Anika Therapeutics 5-year share price performance. Source: TradingView
Anika Therapeutics’ (ANIK) share price has dealt in peaks and troughs over the past couple of years after a 5-year period of exceptional growth – the stock grew by 2000% between 2013 and 2018.
A poor set of Q118 results and the voluntary recall of 3 products (HYALOFAST, HYALOGRAFT-C and HYALOMATRIX) sent Anika’s share price tumbling in mid 2018, before the failure of knee osteoarthritis treatment CINGAL in a phase 3 clinical trial in the US wiped another 21% from its value.
The stock perked up after a strong set of Q219 earnings, gaining 35%, and gained another 30% after Anika forecasted full-year 2019 non-GAAP EBITDA in the mid-to-high $40m range. In the end, the company posted GAAP FY19 revenues of $114.6m (+9% year-on-year), EBITDA of $34.2m, and EPS of $1.93 for a P/E ratio (based on current price of $37) of 19x.
Anika was then rocked by the unexpected death of CEO Joseph Darling who passed away in Jan ’20, with board member Dr. Cheryl Blanchard assuming the interim CEO role, before being appointed permanently in Apr ’20.
The wide scale cancellation or suspension of elective surgeries both domestically and internationally as a result of coronavirus has led to Anika withdrawing its FY20 guidance projecting revenue growth of ~40% to $162.5m, including an extra ~45m of revenues contributed by new acquisitions Parcus Medical and Arthrosurface.
In short, Anika has endured something of a perfect storm over the past 12-18 months, culminating in a March ’20 stock price low of $22. Despite this, Anika’s Q120 results were impressive. The company posted record revenues of $35.4m (+43% year-on-year), net income of $5.8m, and adjusted EPS of $0.45, compared to $0.31 in Q119. GAAP EPS was $0.24 owing to a $20m goodwill impairment charge and $24m reduction in fair value of contingent consideration recorded as benefit.
I think that this could be an optimal time to be opening a long-term position in Anika for several reasons.
Firstly, because the company seems to have come through a very challenging period in its development having grown revenues both organically – driven by the strong performance of its Joint Pain Management injectable viscosupplement franchise (up 12% between Q119 and Q120) – and inorganically – via the acquisitions of sports medicine implant provider Parcus (2019 revenues ~$13m) and joint preservation technology developer Arthrosurface (~$30m) – and ought to reap the benefits of this transition over the next 12-18 months.
Secondly, the company is in a strong financial position. Having absorbed $92.5m of the costs of the Parcus and Arthrosurface acquisitions in Q120 the company still has a cash position of $66m and total near term assets of $161.1m whilst its debt to equity ratio is just 0.1.
Thirdly, using DCF analysis and a scenario in which Anika earns just 85% of its originally forecast ~$160 – $165m in FY20, and achieves double digit growth for the next several years (a likely scenario given the impact of new acquisitions and new product lines), and a free cash flow of ~$60m by 2025, by my calculation Anika’s shares are undervalued compared to my (conservatively) estimated fair value of $51.
Fourthly, the company’s financial guidance for FY20 was quite surprising, given that Anika projected $160-$165m of revenues but operating expenses of $150-$155m – which factors in $27m of acquisition related expenses – and a GAAP net profit of just $5-12m.
This is not especially attractive (EPS of $0.35 compared to $1.91 in FY19), and when we factor in COVID-19 disruption, it is not inconceivable that Anika could make a loss in 2020. The upside of this is that it may well be keeping Anika’s share price artificially low, given that the headwinds Anika is facing – disruption to elective surgeries, swallowing 2 new acquisitions, and building a new management team – are temporary in nature.
I expect Anika to achieve double-digit top-line revenue growth in FY20, and to continue to integrate its new acquisitions, whilst also bringing new products to market – such as its implant for rotator cuff repair – and potentially securing new approvals in the US for HYALOFAST and CINGAL in 2021. If this happens, Anika’s growth prospects will be hard to ignore.
The one analyst price target for Anika stock I could find is $51, and I would agree this valuation. My own DCF analysis model, which has Anika recording a loss in FY20, also values Anika shares at $51 based on its core product lines returning to pre-pandemic levels of sales in the rest of 2020 and going forward, plus the contributions from Parcus and Arthrosurface, with the extra growth coming from the release of new product lines (6 are planned this year alone), new approvals e.g. CINGAL in the US, and the reduction of OPEX as the new acquisitions become fully integrated.
Since Anika is a thinly traded stock, so long as the company can execute on the above without any further setbacks, I expect the share price to gain rapidly – possibly as early as late 2020, but certainly during 2021.
Anika Therapeutics was founded in 1992 and is headquartered in Bedford, Massachusetts. In the past 3 decades, the company has commercialized more than 20 products – all based around its proprietary hyaluronic acid (“HA”) platform – which have been involved in more than 35m treatments worldwide.
Anika company progress since 1992. Source: Anika Investor Presentation May ’20.
The company operates 3 divisions: Joint Pain Management Therapy, Orthopedic Joint Preservation and Restoration Care, and Other.
Anika Product categorization and overview. Source: Anika 2019 10K submission.
The company earned 90% of its $114.6m FY19 revenues from its Joint Pain Management Division – primarily from injectable viscosupplements ORTHOVISC, MONOVISC and CINGAL, which are used in a variety of pain relief settings including osteoarthritis and damaged cartilage tissue. MONOVISC and ORTHOVISC are marketed and sold by DePuy Synthes Mitek Sports Medicine and are the viscosupplement market leaders, based on revenues generated, Anika says.
CINGAL is still awaiting approval in the US – the FDA has requested a third phase 3 trial and a pilot study is currently underway to determine best steps – but is approved in Canada and the European Union. Management says its sales have been growing ahead of expectations, whilst viewing US approval as its biggest market opportunity going forward – potentially worth ~$1bn, Anika believes.
The growth of Anika’s Orthopedic Joint Preservation and Restoration division – led by the launch of HA-enhanced bone repair therapy TACTOSET in 2019, and the Parcus and Arthrosurface acquisitions completed in Q120 – earned the company $8m in the quarter – up from just $163k in Q119, reducing the Pain Management Division’s share of overall revenues to ~72%.
Arthrosurface provides more than 150 partial and total joint surface implants and preservation solutions for the knee, shoulder, hip, ankle, wrist and toe, sold in the US and 25+ international markets, whilst Parcus provides a range of screws, sutures, anchors, and other systems that facilitate surgical procedures on the shoulder, knee, hip and soft tissue (source: company 10Q). HYALOFAST, marketed and sold in international markets only, is a biodegradable support used in the repair of chondral and osteochondral lesions.
The remainder of Anika’s marketed products comprise advanced wound care solutions, products used in the treatment of ear, nose and throat conditions, and a selection of ophthalmic treatments, and earned the company ~$2m in Q119.
The notable recent changes to Anika’s management team are the appointment of Dr. Cheryl Blanchard as CEO after the passing of Joseph Darling, who joined Anika as President in 2017 and became CEO in 2018, and the resignation of Chief Financial Officer Sylvia Cheung – effective from August, as well as the integration of the 2 co-founders of Parcus – as VP of sales and marketing and President of Sports Medicine respectively, and Arthrosurface’s President and CEO – as VP of R&D – into the Senior Management team. Nearly all of the company’s senior leadership team have been appointed since 2018. At the end of 2019, the company had 154 employees, with the majority located in the US and small teams in Italy and the United Kingdom.
Anika is ~60% institutionally owned, with BlackRock (15%), Wellington Management (1%), and Vanguard Group (6.4%) notable shareholders.
As expected, Q2 results released yesterday were a mixed bag. Total revenue came in at $30.7m – up 1% year-on-year – with revenues from the new acquisitions making up for lost sales in the Joint Pain Management division.
As forecast, OPEX nearly doubled year-on-year, growing from $18.5m, to $36m on account of higher costs related to the integrating Parcus and Arthrosurface. All in all, Anika made a $7.7m – or $0.54 per share loss in Q220, whilst near-term cash increased from $65m in Q120 to $144.4m as the company made a $50m drawdown on its existing credit facility.
I would expect Q2 to be Anika’s worst of the year performance-wise, owing to pandemic pressures being at their fiercest, and the company’s acquisition-related costs being at their highest.
Anika is typically a high net margin (+20%) business and the company will hope to maintain this competitive advantage as it integrates Parcus and Arthrosurface. Both acquisitions employ a similar hybrid sales model; Parcus has a network of ~50 US-based and ~50 international distributors, whilst Arthrosurface has ~100 US distributors and ~20 international, as well as a direct sales staff of ~35 – that is highly complementary to Anika’s own combination of direct sales staff and distributor agreements.
Although the acquisitions come at a tricky time, with the pandemic making staff co-ordination difficult, and reducing the number of surgical procedures taking place, I see it as a positive that the co-founders of both Parcus and Arthrosurface have joined Anika. This ought to help with the transition, whilst improving the overall strength and experience of the management team. One of the reasons I like Anika is due to its ambitious growth-driven strategy, hence I view the willingness of its acquirees’ management to join the company as a strong vote of confidence in the overall growth story.
Anika management says it intends to release 6 new sports medicine surgical devices and instruments into the market in Q3, and is also preparing for the launch of CINGAL in Australia, and I would expect to see the company continue to release products regularly into its new markets – which have, management says, increased the overall TAM of the company from $1bn to $8bn.
With new product launches providing incremental top-line growth (as bottom line margins increase with integration), Anika has also suggested it won’t stop making complementary acquisitions. We will know better at the end of the year, but I have certainly been impressed by how quickly Anika has paid for the Parcus / Arthrosurface deals and had them release new products. The company clearly knows its market, and how to make sure products meet marketing standards and earn 510(k) clearance.
I suspect the holy grail is US approval for CINGAL, which would be the icing on the cake, and complete a satisfactory transition period for the company, in spite of everything – from a pandemic to the death of its CEO – that has been thrown at it.
In my DCF model (available to all members of Haggerston BioHealth’s marketplace channel) I have the company earning FY20 revenues of ~$138m. I base this on the company achieving flat year-on-year growth in Q3 (owing to ongoing disruption caused by coronavirus netted off by new revenue streams), but I assume that in Q4 Anika achieves a similar year-on-year uplift to that which it experienced in Q120 of 43% – so ~$42.6m in Q4.
$138m of revenues is 15% less than the ~$162.5m the company forecast in its Q419 earnings presentation for FY20, which I consider to accurately reflect the loss of sales due to the pandemic. I have kept the company’s estimate of ~$152.5m of OPEX, even though Anika has burned through only $64m so far this year, and OPEX in Q3 and Q4 in 2019 was just $43m – to be on the safer side. This gives me an operating loss for the full year of $14.5m, and net loss of $15.3m based on interest expense of ~$828k.
As I have discussed above, for me this represents rock bottom for Anika and I expect revenues to increase by 10% in FY21 – although it would not surprise me if it was greater given the 43% uplift Parcus and Arthrosurface provided in Q120. Extrapolating out the same growth rate to 2025, I have the company earning ~$220 by 2025, which does feel challenging, but within reach of a reasonably cash rich, acquisition hungry company that has just increased its TAM by 8x.
With CAPEX at $2.8m and depreciation at 5.2% of revenues (and a tax rate of 25%), I have Anika doubling its free cash flow over the next 5-year period, to ~$53m (from $25.8m in FY19), and using a WACC of 10% (beta = 1.18, expected market return = 9%), I am looking at a firm value ~$717m and FVP of $51. The company’s current market cap is $511m.
Conclusion – Anika has weathered a storm and its outlook is starting to look sunnier. Its share price ought to respond
Since my DCF analysis gives Anika Therapeutics a forward P/E of just 10x, it seems highly likely to me that the only way is up for the company’s share price.
The company could not have asked for a worse set of circumstances over the past 18 months but as I have discussed, it appears to have coped admirably. I like the space that the company is in due to the growing global population of elderly people who are in need of its specialist products and I also believe the pain management and sports medicine industries are set for solid growth as treatments improve over time and become more varied, less niche, and applicable to a wider range of indications.
CINGAL is a potentially transformative approval in the US for the company, if it can be secured, which seems likely given its approved status in Europe and elsewhere. The company has increased its sales team, sales leadership and expertise by absorbing Parcus’ and Arthrosurface’s sales teams and Senior Management, and it is not indebted.
Whilst I understand the market’s caution towards Anika, I do not think the skepticism will last much longer, and having just posted results from what will surely be its worst quarter of the year, without experiencing significant share price losses, I am looking forward to profitable days ahead for Anika and its shareholders.
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ANIK over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.