Anika Therapeutics Inc (ANIK 1.67%)
Q1 2020 Earnings Call
May 8, 2020, 11:30 p.m. ET
- Prepared Remarks
- Questions and Answers
- Call Participants
Good evening, ladies and gentlemen, and welcome to the Anika Therapeutics First Quarter 2020 Earnings Conference Call. [Operator Instructions].
I would now like to turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.
Sylvia Cheung -- Chief Financial Officer
Thank you, Sadie. Good evening, everyone, and thank you for joining us. With me on the call today is Dr. Cheryl Blanchard, who was recently appointed President and Chief Executive Officer of Anika. I've worked with Cheryl for almost two years and closely alongside her over the past several months during this highly unusual time externally and internally. I look forward to continuing to work with her and the rest of our management team to deliver progress toward our strategic plan. During today's call, Cheryl and I will review our first quarter 2020 financial results and key business highlights, which were summarized in our earnings release issued today. A copy of the earnings release is available on the Investor Relations section of our website at anikatherapeutics.com. In addition, a slide presentation is posted on our website in the Investors Relations section under the Events and Presentations tab. We invite you to take a moment now to open the file and follow the presentation along with us. Please turn to slide number two.
Before we begin, please remember that certain statements made during this conference call constitute forward-looking statements as defined in the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations, including statements with respect to impacts of the COVID-19 pandemic on Anika. These statements are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results, performance or achievements. Please also see our SEC filings for more information about factors that could affect our results. Certain financial measures we will discuss on this call are non-GAAP financial measures. We believe that by providing these measures, helps investors gain a more complete understanding of our results and is consistent with how management views our financial performance. A reconciliation of these non-GAAP financial results to the most comparable GAAP measurement, calculated and presented in accordance with U.S. GAAP is available in the Investor Relations section of our website. Finally, due to circumstances and disruptions related to the COVID-19 pandemic, we have estimated the amounts related to goodwill impairment, a reduction to the fair value of contingent consideration related to the Arthrosurface and Parcus Medical acquisitions.
These noncash amounts should be considered provisional subject to the completion of related accounting work. Specifically, in order to assure accurate and transparent reporting to our stakeholders, the company with its advisors, is determining the impact of the evolving COVID-19 situation on these amounts as they relate to the recent acquisitions completed during the first quarter. The amounts associated with these U.S. GAAP measures are reasonable estimates based on the information available in our assumptions and judgment to date. Due to the fluidity of the situation, final results could differ from those presented today. Anika does not expect changes with respect to other reported results, except as a result of changes that may be made to the provisional amounts. With respect to the financial results presented on this call that are not related to goodwill or fair value of contingent consideration, we do not expect any material changes unless results are impacted by events between today and the date we submit our SEC Form 10-Q for the first quarter. We intend to use the extra time provided by the recent COVID-19 SEC filing release measures to determine these acquisition accounting matters. We plan to file our Form 10-Q on or before May 22, 2020, but no later than June 25, which is 45 days from the Form 10-Q's original filing due date of May 11. For additional information, please see the section captioned Clarifying Note about Financial Results in our earnings press release we issued this afternoon.
I'll now turn the call over to our CEO, Dr. Cheryl Blanchard. Cheryl?
Cheryl R. Blanchard -- President and Chief Executive Officer
Thank you, Sylvia, and good evening. We hope that everyone joining us on this call remains safe and in good health during this difficult and unprecedented time. Whether at home or in the workplace, we have all been impacted by the effects of the COVID-19 pandemic and our hearts go out to everyone who has suffered personal hardship or loss. Our hearts also go out to the healthcare workers around the world, who are on the front lines selflessly fighting this global pandemic. As this is my first quarterly call since being named President and CEO, I would like to thank the Board of Directors for their support during the last several months and for their confidence in my leadership. As a Board member and then as interim CEO, I realized that I had a unique opportunity to leverage my past experiences to help guide Anika through its continued evolution. I have successfully led operational and commercial businesses through periods of significant growth, scaling, integration and even disruption.
I am very excited and humbled to have been chosen to continue working with the Anika leadership team to drive the company's momentum and growth. As I considered taking on the CEO role permanently, I thought about Anika's tremendous opportunity: a company with products that address true unmet patient and market needs and the commercial engine to deliver significant value in attractive segments of the orthopedic market. I thought about Anika's strong culture of innovation, operational excellence and financial discipline. I also thought about the recent transformative acquisitions of Parcus and Arthrosurface and the tremendous growth opportunities they present. In short, over the last several months, I have come to appreciate that Anika presents an exceptional opportunity. Anika has a strong leadership team as well as talented and passionate employees. And I have the benefit of having already worked beside this team, long enough to see what is possible as we continue to identify new opportunities to create value for patients and shareholders.
I look forward to getting to know Anika's analysts and investors better in the coming weeks and months as we attend virtual and then, hopefully, soon, in-person investor events. Before diving into our first quarter results, business update and outlook, I'd like to discuss how Anika has been navigating the evolving COVID-19 environment. Please turn to slide number three. First and foremost, we have taken the necessary steps to safeguard the health and well-being of our employees, our communities and the patients we serve. All Anika employees who are able to work remotely have been doing so since the middle of March. We continue to closely monitor and follow guidance from the CDC, the World Health Organization, and state and local authorities in the U.S. and abroad. I'd like to thank our employees, their families and our partners for all of their extraordinary efforts and commitments, while adjusting to the new normal of remote work and social distancing. Our manufacturing operations and supply chain have continued with minimal disruption. And employees in those areas are following best practices and guidance from public health authorities to keep safe.
Our team and distribution partners have coordinated closely with medical facilities and surgery centers to ensure patients have uninterrupted access to the treatments and implants they need. At this time, we do not anticipate disruption to the supply of our therapies for patients due to COVID-19 and are actively monitoring and adjusting manufacturing operations to respond to the temporary changes in customer ordering patterns. We have been working with the clinical trial sites and other partners to safely continue ongoing studies, while at the same time, determining the impact of COVID-19 on those studies. The goals are to maintain patient safety and minimize disruption to ongoing clinical trials so that we can accelerate our activities when the COVID impact lessens. We'll discuss those efforts in more detail shortly. We have also worked with industry partners to donate supplies to meet the urgent needs of healthcare providers. This includes the donation and delivery of personal protective equipment to local clinics and healthcare workers on the front lines. And lastly, we have taken swift and important steps to strengthen our liquidity and ensure that we are best positioned to successfully navigate through the uncertainty of COVID-19 and are ready for a strong recovery. Internally, we have implemented short-term expense controls to maintain our healthy balance sheet.
We have also prioritized key business initiatives to help align expenditures with near-term needs and to balance longer-term opportunities where possible. Now I'd like to turn to progress Anika made in the first quarter and highlight some of our recent achievements. We delivered a decidedly strong total revenue growth of 43% year-over-year in the quarter driven by double-digit growth in our legacy joint pain management portfolio and a strong contribution from our Joint Preservation and Restoration surgical portfolios following the recent acquisitions of Parcus and Arthrosurface. International joint pain management therapies grew 36% year-over-year. Global CINGAL revenue, close to doubled year-over-year. We continue to expand our geographic penetration of CINGAL and recently received marketing approval in Australia. We ended the quarter with $92 million of cash and investment on our balance sheet. As I noted earlier, during the quarter, we closed the Parcus and Arthrosurface acquisitions in late January and early February, respectively. We also appointed David Colleran to the newly created position of Executive Vice President, General Counsel and Corporate Secretary. These achievements strengthen our ability to successfully execute on our 5-year strategic plan and achieve a leadership position in joint preservation and restoration.
While we are pleased with our first quarter results and business progress, COVID-19 has impacted our ability to forecast our results for the rest of this year as elective procedures are being temporarily suspended or postponed in countries worldwide. As a result, we are withdrawing our full year 2020 financial guidance, which we issued in February prior to the COVID-19 situation impacting the business. We intend to reinstate our guidance practices when visibility into our future revenue trends improves. The big question that many, including Anika, are working to address is how long it will take for elective procedures to recover back to pre-COVID-19 volumes. In the U.S., COVID-19 policy making is being handled largely on a state-by-state and even city-by-city basis. The international outlook is similar as countries are taking varying approaches to combating the pandemic and returning to pre-COVID operations. The pace of recovery will be phased and regionally determined based on local orders and the overall impact of COVID-19. While elective procedures have been significantly impacted, we are continuing to fulfill purchase orders for ORTHOVISC and MONOVISC. This revenue is expected to help offset some of the near-term impact from procedure delays affecting the legacy Parcus and Arthrosurface products and reflects the resiliency of Anika's diversified portfolio.
We are closely monitoring procedure volumes and analyzing trends as we manage our inventory. It's important to remember that many of these procedures are postponed, not canceled. Our top priority is taking the necessary steps, so we will be ready to support our customers and the patients they serve when these procedures return and making sure we are positioned to continue our strong growth trajectory post-COVID-19. Now I'd like to discuss our strategy for the road ahead. Let's start with what we know today. Anika's commercial products and innovative therapies address significant and painful orthopedic conditions, delivered both as emergency and elective procedures in surgical and office-based settings. At the same time, demands on the healthcare system and prioritization of COVID-19 cases have resulted in elective and scheduled procedures being suspended and delayed. Because of the importance of the treatments we offer, we expect a robust recovery in both in-office and surgical procedures once restrictions lift and volumes return to normal levels. We are actively tracking the situation through multiple channels with the goal of quickly returning to full commercial activity as soon as we can.
We are monitoring leading indicators, including hospital, surgery center and office-based activity, and we are in regular and direct contact with our customers and distributors. We are maintaining frequent and productive dialogue with commercial and business partners around the globe to determine how regional authorities are planning to safely phase in normal surgical activities. We are overlaying the data we analyze with our direct and partnered commercial and clinical support teams to optimize activity in early moving regions first, followed by those areas where impacts will remain for longer periods. And we are closely monitoring competitive activities across our global network in order to understand and react to developments that might represent an opportunity or challenge to our return to full activity. Our ability to continue implementing vigilant analysis while maintaining readiness and flexibility will be the key to our success. Our new hybrid commercial model in the U.S. will also contribute to this success by enabling us to scale expenses more efficiently, particularly during this period of uncertainty and respond more rapidly as regional procedural volumes gradually return to a normal level. Please turn to slide four.
I with respect to clinical trials, we have adopted a policy of safely maintaining existing programs with a focus on safety and responsibility to the patients and healthcare professionals at the clinical trial sites. Consistent with recent FDA guidelines, we are fully engaging all key stakeholders in the clinical trial ecosystem, including investigators, patients, facilities and service providers where applicable. For ongoing trials, we are leveraging virtual communication tools and delaying in-person visits. Additionally, we have deferred new patient enrollment and new trial site initiations due to COVID-19-related challenges. Because of these factors, we no longer expect to begin the CINGAL pilot study in the first half of this year. Fortunately, the pilot study was at a relatively convenient point for a temporary pause in activity as pre-enrollment activities are substantially complete, and we have not initiated patient enrollment. We are eager to begin enrolling clinical sites and patients as we continue to closely monitor the situation. We intend to commence the pilot study as soon as we can safely do so. Enrollment in the HYALOFAST Phase III trial was also impacted in the first quarter and was temporarily paused in April. As a result, we no longer expect to complete patient enrollment by the end of this year.
We are actively managing the trial activities to minimize disruption. Prior to COVID-19, we made efforts to improve the pace of trial enrollment by expanding new sites in several countries outside of the U.S. We have identified and completed much of the pre initiation site activities at clinical site locations in Mexico, Indonesia and the Philippines that are well-qualified to complete initiation and begin enrollment as soon as it is safe to move forward. On the product development front, we previously anticipated submitting a 510(k) application to the FDA for our rotator cuff repair therapy in early 2021. In light of COVID-19, we are withdrawing this expectation at this time. We will provide a more definitive time frame for the CINGAL, HYALOFAST and rotator cuff development programs when we are able to restart normal trial and development activities and have more visibility on the length and regional impacts of the COVID-19 pandemic. Turning to slide number five. I'll now provide an update on the ongoing integration activities associated with our recent acquisitions of Parcus and Arthrosurface. In February, shortly after completing both transactions, we held our first national sales meeting with the combined commercial teams. It was an exciting high energy gathering of 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.
The result was an energized team, creative ideas for cross-selling opportunities and encouraging momentum as we look to grow the business from a larger and more diverse product base. In recent weeks, we have had daily product cross-training sessions to educate the global commercial team on the newly combined product portfolio. Since early April, we have also continued to engage with the surgeon community through our Anika virtual medical education program. These are virtual sessions focusing on surgeon peer-to-peer training on our products. We expect medical facilities to start reopening for elective surgical procedures around midyear, with the pace of procedural volumes potentially accelerating in the second half of the year. We are taking all the necessary steps to ensure our commercial team is ready to hit the ground running as soon as safely possible. It is very exciting to see the three teams becoming one, particularly in light of this global crisis. This has fueled a passion across our organization to fully leverage our innovative product portfolio to help patients in need. Our team is aligning and is energized as we look to the future and this next important chapter in Anika's story.
I will now turn the call over to Sylvia to review our first quarter 2020 financial results. Sylvia?
Sylvia Cheung -- Chief Financial Officer
Thank you, Cheryl. Please turn to slide number six. I'd like to begin by reviewing our three new product categories for which we are reporting revenue, following the expansion of our product portfolio into therapies for joint preservation and restoration. First is the joint pain management family, which includes the human and animal viscosupplement products, including MONOVISC, CINGAL and ORTHOVISC. Second is the orthopedic joint preservation and restoration family, including TACTOSET, HYALOFAST and sports medicine surgical products from Parcus and Arthrosurface. And lastly, the other category, which includes legacy products, such as ophthalmology, advanced wound care and anti-adhesion surgical products. Please turn to slide number seven. Anika achieved a record Q1 revenue despite the COVID-19 pandemic, which impacted our first quarter results. Total revenue for the first quarter of 2020 increased 43% year-over-year to $35.4 million compared to $24.7 million in the prior year. Revenue growth for the quarter was driven primarily by orthopedic joint preservation and restoration products due to the acquisitions of Parcus and Arthrosurface, which contributed a combined $6.8 million of revenue during the quarter. Further, our joint pain management portfolio delivered worldwide growth of 12% year-over-year.
Domestic joint pain management revenue increased 7% year-over-year for the quarter, and international joint pain management revenue increased 36% year-over-year for the quarter. Cost of product revenue, R&D and SG&A expenses in the quarter were $34.7 million compared to $19.2 million in the first quarter of 2019. The cost of product revenue increased $6.9 million due to robust top line growth. It included $3 million of acquisition-related amortization expense. Selling, general and administrative expenses increased $6.8 million, which reflected $4.2 million of acquisition-related expenses in the first quarter. In addition, SG&A expenses also included increased selling and marketing expenses related to the two newly acquired companies, Parcus and Arthrosurface, that broad expanded sales commercial infrastructure to Anika. As I noted earlier, we're consulting with our external advisors to determine the impact of the evolving COVID-19 situation on the impairment of the goodwill, and reduction to the fair value of contingent consideration associated with the recent acquisitions of Parcus and Arthrosurface. The estimated impact of the COVID-19 pandemic on the recently acquired companies resulted in a provisional $20 million of noncash goodwill impairment charge. Total operating expenses for the first quarter of 2020 also included $24.3 million of reduction in fair value related to acquisition contingent consideration liabilities, which was recorded as a benefit in the first quarter.
The amounts discussed are provisional in nature. We believe these estimates are reasonable based on the information available and judgments made to date and are subject to potential changes. Based on these provisional estimates, net income for the quarter was $3.5 million or $0.24 per diluted share compared to $4.5 million or $0.31 per diluted share in the first quarter of 2019. Non-GAAP adjusted net income for the first quarter of 2020 increased by $2 million year-over-year to $6.5 million or $0.45 per diluted share. Adjusted EBITDA was $9.5 million for the quarter compared to $8.3 million for the first quarter of last year. The increase in adjusted EBITDA was primarily due to total revenue growth partially offset by increases in cost of product revenue and selling and marketing expenses. Adjusted EBITDA is defined by the company as U.S. GAAP net income, excluding depreciation and amortization, interest and other income or expense, income taxes, share-based compensation expense, acquisition-related expenses, noncash charge related to goodwill impairment, and change in fair value of contingent consideration associated with our recent acquisitions as a result of the COVID-19 pandemic. In 2020, acquisition-related expenses consisted of professional service fees as well as amortization expenses associated with the Parcus and Arthrosurface transactions.
These are costs that the company would not have incurred, except as the direct result of the acquisitions. In the first quarter, we used $93 million from existing cash on our balance sheet to fund the upfront payments for the acquisitions of Parcus and Arthrosurface. We ended the quarter with a solid $92 million in cash and investments on our balance sheet. In April, we drew down $50 million on our existing credit facility to strengthen liquidity in light of COVID-19. We have also implemented a number of short-term expense controls and are prioritizing business initiatives to conserve cash flow and continue selected investments in critical strategic initiatives for future growth. The credit facility matures in October 2022, and we can make prepayments without penalty. The applicable initial interest rate is approximately 2% for the $50 million drawdown. The credit facility also has a $50 million accordion, which is a feature that we can potentially access in the future. As Cheryl mentioned, we are withdrawing our financial guidance for the full year of 2020 until our visibility into revenue trends improves. Importantly, the long-term fundamentals of our business remains strong, and Anika is well positioned to successfully navigate this period of uncertainty.
We're now ready to take your questions.
Questions and Answers:
[Operator Instructions] I am showing no questions at this time. I would like to turn the conference back over to Sylvia Cheung.
Sylvia Cheung -- Chief Financial Officer
Cheryl, we'll turn the call over to you for closing remarks.
Cheryl R. Blanchard -- President and Chief Executive Officer
Great. Thanks, Sylvia. As you heard today and from merely all companies in recent weeks, this is certainly not a business-as-usual moment in time. There is simply no playbook for how to emerge safely and effectively from a global pandemic. However, I can assure you that Anika is positioned very well to weather the impact and emerge stronger than before, with renewed purpose and vision and an enhanced organizational structure that will enable us to deliver meaningful therapies to patients and value to shareholders. Thank you for your time today. We look forward to updating you as we continue to deliver progress on our strategic initiatives. Have a great evening, and please stay well. [Operator Closing Remarks]
Duration: 29 minutes
Sylvia Cheung -- Chief Financial Officer
Cheryl R. Blanchard -- President and Chief Executive Officer