Description

·         Anticipated double-digit top-line and bottom-line growth from its current business portfolio will likely triple the stock price over the next five years

·         Blockbuster drug CINGAL (already in 20+ countries) is in Phase III Trials

·         FDA approval of CINGAL will be a “game-changer” (add $1B incremental revenue)

Thesis

·         Industry leader in injectable therapies for osteoarthritis (OA) pain management

·         75% of steady revenues come from its Partnership Model (Mitek/Johnson & Johnson)

·         Rapid transformation from a low-growth Partnership Model (ORTHOVISC and MONOVISC) to a high-growth Hybrid Commercial Model (CINGAL and several other diversified products)

·         For every $1,000 in end user sales, operating income is $100 for the Partnership Model and $500 for the Hybrid Commercial Model

·         Total addressable market is increasing from $1B to $8B as ANIK expands from OA Pain Management to Joint Preservation & Restoration

·         2020 acquisitions Parcus Medical (surgical products) and Arthrosurface (surface implant curvatures) are expected to be 25% of overall company sales

·         Another six new products being released in 2020

Back-of-the-Envelope Valuation – 5 Years Out

$250 million in rev X 30% Net Margin / 15 million shares = $5 EPS

I think a 20 multiple on 5 years of double-digit growth is easy and gets you to $100. This is a likely 3 bagger in the next five years, but the kicker is FDA approval of CINGAL. If this occurs, and I believe this is very possible, then ANIK will do far better.

If ANIK Is So Great, Why Is It Getting Beat Up So Badly?

·         Widely ignored:  no VIC writeups, only two analysts, small market cap, investor fatigue

·         “Perfect Storm”: failed initial Phase III Trial for CINGAL in 2018; CEO who initiated the model transformation and acquisitions suddenly died in early 2020 and CFO resigned soon after (presumably because she didn’t become the new CEO); Covid-19 has disrupted normal market activities and delayed Phase III Trial for CINGAL

Industry Overview

To ease pressure and friction caused by OA, hyaluronic acid (HA) injections are given to lubricate the joints. HA therapy is an alternative to invasive and costly surgeries (such as knee replacements). The global HA market was valued at roughly $9 billion in 2019 and is expected to grow at an annual rate of 8% (a global market of $16.5 billion in 2027). Growth factors include:

1.       Aging population (global 65+ population should rise from 7% in 2000 to 16% in 2027)

2.       Increased incidence of obesity, skin aging and osteoarthritis

3.       Introduction of technologically advanced products

4.       Preference for minimally invasive procedures and rapid results

5.       Cost efficiency (a knee replacement costs in the range of $50,000)

Osteoarthritis represented roughly 40% of the HA market in 2019 ($3.75 billion). Almost 90% prescriptions of visco supplements are to treat knee osteoarthritis. Both corticosteroids and hyaluronic acid injections can be used to treat osteoarthritis, but visco supplementation is more effective than corticosteroids. North America represents roughly 45% of the global HA market. According to the CDC, 58.9% of the US population suffers from some form of arthritis. 

Hierarchy – A Pathway to Care (Least Expensive/Invasive to Most Expensive/Invasive)

1.       Patient education, physical/occupational therapy, weight reduction, exercise

2.       Acetaminophen, over the counter / prescription pain-killers

3.       Viscosupplementation (ORTHOVISC, MONOVISC, CINGAL), Platelet Rich Plasma

4.       Corticosteroids, Opioids

5.       Surgery (HYALOFAST)

Company Overview

ANIK is a steady company with the US market-leading visco supplement for knee pain from OA. This business earns about a 10% margin on end-user cost and is marketed through their Johnson and Johnson distributor (Mitek). 75% of ANIK revenues come from this product, which is sold exclusively by JNJ in the US. Older and heavier people are driving the size of the market for OA and this will act as a tailwind. ANIK’s injectable HA products are covered by Medicare and most medical insurance (the alternative Platelet Rich Plasma therapies are not covered).

The founder and long-time CEO retired in 2018 and the company began a transformation. This included an emphasis on products outside of the JNJ distributorship model. ANIK refers to this as the Hybrid Model and they receive 5 times as much profit from end-users. ANIK has several new products that are sold directly including CINGAL, which is a potential blockbuster and is currently being sold in more than 20 countries but not the US. They also launched TACTOSET in Sept 2019 and completed the acquisitions of Parcus and Arthrosurface in January 2020. HYALOFAST and CINGAL US clinical trials were to be completed as well, making 2020 a breakout year with sales forecast to grow 60%.

Strategic Transformation To Hybrid Commercial Model

Anika is launching a Hybrid Commercial Model that offers a direct line of sight to customers and will focus on:

·         Independent Distribution Agents

·         Key Opinion Leaders

·         Hospital / Ambulatory Surgery Centers (ASCs) administration

This will diversify their business away from the exclusive contracts (Existing Partnership Model) for ORTHOVISC/MONOVISC with Mitek (JNJ) for the US market. It offers control for pricing and marketing and substantially improved margins and growth.

CINGAL – A Potential Blockbuster With FDA Approval

The biggest growth in the HA market is expected in the single-injection therapy sector. Most of ANIK’s injectable products are single-injection. ORTHOVISC is a multi-injection (3 or 4 times) HA treatment. MONOVISC is a single-injection HA treatment. CINGAL is also a single-injection treatment – it is the first combination viscosupplement that combines the proven benefits of a proprietary hyaluronic acid with a well-established steroid to provide fast-acting and long-lasting pain relief from osteoarthritis.

ANIK is not tied to Mitek regarding CINGAL marketing and distribution in the event of FDA approval. CINGAL is a big part of the migration to the Hybrid Commercial Model.

CINGAL is approved in over 20 countries, including European countries and Canada. Europe has double-digit growth. CINGAL is a Canadian success story. Initially, ORTHOVISC was introduced as a 1^st generation HA treatment in the late-1990s. In the mid-2000s, MONOVISC was the 2^nd generation HA treatment. In 2016, CINGAL debuted as the new generation treatment, the only available combination (HA + steroid) injection. In only three years, CINGAL has captured 15% Canadian market share and is driving 70% of the total HA market growth. A similar US success story would be a game-changer for ANIK. Here is a status timeline:   

·         May 19, 2016:  Canadian launch

·         June 1, 2016:   European launch (initial countries)

·         May 22, 2017:  Publication of Phase III Data Demonstrating Efficacy and Safety

·         June 19, 2018: 26-week Phase III study compared CINGAL (HA + steroid TH) to TH alone; while CINGAL achieved greater pain reduction at every time point, the difference at 26 weeks did not reach statistical significance. 

·         October 24, 2018:  8-k highlights continuing efforts with FDA to get CINGAL approval.

·         February 21, 2019:  8-k notes that ANIK needs to conduct another Phase III clinical trial.

·         December 31, 2019:  Per 10-k, two Phase III clinical trials and two follow-up studies have been conducted; FDA needs an additional Phase III trial for approval. ANIK remains on track to commence the study in the first half of 2020.

·         Mid-March 2020:  Covid-19 delays Phase III trial

Competitive Advantage

1.       #1 In Category (Single Injection HA Products)

Of the three FDA-approved therapies, MONOVISC is the leading US single-injection HA product. One reason is superior efficacy. A comparison of pain outcomes from clinical trials show that MONOVISC achieved the largest pain reduction from baseline with a durable effect. The mean pain reduction at 26 weeks for MONOVISC remained at a level greater than that obtained for the other products. A MONOVISC injection has the highest HA concentration, total HA content and molecular weight. Also, MONOVISC is formulated in a 4 ml volume to minimize injection site discomfort. Prescribing doctors know this means the greatest potential pain reduction. Even if MONOVISC does not ultimately eradicate pain, it delays knee replacement surgery by an average of 3.6 years – this is attractive to patients, doctors, and health insurance companies. 

2.       Partnership with Mitek (Johnson & Johnson)

Another reason why MONOVISC is the leading single-injection HA product is the US marketing and distribution strength of Mitek (Johnson & Johnson). This partnership is long-standing, successful, and tough to replicate for competitors. 

3.     Existing FDA Approvals

Gaining entry to the injectable HA market requires FDA approval – a very tough process and a considerable barrier to entry.   

4.       Leading Global Position for Combination Single Injection (HA + Steroid)

ANIK is the first company to offer a combination single injection (CINGAL) for osteoarthritis in 20+ countries. This head start should help ANIK protect its dominant global position.  

5.       First-In-Line for Leading US Position: Combination Single Injection (HA + Steroid)

Assuming FDA approval for CINGAL, ANIK will be the first company to offer a combination single injection for osteoarthritis in the US. 

Valuation

Covid-19 shutdowns have impacted elective procedures and make building a valuation model meaningless. Orthopedic Joint Preservation and Restoration volume were at about 25% of historical levels in April and rose to around 50% in May and over 80% in June on a pro forma basis. July’s orthopedic Joint Preservation and Restoration run rate volumes are around 75% of 2019 levels, also on a pro forma basis (data from Q2 2020 call).

Their balance sheet is very solid. As of June, they have $144 million cash and they were free cash flow positive in Q1 & Q2. In April, ANIK drew down $50 million on its existing credit facility to strengthen liquidity in light of COVID-19. They 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 they 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.

Sales and gross margins have been remarkably consistent. The company transformation from an exclusive Partnership Model to a Hybrid Commercial Model is evident in the R&D numbers increasing in 2017 and the SG&A increasing as the Hybrid model was introduced. These reflect higher current expenses that should have a future benefit. The result was the op margin fell from consistently over 40% to a much lower number. 2018 was an anomaly with the voluntary recall of certain lots of Hyalofast, Hyalograft-C and Hyalomatrix which was approximately 3% of firm revenue.

Instead, it’s helpful to review 2019 and the original outlook for 2020. The original revenue forecast included their acquisitions and the full year of Tactoset and growing sales of CINGAL abroad and were projected to be $162.5 million of which $45 million was projected to come from the acquisitions of Parcus Medical and Arthrosurface. 

The company did say they expect double digit top line and bottom-line growth over the next 5 years with improving margins. Both acquisitions have grown 2019 sales at above that clip and choose your starting point, but it sounds like they can easily be at $250 million in sales with a 30%+ net margin which puts that at $75 million of earnings or > $5 EPS. Their margins could be even higher with more sales falling into their higher margin products. Early indications support this with double digit Q1-2020 legacy pain management growth. They have the leading position in visco-supplements, and growing market opportunity combined with a very strong balance sheet.

Back-of-the-Envelope Valuation – 5 Years Out

$250 million in rev X 30% Net Margin / 15 million shares = $5 EPS

I think a 20 multiple on 5 years of double-digit growth is easy and gets you to $100. This is a likely 3 bagger in the next five years, but the kicker is FDA approval of CINGAL. If this occurs, and I believe this is very possible, then ANIK will do far better.

Risks

1.       FDA Approval of CINGAL

Approval timelines can range from several months to several years, or applications can be denied entirely.

2.       Pandemic

Covid-19 has disrupted demand for current products as hospitals and health care professionals prioritize dealing with the pandemic. As well, Covid-19 has delayed the Phase III trial for CINGAL. For the short-term, it appears pandemic incidence is rising.

       3.       Competition

ANIK competes with many companies including large pharmaceutical firms and specialized medical device companies across all their product lines. Many of these companies have substantially greater financial resources, large research and development staffs, more extensive marketing and manufacturing organizations, and more experience in the regulatory processes.

4.       Policy Changes in Health Care Coverage

Products generally rely on third party payers, including Medicare, Medicaid, and other health insurance and managed care plans. Third party payers are increasingly trying to contain costs by limiting both coverage and level of reimbursement.

5.       Mitek / Johnson & Johnson Relationship

While ANIK is increasingly moving towards a Hybrid Commercial Model, the company remains heavily dependent on its Partnership Model. Mitek accounted for 71% of product revenue in 2019. Fortunately, it appears that the long-standing relationship is healthy.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1.       Time

ANIK is “off the radar” – this should change.

2.       FDA Approval of CINGAL

A blockbuster drug will catapult ANIK to tremendous heights.

3.       Pandemic Subsides

A return to normal conditions will prop demand for existing products and allow the CINGAL Phase III trial to resume.