have the right distributors that they're focused on the right things that they.
Are able to represent the product lines that we have and that we're continuing to develop and especially as we launch new products, where we're always sort of doing a gut check to ensure that we're optimizing our distribution network.
We also mentioned that that we had done some streamlining of our existing geography. So there there will be as you see going forward continued focus on commercial execution and ensuring that we have the right people driving that focus.
And can I ask just an updated updated figure a rough figure on how many internal sales folks you have and then how many distributors you are currently using.
Yeah from our direct employee perspective that hasn't changed materially it's it's a little over 30 and from our our independent distributors. It's it's still a number that's over 100.
Would you expect to hit last question on this I promise you expect like a year from now.
And that number is lower.
I would expect us to continue to again to dig in and look at our new product portfolio and continue to optimize the construct of that organization.
Alright, I guess in terms of the.
Cingal readout I mean would you expect.
Sort of.
Release from you guys prior to next quarters.
Conference call, which I assume would be somewhere around November 1st or thereabouts. I mean would you expect to have something on that before that conference call or or with a conference call or or more likely after.
I mean, we talked about having a read out in the fall I I would fully expect that we'll be talking about it on on that next conference call.
Alright so.
What you see looks strong.
Are there ongoing or are there conversations regarding partnering the pivotal.
Or do you expect to do that yourselves.
So you know on the Cingal topic first of all we're really excited to get to that read out you know that's been a significant investment that the company has made we're excited to be where we are with that and I think you know when we get to the point in the fall of talking about the readout will will be at a.
Point, where we can talk about sort of next steps with that but we're excited to get to that point. We're excited that we're done with that trial and analyzing the data.
Okay last question for me.
Mike you alluded to.
Most of sort of the pickup in joint preservation in Q4, and as I'm looking at sort of my model. It looks like you have an easy comp in Q3, I guess my question would be.
If youre not going to see much before Q4 is that a result of the fact, you guys are sort of working through the distributor.
Issue or Y Y O y.
Seemingly an easy comp in Q3 wouldn't you.
Be able to move the needle on that on that business.
Hi, Mike Yeah, no great question.
One of the things we are definitely focused on a strong Q4, driven by you know a few key drivers one dx twist launch or in limited market release. There. The continued traction in the sales force normal seasonality and I think normal seasonality is a really important dynamic.
As you know in orthopedics in the summer months things can be softer and quieter as is its people delay elective procedures in a later and that's why the fourth quarter I think for everybody. In this space are so strong. So you know that aligns with the limited market release and all of the momentum in all of these things you know the things that are driving the sales growth include.
US being back with in person meetings, driving the training on safe and effective use of our products and those things take time to come in so I think.
We do.
<unk> growth in the third quarter, we're excited for the trajectory that we're going.
We're just saying you know as you do your modeling you know Rob has come in here he's new he's coming in as Sheryl said, he's realigned territories. We just had some distributed changeovers and whatnot people are ramping up and getting up to speed and so you know because all the work that we're doing right now is really laser focused toward that acceleration in 'twenty three and beyond.
As we focus on those multiyear targets and so we do expect acceleration. This year, we're very excited about the direction things are going, especially as we focus on that one anika portfolio instead of the different discrete discrete elements and so.
We're just trying to make it as clear as possible that you know what.
Just the normal seasonality is one of the key drivers in and.
And so that's what's behind our guide at this point.
Thanks, a lot I appreciate it.
Thanks, Mike.
As a reminder, star one for questions. Please make sure to mute function on your phone is turned off so the signal can be red bar equipment.
Darwin for questions, we'll pause a moment to assemble the queue.
And Thats star one for questions or comments please.
This will conclude today's question and answer session. At this time I'd like to turn the conference back to your presenters for any additional or closing remarks.
Thank you all very much for your attention and interest in Anika. We look forward to speaking next on our third quarter call in November have a great night everybody.
Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.
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