Anika Therapeutics, Inc. (ANIK) Earnings Call Transcript & Summary

Good morning, and thank you for coming to the 2020 Virtual UBS Global Healthcare Conference. My name is Mallet Njonkem, and I'm happy to be your host for this session. Our next presenter will be Dr. Cheryl Blanchard, President and CEO; and Sylvia Cheung, Chief Financial Officer from Anika Therapeutics. A Q&A session will follow immediately after the presentation. [Operator Instructions] We now turn it over to Cheryl and Sylvia. Thank you.

Thank you, Mallet. Good morning, everybody. I'd like to thank the UBS team for giving us the opportunity to present today, and I'd also like to thank everybody on the line listening in for your interest in Anika. I'm Cheryl Blanchard, Anika's President and CEO; and with me on the call today is our CFO, Sylvia Cheung, and we're both very excited to speak with you today about Anika. So if we want to look at Slide 2, I'm going to just sort of walk everybody through the slides today, so we can stay in sync in the virtual setting that we're all operating in. Before I begin, I'd like to remind you that any forward-looking statements I might make today should be considered within the context of the safe harbor. So if we want to dig into the meat of things on Slide 3, we've got a slide here just kind of summarizing our investment thesis as a company. I can point a few things out here. Anika has got a strong track record of delivering innovative therapies to the orthopedic community. And recently, we evolved into a global commercial company focused on joint preservation and restoration. Our innovative therapies have improved the lives of millions in over 75 countries for a number of years. We've really been, for most of the company's history, a leader in the OA Pain Management space, osteoarthritis pain management space, specifically with our ORTHOVISC and MONOVISC franchises that, combined, hold the #1 position in the U.S. viscosupplement markets. We're also a leading innovator, though, in the OA Pain Management space with our CINGAL product, which I'll talk about a little bit later. CINGAL, as many of you know, is a novel HA steroid product. We sell today in many countries outside the U.S., and we're poised to begin a clinical trial in the U.S. We recently expanded our portfolio into the $8 billion joint preservation and restoration market through a couple of transformative acquisitions, one being Parcus Medical and the other Arthrosurface. These companies really allow us to target a number of exciting high-growth market opportunities within that $8 billion joint preservation and restoration market, and they also enhance our commercial capabilities and infrastructure, in addition, diversifying our revenue mix and they brought along a lot of nice new products to expand our product portfolio and our pipeline. The last point I'll make on this slide is that we continue to advance an innovative product pipeline filled with game-changing therapies, and they leverage our legacy regenerative medicine platforms. So moving on to Slide 4. We have kind of the pillars of our 5-year strategic plan for growth here, where our mission is to become the global leader in joint preservation and restoration. Through our 5-year strategic plan, we're actively working to expand our portfolio beyond that primary historical focus on OA Pain Management into therapies across that joint preservation and restoration continuum of care. The first pillar here of our plan is around talent and culture, where our focus has been and will continue to be building a strong team that will continue to build our product development, operational and commercial capabilities as well as our culture of innovation and growth. The second piece here is around commercial acceleration through the new hybrid commercial strategy we're deploying in the U.S., and our focus on international expansion to make our full product lines available to patients globally. Third is around R&D innovation through the expansion and advancement of our pipeline across the joint preservation and restoration continuum of care and leveraging the Regen Med platform that Anika -- legacy Anika brought to the table. The fourth piece is around inorganic growth. We just completed 2 significant and transformative acquisitions, but we continue to look at tuck-in acquisitions and other potential transactions that will complement our existing and future product portfolio and provide meaningful solutions to patients with unmet needs. We're well positioned now to drive innovation across that joint preservation and restoration continuum of care and launch multiple products over the next 5 years to achieve a leadership position in that space. We want to turn to Slide 5 now. I'll speak for just a couple of minutes on our response to the COVID-19 pandemic that we're all living in today. I would like to mention that our hearts go out to everyone who has suffered personal hardship or loss. This is certainly a truly difficult situation that the entire planet is dealing with, whether at work or at home. First and foremost, we've taken the necessary steps to safeguard the health and well-being of our employees, the patients we serve and our communities, especially with a number of countries and states beginning to open up now. We continue to closely monitor and follow guidance from the CDC, the WHO and state and local authorities in the U.S. and abroad. We've taken swift and important steps to strengthen our liquidity, ensure that we're positioned well to successfully navigate through this uncertain time and be positioned for strong recovery at the other end. Our manufacturing operations and supply chain have continued with minimal disruption. And at this time, we don't anticipate any disruption to the supply of our therapies for patients due to COVID-19. And we've been working with clinical trial sites and other partners to minimize disruption to our ongoing clinical trials so that we can accelerate those activities when the COVID-19 impact lessens. We've also worked with industry partners to donate supplies to meet the urgent needs of health care providers. And we continue to actively track the situation through multiple channels, including directly with our customers, with the goal of quickly returning to full commercial activity as soon as we can. On Slide 6, we show a nice history of Anika, but really to demonstrate our next phase in our growth story around commercial acceleration. And specifically, the legacy strategic focus has been around that viscosupplementation portfolio, including MONOVISC, ORTHOVISC and now the newer product, CINGAL. We're very pleased with what we've achieved in that market and our leadership position, have been generating strong cash flow and profitability. Most exciting, we think our future lies to a growing degree in the joint preservation and restoration markets. We recently, at the end of 2019, launched the TACTOSET product to treat insufficiency fractures. And then with the Parcus and Arthrosurface transactions, extended our product offering down that continuum of care more into joint preservation and restoration. And we did that by also bringing to bear an enhanced commercial infrastructure. We have a lot more coming in the future. On Slide 7, you can kind of see what we're transitioning to today and tomorrow. While we continue to leverage that leadership in the OA Pain Management space and innovate with great products like CINGAL, the recently completed acquisitions of Parcus and Arthrosurface have brought great talent, great products and great pipeline to the company. Parcus brings a broad offering of sports medicine, implant and instrumentation solutions; and Arthrosurface offers a wide array of less invasive bone preserving, partial joint replacement solutions. Both companies have products that treat foot and ankle and extremities issues and play in those high-growth segments. We're excited about that. This expanded therapeutic continuum across multiple fields increases Anika's total global market opportunity from approximately $1 billion to $8 billion. And importantly, that joint preservation and restoration space are both markets with significant unmet needs and where population demographics are creating tailwinds. So let's dive in on Slide 8, a little bit more to the Arthrosurface and Parcus Medical story and where we're at with our integration update. We've made a lot of great progress. We view this integration in bringing Arthrosurface and Parcus Medical to bear as a growth story for the company. In February, shortly after we completed both transactions, we held our first national sales meeting with the combined commercial teams. It was an exciting high-energy gathering of the direct sales teams, key partners and executives, all armed with a common vision of well-defined goals, necessary tools and the road map to achieve them. What we saw at the other end of that was an energized team, creative ideas for cross-selling opportunities, which we've been very focused on during the last few weeks and encouraging momentum as we look to grow the business from a larger and more diverse product base. In recent weeks, we've had daily product cross-training sessions to educate the global commercial team on the combined product portfolio and really taking advantage of this time that we've had. We've also continued to engage with the surgeon community through our Anika Virtual Medical Education Program. These virtual sessions focus on surgeon peer-to-peer training on our products. And we're in active and productive discussions with commercial and business partners around the globe to monitor elective procedure recovery and the related pace. We're taking all the necessary steps to ensure full readiness to hit the ground running as soon as it's safely possible. And on that note, we're starting to see surgeries come back on the schedule in some geographies. We're very excited about that. On Slide 9, we can kind of dive in a little bit more to Parcus and Arthrosurface They really brought a wealth of talent into our organization and further enhanced our commercial capabilities and infrastructure, the product portfolio and the pipeline. Combined, they added about 40 sales reps and more than 150 distributors in the U.S. to our hybrid commercial model and over 70 international distributors. The acquisitions enabled us to achieve a level of commercial scale far more efficiently and quickly than we otherwise would have by greenfielding a commercial team. Parcus is a sports med implant and instrumentation solutions provider focused on surgical repair and reconstruction of ligaments and tendons. And that acquisition brought a broad portfolio and a strong commercial distribution network in the U.S. and outside the U.S. and provides natural cross-selling opportunities across the combined companies' orthopedic surgical product portfolio. Parcus has and brought to the table a diverse family of products that help facilitate surgical procedures on the shoulder, knee, hip and distal extremities, along with foot and ankle. Arthrosurface, the other acquisition, is a joint preservation technology company that specializes in less invasive bone preserving partial joint replacement solutions, really earlier in the continuum of care before you get to a total joint. That company significantly enhanced our commercial capabilities with the addition of a hybrid sales organization of about 35 sales reps and more than 100 distributors in the U.S. Its product portfolio features more than 150 different surface implant curvatures for the shoulder, knee, ankle, wrist and toe. More than 100,000 patients have been treated with its implants since the company was founded in 2002. They're a global leader in joint preservation technology, manufacturing those technologies that are clinically proven. The combined product portfolio is uniquely positions Anika to truly offer innovative and broad sports med solutions that cover the entire early intervention, joint preservation and restoration market and really will help us leverage Anika's legacy Regen Med portfolio. Diving in on Slide 10, you can see some images here and kind of product breakdown of that legacy, Parcus Medical, business. They have a track record of double-digit revenue growth and delivered about $13 million of revenue for the full year of 2019. That represented about 15% growth for the year. The Majority of their legacy revenue was driven by surgical procedures on the shoulder and knee, synergistic with Arthrosurface's business, as you can see on the next slide, Slide 11. Arthrosurface delivered about $30 million of revenue for 2019, representing growth of about 10%. Their revenue was broadly distributed across surgical procedures on the shoulder, knee, ankle, wrist and toe, and you can see some images there of what the implants look like that they bring to the table. On Slide 12, both acquisitions are highly complementary to the Regen Med expertise and portfolio that Anika brings to the table, so bringing these 3 entities together is very exciting from that perspective. They're adding high-growth markets to our stream and expand our commercial capabilities and our product pipeline. And as you can see on the right side of this slide, that Anika's domestic MONOVISC and ORTHOVISC franchises combined represented -- represent about 50% of pro forma revenues from post acquisition, down from approximately 70% that it represented before the transactions. So really diversifying the revenue base here. Importantly, the addition of Parcus and Arthrosurface increases the amount of revenue generated under our hybrid commercial model and gives us direct line of sight to our surgeon customers, which, from my perspective, is absolutely critical relative to continued innovation going forward. We really believe this combination builds upon what each business has achieved individually and creates a unique and powerful sports med and Regen Med company. Moving on to Slide 13. We can take a look at our innovative and diverse products and pipeline. Last year, we launched TACTOSET, which is our surgically delivered bone repair therapy to treat insufficiency fractures, and we launched that under our legacy hybrid commercial model in the U.S. Arthrosurface and Parcus have increased our product pipeline from a handful of products to more than a dozen products. We're continuing to make products -- progress on our product pipeline road map, that's a tongue twister, and we'll provide an update on timing for those activities as soon as we can safely resume our clinical projects. We look forward to doing that. Product development for our rotator cuff repair therapy has progressed, but as we've previously reported is currently on hold because of the COVID-19 situation. This therapy is exciting and highly synergistic with our growing joint preservation and restoration portfolio at Parcus and Arthrosurface. For our products in ongoing clinical trials, that includes HYALOFAST and CINGAL, we're leveraging virtual communication tools and delaying in-person visits in light of COVID-19. In addition, we've deferred new patient enrollment and new trial site initiations due to COVID-19-related challenges. Diving in a bit on HYALOFAST, our cartilage repair technology, that's currently available in international markets and is in a Phase III clinical trial for U.S. regulatory filing. So as soon as COVID-19's kind of past the point where clinical trials are on hold, we'll be continuing enrollment in that trial. CINGAL is our novel third-generation viscosupplement therapy combining HA and steroid, and it is commercially available in the EU and Canada and was recently approved in Australia. Preenrollment activities for the CINGAL pilot study are substantially complete, and we intend to commence that pilot study as soon as we can safely do so. We'll provide a more definitive time frame for CINGAL and HYALOFAST and the rotator cuff development programs when we're able to restart normal trial activities and have more visibility on the length and regional impacts of the COVID-19 pandemic. Moving on to Slide 14, we can talk about some of our financial highlights. We delivered record revenue in the first quarter of 2020 despite the impact of COVID-19 toward the end of the quarter when things got a bit soft due to the COVID-19 situation. But our total revenue increased 43% year-over-year in the quarter. It's important also to highlight that our organic growth was strong, driven by double-digit revenue increase from our legacy joint pain management portfolio. We also saw an outstanding contribution of $6.8 million from our joint preservation and restoration surgical portfolios with just a partial quarter following the acquisitions of Parcus and Arthrosurface. The adjusted EBITDA was $9.5 million for the quarter, and we ended the quarter with $92 million of cash and investments on our balance sheet. The big question Anika and others are working to address is how long it will take for elective procedures to recover back to pre-COVID volumes. We see medical facilities starting to reopen for elective surgical procedures even this week in some geographies. And we expect the pace of the procedural volumes to potentially accelerate into the second half of the year. The pace of recovery will be phased and regionally determined based on local orders and the overall impact of COVID-19, things that we're tracking in great detail with each of our customers. While the elective procedures have been significantly impacted, we're continuing to fulfill purchase orders for ORTHOVISC and MONOVISC. This revenue is expected to help offset some of the near-term impact from procedural delays affecting the legacy Parcus and Arthrosurface products and reflects the resiliency of Anika's diversified portfolio. We're closely monitoring procedure volumes and analyzing trends as we manage our inventory, and our commercial teams are gearing back up to hit the ground running. As the post prone procedures come back online, they're ready to go. So on Slide 15, we're actively tracking the COVID-19 situation through multiple channels with the goal of quickly returning to full commercial activity as soon as we can. And I can assure you that Anika is positioned very well to weather the impact and execute on our strategic growth plan. We remain laser-focused on integrating the recent acquisitions to form an enhanced organizational structure that will allow us to deliver meaningful therapies to patients and value to shareholders. And importantly, the long-term fundamentals of our business remain strong, and we're excited and well positioned to hit the ground running as soon as we can. So wrapping up on Slide 16, and before we open the line to questions, there are about 3 things about Anika that I hope you'll take away from today's presentation. First, we've taken significant steps to transform Anika into a global commercial company focused on the $8 billion global joint preservation and restoration market and to accelerate growth and shareholder value creation in the coming years. Second, we're focused on driving innovation across the joint preservation and restoration continuum, also leveraging the legacy Anika Regen Med platforms, and expect to launch multiple products over the next 5 years to achieve our growth objectives. Let me add that we're committed to sustaining our legacy of operational excellence and financial discipline while we drive our next phase of growth. And third, we are very well positioned to successfully navigate the COVID-19 environment. We're confident in our liquidity position. The long-term fundamentals of our business remain strong, and we're confident that we have the right people, products and strategies in place to drive long-term growth and value for our shareholders. Thank you for your time today, and please stay well. I think we're ready for questions. So I'll turn it back over to Mallet.

We will now move to the Q&A portion of the presentation. [Operator Instructions] Our first question for Cheryl and Sylvia is, following the first quarter, can you provide us with an update on your U.S. viscosupplement franchise and the overall market?

I'll turn that one over to Sylvia and then can add some commentary at the end.

Thank you, Cheryl. Absolutely, I can provide some high-level summary of our first quarter U.S. viscosupplement franchise. First of all, I'd like to say that our commercial partner in the U.S. is focusing on continuing to expand and maintain the market share for ORTHOVISC and MONOVISC here in the U.S., which achieved a #1 position, as Cheryl mentioned earlier, and that was obtained in the first quarter of 2018, and we've been able to maintain and grow from there. With regards to the first quarter, during the quarter, we saw a decline in pricing, which was around the mid-single-digit percentage range for both ORTHOVISC and MONOVISC, and this is on a year-over-year basis. However, the unit volume increase pre-COVID-19 was very healthy. In the months of January and February, we continue to see a double-digit volume increase in the U.S. for MONOVISC. And our U.S. ORTHOVISC and MONOVISC business generated 7% growth in the first quarter despite the impact from COVID-19, which impacted our business in the second half of March as a result of the COVID-19 pandemic. We continue to be very -- having very open and productive discussions with our U.S. partner, and we're confident in the long-term prospects for the U.S. viscosupplement franchise. Cheryl?

Thanks, Sylvia. Yes. I would just add that while elective procedures certainly took a hit in late Q1 and into Q2, we've had very good discussions with our commercial partner in this space. They're poised and ready to get back at it. And we are certainly hearing communications that things are starting to move back into the clinic and starting to restart again.

The next question is how do you manage potential channel conflicts with your core business partners in the OA Pain Management business as Anika expands its business into the joint preservation and restoration continuum of care, an area with potential overlap with partner activities?

Sure. I'll take that question. It's a good question. So there really isn't channel conflict there because the viscosupplement business is really an office-based practice, whereas the products that we bring to bear in that joint preservation space are surgical based. So our call point is to the surgeon. The commercial partner that we work with on the visco space is really focused on those office-based procedures, so we've managed through that.

Our next question is for Cheryl. Cheryl, are you supportive of Anika's 5-year strategic plan? Or should we expect you to make some adjustments?

Yes. Thanks for that question. As a new CEO, I think it's a good question. I think most people know that I came to the Anika Board about 2 years ago. Joe Darling, the former CEO, brought me on the Board and was in direct communication with me is that strategy developed. He worked very closely with the Board on developing that strategy. And so it was a strategy that I was very bullish on. I'm very confident with it, and I look forward to continuing forward on that strategy. I'm sure, as any company does with any strategy, we will continue to adjust and grow that as we go forward. But aside from the pauses that we've had to take on a couple of things due to COVID-19, I'm excited to completely get back to it and continue to push it forward.

Thanks, Cheryl. The next question is for Sylvia. Sylvia, how are you thinking about capital deployment going forward?

Thank you, Mallet. So first of all, I would like to say that Anika and we are confident in our financial position, and we're well capitalized and have a strong balance sheet. And given the current market uncertainty surrounding COVID-19, our focus in the immediate term is on cash preservation, while also paying attention and focusing on the integration of Parcus and Arthrosurface, 2 businesses that we're very excited about given the Q1 acquisitions. And alongside with that, we remain optimistic regarding bolt-on acquisitions to leverage the commercial infrastructure, which Cheryl talked about earlier in terms of further leveraging that to enhance our top line growth with the focus on sports med and other joint preservation and restoration products. And we'll continue to maintain a disciplined and strategic approach on capital allocation front, targeting the highest return opportunities possible. So those would be our principles as well as the near- and longer-term focus.

Thanks, Sylvia. Next question is for both Cheryl and Sylvia. What are your assumptions on the pace of elective procedures returning and how that will impact the fundamentals of your business?

Yes. Thanks for that question. We've actually done quite a bit of work around it. We -- I think everyone understands we withdrew guidance just because of the degree of uncertainty around the pace of return to procedures. I can tell you that we're seeing surgeries come back on the schedule even this week. So we know that things are starting to return. It's very geographically driven. It's completely dependent on what any state or even any city, and outside the United States any country, is allowing for. There are a number of factors at play that I think are going to impact the pace. For sure, the fact that extra precautions are being taken in both the office and the operating setting due to COVID-19 are, I think, slowing things down even as things return. And so the modeling that we have done is based on a number of interviews, hundreds of interviews that we've done with our customers and also staying in close communication with our commercial partner in the U.S. So we are starting to see things recover. I think trying to guess what the pace of that looks like would be an exercise that would result in incorrect information, but we're keeping track of it very closely and making sure that we are producing product to be able to meet the demand as it comes our way. Sylvia, maybe you want to add something to that, too.

Yes. I think you said it right. At this point, we're doing all the necessary work, very proactive about gathering information from our partners and looking at market developments. And as we see trends and have more information and more confident about the revenue picture for the rest of the year, we'll be providing commentaries later in the year. But Cheryl, your points were pretty comprehensive in terms of the pace of recovery and what we're currently seeing and doing.

The next question is, outside of the U.S., what are the key geographies of focus with the biggest opportunity for growth, gain of market share and/or bolt on M&A?

Sure. From the perspective of OUS, it's, first and foremost, pretty product specific. So in the viscosupplement space, we continue to bring new distributors on in various geographies. I mentioned earlier that we just received approval for CINGAL in Australia. We think that's a nice opportunity. But we have targeted a pretty long list of other geographies that we're looking at relative to the viscosupplementation products. On the Parcus and Arthrosurface side, Parcus actually has a pretty strong OUS presence, which we will continue to leverage. And our international presence is continuing to look at how to leverage those Arthrosurface and existing Anika products into other OUS markets. So we have a pretty strong strategy that we are kicking off. And I think that was demonstrated even in last year's growth numbers, looking at the growth, for example, of CINGAL outside the United States, which was very healthy. Sylvia, do you want to add anything to that?

Yes. Maybe a little bit more color. I agree with you, Cheryl, on the points that you raised. We, from a performance standpoint, continue to see very strong growth from CINGAL, our novel innovative viscosupplement product with HA plus a steroid. As Cheryl mentioned before, that's available in Canada and in Europe, and we recently received product registration or approval in Australia. And once the COVID-19 pandemic issue is under control, we expect to see some revenue growth in that area. For Q1, the year-over-year growth was close to doubling last year's performance, which was exciting for us. In terms of the Parcus and Arthrosurface acquisitions, I do believe that they offer additional international expansions for us. As we look at the distributor network outside of the U.S., there are very little territories that are overlapping, and most of them are actually supplementary to our legacy Anika international distribution network, which presents opportunity for us in terms of international expansion and South America is one area. During the first quarter, we also established new distribution agreements and most of them are surrounding HYALOFAST, which is our cartilage repair product. And there were 3 countries in Europe and in Asia that we added new distribution networks. So we believe that in the near term and medium term, these countries will continue to contribute to our orthopedic joint preservation and restoration family. So I think all in all, the international business exhibited really good growth for the year for Anika. And for viscosupplement, for example, the year-over-year growth was about 30%, which contributed to the Pain Management overall double-digit growth for the quarter. So those are some of the additional colors on our international growth opportunities and prospects.

Thanks, Sylvia.

As a quick follow-up to that question, what should we expect in terms of the pace of bolt-on acquisitions and cash consumption resulting from that?

Well, I think for bolt-on acquisitions, we'll continue to be disciplined in how we look at things, ensuring that there is the opportunity to be accretive in the near term, bring revenue to the near term and additional innovative products to add to our commercial bag in the spaces in which we operate. There -- at this point in time, the team is continuing to be out there looking, and we feel like we're well capitalized to be able to do the things that we want to do at this point. Sylvia, you want to add anything to that?

No, I think that was clear. I don't have additional comments to add that on that point.

One more question we have. Given prior commentary on cash preservation, have you taken any cost containment measures to conserve cash in light of COVID-19?

Yes. It's a good question, given what everybody is going through right now. We are confident in our financial position, and we are well capitalized and have a strong balance sheet. But we have taken some cost control measures. And in additionally -- in addition to that, we've temporarily reallocated some technical resources, members of the R&D team to support some business-critical functions. And we're also taking the opportunity to accelerate our commercial integration activities. So I think it's important to note in the recent acquisitions, we welcomed an awful lot of talent to the organization that are going to help us grow going forward. And our top priority is really taking all the necessary steps, so we're ready to supply products when the procedures are returning. But we'll continue to monitor the situation as it evolves and evaluate opportunities to ensure the financial strength of the company. But we're feeling very bullish about where we sit right now with the measures that we've taken.

And on that note, we'd like to thank Cheryl and Sylvia from Anika Therapeutics for presenting today and you all for attending the 2020 Virtual UBS Global Healthcare Conference. You are now free to disconnect from the conference line. Thank you.

Thank you.