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

Good morning. This is Peter Harrison. I run Morgan Stanley's medtech investment banking efforts. Before we get started, a quick disclaimer. Please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not for members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley Research disclosure website at www.morganstanley.com\researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Thanks for being with us today. I want to welcome Anika Therapeutics at the conference. With us today is Cheryl Blanchard, CEO; and Mike Levitz, CFO. To get us started, why don't we -- Cheryl, why don't you talk a little bit about the story for those less familiar to Anika, and then we'll move on for some questions. Also, there is a question portal. If you have any questions, please submit them, and I'll be monitoring that and ask them as appropriate. Cheryl?

Great. Thank you, Peter, and good morning, everyone. I would first like to thank Morgan Stanley for giving us the opportunity to present today, and everyone that's listening, for your interest in Anika. I hope everybody is safe and healthy. Let me just talk a little bit about Anika's history. For much of our history, we've been a company based on developing hyaluronic acid technologies and have really focused, over the years, in the osteoarthritis pain management space, specifically with our ORTHOVISC and MONOVISC products, which today, we sell through a fully partnered relationship. But they together hold the #1 position in the U.S. viscosupplementation market than we have for the last couple of years. But a couple of years ago, the company really started to strategize about what was next from a growth trajectory perspective. And recently, we announced 2 transformative acquisitions: one of Parcus Medical and one of Arthrosurface. And what this did was it really allowed us to pivot the company in a direction where we're now going to be focused more broadly on the joint preservation space and really kind of move away from that legacy fully partnered model. These acquisitions allowed us to diversify our revenue. They gave us a fully commercial team in the United States with direct sales reps that are focused on that early intervention call point in orthopedics. And while we love our legacy business and we continue to focus on it and we played in that $1 billion TAM of the viscosupplementation market, we've now expanded our TAM to $8 billion in that early intervention and joint preservation area. We've got a lot of great products that we're leveraging from the legacy Anika regenerative medicine portfolio into now that early intervention and commercial team, along with a number of sports medicine products and products that really address all joints in that early intervention area. So I'm really optimistic about the future of the company. Clearly, COVID has had an impact on our top line as it has all orthopedic companies, but we have great business fundamentals. We've got a very strong balance sheet, and we're excited to continue to hit the ground running out the other end of this thing.

Perfect. Before we get into some detailed questions. I thought maybe, Mike, I've known you a long time going back to helping you out when you were CFO at Insulet. I'm sure you had a number of opportunities you were thinking about as your next step after leaving Insulet. Maybe you could talk a little bit about why this was the opportunity you chose? And what gets you excited about the story and the opportunity?

Thank you, Peter. Yes, I'm very excited to join Anika. One of the things that -- one of the reasons I was at Insulet, and I've been in medtech for the last 20 years or so is I loved innovation and I love when you can tailor it to hope people and address their real need. When I first heard of Anika, which was through a colleague that I had at Insulet, who joined the company recently. This is an exciting time for this company. I've generally joined companies around this size, the $100 million to $300 million revenue, but moving from a $1 billion TAM to an $8 billion TAM, and these -- they got a new management team, they've got the acquisitions that happened earlier this year, I think this company has a real runway. And when I met with the team and the Board, I was very impressed with the number of industry veterans that have joined the company recently and their excitement in the earlier intervention orthopedics space, and also the alignment with the Board -- between the Board and management around driving growth and shareholder value. So I think this company has been around for a while with under its partnership model, and these new acquisitions and the strong financial footing that the team has worked so many years to build, I think, give it a real opportunity for driving success over the coming years. And I'm excited to be a part of that transformation.

Great. Maybe I do find the pivoting away from the J&J relationship pretty important to the story. So maybe let's turn to those 2 acquisitions, Parcus and Arthrosurface, and talk about the strategic rationale. And then importantly, I think what are the competitive advantages you see of those products? And how they'll take kind of your direct sales force effort into the future?

Yes. Thanks. I appreciate that question. Yes, moving away from that fully partnered model is really key to this transformation that we're undergoing. We feel like having that direct commercial access, the focus, the commercial focus and really being very purposeful about developing -- creating and developing meaningful solutions that address unmet clinical needs in that early intervention space that's really focused around joint observation, I really think about it, everything up to getting a total joint. We don't intend on playing in that space, just to be clear. But the additions of Parcus and Arthrosurface really allowed us to immediately, overnight, have that commercial team to be able to leverage that early intervention call point on that surgical business with the regenerative medicine products, with the soft tissue fixation, sports medicine products. And then with the Arthrosurface products, which really are kind of the next step from an invasiveness perspective, along that continuum of care, where you're replacing parts of the damaged joint instead of repairing it. We like our product mix. We think we've got a nice full bag that we also, by the way, will be continuing to develop. Both companies and legacy Anika have really nice R&D pipelines, which we will be speaking in more detail about on our Q3 earnings call. We're looking forward to sharing that with everybody. Really diversifying away from that reliance on that J&J partnership revenue. And I think the thing I love the most is just that direct access to the customer feeding right back into the R&D pipeline. So I think there aren't other companies out there that are solely focused on this early intervention call point, and we are still a company that's able to be nimble and responsive and focused from a commercial perspective, and I really think we have some pretty significant advantages in that regard.

That was good to hear. The pipeline commentary, I think is helpful because there's a question from the audience. Within the $7 billion TAM, what is the TAM for just the commercial products acquired from Parcus and Arthrosurface versus the TAM for your products in the pipeline that you'll be discussing in more detail in the next quarter?

Yes. So to be clear, the products in the pipeline cut across all 3 of the legacy companies, if you want to think about it that way. So we have products in the pipeline that are kind of coming out of that soft tissue fixation, sports medicine area, from the -- kind of the joint repair area before you get to a total joint, but also really layering in those regenerative medicine products. So that TAM in the pipeline really is that $8 billion number because it also includes $1 billion of osteoarthritis pain management TAM and we have CINGAL in the pipeline. So we really have activities ongoing in that R&D pipeline from an organic perspective that cut across the full TAM.

Great. Very helpful. And then obviously, you now need to sell these attractive products you got. So how are you thinking about the commercial infrastructure you have? Where is it today? Where do you think it needs to go as you drive the sale of these products and also the pipeline into the future?

Yes. So our commercial team in the United States is 35 direct folks, and they work across 150 independent distributors. So it's really a hybrid model. We have great coverage and great depth across the entire United States, and they are very focused on that early intervention call point. So I think the fact that there's great focus from a call point perspective, and now that broader team has, what I would consider to be, a full bag compared to what any of the individual legacy companies had prior to that. So if you want to think about it early on, our cross-selling opportunities -- we've now integrated that team. But if you think about the cross-selling opportunities in that larger team with that greater focus, we're really starting to see some benefit of that. It's obviously a little tough to talk about from a numerical perspective because of COVID, we along with everyone else withdrew guidance, but we are starting to see some really nice leverage with the focus on that, 35 sales reps across 150 distributors.

Great. You mentioned COVID. So we should probably get this question out of the way. How do you think about COVID? Has it impacted your business? Would you do any cash conservation, restructuring efforts? And then how do you see the recovery? I think we've seen some commentary yesterday from other companies about pushing out of the recovery from the fourth quarter to maybe early '21. And then I guess, lastly, I know it's a long question. How do you see your business set up for a COVID world as patients are trying to move from acute to ASCs and at home and that sort of thing?

Right. Well, so let me take the last part first. What we have seen -- we obviously have products that get used in an ASC setting, in a hospital OR and in office procedures with the injectable products. What we have seen is that the fastest recovery ramp has been in the ASC setting, and I think that's been talked about pretty widely across the industry. On the surgical side of our business, which is about half of our revenue today, that represents -- about 80% of that gets done in the ASC setting. So from that perspective, I think we're in a good position. The second kind of uptick has been in the office setting and that's the other half of our business. So I think from where our products get used and how the COVID recovery is happening, we're probably in a very good spot relative to how that looks. From a recovery perspective, I need to split the business into the 2 parts. So if you think about our partner business, which is largely the J&J, Mitek relationship with ORTHOVISC and MONOVISC. Because of their ordering patterns relative to how we're contractually set up, Q2 was sort of a normal ordering delivery pattern. So into -- but obviously, the end market sales were affected by COVID. Into Q3 and Q4, they will be changing their ordering patterns to sort of address inventory management, while at the same time, there will obviously be recovery in terms of end market sales, which kind of speaks to parts of that revenue stream, the product revenue and the royalty revenue, which ties back to the actual end customer sale. In the -- on the surgical side of our business, though, we are seeing a nice recovery. In April, we saw, from a procedural volume perspective, from a pro forma look, we were at about 25% of what a pro forma look would have been relative to last year. In May, we were at about 50%. And then June, July started to head towards 75%, and we continue to see improvements from there. So we do see nice recovery in all parts of the business. But the way we kind of book sales from the 2 different parts of the business, there will be a little bit of metering on the product sales side into the second half of the year from our viscosupplement business in the U.S.

And I'll be happy to jump in on the capital side. So the company was being very thoughtful from a capital preservation side. Anika drew down on its line, just to make sure that it had additional cash available, and so it brought in $50 million there back at the start of COVID. As Cheryl said, things have recovered nicely. And one of the areas that this company spends money on is on clinical work because there's so much opportunity in the future. Now a lot of that clinical work slowed down because of COVID. So from a cash management standpoint, that worked in the company's favor, and -- but the company has been very thoughtful, and it also allows us this opportunity right now with COVID to drive the integration of the sales force that Cheryl said. Being in the faster-growing parts of the orthopedics market, the upper and lower extremities, this early intervention space, we believe is a real opportunity, and that's why we're really focusing our investment and our time there. So -- but from a capital standpoint, I think the company has been very thoughtful in its spending and is in a fine position.

Yes. Thanks for that, Mike.

Great. On the capital priorities, obviously, like a lot of my clients, you guys are cash generative, have an attractive EBITDA margin, have historically done some share buybacks under previous management teams. How do you, Mike and Cheryl, think about capital allocation priorities, whether it's return of capital to shareholders, whether it's M&A, investing in R&D. Let's talk a little bit about your mindset as you -- Mike, you joined the company and, Cheryl, you've been there a little over a year or so as the CEO.

Yes. Thanks for that. So I would say, first of all, we were very focused on cash preservation in the first instance. And I think we've done a really nice job of that with some expense cutting and reallocated some resources to get some acceleration done on some integration activities that, because we weren't able to be fully commercial, we were able to get done. So we were able to accelerate a lot of the commercial integration. We still have quite a bit of systems implementation to work to do into next year on that. But those expense cutting measures really helped us from a cash preservation perspective. The other thing we did was we drew down $50 million on our existing credit facility. That was at the very beginning of COVID. It was really out of an abundance of caution, and so our balance sheet is sitting very strongly right now. From an allocation perspective, we will be very focused on organic R&D. And again, folks will hear more about that on the Q3 call in a few weeks. We also are continuing to look for bolt-on acquisition opportunities from an M&A perspective. We feel like there are other opportunities out there that we should continue to consider and we will. At the same time, we are pretty strongly messaging to folks that we are considering ourselves a growth company. And so we will be allocating our capital, obviously, very smartly and with great financial discipline, but -- to drive that aspect of our strategy. And Mike, I don't know if you have any thoughts to add to that.

Yes, absolutely. I would just echo. The company has had a balanced strategy. I mean, if you look at the last year, the company in the last year did the buyback, they did M&A, and they've been investing in R&D. So it really is a balanced approach. One of the things that the company said last year is a runout with its 5-year targets, right? And I talked about doubling the revenue of the company and also driving double-digit EBITDA growth. And so that's where the company is focused on driving both the top line and the bottom line to drive shareholder value. The acquisitions fit into that, the organic investments fit into that, and so those are the areas that the company is focused on. We do need to -- and we're making the progress on internalizing the acquisitions that happened earlier this year. So as Cheryl said, bolt-on acquisitions would be more of what we would expect as opposed to other transformative ones because this pivot into the direct space in these markets has now happened with these acquisitions. And so it will really be just shoring that up so that we can deliver on what we said we were going to do over the coming 5 years.

Yes. Look, I think the commentary you made about your growth and expectations is differentiating in orthopedics. And so I guess the question is, you have this bucket of HA, which is a mature portfolio, I guess, is what I would say. So it's a fair comment. How do you think about achieving those differentiated orthopedic growth expectations? Is it -- do you have the products approved now that will get you there? Are you relying on the pipeline? How do you think about that? And it sounds like, on the next call, we'll get a lot more color on the pipeline, which obviously, we're all looking forward to.

Yes. Yes, I would say that's obviously a big part of it, although we have products in the pipeline that we've been talking about for some period of time. I would point out CINGAL, which is, I think the most -- one of the most exciting products out there in many markets. We sell that product in 25 markets outside the United States, and it's one of our fastest-growing products right now. We talked about the fact that in Q1 of this year, we almost doubled the CINGAL revenue year-over-year. So we are very bullish on that product and still very focused on getting that into the United States so that United States osteoarthritis patients can benefit from that product. We think that, that product is game changing. Another product I would call out is HYALOFAST, which is a single-stage cartilage repair product. Again, we sell that in more than 25 countries outside the United States, and it is also one of our fastest-growing products. And it is a game changer in cartilage repair. That's a space I've operated in for years, and I could not be more excited about getting that product into the United States market. We launched, at the end of last year, TACTOSET, which is a regenerative medicine product that came out of the legacy Anika organization, to treat insufficiency fractures. And we are actually growing that market into some extremities areas and taking market share away from some of the players that are already in that space. And then we do have what I think is a very exciting pipeline that we will be talking about in a few weeks that I think will also contribute to that. We also, last quarter, announced the release of -- the launch of 7 new products, many of them in the soft tissue fixation and extremities areas, and also additional product development activities that are supporting that TACTOSET franchise into the small bone area. So I think we've got some exciting stuff that's already out there and really starting to gain traction and some things in the pipeline that will really contribute meaningfully to that.