Anika Therapeutics, Inc. (NASDAQ:ANIK) Q3 2023 Earnings Call Transcript
Anika Therapeutics, Inc. (NASDAQ:ANIK) Q3 2023 Earnings Call Transcript November 3, 2023
Operator: Good evening, ladies and gentlemen, and welcome to Anika's Third Quarter 2023 Earnings Conference Call. All participants' will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded. I'd now like to introduce Mark Namaroff, Vice President Investor Relations, ESG and Corporate Communications. Please proceed.
Mark Namaroff: Thank you. Good afternoon, everyone and thank you for joining us for Anika's Third Quarter Conference Call and Webcast. Our Q3 earnings press release was issued after the close of the market today and then available on our Investor Relations website located at anika.com as our supplementary PowerPoint slides that will be used for the discussion today. With me on the call today are Dr. Cheryl Blanchard, President and Chief Executive Officer; and Mike Levitz, Executive Vice President, Chief Financial Officer and Treasurer. Please take a moment and open the slide presentation and refer to Slide number 2. Before we begin, please understand that certain statements made during the call today constitute forward-looking statements as defined in the Securities Exchange Act of 1934.
These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results performance or achievements. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. Please also see our most recent SEC filings for more information about risk factors that could affect our performance. In addition, during the call, we may refer to several adjusted or non-GAAP financial measures, which include adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted earnings per share, which are used in addition to results presented in accordance with GAAP financial measures.
We believe that non-GAAP measures provide an additional way of viewing aspects of our operational performance. But when considered with GAAP financial measures and the reconciliation of GAAP measures, they provide an even more complete understanding of our business. A reconciliation of these adjusted non-GAAP financial measures to the most comparable GAAP measurements are available at the end of the presentation slide deck and in our third quarter 2023 press release. And now, I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?
Cheryl Blanchard: Thanks, Mark. Good afternoon, everyone and thanks for joining us. Please turn to Slide 3. We are pleased with our third quarter results, which underscore the strength of our strategy and reinforce our confidence in the powerful growth engine we've created. Following a period of purposeful investments to enable our transformation into the largest and highest opportunity areas of the joint preservation market, we are beginning to see the accelerated growth and momentum building across the business we've been working toward for some time. We delivered 14% growth in Joint Preservation and Restoration in the quarter and higher-than-expected growth in OA Pain Management, which has now grown 11% year-to-date. The acceleration in Joint Preservation and Restoration is being led by our newest products X-Twist and RevoMotion, which are gaining traction and generating a lot of interest in the markets we serve.
The double-digit growth in the quarter positions us well for Q4 and as we head into 2024. The continued growth in our OA pain business follows a strong second quarter led by Monovisc growth globally and double-digit Cingal growth outside the US. Given the strong performance across our business, we are raising our revenue and EBITDA margin guidance for the year which Mike will go into in a minute. Our expanding Joint Preservation and Restoration portfolio has been key to our continued growth and we achieved a number of important milestones in the third quarter. Our RevoMotion reverse shoulder arthroplasty system had a very successful full market release in September at the OSET Annual Meeting in Boston attracting strong interest from surgeons.
We also received the final 510(k) clearance from the FDA for our Integrity Implant System and we're on track for full launch in the first quarter of 2024. As a reminder, Integrity is our truly differentiated regenerative HA-based patch system for the augmentation of rotator cuff and other tendon repairs. Our X-Twist Fixation System also achieved a significant milestone this quarter, receiving 510(k) clearance for the biocomposite version, complementing the PEEK version that was released earlier this year. The clearance of X-Twist biocomposite now allows Anika to address the full US$600 million rotator cuff market. We are on track to launch the Biocomposite version in Q1 of 2024. We also reached a milestone in Medical Education training over 500 surgeons this year across our full Joint Preservation and Restoration portfolio.
We're pleased to see that OA Pain Management continues to outperform. This includes J&J's above-market growth and share capture as they continue to expand their number one market position in the US OA Pain Management segment. Outside the US, Cingal has consistently delivered double-digit growth and is the next-generation non-opioid osteoarthritis pain product of choice in over 35 countries. Cingal's highly-differentiated clinical profile and its demonstrated real-world benefits have underpinned its international growth. We continue to explore Cingal partnership opportunities in the US and select Asian countries with significant interest from several parties. We're also continuing to engage with the FDA to advance Cingal towards US regulatory approval.
As a reminder, we had a Type C Meeting with the FDA earlier this year. And we are awaiting feedback on our proposal to them on next steps to complete non-clinical work so that we can file an NDA as quickly as possible. We will continue to keep everyone updated on this process. Our Cingal market adoption and double-digit growth outside the US reinforces, that this next-generation product would be a meaningful addition to US clinicians' arsenals to treat OA Pain with a non-opioid product. On Slide 4, I'd like to spend a few minutes reviewing our Integrity System, which will be a key value driver for Anika and a game-changer in how surgeons augment their rotator cuff and other tendon repairs. Integrity's key differentiating feature is the inherent structural integrity of the Hyaluronic acid-based scaffolds, compared to the current collagen patches on the market.
This strength comes from its HA-based hybrid structure resulting in a patch that is over 50% stronger than the leading collagen patch in Tensile Strength, Suture Retention and Tear Resistance even when hydrated. That provides for the ability to confidently manipulate the patch intraoperatively and strongly affix it with staple, tacks or suture during the repair. Another key value driver for Integrity is in its regenerative capacity. The hyaluronic acid scaffolds support healing through improved cell infiltration, tissue remodeling and tendon thickening. In a head-to-head animal study the Integrity patch demonstrated about three times the regenerative capacity compared to the leading collagen patch. This data is important to both the surgeon and the patient.
The combination of Integrity's strength, increased regenerative capacity and an efficient reproducible delivery system is what is getting surgeons really excited. We are feeling a pull from surgeons excited for Integrity to launch. We're confident that it will become the standard of care in rotator cuff augmentation and along with our recently-launched RevoMotion and X-Twist position us to drive growth for years to come. Please turn to Slide 5. We've been investing with purpose to establish Anika, as a global leader addressing unmet needs in early intervention orthopedics. We are leveraging our core expertise in hyaluronic acid and portfolio across OA Pain Management, Regenerative, Sports Medicine and Arthrosurface Joint Solutions. The investments we've made over the past three years are now beginning to bear fruit.
In fact most of the products on this slide are either launched or are launching in the first quarter of 2024 into larger markets than Anika has entered before in our direct business, setting up 2024 as an exciting year. In addition to those products our value-driving Cingal and Hyalofast products have now advanced and are closer than they have ever been with line of sight to US regulatory filings for both products. We expect the next-generation OA Pain market served by Cingal adds an additional $1 billion plus to our existing $1 billion market opportunity served by MONOVISC and ORTHOVISC and Cingal is perfectly positioned to win. Hyalofast addresses the $1 billion-plus cartilage repair market with a single-stage off-the-shelf regenerative product.
Now that we are fully enrolled in our pivotal trial, this breakthrough device has a well-defined pathway to launch in the US market by 2026. In short, our highly-differentiated new product pipeline is being realized. On Slide 6, I'll discuss our focus on commercial execution and profitability. Anika has a long history of generating strong profitability and cash flows. We've used these cash flows in recent years to significantly expand Anika's market and growth opportunities with key new products and critical internal investments to support sustainable long-term growth and our commitment to growing profitability. With the 2023 full market launches of RevoMotion and X-Twist PEEK and the 2024 launch of Integrity and X-Twist Biocomposite, we're expecting sustained double-digit growth in joint preservation in 2024 and beyond.
We are also confident in the continued above-market growth of our core OA pain management products led by Monovisc globally and Cingal outside the US. With the investments we've made in R&D, scaling the business and addressing MDR, we're now focused on actively managing our OpEx, while still supporting the significant growth and profitability acceleration in the coming years. As spending stabilizes, we are shifting the investments we do make toward commercial execution as we begin to establish a very targeted direct sales force going into 2024. These hires will be focused on regenerative solutions and sports medicine products to augment our hybrid sales channel and penetrate underperforming accounts and geographies. The hybrid channel is a cost-effective model and works very well where distributors are focused on our products.
The direct reps will strengthen the areas where we can drive better focus and commercial execution to deliver on the significant growth opportunity in front of us. These investments to augment our hybrid sales force with targeted direct sales reps are thoughtfully timed with the launch of our newest products such as Integrity, X-Twist and Tactoset expansion. At the same time and to be clear, we are committed to keeping total company costs stable as we leverage the investments we've already made to develop and launch these exciting new products. In summary, we continue to have a strong balance sheet with a healthy cash position and no debt and with our meaningful accomplishments this year are confident as we move forward to realize the significant opportunity in front of us.
Now I'd like to turn the call over to Mike to review the third quarter results and our outlook for the remainder of the year. Mike?
Mike Levitz: Thank you, Cheryl. Please turn to slide 7. I'll now walk you through our financial results for the third quarter of 2023. I'm pleased to report total revenue for the quarter grew to $41.5 million, exceeding our expectations driven by accelerated double-digit growth in Joint Preservation and Restoration and better than expected growth in OA Pain Management. Our results also reflected the lower non-orthopedic revenue we discussed in prior quarters following our planned exit from product lines that did not fit our profitability objectives. The lower non-orthopedic revenues reduced total company growth in the quarter by approximately three percentage points. Our Joint Preservation and Restoration revenue increased 14% in the third quarter to $13.5 million.
This accelerated growth was driven by our recent product launches in the United States with X-Twist and RevoMotion and by strong international growth, some of which reflected favorable order timing. Through the first nine months of this year, Joint Preservation revenues have grown 10% compared to the same period of 2022, a nice acceleration from historic growth rates as we see the early benefit of our recently launched products in the United States as well as continued international growth. Revenue in our largest product family, OA Pain Management increased 2% to $24.9 million on increasing above market global customer demand offset by lower transfer units in the quarter on order timing following a high second quarter. Through the first nine months of the year, our OA Pain Management revenues have grown 11% compared to the same period of 2022 on rising global demand led by Monovisc in the United States and both Monovisc and Cingal outside the United States.
As expected, our non-orthopedic revenue declined 22% to $3.1 million and is down 34% year-to-date reflecting the continued impact of our exit from legacy product lines that do not support our growth and profitability objectives. Our gross margin in the third quarter increased to 60% and includes the non-cash impact of $1.6 million of acquisition related amortization expense from acquisitions made in 2020, as well as product rationalization reserves of approximately $750,000 associated with legacy non-orthopedic products we no longer expect to sell. Our adjusted gross margin, which excludes the non-cash acquisition-related amortization and product rationalization reserves was 66% in the quarter, down from 67% in the same quarter last year as higher costs were largely offset by favorable product mix and improved operating efficiency.
From a spending standpoint, our operating expenses totaled $32.6 million in the third quarter, up from $28.6 million in the same period of 2022, primarily due to a $4.5 million nonrecurring charge in the quarter associated with the discontinuation of a software development project. Excluding this charge, our operating expenses were lower than last year on continued expense management as we approach the completion of the development and launch readiness of our new FDA-cleared products in support of their planned launch in the first quarter of 2024. Our net loss for the quarter was $6.6 million or $0.45 per share compared to a net loss of $4.2 million or $0.29 per share in the third quarter of last year. On an adjusted basis net income improved to breakeven, up from an adjusted net loss of $725000 or $0.05 per share in the prior year reflecting growth in the business and spending management.
Anika generated adjusted EBITDA in the quarter of $4.7 million, up from $4.1 million in the third quarter of last year and our adjusted EBITDA margin in the quarter was 11% up from 10% in the same period last year. Lastly, with regards to our cash flow and capital structure. We generated operating cash flows of $6.5 million during the third quarter, up from $2.7 million in the same period last year on growth in the business and spending management. Our capital expenditures in the quarter were approximately $700,000 and primarily reflected investments in instruments in support of our key product launches such as RevoMotion. We ended the third quarter with $70.7 million in cash and no outstanding debt. Anika maintains a healthy balance sheet and is well positioned to continue to self-fund our growth initiatives to drive shareholder value.
Please turn to slide 8. Now I would like to review our updated financial outlook for fiscal year 2023. Based on our results to-date and current momentum, we are raising our full year guidance with an updated total company revenue outlook for fiscal year 2023 of $164 million to $166 million, representing growth of 5% to 6% over 2022 on above-market growth in OA Pain Management and accelerated growth in Joint Preservation and Restoration, offset in part by lower non-orthopedic revenues. The lower non-orthopedic revenues are expected to reduce total growth this year by approximately 4 percentage points. As such, excluding non-orthopedic, Anika's revenues are expected to increase 9% to 10% this year over 2022. In OA Pain Management, we now expect revenue of $99.75 million to $101 million, up 8% to 10% over 2022 as our market-leading products continue to gain adoption globally.
This outlook is up over $3 million from our previous range of $96 million to $97.5 million on the strong progress year-to-date and positive momentum globally, and positions this core part of our business to reach a key milestone of $100 million this year. In Joint Preservation and Restoration, we now expect revenue of $54.75 million to $55.5 million, up 9% to 10% over last year, an acceleration due primarily to our new product launches in the United States as well as continued growth internationally. Our previous range was $54 million to $55.5 million. We continue to expect non-orthopedic revenue of approximately $9.5 million. That's a decrease of just over 30% from last year primarily due to last-time buys of legacy products and veterinary order timing in 2022.
We continue to expect adjusted gross margin for the year to be roughly in line with the 65.9% we reported last year. And based on the higher revenue guidance, we are also raising our adjusted EBITDA margin guidance for the year to 6% to 8%, up from our previous guidance of low-single-digit. We continue to manage operating expenses prudently, as we've expire some non-recurring costs in the first three quarters, primarily associated with the settlement of Parcus Medical arbitration, shareholder activism and discontinuation of a software development project. As we look ahead to 2024, based on our recent and upcoming product launches and with the momentum we saw in the third quarter and are seeing as we move now into the fourth quarter, we expect 2024 to be a year of above-market revenue growth led by double-digit growth in Joint Preservation and continued above-market growth in OA Pain Management.
With the growth in revenue and stabilized spending now that X-Twist, RevoMotion and Integrity are all FDA cleared and on or coming to the market, we also expect to increase our adjusted EBITDA margin and bottom line in 2024 approaching breakeven adjusted net income was turned positive on excluding non-cash stock-based compensation. We look forward to providing additional details on our normal schedule as part of our year-end earnings call. In summary, as we head into the fourth quarter, we are pleased with our growing momentum, which is reflected in our increased revenue and EBITDA margin outlook for the year. We remain focused on delivering growth and operational execution to position Anika for long-term success. I will now turn the call back over to Cheryl.
Cheryl Blanchard : Thanks, Mike. Please turn to Slide 9 before we open up the call for Q&A. We're excited about the acceleration and growth of our Joint Preservation and Restoration portfolio, as our new products gain market traction and we see our strategy in action. We are also pleased with the expansion of our market-leading OA pain management products both in the U.S. and OUS. With the strength of our growing differentiated HA-based regenerative portfolio, as well as our value creation opportunities with Cingal and Hyalofast, Anika is very well positioned for and committed to continued top and bottom line growth in the years to come. Importantly, we have self-funded this transformation and continue to maintain a healthy balance sheet with a solid cash position with no debt.
I'd like to take a moment to thank all of our employees for their continued hard work and dedication to supporting our efforts, as we build Anika into a leader in joint preservation and restoration. Together we're driving real momentum, as we work to achieve our mission of restoring active living for people around the world. And with that, we'll open up the line for questions.
Operator: Thank you. [Operator Instructions] Today's first question comes from Mike Petusky with Barrington Research. Please go ahead.
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