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

Good afternoon, and thanks for joining us for Anika Therapeutics fireside chat. Joining me today is Cheryl Blanchard, CEO; and Mike Levitz, CFO. Before we get started, let me get rid of the required disclosures. 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. Great. With that behind us, and obviously, the portal is open for any questions you all may have. Let's get started.

Cheryl, I thought maybe we get started. Before we into details, maybe talk a little bit about Anika, who Anika is for those who are not as familiar with the story?

Yes, absolutely. Thanks, Peter, and thanks for the invitation to allow us to continue to tell the exciting story that we've got around really a recent transformation story for Anika. Anika has historically been more of a contract manufacturer, contract developer, and manufacturer organization that was a company that was really based on our proprietary and exciting hyaluronic acid platform technology. Primarily, from a top line perspective, the product's ORTHOVISC and MONOVISC, which in the United States are distributed by J&J Mitek. Great relationship there. Very solid business. But really, for Anika, thinking about what the future looked like, about 18 months ago, we embarked on a pretty significant transformation story that Mike and I are excited about, and we'll talk a little bit about today, it really had the company moving from that contract manufacturer, developer type space into now a fully integrated and fully commercial organization that's focused now on joint preservation. And in the joint preservation space, really along that joint preservation continuum in orthopedics. Starting out with that OA pain management, the existing ORTHOVISC and MONOVISC business, CINGAL outside the United States and obviously, work to bring that into the U.S., our next-generation product there. And then moving along that continuum, regenerative solutions, sports medicine, soft tissue fixation, and bone preserving joint solutions or bone preserving implants. So really kind of sticking to that joint preservation focus where we think we have a right to win. Also very focused on targeting the ASC as an environment for us to push forward with those joint preservation surgeons. It's where those procedures were going, it's where they've gone even more rapidly during COVID, and we think we have a real advantage, given that we were already focusing on that relative to our strategy. And then really, looking out over our 5-year strategy, starting in 2019, that we have plans to double our top line and really derive that from a pretty even combination of commercial execution and a new product development pipeline. I would say more recently, obviously, we continue to experience COVID disruptions. I think, just like everybody else does in the space in which we operate. We -- things picked up for a bit, the Delta variant has come upon us. And so we continue to work through that, but stay very focused on continuing this transformation, investing in people, processes and systems that are really going to allow us to scale and drive this business throughout our 5-year strategy. One last point I would make is that we also, in addition to the fact that we've brought this exciting product portfolio together, we can do cross-selling and that we've got a really exciting new product development pipeline. But we also have plans to continue to do some tuck-in M&A. We have a strong balance sheet. And we're kind of a unique asset in this space for a med tech company of our size and scale, the fact that we are projecting and experiencing really exciting growth numbers, but we're doing it in a profitable way, which I don't think a lot of companies of our size and scale are doing. So Mike, I don't know if you want to add any comments to that before we move on to next question.

Yes. Thank you, Cheryl. I would just add that we're really excited about the opportunity in front of us. And so as far as how the transformation is going, we're in the earlier stages of the transformation. The acquisitions were very helpful. The new product introduction is helpful. There's a lot of work going on behind the scenes, we are making sure we have the right team with the right competencies and abilities to drive things, the right processes and systems. There's a lot of execution that continues to happen and is positioning us very well to execute on this plan. This is the doubling of the revenue from this point by 2024 is an organic plan, largely, as Cheryl said, or it is an organic plan with the opportunity to accelerate that tuck-ins. And so we recognize that's not automatic. And so there's a lot of focus on the capabilities and competencies, and that's where we're executing right now.

Okay. And to execute the plan, do you have the portfolio where you want it today? Are there key pipeline products in development that will get that portfolio to exactly where you want to be to be in the ASC setting and really focus on joy preservation? Are you going to continue looking at tuck in M&A? How do we think about the portfolio where it is today versus where you want it to be to capture this pretty exciting plan you all put forward at your Investor Day?

Yes. Great question. We did give a lot of detail on our Investor Day, and I would refer people to that deck on our website because it really does go into a lot of detail around those plans. With the recent acquisitions that we completed early last year, it really allowed us to assemble a strong product portfolio also with the release in 2019 of Anika's regenerative solutions technology, TACTOSET in the United States, really put a nice product portfolio together. But we have continued big plans to not only do gap filling, but bring real innovation to the joint preservation space. In the short term, we have a number of sort of 510(k) products that we're working on. And then sort of outside of that 2024 planning period, HYALOFAST and CINGAL, which are legacy Anika products that were in active clinical studies around. So I would say strong product portfolio that we're driving commercial execution around now, some near and midterm product pipeline opportunities in our NPD pipeline. And then kind of past 2024, we're not done there. We've got a lot of opportunity for big growth after that with HYALOFAST and CINGAL.

Great. Maybe talk a little bit about how COVID impacted you? Because, obviously, one of the themes we've seen is companies trying to get into the ASC setting, and you guys had gone there ahead of COVID. And so how did COVID impact Anika versus other people who may not have had that concern after the ASC going into COVID?

Well, I think one of the things to think about that, I think, differentiates us is going into the ASC for a company that's been in the hospital OR and really has their capital structure, their implants, their instrument trays, their whole method of doing business focused around the hospital, making that change is a little bit like turning the titanic. Whereas we kind of came into this joint preservation strategy with the ASC in mind. And so the acquisitions that we did, the new product development that we're doing, we start out with what works in the ASC, and we develop our products around that philosophy, and we commercialize our products around that philosophy. So I think we're able to be a bit more -- I mean, I think we were more thoughtful about it before COVID even hit, and we're able to be a little bit more agile and responsive in that regard. So again, good product portfolio today, but as we develop products, very focused on how those products work in the ASC setting around complexity, ease of implantation, fewer instrument trays, the right pricing, all of those things reimbursement, that were really rolling up into that strategy.

Great. And how is -- at this conference, we've heard a number of people come out with some cautious statements about Delta in the acute care setting. How are you seeing the impact of Delta in the ASC setting, which has shown some different trends over time than the acute care setup?

Yes. I mean, what we've seen is clearly the biggest impact of Delta has been in the hospital environment for, I think, reasons everyone understands. I would say the ASCs certainly get impacted more on a rolling basis and very regionally, but less so than in the hospital setting. And then the injection part of our business has been impacted by COVID and continues to be impacted by COVID, especially as Delta has popped because that's probably sort of more elective than the surgeries are even. And so that definitely has -- is impacted in the short-term for sure.

Obviously, you guys are doing a lot on your own product portfolio. But maybe talk a little bit about what the injection and the HA arrangement is with J&J for some people who may not be as familiar with it? Because obviously it does provide as you alluded to, profitability for a company in many stages like you don't have profitability. So how is that HA relationship with J&J?

Right. Yes, I'm happy to talk about it. We have a great relationship with J&J. We've really benefited from that relationship over the years and continue to do so. Having the marketing and sales powerhouse of J&J Mitek behind the ORTHOVISC and MONOVISC name has really resulted in those products representing in combination, the #1 market share position in the United States for the viscosupplement market. And so that continues to be that dynamic. We are very happy with that relationship. It's a very good relationship, and they continue to put their muscle behind those products. They're very good products. They have great clinical data, and we look forward to leveraging the work that the company put into those products for many years to come. We did give some sort of directional guidance around our business here in the last quarter. And we feel like the range that we provided did a decent job of accounting for the ongoing COVID dynamics. So I think that's one way to think about that. And Mike, I don't know if you have anything you want to add on that point.

Yes. We've -- COVID been a headwind, as Cheryl said. For the first half of the year and with delta, it continues to hang around. And we see the statements that other people are making as well, and we're all in the same boat. We're excited for where things are going. In the near term, we've had some impact on trade shows and the ability to get the word out. We were just at AOS, which was exciting, but with limited attendance. So I think there's some near-term challenges with COVID that have been there, that other people have talked about. And but none of that changes kind of what we're focused on. And we've been using COVID as an opportunity to drive to the ASC, to drive these back office changes, these other things because we are laser-focused on the -- doubling the revenue by '24, the growth in the bottom line at the same time. And so that's how we're focused.

Right. On AAOS, I did have the opportunity to do some booth there, and they felt fresh, a lot of new products. One that the rest seem particularly excited about was the WristMotion, your total wrist replacement system. Maybe talk a little bit about that category, where you're seeing growth. And I think talking to you all kind of full launch this month and what are the opportunities for that product, which did seem very exciting to me?

Yes, by the way, thanks for coming by the booth. It was really exciting for us. That was really the first big meeting where we could get our brand-new big booth out there and be able to show everybody really what the new Anika is, what this transformation story looks like. So it was a great opportunity to do that. The wrist product, we're very excited about. We're in limited release right now, still fully on track for our full release at the end of this month, where we'll do a full release at the American Society for Surgery of the Hand on September 30. The limited release has gone great. Surgeons are very excited. The follow-ups they've been doing with their patients. They're giving us feedback like where has this thing been and my patients have motion preservation and biomechanics that I've never seen in any of the legacy wrist implants. This is -- one of the things we're focused on here is still today, wrist fusion is a procedure that's primarily done to treat wrist arthritis and to give the surgeons a reason to provide their patients with a motion preserving solution is what we were really focused on doing here. And we think with the improved biomechanics, the improved fixation and the design elements that we've put out there and the ability, again, to leverage this into the ASC, extending our risk franchise where we already sell a hemi, this is just a really nice fit for a next product for Anika.

Great. And the other product I was intrigued about and excited about was the shoulder product. Obviously, you've seen a number of M&A deals in MedTech recently to acquire shoulder, Stryker, Smith & Nephew, Integra. Maybe talk a little about your presence in shoulder because I know it's an area that investors get excited about and a large opportunity?

Yes, absolutely. I mean, we -- in all of our strategy and product portfolio thinking, extremities are a very important part of that, both upper and lower, so shoulder, hand risk, foot and ankle. And the shoulder really is a very large concentration of business for us across those verticals I talked to you about, regenerative solutions, soft tissue, sports med soft tissue fixation and in the arthroplasty space. So OVOMotion is a product that came in through the Arthrosurface acquisition. It's a product that's been available for many years, has great clinical data, really lends itself to use in the ASC. It's minimally invasive, it's bone preserving, it's tissue preserving. Again, great clinical results, great biomechanics, fewer instrument trays. And so that's one of the areas that we've really been able to focus on understanding how that can be a great solution for doing a total shoulder in the ASC. Again, it's stemless, so the instrument trades look very different for that device. So very exciting and really kind of speaks to our entire shoulder strategy across that continuum in the joint preservation area.

Right. And lastly, our products. TACTOSET that was the other one that I found -- had a discussion with one of your reps about it and she seemed very excited about the opportunity. So maybe talk a little bit about that opportunity, where it can go, how you're going to grow that one when it comes out on full launch?

Absolutely. I mean, TACTOSET is a great example of how we're leveraging the legacy Anika, hyaluronic acid proprietary technology. That is a product that is a calcium sulfate, hyaluronic acid injectable, settable bone grass substitute that we originally developed with a focus on treating insufficiency fractures, which is a nice about $100 million target market opportunity for us. And so we launched the product in late 2019, targeting that market. It's obviously been COVID hit, but we've seen since procedures have resumed that we're getting a lot of nice pickup. It's doing well for us commercially, and the surgeons are very excited about the patient outcomes that they're seeing early on. Most recently, actually, yesterday, we had some new news about TACTOSET. We've talked about the fact that we're going to continue to invest in that franchise. And yesterday, we announced that we have a new 510(k) clearance for using TACTOSET to augment soft tissue anchor fixation, which is, again, our ability to kind of expand into a new market area that previously didn't exist for that product and even for some of the competitive products that are out there for it. So we're looking to launch that indication at the end of October. And then we have additional projects continue to build out and invest in that franchise that we'll be talking about in the future. We haven't really given a lot of detail about that, but we're very excited about where that product takes us as a nice platform in the space.

Great. And I think on the pipeline, went away from kind of near-term launches or already launched products and the pipeline, you have HYALOFAST and CINGAL, obviously, both approved OUS, I think in 30-plus countries. Obviously, CINGAL had a step back 2 years ago, sort of like that can't even keep track of when that was. Maybe give an update on where those 2 products are in the U.S. in the clinical trials and what kind of what their pathway to approval is as we move forward to the FDA?

Yes, I'm happy to do that. So both products were very bullish on -- and we're bullish on them for very real reasons. We sell them both in over 30 countries outside of the United States. They do well. They've got a lot of traction. Again, we get great feedback around clinical results around patient feedback for how they experience those products. So our level of excitement on those products continues to grow as a result of that OUS experience. For HYALOFAST, that is a single-stage off the shelf, cartilage repair product that we can't wait to bring into the United States. It's a perfect fit in our joint preservation portfolio, really leveraging the call point that our commercial team is focused on. That is in a Phase III clinical trial in the United States right now. It certainly was impacted from an enrollment perspective by COVID, I think, just like many of the clinical trials where elective procedures were part of the process there as it was for HYALOFAST. But we have provided an updated time line. That's all on our investor website and we continue to march towards that updated time line and work toward patient enrollment there. That is an after 2024 event from a commercial sales perspective. CINGAL, we are in a pilot study in the United States that will then progress into a final definitive study for CINGAL in the U.S. again, that is a post 2024 event from a strategic planning perspective, but we continue to make those investments and have robust discussions with the FDA on the path forward with that product. Again, that is a sort of second-generation viscosupplement products, hyaluronic acid plus a steroid triamcinolone hexacetonide. We have great results with it outside the United States, very good clinical data, and we continue to push ahead with that clinical trial.

Great. You guys had a very robust Investor Day with lots of disclosure and as was referenced earlier, you put out some impressive financial targets. Maybe you like walk us through those financial targets and give some color as to, in particular, given the focus investors have these days on top line growth, how will you achieve that doubling of the revenues off the 2019 baseline?

Thank you, Peter. No, we're very excited about this opportunity. So as you said, the target is to double the 2019 state revenue. That was $115 million. So that would, say, by 2024, our target is $230 million or more of revenue. As we laid out at the Investor Day, that growth is coming from a combination, Cheryl mentioned, this is a combination of commercial execution, evenly between commercial execution and new product introductions. But what I think is meaningful to note is, Cheryl just spoke about the exciting products we have with HYALOFAST and CINGAL. HYALOFAST and CINGAL are not products that we're including in that 2024 targets. Those are upside beyond after '24 when those get introduced. The drivers for the new product side through 2024 are actually 510(k) products. And so there's less of [indiscernible] less cost, there's the quicker turnaround to doing that. So the combination of commercial execution and new product introduction is different than waiting on 2 big products that are exciting, but have a longer clinical pathway. So in terms of what does that look like, one of the things that is important to us is we tell this -- explain what's going on at Anika is how are we going to get there? These all sound like great targets, but what are we doing? So we laid out at the Investor Day, and it's on our website, what does this look like over this period between now and 2020, 2021, the transformation period where we're adding the team, the capabilities, all the processes and so on, to 2024 where we hit those targets. And so we broke that down into what's the work that we're doing, and the transformation and the building the foundation for the growth and then the acceleration. And what does that mean from a revenue standpoint, gross margin standpoint and an operating profit standpoint. So long story short, the company has accelerated towards double-digit growth. The guidance that we gave on our last call was 11% to 14%. And so we're doing just what we said we were going to do. And that's happening while we're transforming the business, the combination of these new product introductions, the acquisitions and so on and the existing business. Are what's driving that. And we have healthy profitability that comes from that. As we introduce these new products over the coming years, that's when we accelerate to the mid-teens CAGR. And again, just as a reminder, that's a mid-teens overall company. So our growth is being driven by joint preservation. Joint preservation is the part of the business that is a high-growth part of our business. That's the part with -- that we acquired, the Arthrosurface and Parcus products in soft tissue repair and inbone spring technologies. It's where we brought in our Anika products on the [ U.K. ] side. And so that's where the real growth drivers are from a revenue standpoint. And there, we guided this year to high 20s, low 30s, and that's a high-growth area of our business as we go through the plan period. And that will accelerate as we introduce new products through that. So what will happen is the total company view is we go from mid-teens where we are here in the transformation period. And as we kind of roll through, it's not all back-end loaded, but you really need to get the movement on the new products, the team coming together, the systems and capabilities as we go through towards '23 and then accelerating between [indiscernible]. So we laid it out in more detail, but I think the point is, it's not based on one product, it's not based on one area, it's focus of joint preservation with the growth, and then a lot of the profitability is coming from the legacy business, it's a more mature business, and it helps us to fund that growth organically. And then where we can do tuck-ins to accelerate, to strengthen, to -- we move from a $1 billion addressable market with the legacy business to an $8 billion addressable market, now that we have extremities and [indiscernible] it is like different tone. Being a $230 million business, with an $8 billion TAM, we recognize that this is a big space, and we don't need to corner the market on it, but tuck-ins to accelerate our expansion in this space. It just makes a lot of sense. So we have a healthy balance sheet. We have strong cash flows, positive cash flows and already a very strong organic portfolio. So we're doing a lot of work in house, and we'll use the balance sheet, where it makes sense.

Great. My next question, I think you kind of front ran it was going to be on M&A. So it sounds like even while digesting Arthrosurface and Parcus, you guys remain given your healthy balance sheet, open for business on tuck in? In your words, tuck-in M&A, is that fair to say?

Yes, absolutely. Yes. I mean, we look to maintain our financial discipline around thinking about acquisitions, but there are other opportunities like in licensing, distribution, anything that kind of fits along that tuck-in type continuum right now is really an area that we continue to look at to ensure that we're leveraging the investments that we've made in our commercial team and that we use that as a potential opportunity for broadening the portfolio, but still staying very focused in that joint preservation continuum.

And just the only thing I would add to that is, as I said, Peter, our doubling the revenue of the company is an organic plan. So -- but we recognize that's not the end of the story. $230 million does not include the internal projects of HYALOFAST and CINGAL, it doesn't include tuck-ins. And so there's a big opportunity in front of us, and we're building for that.

Great. That makes sense. What I -- look, you guys play in a big TAM. You're growing very, very nicely. Some could argue the stock price doesn't reflect that today. So what is the biggest misconception about Anika that you'd like to kind of clear up with the investment community as you guys continue to embark on? I think what's been a very impressive strategic plan to date?

Yes, I think your reflections are true. And I think COVID has partly been a little bit restrictive in our ability to really get out and tell our story, both to our customer base and to the investor base. We haven't been able to be face-to-face. It's just been another layer of difficulty in getting our story out. And we really embarked on this transformation literally weeks before COVID hit. So I think people still don't really have a good understanding of who the new Anika is that we have transformed that we are now a fully integrated fully direct commercial organization that we're a company of our size and growth numbers that are growing profitably, which, again, kind of puts us in a little bit of a different category for a company in our space of our size and scale. I still don't think the message is completely out about how focused we are on the ASC and how we've really kind of been able to have a strategy there frankly, the strategy was before COVID, but we've been able to take advantage of that COVID dynamic of things really pushing to the ASP. But look, I think the word is getting out, we still have the situation where meetings get canceled. And I think customer-facing and investor facing continues to be mostly virtual, but we continue to push forward, and we're getting the story out. We think it's an exciting one, and we look forward to continue talking about it.

And I would just add, I think we saw the same thing when I was at Pod, and you talked about transforming a company. Investors need to see it, they need to see it executing. And they need to see it in the numbers. And that's why we've been more descriptive in the Investor Day and laying out what we're going to do and how we're measuring ourselves as we do it. And so we need to do what we say we're doing and prove it. And COVID, over -- in the year that I've been here, it's been a challenge because it does limit our ability to do that in the short term. But we're very excited for the opportunity in front of us. And I think the stock price were reflected as we execute our plan over the coming years.

I guess time for one last question. We've talked a little bit and bounced around a little bit about your profitability. And Mike, you and I spent time when you were at Insulet, which wasn't as profitable or wasn't profitable like you guys are today. As you reflect on being profitable when in previous time you haven't been. What inherent benefits does that bring Anika because there are a number of most of my clients, frankly, with your growth profile are not profitable. So how should investors think about what differentiation and benefits that can bring to the Anika story and, therefore, to investors?

It's interesting, as we talk about Insulet. One of the things that I talked a lot about was the pivot to profitability. And we made that pivot while I was there and part of the team that did that. I think people get really excited about revenue growth as they should, especially for small-cap companies. But having that stability, when things aren't going right, it's nice to have that profitability underneath it. And so I'm never going to apologize for profitability. I know that we're going to -- that revenue growth is the top driver of our value, and we are laser-focused on what we believe is a very healthy growth story, right, mid-teens growth driven by high-growth in our fast-growing joint preservation segment. But it's -- I like to see the profitability there. Not just we have a healthy gross margin, but the positive cash flows, I think is just healthy for investors and for valuations. And so we're laser-focused on the top line, but I think that having both, I think, separates us. And I've seen it in some of the data that, that really drive valuations. Again, once people are securing the top line, when they can see the bottom line along with. So I think it's -- I wouldn't call it a problem, I was going to say it's a good problem to have. It's really a good place to be in the situation that we are so that we can invest and drive growth.

And with that, we're out of time. Cheryl, Mike, thanks for presenting. I love your attendance at the conference and best of luck, executing the plan.

Thank you very much.

Thanks, Peter. We appreciate the invite. Bye-bye.

Thanks, everybody.