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ANIK > SEC Filings for ANIK > Form 10-Q on 6-Aug-2013All Recent SEC Filings

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Form 10-Q for ANIKA THERAPEUTICS INC


6-Aug-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements regarding:

? Our expectations regarding future sales and product revenue, including geographic expansions, possible retroactive price adjustments, and expectations of unit volumes or other offsets to price reductions, for our products;

? Our manufacturing capacity and efficiency gains and work-in-process manufacturing operations;

? The timing, scope and rate of patient enrollment for clinical trials;

? The development of possible line extensions and new products;

? Our ability to achieve or maintain compliance with laws and regulations;

? The timing of and/or receipt of Food and Drug Administration, foreign or other regulatory approvals, clearances, and/or reimbursement approvals and changes of current, new or potential products, and any limitations on such approvals and/ changes;

? Our intention to seek patent protection for our products and processes, and protect our intellectual property;

? Our ability to effectively compete against current and future competitors;

? Negotiations with potential and existing partners, including our performance under any of our existing and future distribution or supply agreements or our expectations with respect to sales and sales threshold milestones pursuant to such agreements;

? The level of our revenue or sales in particular geographic areas and/or for particular products, and the market share for any of our products;

? Our current strategy, including our corporate objectives, research and development, and collaboration activities;

? Our and Bausch & Lomb's performance under the non-exclusive supply agreement for AMVISC® and AMVISC® Plus ophthalmic viscoelastic products that expires on December 31, 2014, and our expectations regarding revenue generated from ophthalmic products;

? Our ability to commercialize AnikaVisc and AnikaVisc Plus, and our expectations regarding such commercialization and the potential revenue generated thereby;

? Our expectations regarding our orthobiologics products, including expectations regarding new products, expanded uses of existing products, new distribution partnerships, and revenue growth;

? Our intention to increase market share for our orthobiologics products in international and domestic markets or otherwise penetrate growing markets for osteoarthritis of the knee and other joints;

? Our expectations regarding next generation osteoarthritis/orthobiologics product developments, clinical trials, regulatory approvals and commercial launches;

? Our ability to license our aesthetics product to new distribution partners domestically and internationally; our ability, and the ability of our distribution partners, to market our aesthetic dermatology product; and our expectations regarding the distribution and sales of our HYDRELLE™/ELEVESS™ products and the timing thereof;

? Our expectations regarding our existing aesthetics product line's extensions;


? Our expectations regarding product gross margin and profit;

? Our expectations regarding U.S. MONOVISCTM and the results of the related premarket approval ("PMA") filing with the FDA, including our PMA amendment in connection with recent discussions with the FDA following their rejection of our appeal of the non-approvable letter, and the likelihood of our obtaining such approval and/or the anticipated timing thereof;

? Our expectations regarding the completion of CINGAL™ clinical trial, including the expense associated therewith, and our ability to obtain regulatory approvals for CINGAL;

? Our expectation for changes in operating expenses, including research and development and selling, general and administrative expenses;

? The rate at which we use cash, the amounts used and generated by operations, and our expectation regarding the adequacy of such cash;

? Our expectation for capital expenditures spending and future amounts of interest income and expense;

? Our ability to continue streamlining operations and improving our manufacturing activities and general business operations;

? Possible negotiations or re-negotiations with existing or new distribution or collaboration partners;

? Our ability to remain in compliance with debt covenants;

? Our ability to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and other sources, to the extent our current sources of funds are insufficient;

? Our ability to successfully complete the restructuring of Anika S.r.l., including the closing of the tissue engineering facility in Abano Treme, Italy, and manage its operation from one with losses, into a company generating profits;

? Our abilities to effectively commercialize the many research and development projects underway;

? Our ability to obtain U.S. approval for the orthopedic and other product franchises of Anika S.r.l., including the timing and potential success of such efforts, and to expand sales of these products in the U.S., including the impact such efforts may have on our revenue;

? Our ability to satisfactorily resolve the dispute with Fidia Farmaceutici S.p.A regarding the Merogel Injectable product; and

? Our ability to successfully defend the Company against lawsuits and claims, including the Genzyme lawsuit, and the uncertain financial impact such lawsuits and claims and related defense costs may have on the Company.

Furthermore, additional statements identified by words such as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could," and other expressions that are predictions of or indicate future events and trends and which do not relate to historical matters, also identify forward-looking statements.

You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control, including those factors described in the section titled "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2012. These risks, uncertainties and other factors may cause our actual results, performance or achievement to be materially different from anticipated future results, performance or achievement, expressed or implied by the forward-looking statements. These forward-looking statements are based upon the current assumptions of our management and are only expectations of future results. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences, including those factors discussed herein and in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of this Quarterly Report on Form 10-Q, as well as the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2012 and in our press releases and other filings with the Securities and Exchange Commission. We undertake no obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors of new information, future events or other changes.


Management Overview

Anika Therapeutics, Inc. (together with its subsidiaries, "Anika," the "Company," "we," "us," or "our") develops, manufactures and commercializes therapeutic products for tissue protection, healing, and repair. These products are based on hyaluronic acid ("HA"), a naturally occurring, biocompatible polymer found throughout the body. Due to its unique biophysical and biochemical properties, HA plays an important role in a number of physiological functions such as the protection and lubrication of soft tissues and joints, the maintenance of the structural integrity of tissues, and the transport of molecules to and within cells.

Anika's proprietary technologies for modifying the HA molecule allow product properties to be tailored specifically to therapeutic use. Our patented technologies chemically modify the HA molecule to allow for longer residence time in the body. Anika Therapeutics, Inc.'s wholly-owned subsidiary, Anika Therapeutics S.r.l., has over 20 products currently commercialized, primarily in Europe. These products are also all made from hyaluronic acid, based on two technologies: "HYAFF", which is a solid form of HA, and ACP gel, an autocross-linked polymer of HA. Both technologies are protected by an extensive portfolio of owned and licensed patents. We offer therapeutic products from these aforementioned technologies in the following areas:

                                                    Anika  Anika
                                                           S.r.l.
                Orthobiologics                        X      X
                Dermal
                  Advanced wound care                        X
                  Aesthetic dermatology               X
                Surgical
                  Anti-adhesion                       X      X
                  Ear, nose and throat care ("ENT")          X
                Ophthalmic                            X
                Veterinary                            X

In December 2012 the Company announced the closure of its tissue engineering facility in Abano Terme, Italy due to the inability to meet strict regulatory standards established by the European Medicines Agency ("EMA") for Advanced Therapy Medicinal Products ("ATMP") (cell based) products that were effective January 1, 2013. The Company adopted a restructuring plan which includes a reduction-in-force of 12 people and provides for severance payments and the disposal of related supplies, equipment, and other assets. The plan was intended to improve the efficiency and financial performance of the Company's Italian operations by reducing costs and focusing on products and technology with strong commercial potential. We are substantially completed with the implementation of the restructuring plan as of June 30, 2013.

Historically, a significant portion of the Company's accounts receivable, arising from product sales within Italy by Anika S.r.l., were due from public hospitals or other government-funded healthcare agencies. As of June 30, 2013, the Company's accounts receivable from all Italian customers totaled approximately $1.2 million, of which public hospital or agency receivables were approximately $0.3 million, as compared to accounts receivable from all Italian customers of approximately $2.6 million, of which public hospital or agency receivables totaled approximately $1.6 million, at June 30, 2012.

Please see Management's Discussion and Analysis of Financial Condition and Results of Operations-Management Overview (Item 7) to the Company's Annual Report on Form 10-K for the year ended December 31, 2012, for a description of each of the above therapeutic areas, including the individual products.

Research and Development

Anika's research and development efforts primarily consist of the development of new medical applications for our HA-based technologies, the management of clinical trials and studies for certain product candidates, the preparation and processing of applications for regulatory approvals or clearances at all relevant stages of product development, and process development and scale-up manufacturing activities relative to our existing and new products. Our development focus includes products for tissue protection, healing and repair. Our investment in R&D varies considerably depending on the number and size of clinical trials and studies underway. We anticipate that we will commit significant resources to research and development, including clinical trials, in the future.


Two key products currently under development or regulatory review include MONOVISC for U.S. marketing approval and CINGAL. Our first next generation osteoarthritis product is MONOVISC, a single-injection treatment product that uses a non-animal source HA. MONOVISC is also our first osteoarthritis product based on our proprietary cross-linked HA-technology. We received Conformité Européenne ("CE") Mark approval for the MONOVISC product in October 2007, and began sales in Europe during the second quarter of 2008, following a small, post-marketing clinical study. In the U.S., we filed the final module of our MONOVISC PMA containing the clinical data in December 2009. We were informed that there were deficiencies in our submissions through a deficiency/non-approvable letter. In December 2012, the FDA upheld its non-approvable decision following our appeal. Subsequent to that decision, in February 2013, the Company submitted a new PMA amendment which is under review by the FDA. The Company continues to discuss pathways for MONOVISC approval with the FDA.

Our second single-injection osteoarthritis product under development is CINGAL, which is based on our hyaluronic acid material with an added active therapeutic molecule designed to provide broad pain relief for a longer period of time. We have completed the formulation and biocompatibility studies of the product. During the second quarter of 2013, we commenced the clinical trial to obtain the needed clinical data for a CE Mark submission and approval.

The technologies obtained through our acquisition of Anika S.r.l. have enhanced our research and development capabilities, and our pipeline of candidate products. Anika S.r.l. has research and development programs for products including Hyalofast, an innovative, biodegradable support for human bone marrow mesenchymal stem cells used in connection with soft tissue regeneration; Hyalospine, an adhesion prevention gel for use after spinal surgery; Hyalobone, a bone tissue filler; and Hemostatic Patch, a resorbable hemostatic pad for bleeding control and hemostasis promotion in various surgical procedures.

Litigation and Other Legal Matters

On July 7, 2010, Genzyme Corporation ("Genzyme") filed a complaint against the Company in the United States District Court for the District of Massachusetts seeking unspecified damages and equitable relief. The Complaint alleges that the Company has infringed U.S. Patent No. 5,143,724 by manufacturing MONOVISC in the United States for sale outside the United States and will infringe U.S. Patent Nos. 5,143,724 and 5,399,351 if the Company begins manufacture and sale of MONOVISC in the United States. On August 30, 2010, the Company filed an answer denying liability. On April 26, 2011, Genzyme filed a motion to add its newly-issued U.S. Patent No. 7,931,030 to this litigation and also filed a separate new complaint in the District of Massachusetts alleging that the Company's manufacture and sale of MONOVISC in the United States will infringe that patent. On May 23, 2011, the Court entered orders permitting Genzyme to file its supplemental complaint adding its newly-issued U.S. Patent No. 7,931,030 to this litigation and requiring Genzyme to withdraw its separately filed complaint. On July 14, 2011, the Company filed an answer to the supplemental complaint, denying liability. On May 10, 2012, Genzyme dismissed its claim of infringement of U.S. Patent No. 5,399,351 and is no longer asserting that patent against the Company. The Company believes that neither MONOVISC, nor its manufacture, does or will infringe any valid and enforceable claim of the asserted patents. Management has assessed and determined that contingent losses related to this matter are not probable. Therefore, pursuant to ASC 450, Contingencies, an accrual has not been recorded for this loss contingency. Pursuant to the terms of the licensing and supply agreement entered into with Depuy Mitek, Inc. in December 2011, DePuy Mitek agreed to assume certain obligations of the Company related to this litigation. On August 3, 2012, a jury in the United States District Court for the District of Massachusetts held U.S. Patent No. 7,931,030 invalid as obvious and not infringed in litigation between Genzyme and Seikagaku Corporation, Zimmer Holdings Inc., Zimmer, Inc. and Zimmer U.S., Inc. concerning the Gel-One product. On September 19, 2012, Genzyme and the Company jointly requested that the Court stay Genzyme's lawsuit against the Company pending the full resolution of the Seikagaku/Zimmer lawsuit, including through any appeal of the judgment entered in that lawsuit. The District Court granted the motion on September 28, 2012.

In 2011, Merogel Injectable was withdrawn from the market due to a labeling error on the product's packaging, discovered by the Company. We settled the matter related to this dispute with Medtronic in August, 2012. This labeling error related to conduct that initially occurred prior to our acquisition of Anika S.r.l. from Fidia Farmaceutici S.p.A. and, as a result, we have made claims against Fidia for indemnification for Anika's losses related to this issue. Fidia has informed us that it does not believe that it has liability for this matter, and has asserted a counterclaim against Anika for failing to consent to the release of the remaining shares held in escrow upon the closing of the Anika S.r.l. acquisition. We have begun an arbitration process with Fidia in the London Court of International Arbitration to resolve the matter. Management has assessed Fidia's claims and determined that contingent losses related to this matter are not probable. Therefore, pursuant to ASC 450, Contingencies, an accrual has not been recorded for this loss contingency.

We are also involved in various other legal proceedings arising in the normal course of business. Although the outcomes of these other legal proceedings are inherently difficult to predict, we do not expect the resolution of these other legal proceedings to have a material adverse effect on our financial position, results of operations or cash flow.


Results of Operations

   Three and Six Months Ended June 30, 2013 Compared to the Three and Six Months Ended June 30, 2012

                                  Three Months Ended June 30,                                         Six Months Ended June 30,
                                                                 $                %                                                 $                %
                              2013             2012          Inc/(Dec)        Inc/(Dec)          2013             2012          Inc/(Dec)        Inc/(Dec)
Product revenue          $ 20,067,407     $ 18,882,277     $  1,185,130              6 %    $ 34,561,896     $ 32,495,605     $  2,066,291              6 %
Licensing, milestone
and contract revenue          760,970          742,492           18,478              2 %       1,513,492        1,489,824           23,668              2 %
Total revenue              20,828,377       19,624,769        1,203,608              6 %      36,075,388       33,985,429        2,089,959              6 %

Operating expenses:
Cost of product
revenue                     6,311,332        8,084,226       (1,772,894 )          (22 %)     11,152,502       14,497,707       (3,345,205 )          (23 %)
Research & development      1,829,052        1,298,170          530,882             41 %       3,411,962        2,831,273          580,689             21 %
Selling, general &
administrative              3,400,679        4,108,503         (707,824 )          (17 %)      7,347,793        7,459,519         (111,726 )           (1 %)
Restructuring charges        (111,178 )              -         (111,178 )          N/M          (246,785 )              -         (246,785 )          N/M
Total operating
expenses                   11,429,885       13,490,899       (2,061,014 )          (15 %)     21,665,472       24,788,499       (3,123,027 )          (13 %)
Income from operations      9,398,492        6,133,870        3,264,622             53 %      14,409,916        9,196,930        5,212,986             57 %
Interest income
(expense), net                (36,381 )        (49,129 )         12,748            (26 %)        (75,939 )       (100,332 )         24,393            (24 %)
Income before income
taxes                       9,362,111        6,084,741        3,277,370             54 %      14,333,977        9,096,598        5,237,379             58 %
Provision for income
taxes                       3,467,219        2,347,873        1,119,346             48 %       5,371,083        3,447,611        1,923,472             56 %
Net income               $  5,894,892     $  3,736,868     $  2,158,024             58 %    $  8,962,894     $  5,648,987     $  3,313,907             59 %
Product gross profit       13,756,075       10,798,051        2,958,024             27 %      23,409,394       17,997,898        5,411,496             30 %
Product gross margin               69 %             57 %                                              68 %             55 %

Product Revenue

Product revenue for the quarter ended June 30, 2013 was $20,067,407, an increase of 6%, as compared to $18,882,277 for the quarter ended June 30, 2012. Product revenue for the six months ended June 30, 2013 was $34,561,896, an increase of 6%, as compared to $32,495,605 for the six months ended June 30, 2012. The second quarter increase was primarily driven by a strong quarter for our orthobiologics franchise, in particular the Orthovisc product, both domestically and internationally, which was offset by the anticipated decrease in Opthalmic sales.

The following table presents product revenue by group for the three and six-month periods ended June 30, 2013 and 2012:

                             Three Months Ended June 30,         Increase (Decrease)
                                2013              2012              $              %
         Orthobiologics   $   16,506,226     $ 10,903,364     $  5,602,862        51 %
         Dermal                  557,059          155,735          401,324       258 %
         Surgical              1,830,022        1,464,505          365,517        25 %
         Ophthalmic              464,340        5,299,732       (4,835,392 )     (91 %)
         Veterinary              709,760        1,058,941         (349,181 )     (33 %)
                          $   20,067,407     $ 18,882,277     $  1,185,130         6 %



                              Six Months Ended June 30,         Increase (Decrease)
                                2013             2012              $              %
          Orthobiologics   $ 27,789,773     $ 21,020,209     $  6,769,564        32 %
          Dermal                798,643          657,051          141,592        22 %
          Surgical            2,818,886        2,448,133          370,753        15 %
          Ophthalmic          1,392,798        6,623,726       (5,230,928 )     (79 %)
          Veterinary          1,761,796        1,746,486           15,310         1 %
                           $ 34,561,896     $ 32,495,605     $  2,066,291         6 %


Orthobiologics

Our orthobiologics franchise consists of our joint health and orthopedic products. Overall, sales increased 51% and 32% for the three and six months ended June 30, 2013, respectively, compared to the same periods in 2012, primarily due to DePuy Mitek's continued market penetration efforts in the U.S. for ORTHOVISC, combined with strong year-over-year increases in international sales of our viscosupplementation products ORTHOVISC and MONOVISC. The improvement in international product revenue was primarily due to increased sales in Europe and the Middle East. As previously disclosed, we expect joint health product revenue to increase in 2013 as compared to 2012, both domestically and internationally.

Dermal

Our dermal franchise consist of advanced wound care products and aesthetic dermal fillers. Overall, dermal product sales increased 258% and 22% for the three and six-month periods ended June 30, 2013, respectively, to $557,059 and $798,643, driven by increase in advanced wound care product revenue in Europe and Latin America, and higher sales of our aesthetic product to our international distributors due to order timing. Anika's advanced wound care products treat complex skin wounds ranging from burns to diabetic ulcers and leading products include Hyalomatrix and Hyalofill. During the first quarter of 2013, we terminated our U.S. distribution agreement with Misonix for Hyalomatrix. We are actively working on a new domestic commercialization strategy. For the full year 2013, we expect revenue from our dermal products to increase from 2012.

Surgical

Our surgical franchise consists of products used to prevent post-surgical adhesions in abdominal, spinal, and ear, nose and throat ("ENT") disorders. Sales of our surgical products increased 25% and 15% to $1,830,022 and $2,818,886 for the three and six-month periods ended June 30, 2013, respectively, as compared to the same periods in 2012. Our anti-adhesion products include Hyalobarrier and INCERT. The increases in both three and six-month periods ended June 30, 2013 were primarily due to higher Hyalobarrier revenue in Europe. Sales of our ENT products sold through our worldwide partner, Medtronic, increased 11% for the six-month period ended June 30, 2013, as compared to the same period in the prior year, primarily due to the re-launch of a compliant version of Merogel Injectable in the U.S. in February 2013.

Ophthalmic

Our ophthalmic franchise consists of HA viscoelastic products used in ophthalmic surgery. Ophthalmic product sales decreased 91% and 79% to $464,340 and $1,392,798 for the three and six month-periods ended June 30, 2013, respectively, as compared to the same periods in 2012. The decreases were primarily attributable to decreased sales to B&L. During the second quarter of 2012, we had approximately $5 million of ophthalmic revenue from B&L as a result of their significantly higher than expected demand. As previously disclosed, the overall ophthalmic revenue will be lower in 2013 compared to 2012, under the terms of the current Bausch & Lomb supply agreement.

Veterinary

Veterinary revenue from HYVISC decreased 33% to $709,760 and increased 1% to $1,761,796 for the three and six-month periods ended June 30, 2013, respectively. The variations were primarily due to order timing by our distribution partner, Boehringer Ingelheim Vetmedica. We expect overall HYVISC revenue for 2013 to be at a higher level compared to 2012's revenue for this product.

Licensing, milestone and contract revenue

Licensing, milestone and contract revenue for the three and six-month periods ended June 30, 2013 was $760,970 and $1,513,492, respectively, as compared to $742,492 and $1,489,824, respectively, for the same periods in 2012. Licensing and milestone revenue includes the ratable recognition of the $27,000,000 in up-front and milestone payments related to the U.S. distribution agreement with Depuy Mitek received in 2004. These amounts are being recognized in income over the ten-year expected life of the agreement, or $2,700,000 per year. In December 2011, the Company entered into a fifteen-year licensing and supply agreement with DePuy Mitek to market MONOVISC in the U.S. The Company received an initial payment of $2,500,000 in December 2011, which is being recognized ratably over the fifteen year term of that agreement.

Product gross profit and margin

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