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ANIK > SEC Filings for ANIK > Form 10-Q on 5-Nov-2013All Recent SEC Filings

Show all filings for ANIKA THERAPEUTICS INC

Form 10-Q for ANIKA THERAPEUTICS INC


5-Nov-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 future sales and product revenue, including geographic expansions, possible retroactive price adjustments, and expectations of unit volumes or other offsets to price reductions;

· 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 new and line-extension products;

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

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

· Our intention to seek patent protection for our products and processes, and our ability to 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 and research and development and collaboration opportunities;

· 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 joint health products, including expectations regarding new products, expanded uses of existing products, new distribution and revenue growth;

· Our intention to increase market share for joint health 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/joint health product developments, clinical trials, regulatory approvals and commercial launches;

· Our expectations regarding revenue from sales of HYVISC®;

· Our ability to license our aesthetics product to new distribution partners domestically and outside of the United States;

· 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 ELEVESSTM product and the timing thereof;

· Our expectations regarding development of aesthetics product line extensions;


· Our expectations regarding product gross margin;

· Our expectations regarding our U.S. MONOVISC premarket approval ("PMA") filing with the FDA, including the escalation of the appeal process with the FDA and the outcome of FDA's review of the additional information requested from us, and the likelihood of our obtaining such approval and/or the anticipated timing thereof;

· Our expectations regarding CINGAL™, including the expense associated therewith, and our ability to obtain regulatory approvals for this product;

· 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;

· 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 manage Anika S.r.l.'s operations from one with losses, into a company generating profits;

· The strength of the economies in which the Company operates or will operate, as well as the political stability of any of those geographic areas;

· Our ability to effectively prioritize 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; 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 EMA for Advanced Therapy Medicinal Products ("ATMP") (cell based) products that were effective January 1, 2013. The Company adopted a restructuring plan which included a reduction-in-force of 12 people and provided 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 were substantially completed with the implementation of the restructuring plan as of June 30, 2013.

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 and July 2013, the Company submitted PMA amendments. The latest amendment is under review by the FDA. The Company continues to discuss pathways for MONOVISC approval with the Agency.


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, and to support other product registrations including in the United States.

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, and Hyalospine, an adhesion prevention gel for use after spinal surgery.

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 District 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 District 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 September 2013, the District Court in the Seikagaku/Zimmer lawsuit issued an order denying all the post-trial motions in the case, except for Seikagaku/Zimmer's motion for damages against Genzyme. On October 14, 2013, Genzyme filed a notice of appeal to the United States Court of Appeals for the Federal circuit challenging the District Court's judgment of invalidity and non-infringement. The appeal is currently pending. As to Seikagaku/Zimmer's motion for damages, the District Court held a scheduling conference on October 30, 2013 and issued a scheduling order on October 31, 2013.

In 2011, Merogel Injectable was voluntarily withdrawn from the market due to a labeling error on the product's packaging. 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. ("Fidia") and, as a result, we made claims against Fidia for indemnification for Anika's losses related to this issue. Fidia maintained that it did not have liability for this matter, and 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. The Company reached agreement with Fidia in October 2013 to settle this matter without admission of liability by either party in return for a payment made by Fidia to the Company. As a result of the settlement, the arbitration with Fidia pending before the London Court of International Arbitration has been withdrawn, and shares previously held in escrow have been released.

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 Nine Months Ended September 30, 2013 Compared to the Three and Nine
                        Months Ended September 30, 2012

                                                   Three Months Ended September 30,                     Nine Months Ended September 30,

                                                 2013              2012          Inc/(Dec)           2013              2012          Inc/(Dec)
Product revenue                             $   17,023,346     $ 14,055,440              21 %    $  51,585,242     $ 46,551,045              11 %
Licensing, milestone and contract revenue          731,092          711,171               3 %        2,244,584        2,200,995               2 %
Total revenue                                   17,754,438       14,766,611              20 %       53,829,826       48,752,040              10 %

Operating expenses:
Cost of product revenue                          5,377,568        7,221,028             (26 %)      16,530,070       21,718,735             (24 %)
Research & development                           1,618,012        1,217,086              33 %        5,029,974        4,048,359              24 %
Selling, general & administrative                3,188,669        3,601,737             (11 %)      10,536,462       11,061,256              (5 %)
Restructuring charges                             (196,084 )              -             N/M           (442,869 )              -             N/M
Total operating expenses                         9,988,165       12,039,851             (17 %)      31,653,637       36,828,350             (14 %)
Income from operations                           7,766,273        2,726,760             185 %       22,176,189       11,923,690              86 %
Interest income (expense), net                     (32,816 )        (45,161 )           (27 %)        (108,755 )       (145,493 )           (25 %)
Income before income taxes                       7,733,457        2,681,599             188 %       22,067,434       11,778,197              87 %
Provision for income taxes                       2,776,199        1,036,349             168 %        8,147,282        4,483,960              82 %
Net income                                  $    4,957,258     $  1,645,250             201 %    $  13,920,152     $  7,294,237              91 %
Product gross profit                        $   11,645,778     $  6,834,412              70 %    $  35,055,172     $ 24,832,310              41 %
Product gross margin                                    68 %             49 %                               68 %             53 %

Product Revenue

Product revenue for the quarter ended September 30, 2013 was $17,023,346, an increase of 21%, as compared to $14,055,440 for the quarter ended September 30, 2012. Product revenue for the nine months ended September 30, 2013 was $51,585,242, an increase of 11%, as compared to $46,551,045 for the nine months ended September 30, 2012. The increases in each of the three and nine-month periods were primarily driven by an increase in sales of our Orthobiologics products, as compared to the same periods in the prior year, when we experienced the previously-disclosed temporary scale-up issue at our Bedford, MA manufacturing facility. For the three and nine months ended September 30, 2013, increases in sales of Orthobiologics products were partially offset by the expected decline in sales of our Ophthalmic product line, as compared to the same periods in the prior year.

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

                   Three Months Ended September 30,          Increase (Decrease)
                       2013                  2012                $              %
Orthobiologics   $      12,830,566       $   9,242,783     $    3,587,783        39 %
Dermal                     267,766             376,251           (108,485 )     (29 %)
Surgical                 1,136,248           1,426,273           (290,025 )     (20 %)
Ophthalmic               1,425,609           1,891,433           (465,824 )     (25 %)
Veterinary               1,363,157           1,118,700            244,457        22 %
                 $      17,023,346       $  14,055,440     $    2,967,906        21 %



                   Nine Months Ended September 30,           Increase (Decrease)
                       2013                 2012                 $              %
Orthobiologics   $     40,620,339       $  30,262,991     $    10,357,348        34 %
Dermal                  1,066,409           1,033,302              33,107         3 %
Surgical                3,955,134           3,874,405              80,729         2 %
Ophthalmic              2,818,407           8,515,160          (5,696,753 )     (67 %)
Veterinary              3,124,953           2,865,187             259,766         9 %
                 $     51,585,242       $  46,551,045     $     5,034,197        11 %


Orthobiologics

Our Orthobiologics franchise consists of our joint health and orthopedic products. Overall, sales increased 39% and 34% for the three and nine months ended September 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 Canada. The growth rates in the three and nine-month periods ended September 30, 2013 are not indicative of fourth quarter and full year results for 2013 due to several factors, including the deferral of revenue from the third quarter to the fourth quarter of 2012 as a result of the temporary scale-up issue at our Bedford, MA manufacturing facility, as well as any potential inventory management order activity by DePuy Mitek. Overall, we expect Orthobiologics product revenue to increase in 2013 as compared to 2012, both domestically and internationally.

Dermal

Our dermal franchise consists of advanced wound care products and aesthetic dermal fillers. Overall, dermal product sales decreased 29% for the three-month period ended September 30, 2013 to $267,766, as compared to the same period in 2012. Sales of this product franchise increased 3% for the nine-month period ended September 30, 2013 to $1,066,409, as compared to the same period ended in 2012, driven by increases in advanced wound care product revenue in Europe and Latin America, offset by lower sales of our aesthetic product due to order timing by our international distributors. Anika's advanced wound care products treat complex skin wounds ranging from burns to diabetic ulcers, with Hyalomatrix and Hyalofill as lead products. During the first quarter of 2013, we terminated our U.S. distribution agreement with Misonix for Hyalomatrix and 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-pelvic, spinal, and ear, nose and throat ("ENT") disorders. Sales of our surgical products decreased 20% for the three-month period ended September 30, 2013 to $1,136,248, as compared to the same period ended in 2012, due primarily to order timing of our Hyalobarrier product by our European and Asian partners. Sales of this product franchise increased 2% for the nine-month period ended September 30, 2013 to $3,955,134 primarily due to sales of our ENT products to our worldwide partner, Medtronic, resulting from 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 25% and 67% to $1,425,609 and $2,818,407 for the three and nine month-periods ended September 30, 2013, respectively, as compared to the same periods in 2012. The decreases were primarily attributable to the anticipated sales decline with B&L to contractually dictated minimum purchase levels. During the nine-month period ended September 30, 2012, we had approximately $7.7 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, as compared to 2012, under the terms of the current Bausch & Lomb supply agreement.

Veterinary

Veterinary revenue from HYVISC increased 22% and 9% to $1,363,157 and $3,124,953 for the three and nine-month periods ended September 30, 2013, respectively, as compared to the same period in 2012. 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 that of 2012.

Licensing, milestone and contract revenue

Licensing, milestone and contract revenue for the three and nine-month periods ended September 30, 2013 was $731,092 and $2,244,584, respectively, as compared to $711,171 and $2,200,995, 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.

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