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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For Fiscal year ended December 31, 2000
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1943
For the transition period from ________ to
Commission File Number 001-14027
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Anika Therapeutics, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Massachusetts 04-3145961
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
236 West Cummings Park, Woburn, Massachusetts 01801
(Address of Principal Executive Offices) (Zip Code)
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Registrant's Telephone Number, Including Area Code: (781) 932-6616
Securities registered under Section 12 (b) of the Exchange Act: None
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $.01 per share
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the last 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
The aggregate market value of voting stock held by non-affiliates of the
Registrant as of March 20, 2001 was $11,176,065 based on the closing price per
share of Common Stock of $1.125 as of such date as reported by the NASDAQ
National Market. At March 20, 2001 there were issued and outstanding 9,934,280
shares of Common Stock, par value $.01 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information required in response to Items 10, 11, 12 and 13 of
Part III are hereby incorporated by reference from the Company's Proxy Statement
for the Annual Meeting to be held on June 6, 2001. Such Proxy Statement shall
not be deemed to be "filed" as part of this Annual Report on Form 10-K except
for the parts therein which have been specifically incorporated by reference
herein.
FORM 10-K
ANIKA THERAPEUTICS, INC.
For Fiscal Year Ended December 31, 2000
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of
the Securities Exchange Act of 1934. The words "believe," "expect", "seek,"
"plan", "develop", "anticipate," "intend," "estimate," "will" and other
expressions, which are predictions of or indicate future events and trends
and which do not relate to historical matters identify forward-looking
statements. Forward-looking statements involve known and unknown risks,
uncertainties and other factors, including but not limited to statements
regarding: future sales, possible development of new products, clinical
trials, possible regulatory approval of ORTHOVISC(R) and INCERT(R)-S, and new
or potential products, capacity of manufacturing facilities and performance
under supply agreements. There can be no assurances that the Company will
continue to achieve increased sales of its ophthalmic products to Bausch &
Lomb and/or other companies sufficient to offset the effects of the price
reduction to Bausch & Lomb. In addition, there can be no assurance that the
termination of the distribution agreement with Zimmer will not have a
material adverse impact on sales or distribution of ORTHOVISC or effectively
transition the distribution of ORTHOVISC to such distributors, once engaged.
Furthermore, the Company may not be able to identify or engage appropriate
distribution or collaboration partners for sales of ORTHOVISC or INCERT-S.
The Company cannot make any assurances that (i) the investment of its Spanish
distributor in an additional human clinical trial for ORTHOVISC will render
positive results; (ii) it will submit an application for, or successfully
obtain, CE Mark registration approval for INCERT-S on a timely basis, or at
all; (iii) inventory management or other efforts will result in improved
gross margins by mid-2001 or ever; or (iv) the current levels of selling,
general and administrative expenses will not continue. Moreover, there can be
no assurances that the Company's investments or its increased emphasis in
clinical research and product development, such as its screening process of
potential opportunities and establishment of a pilot production laboratory,
as well as its currently contemplated clinical trials of ORTHOVISC and
INCERT, will lead to viable products or revenue growth. The Company's actual
results, performance or achievement could differ materially from anticipated
results, performance or achievement, expressed or implied in such
forward-looking statements. Certain factors that might cause such a
difference are discussed throughout this Annual Report on Form 10-K including
sections titled "Business" beginning on page 2, "Risk Factors and Certain
Factors Affecting Future Operating Results" beginning on page 19,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" beginning on page 13 and elsewhere in this Annual Report on Form
10-K. The Company undertakes no obligation to publicly update or revise any
forward-looking statement whether as a result of new information, future
events or otherwise.
PART I
ITEM 1. BUSINESS
Anika Therapeutics, Inc. ("Anika" or the "Company") develops,
manufactures and commercializes therapeutic products and devices intended to
promote the repair, protection and healing of bone, cartilage and soft
tissue. These products are based on hyaluronic acid ("HA"), a
naturally-occurring, biocompatible polymer found throughout the body. Due to
its unique biophysical and biochemical properties, HA plays an important role
in a number of physiological functions such as the protection and lubrication
of soft tissues and joints, the maintenance of the structural integrity of
tissues and the transport of molecules to and within cells. The Company's
currently marketed products consist of ORTHOVISC(R), which is an HA product
used in the treatment of some forms of osteoarthritis in humans and
HYVISC(R), which is an HA product used in the treatment of equine
osteoarthritis. ORTHOVISC(R) is currently approved for sale and marketed in
Canada, Europe, Turkey, and Israel. In the U.S. ORTHOVISC(R) is currently
limited to investigational use and the Company commenced a Phase III clinical
trial in the U.S. and Canada in late February 2001. The Company manufactures
AMVISC(R) and AMVISC(R)Plus, which are HA products used as viscoelastic
supplements in ophthalmic surgery, for Bausch & Lomb Surgical. The Company is
currently developing INCERT(R), which is a family of HA-based products
designed for use in the prevention of post-surgical adhesions. In
collaboration with Orquest, Inc., Anika also has exclusive rights to produce
OSSIGEL(R)(1), an injectable formulation of basic fibroblast growth factor
combined with HA designed to accelerate the healing of bone fractures.
AMVISC PRODUCTS
AMVISC(R) and AMVISC(R) Plus are high molecular weight HA products used as
viscoelastic agents in ophthalmic surgical procedures such as cataract
extraction and intraocular lens implantation. These products coat, lubricate and
protect sensitive tissues such as the endothelium and maintain the space between
them, thereby facilitating ophthalmic surgical procedures.
Anika manufactures the AMVISC(R) product line for Bausch & Lomb. The
Company entered into a new supply agreement (the "BLS Agreement") with Bausch &
Lomb Surgical, a unit of Bausch & Lomb Incorporated, in July 2000. Under the
terms of the BLS Agreement, effective January 1, 2001, the Company became Bausch
& Lomb Surgical's exclusive provider of AMVISC(R) and AMVISC(R) Plus in the U.S.
and international market. The BLS Agreement expires December 31, 2007,
superseding an existing supply contract with Bausch & Lomb Surgical that was set
to expire December 31, 2001. The BLS Agreement is subject to early termination
and/or reversion to a non-exclusive basis under certain circumstances. The BLS
Agreement lifted certain contractual restrictions on the Company's sales of
certain
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(1) OSSIGEL(R) is a registered trademark of Orquest, Inc.
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ophthalmic products to other companies, subject to payment of royalties by
Anika. In exchange, the Company agreed to a reduction in unit selling prices
retroactively effective to April 1, 2000 and the elimination of minimum unit
purchase obligations by BLS. See "Risk Factors and Certain Factors Affecting
Future Operating Results - Dependence on Marketing Partners" and "--Reliance on
a Small Number of Customers."
ORTHOVISC(R)
ORTHOVISC(R) is a high molecular weight, highly purified HA product
designed to relieve pain and improve joint mobility in patients suffering from
osteoarthritis of the knee. ORTHOVISC(R) is delivered by intra-articular
injection to supplement and restore the body's natural HA found in the synovial
fluid of joints.
Osteoarthritis is a debilitating disease causing pain, inflammation and
restricted movement in joints. It occurs when the cartilage in a joint gradually
deteriorates due to the effects of mechanical stress, which can be caused by a
variety of factors including the normal aging process. In an osteoarthritic
joint, particular regions of articulating surfaces are exposed to irregular
forces, which result in the remodeling of tissue surfaces that disrupt the
normal equilibrium or mechanical function. As osteoarthritis advances, the joint
gradually loses its ability to regenerate cartilage tissue and the cartilage
layer attached to the bone deteriorates to the point where eventually the bone
becomes exposed. Advanced osteoarthritis often requires surgery and the possible
implantation of artificial joints. The current treatment options for
osteoarthritis before joint replacement surgery include analgesics,
non-steroidal anti-inflammatory drugs and steroid injections.
ORTHOVISC(R) is approved for sale and marketed in Canada, Europe, Turkey,
and Israel. In Europe ORTHOVISC(R) is sold under Communaute Europeenne ("CE
mark") authorization. The CE mark, a certification required under European Union
("EU") medical device regulation, allows ORTHOVISC(R) to be marketed without
further approvals in most of the EU nations as well as other countries that
recognize EU device regulation.
In the U.S., ORTHOVISC(R) is limited to investigational use. In October
1998, the Company was notified by the U.S. Food and Drug Administration (the
"FDA") that its Pre-Market Approval Application ("PMA") was not approvable and
that additional clinical data would be required to demonstrate the effectiveness
of ORTHOVISC(R). The PMA was submitted to the FDA in December 1997 and contained
clinical data collected from a 226 patient, randomized double blind clinical
study completed in June 1997. In late March 1999, the Company received an
Investigational Device Exemption ("IDE") approval and initiated a second Phase
III clinical study. This trial completed patient enrollment, totaling 385
patients at 22 centers in the U.S. and Canada in August 1999. The final patient
completed the six-month follow-up period on February 28, 2000. The statistical
analysis of the clinical trial failed to show sufficient efficacy in this
patient population to support the filing of a PMA application. In February 2001,
the Company commenced its third Phase III clinical trial of ORTHOVISC(R). The
trial is expected to be conducted in up to 20 centers in the U.S. and Canada,
with 360 patients expected to be enrolled, and with evaluation over a six-month
period following treatment. There can be no assurances that the results of this
third Phase III clinical study will be adequate to demonstrate the effectiveness
of ORTHOVISC(R) to obtain FDA approval.
On November 10, 2000, the Company entered into an agreement to
terminate the ORTHOVISC(R) marketing and distribution agreement with Zimmer,
Inc., a subsidiary of Bristol-Myers Squibb Company. Under the terms of the
termination agreement, Zimmer had the right to continue to distribute from
its existing inventory through December 31, 2000 in the countries in which it
had previously sold ORTHOVISC(R). The Company has established interim
relationships with third party logistics firms so that Anika can continue to
supply ORTHOVISC(R) in Canada and the European countries previously covered
under the Zimmer Distribution Agreement. The Company will seek to establish
long-term distribution relationships in those and other regions, but can make
no assurances that it will be successful in doing so. The Company has
licensed ORTHOVISC(R) marketing and distribution rights to Grupo Ferrer,
Internacional for Spain and Portugal, and to RAFA Laboratories Ltd. in
Israel. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations Overview" beginning on page 13.
HYVISC(R)
HYVISC(R) is a high molecular weight injectable HA product for the
treatment of joint dysfunction in horses due to non-infectious synovitis
associated with equine osteoarthritis. HYVISC(R) has viscoelastic properties
that lubricate and protect
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the tissues in horse joints. HYVISC(R) is distributed by Boehringer Ingelheim
Animal Health, Inc. in the United States under an agreement terminating May
2002.
Research and Development of Potential Products
As discussed below in the section titled "Risk Factors and Certain Factors
Affecting Future Operating Results - Comprehensive Government Regulation; No
Assurance of FDA Approval" beginning on page 19, the Company has not obtained
FDA approval for the sales and marketing in the U.S. of the potential products
described below.
INCERT
INCERT(R) is a family of chemically-modified, cross-linked forms of HA
designed to prevent surgical adhesions. Surgical adhesions occur when fibrous
bands of tissues form between adjacent tissue layers during the wound healing
process. Although surgeons attempt to minimize the formation of adhesions,
nevertheless they occur quite frequently after surgery. Adhesions in the
abdominal and pelvic cavity can cause particularly serious problems such as
intestinal blockage following abdominal surgery, and infertility following
pelvic surgery. Fibrosis following spinal surgery can complicate re-operation
and may cause pain. The Company has tested INCERT(R) in pre-clinical animal
studies.
INCERT(R)-S is the Company's product designed to reduce post-surgical
fibrosis following spinal surgery. The Company has received an IDE approval from
the FDA and plans to commence clinical trials for the product in the first half
of 2001. The planned trial is expected to initially include up to 100 patients
in up to 20 centers in the U.S. and, if results from these patients support
further development, to expand patient recruitment to up to 380 patients. There
can be no assurance that: (i) the Company will begin or successfully complete
clinical trials of INCERT(R)-S; (ii) if completed, FDA approval for sales in the
U.S. will be received; or (iii) if regulatory approvals are obtained, meaningful
sales of INCERT(R) will be achieved.
Anika co-owns an issued United States patent covering the use of INCERT(R)
for adhesion prevention.
OSSIGEL
In June 1997, the Company executed a multi-year collaboration agreement
with Orquest, Inc. to develop and manufacture OSSIGEL(R), a formulation of basic
fibroblast growth factor and HA. OSSIGEL(R) has been shown in pre-clinical
animal models to accelerate the healing of bone fractures. Orquest commenced
human clinical testing of OSSIGEL(R) in Europe and the United States during
1998. Orquest has filed a patent application with the U.S. Patent and Trademark
Office for the use of OSSIGEL(R) in accelerating fracture healing.
MANUFACTURING OF HYALURONIC ACID
The Company has been manufacturing HA since 1983 in its manufacturing
facility located in Woburn, Massachusetts. This facility is approved by the FDA
for the manufacture of medical devices and drugs. The Company has developed a
proprietary HA manufacturing process for the extraction and purification of HA
from rooster combs that yield high molecular weight, highly purified HA.
The Company believes that a substantial supply of rooster combs is readily
available and that all the other materials required for the manufacture of its
HA products are also readily available from a number of sources. The Company
obtains syringes used to deliver certain of its HA products from a single
supplier; however, it keeps sufficient syringes in its inventory to meet
anticipated demand for at least six months.
PATENT AND PROPRIETARY RIGHTS
The Company has a policy of seeking patent protection for patentable
aspects of its proprietary technology. The Company co-owns certain United States
patents and a patent application which claim certain adhesion prevention uses
and certain drug delivery uses of HA, and the Company solely owns patents
covering certain manufacturing processes. The Company also holds an exclusive
license from Tufts University to use technologies claimed in a United States
patent which relates to the anti-metastasis applications of HA oligosaccharides.
The Company's issued patents expire between 2007
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and 2015 and the license expires upon expiration of all related patents. The
Company intends to seek patent protection with respect to products and processes
developed in the course of its activities when it believes such protection is in
its best interest and when the cost of seeking such protection is not
inordinate. However, no assurance can be given that any patent application will
be filed, that any filed applications will result in issued patents or that any
issued or licensed patents will provide the Company with a competitive advantage
or will not be successfully challenged by third parties. The protections
afforded by patents will depend upon their scope and validity, and others may be
able to design around the Company's patents. The Company's issued patents and
any patents which arise from the Company's licensed application would provide
competitive protection, if at all, only in the United States.
Other entities have filed patent applications for or have been issued
patents concerning various aspects of HA-related products or processes. There
can be no assurance that the products or processes developed by the Company
will not infringe the patent rights of others in the future. Any such
infringement may have a material adverse effect on the Company's business,
financial condition, and results of operations. In particular, in 1995, the
Company received notice from the PTO that a third party may attempt to
provoke a patent interference with respect to one of the Company's co-owned
patents covering the use of INCERT(R) for post-surgical adhesion prevention.
The existence of an interference proceeding may have a negative impact on the
marketing of the INCERT(R) product, and no assurance can be given that the
Company would be successful in any such interference proceeding. If the third
party interference were to be decided adversely to the Company, involved
claims of the Company's patent would be cancelled, the Company's sales, use,
and marketing of the INCERT(R) product may be materially and adversely
affected and the third party may enforce patent rights against the Company
which could prohibit the sale and use of the INCERT(R) products, which could
have a material adverse effect on the Company's future operating results.
The Company also relies upon trade secrets and proprietary know-how for
certain non-patented aspects of its technology. To protect such information, the
Company requires all employees, consultants and licensees to enter into
confidentiality agreements limiting the disclosure and use of such information.
There can be no assurance that these agreements provide meaningful protection or
that they will not be breached; that the Company would have adequate remedies
for any such breach; or that the Company's trade secrets, proprietary know-how,
and technological advances will not otherwise become known to others. In
addition, there can be no assurance that, despite precautions taken by the
Company, others have not and will not obtain access to the Company's proprietary
technology. Further, there can be no assurance that third parties will not
independently develop substantially equivalent or better technology.
The Company has granted Bausch & Lomb Surgical a royalty-free, worldwide,
exclusive license to the Company's manufacturing and product inventions which
relate to the AMVISC(R) products, effective upon the earlier of (i) the
termination date of the BLS Agreement or (ii) the loss of exclusivity there
under.
GOVERNMENT REGULATION
Anika's research, development, manufacturing activities, and the future
marketing of products by Anika are subject to regulation by numerous
governmental authorities in the United States and other countries. In the United
States, devices and drugs are subject to rigorous FDA regulation. The Federal
Food, Drug and Cosmetic Act governs the testing, safety, effectiveness,
clearance, approval, manufacture, labeling, packaging, storage, record keeping,
reporting, advertising, and promotion of Anika's products.
Product development and approval within the FDA regulatory framework takes
a number of years and involves the expenditure of substantial resources to
demonstrate safety and effectiveness. There can be no assurance that this
regulatory framework will not change or that additional regulation will not
arise at any stage of Anika's product development process, which may affect
approval of, or delay an application, or require additional expenditures by
Anika.
Furthermore, Anika or the FDA may suspend clinical trials at any time
for a number of reasons, including, among other things, failure to comply
with applicable requirements; or if there is reason to believe that the risks
to subjects are not outweighted by the anticipated benefits to subjects and
the importance of the knowledge to be gained, or informed consent is
inadequate, or the investigation is scientifically unsound, or there is
reason to believe that the device, as used, is ineffective;
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or if an unanticipated adverse device effect presents an unreasonable risk to
subjects.. If clinical studies are suspended, Anika may be unable to continue
the development of the investigational products affected.
In addition to the FDA approval processes for products, manufacturing
facilities for drugs, biologics, and devices, subject to PMA requirements, are
subject to approval by the FDA. Among the conditions for such approval is the
requirement that quality control and manufacturing procedures conform to the
FDA's Good Manufacturing Practices/Quality System Regulations ("GMP/QSR"), which
must be followed at all times. In complying with standards set forth in these
regulations, manufacturers must continue to expend time, monies and effort in
the area of production and quality control to ensure full technical compliance.
The FDA enforces compliance with these GMP/QSR through periodic inspections; and
other federal, state, and local agencies may inspect manufacturing
establishments as well.
In addition to regulations enforced by the FDA, Anika is subject to
regulation under the Occupational Safety and Health Act, the Environmental
Protection Act, the Toxic Substances Control Act, the Resource Conservation and
Recovery Act and other existing and potential future federal, state and local
regulations of foreign governments. Federal, state and foreign regulations
regarding the manufacture and sale of medical products are subject to change.
Anika cannot predict what impact, if any, such changes might have on its
business.
For marketing outside the United States, Anika will continue to be subject
to FDA regulations regarding the export of products within its jurisdiction and
to foreign regulatory requirements governing, among other things, human clinical
trials and marketing approval for medical products and devices. The requirements
relating to the conduct of clinical trials, product licensing, pricing and
reimbursement vary widely from country to country. The process of obtaining
approvals from the FDA and foreign regulatory authorities can be costly, time
consuming, and subject to unanticipated delays. There can be no assurance that
approvals of Anika's products, processes or facilities will be granted or that
Anika will obtain the financing needed to develop certain of such products. Any
failure or delay in obtaining such approvals could adversely affect the ability
of Anika to market its products in other countries.
Medical products regulated by the FDA are generally classified as drugs,
biologics, and/or medical devices. AMVISC(R) is approved as a Class III device
in the United States for ophthalmic surgical procedures in intraocular use in
humans. HYVISC(R) is approved as an animal drug for intra-articular injection in
horse joints to treat degenerative joint disease associated with synovitis. In
the past, most HA products for human use have been regulated as medical devices.
Anika believes that if FDA approval is obtained, its ORTHOVISC(R) and INCERT(R)
products will have to meet the regulatory requirements of Class III devices.
Devices
The steps required to qualify a medical device for marketing in the United
States are complex. Unless a medical device is exempted from premarket
submission and clearance, FDA approval or clearance is required before the
products can be marketed in the U.S. Medical devices are classified as Class I,
II, or III devices. In general, Class I devices require compliance with labeling
GMP/QSR and record keeping regulations and are subject to other general
controls. Class II devices may be subject to special controls, such as post
market surveillance and are subject to general controls. Most Class I devices
are exempt from premarket notification and most Class II devices are subject to
it. Class II devices also may be subject to clinical testing for purposes of
premarket notification to the FDA and clearance for marketing. Class III devices
require clinical testing to assure safety and effectiveness prior to marketing
and distribution. Most Class III devices also require PMA approval from the FDA.
At least 90 days prior to marketing, unless exempt, devices must be
subject to a premarket notification to the FDA to determine the product's
classification and regulatory status. If a product is found to be "substantially
equivalent" to a Class I or Class II device, or a Class III device not subject
to a PMA requirement, it may be marketed without further FDA review. However,
none of the Company's products have been found to be "substantially equivalent"
to a Class I or Class II device, nor have any of them been found to be a Class
III device not subject to a PMA requirement. The FDA may require the submission
of clinical data as a basis for determining whether a device is "substantially
equivalent." If a device is found to be "not substantially equivalent,"
typically, the device manufacturer must file a PMA application with the FDA
based on preclinical and clinical testing intended to demonstrate that the
product is both safe and effective. HA-based products have in the past, and will
likely continue to require the approval of a PMA from the FDA prior to
commercial sale.
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The PMA approval process is lengthy, expensive, and typically requires,
among other things, extensive data from pre-clinical testing and a
well-controlled clinical trial or trials that demonstrate a reasonable assurance
of safety and effectiveness. The performance of human clinical trials must be
done under an IDE. Upon completion of required clinical trials, results are
presented to the FDA in a PMA application. In addition to the results of
clinical investigations, the PMA applicant must submit other information
relevant to the safety and effectiveness of the device, including, among other
things, the results of non-clinical tests; a full description of the device and
its components; a full description of the methods, facilities and controls used
for manufacturing; and proposed labeling. The FDA staff then determines whether
to accept the application for filing. If accepted for filing, the application is
further reviewed by the FDA and then often reviewed by an FDA scientific
advisory panel of people with expertise in the relevant field. The FDA will also
conduct an inspection to determine whether an applicant conforms with the FDA's
current GMP/QSR. If the FDA's evaluation is favorable, the FDA will subsequently
publish an order granting the PMA for the device. Although the initial PMA
review process is required to be completed within 180 days from the date when
the PMA application is accepted for filing, the FDA in many cases raises
additional issues which must be addressed prior to the approval of a PMA, which
may significantly extend the review process. There is no assurance that review
will result in timely or any PMA approval, and there may be significant
conditions on approval, including limitations on labeling and advertising claims
and the imposition of post-market testing, tracking, or surveillance
requirements.
Drugs
Medical devices may meet both the definition of a medical device and a
drug or biologic. In these instances, the FDA may regulate these products as
drugs or biologics or as both medical devices and drugs or biologics. The steps
required before a drug or biologic may be marketed in the United States include
(i) preclinical laboratory and animal tests; (ii) submission to the FDA of an
Investigational New Drug application ("IND"), which must become effective before
human clinical trials may commence; (iii) adequate and well-controlled human
clinical trials to establish the safety and efficacy of the drug; (iv)
submission of a New Drug Application ("NDA") or Biologics License Application
("BLA") to the FDA; and (v) FDA approval of the NDA or BLA prior to any
commercial sales or shipment of the drug. A clinical study program designed to
demonstrate the safety and effectiveness of a drug usually proceeds in three
phases:
o Phase I involves testing the drug for, among other things, safety
and tolerance in a small group of healthy patients or volunteers.
o Phase II involves testing for efficacy and identifying possible side
effects in a target patient group.
o Phase III involves additional testing for efficacy and safety with
an expanded patient group, preferably using a comparative control
agent.
The results of the clinical testing, together with manufacturing
information, are then submitted to the FDA in the form of an NDA or a BLA.
Anika's HA products have not historically been classified as drugs or biologics.
In the event however, Anika's products are classified in the future as drugs or
biologics, it may take five to ten years from discovery to approval, which
typically would be substantially longer than the development process for devices
and would be substantially more expensive. There is no assurance that such a
regulatory path would result in timely or any product approval.
COMPETITION
The Company competes with many companies, including, among others, large
pharmaceutical firms and specialized medical products companies. Many of these
companies have substantially greater financial and other resources, larger
research and development staffs, more extensive marketing and manufacturing
organizations and more experience in the regulatory process than the Company.
The Company also competes with academic institutions, governmental agencies and
other research organizations, which may be involved in research, development and
commercialization of products. Because a number of companies are developing HA
products for similar applications, the successful commercialization of a
particular product will depend in part upon the ability of the Company to
complete successful clinical studies and obtain FDA marketing and foreign
regulatory approvals prior to its competitors. There can be no assurance that
the Company will be able to compete against current or future competitors or
that competition will not have a material adverse effect on the Company's
business, financial condition, and results of operations.
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The Company is aware of several companies, including Pharmacia, Alcon,
Genzyme Biosurgery (successor to Biomatrix, Inc.), Hyal Pharmaceutical Corp.,
Q-Med AB, Fidia s.p.a., LifeCore Biomedical, Inc., Smith & Nephew plc and
Seikagaku Corporation, that are developing and/or marketing products utilizing
HA for a variety of human applications. In some cases, competitors have obtained
product approvals, submitted applications for approval or have commenced human
clinical studies, either in the United States or in certain foreign countries.
Major competing products for the use of HA in ophthalmic surgery include Healon
(manufactured by Pharmacia) and Provisc and Viscoat (distributed by Alcon).
Three HA products for the treatment of osteoarthritis in the knee, Hyalgan,
Synvisc and Supartz have received FDA approval and are being marketed in the
U.S. Hyalgan is manufactured by Fidia s.p.a. and is distributed by Sanofi
Pharmaceuticals. In addition, Fidia s.p.a. is selling the product in select
markets in Europe. Synvisc is manufactured by Genzyme Biosurgery and is
distributed in the United States by Wyeth-Ayerst Laboratories, a division of
American Home Products Corp. Synvisc is also marketed in Canada, Europe, Latin
America, Australia and other countries utilizing various other distribution
partners. Supartz is manufactured by Seikagaku Corporation and is distributed in
Japan, Spain, Sweden, the U.S. and other countries. Genzyme has received
marketing approvals in Europe and the U.S. for a chemically modified HA for the
prevention of post-surgical adhesions under the brand name of Seprafilm.
LifeCore Biomedical has completed a Phase III human clinical trial on its HA
product INTERGEL(TM) to prevent surgical adhesions and has filed a PMA with the
FDA. Smith & Nephew has licensed Supartz from Seikagaku Corporation for
distribution in the U.S., Europe, and other countries.
RESEARCH AND DEVELOPMENT
The Company intends to continue development of its existing product
candidates, to expand the therapeutic applications of its existing products, and
to develop new therapeutic applications for its HA-based technology.
The Company's research and development efforts consist primarily of the
development of new medical applications for its HA-based technology and the
management of clinical trials for product candidates and the preparation and
processing of applications for regulatory approvals at all relevant stages of
development. The Company's development of new products is accomplished primarily
through in-house research and development personnel and resources as well as
with collaboration with other companies and scientific researchers. For the
years ended December 31, 2000, 1999 and 1998, research and development expenses
were $3.3 million, $4.2 million, and $2.0 million, respectively. The Company
anticipates that it will continue to commit substantial resources to research
and development in the future. As of December 31, 2000, the Company had ten
employees engaged primarily in research and development. Given its current plans
for commencing two clinical trials in 2001, the Company expects its investments
in research and development in 2001 to be roughly twice the level of such
spending in 2000.
There can be no assurances that the Company's efforts will be successful
in developing its existing product candidates, expanding the therapeutic
applications of its existing products, or result in new applications for its HA
technology, or that the Company will be able to obtain regulatory approval for
any new applications it develops. Furthermore, even if all regulatory approvals
are obtained, there can be no assurances that the Company will achieve
meaningful sales of such products or applications.
EMPLOYEES
As of December 31, 2000, the Company had approximately 64 full-time
employees. The Company considers its relations with its employees to be good. No
employees are represented by labor unions.
ENVIRONMENTAL LAWS
The Company believes that it is in compliance with all federal, state and
local environmental regulations with respect to its manufacturing facilities and
that the cost of ongoing compliance with such regulations does not have a
material effect on the Company's operations. The Company's leased manufacturing
facility is located within the Wells G&H Superfund site in Woburn, MA. The
Company has not been named and is not a party to any such legal proceedings
regarding the Wells G&H Superfund site.
PRODUCT LIABILITY
The testing, marketing and sale of human health care products entail an
inherent risk of allegations of product liability, and there can be no assurance
that substantial product liability claims will not be asserted against the
Company.
8
Although the Company has not received any material product liability claims to
date and has coverage under its insurance policy of $5,000,000 per occurrence
and $5,000,000 in aggregate, there can be no assurance that if material claims
arise in the future, that the Company's insurance will be adequate to cover all
situations. Moreover, there can be no assurance that such insurance, or
additional insurance, if required, will be available in the future or, if
available, will be available on commercially reasonable terms. Any product
liability claim, if successful, could have a material adverse effect on the
Company's business, financial condition, and results of operation.
ITEM 2. PROPERTIES
The Company leases 35,000 square feet of space at 236 West Cummings Park,
Woburn, Massachusetts for its corporate headquarters and manufacturing facility.
This facility has received all FDA and state regulatory approvals to operate as
a sterile device and drug manufacturer. The lease for this facility terminates
in February 2004. The Company also leases (i) approximately 9,000 square feet of
administrative and research and development space in Woburn, Massachusetts under
a lease terminating in October 2001 and (ii) approximately 9,000 square feet of
warehouse space in Woburn, Massachusetts under a lease terminating in January
2004. For the year ended December 31, 2000 the Company had aggregate lease costs
of approximately $647,000.
ITEM 3. LEGAL PROCEEDINGS
Securities and Exchange Commission Investigation. The SEC has issued a
formal order of investigation and has required the Company to provide
information in connection with certain revenue recognition matters. These
matters, relating to the Company's historical accounting for sales of its
product under a long-term supply and distribution agreement with Zimmer, Inc.,
were also the subject of the Company's March 15, 2000 disclosure concerning an
informal SEC inquiry and the restatement of results for 1998 and the first three
quarters of 1999. The Company has been cooperating fully. However, the Company
is not in a position to predict the probable outcome of this matter or its
potential impact on the Company's business or operations.
Putative Class Action Complaints. Three putative class action complaints
have been filed against the Company, J. Melville Engle, and Sean Moran, the
Company's former chief financial officer, in the United States District Court
for the District of Massachusetts (the "Court") on behalf of all purchasers of
the Company's shares between April 15, 1998 and May 30, 2000 (the "Class"). The
first, filed on or about June 8, 2000, is captioned Casazza, et al. v. Anika
Therapeutics, Inc., J. Melville Engle and Sean Moran, Civil Action No.
00-11127-WGY. The second, filed on or about June 26, 2000, is captioned
Nemeth-Coslett, et al. v. Anika Therapeutics, Inc., J. Melville Engle and Sean
Moran, Civil Action No. 00-11257-WGY. The third, filed on or about August 2,
2000, is captioned Rockefeller, et al. v. Anika Therapeutics, Inc., J. Melville
Engle and Sean Moran, Civil Action No. 00-11540-WGY. Each of these putative
class action complaints encompasses the same class period and covers almost
identical allegations.
On or about August 7, 2000, David and Vivian West, alleged members of the
Class, filed a motion to appoint themselves lead plaintiffs and their law firm
lead counsel, as well as a motion for consolidation of the above cases. On or
about September 13, 2000, the Court granted David and Vivian West's motions,
consolidated the cases and recaptioned the case In re Anika Therapeutics, Inc.
Securities Litigation, Civil Action No. 00-11127-WGY. On or about October 30,
2000, lead plaintiffs filed a consolidated amended complaint. The complaint
alleges that the Company and the individual defendants violated the federal
securities laws by, inter alia, making material misrepresentations and omissions
in certain public disclosures during the period between April 15, 1998 and May
30, 2000. The alleged misrepresentations and omissions relate to the Company's
historical revenue recognition policies and its restatement of revenues for 1998
and the first three quarters of 1999. The complaint seeks an unspecified amount
of monetary damages, costs and expenses, and equitable and/or injunctive relief
to restrict the defendants from disposing of various assets in order to assure
adequate funds are available for the claimed damages. On December 14, 2000, the
Company, Mr. Engle and Mr. Moran each filed motions to dismiss the consolidated
amended complaint. On January 29, 2001, plaintiffs' counsel filed oppositions to
defendants' motions to dismiss. The Defendants filed reply briefs on February
12, 2001. The Company is vigorously defending the lawsuit. The Company is not
able to predict the probable outcome of this matter or its potential impact on
the Company's business or operations.
9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the security holders during the
fourth quarter of the fiscal year covered by this report.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK INFORMATION
The Company's common stock par value $0.01 per share (the "Common Stock")
has traded on the Nasdaq National Market since November 25, 1997 under the
symbol "ANIK". The following table sets forth, for the periods indicated, the
high and low bid prices of the Common Stock on the Nasdaq National Market. These
prices represent prices between dealers and do not include retail mark-ups,
markdowns, or commissions and may not represent actual transactions.
Bid Range
---------
Year Ended December 31, 1999 High Low
- ---------------------------- ---- ---
First Quarter............................................. $5.50 $4.50
Second Quarter............................................ 9.00 4.69
Third Quarter............................................. 8.75 5.00
Fourth Quarter............................................ 7.69 5.50
Bid Range
---------
Year Ended December 31, 2000 High Low
- ---------------------------- ---- ---
First Quarter.............................................$12.00 $6.00
Second Quarter............................................ 9.97 1.38
Third Quarter............................................. 1.88 1.22
Fourth Quarter............................................ 1.81 0.69
At December 31, 2000, there were 309 holders of record of Common Stock.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain earnings, if any, for use in its
business and does not anticipate paying cash dividends on its Common Stock in
the foreseeable future. Payment of future dividends, if any, on the Common Stock
will be at the discretion of the Company's Board of Directors after taking into
account various factors, including the Company's financial condition, operating
results, anticipated cash needs, and plans for expansion.
11
ITEM 6. SELECTED FINANCIAL DATA
Statements of Operations Data:
(In thousands, except per share data)
Four month
Transitional
Period Ended Year ended
Years ended December 31, December 31, August 31,
---------------------------------------- ------------ ----------
2000 1999 1998 1997 1996 1996
---- ---- ---- ---- ---- ----
Product revenue $12,935 $ 13,083 $11,773 $ 9,255 $ 1,212 $ 4,613
Licensing revenue 3,400 400 1,500 2,700 -- --
------- -------- ------- ------- ------- -------
Total revenue 16,335 13,483 13,273 11,955 1,212 4,613
Cost of sales 9,871 6,440 6,014 4,744 1,309 4,472
------- -------- ------- ------- ------- -------
Gross profit (loss) 6,464 7,043 7,259 7,211 (97) 141
Total operating expenses 7,448 7,184 4,687 4,050 2,619 3,104
Income (loss) before cumulative effect of
change in accounting principle 174 1,129 3,752 3,344 (2,658) (2,849)
Cumulative effect of change in accounting principle -- (3,625) -- -- -- --
------- -------- ------- ------- ------- -------
Net income (loss) $ 174 $ (2,496) $ 3,752 $ 3,344 $(2,658) $(2,849)
======= ======== ======= ======= ======= =======
Diluted income (loss) per common share:
Income (loss) before cumulative effect of
change in accounting principle $ 0.02 $ 0.11 $ 0.34 $ 0.44 $ (0.56) $ (0.76)
Cumulative effect of change in accounting principle -- (0.35) -- -- -- --
------- -------- ------- ------- ------- -------
Net income (loss) $ 0.02 $ (0.24) $ 0.34 $ 0.44 $ (0.56) $ (0.76)
======= ======== ======= ======= ======= =======
Diluted common shares outstanding 10,042 10,221 11,006 7,587 4,905 4,053
Balance Sheet Data:
(In thousands)
December 31, August 31,
------------------------------------------------------- ----------
2000 1999 1998 1997 1996 1996
---- ---- ---- ---- ---- ----
Cash and cash equivalents $ 8,266 $ 6,441 $ 10,713 $ 22,680 $ 2,705 $ 3,651
Investments in Marketable Securities 10,040 13,743 12,008 -- -- --
Working capital 23,083 18,973 26,480 25,329 4,226 5,858
Total assets 28,979 32,511 32,393 28,749 6,920 8,580
Redeemable convertible preferred stock -- -- -- -- 2,603 2,523
Accumulated deficit (4,599) (4,773) (2,277) (6,029) (9,374) (6,716)
Treasury stock (280) (960) (1,890) -- -- --
Stockholder's equity 26,712 25,712 29,298 26,224 2,369 4,415
12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following section of this Annual Report on Form 10-K titled
"Management's Discussion and Analysis of Financial condition, and Results of
Operations" contains statements that are not statements of historical fact
and are forward-looking statements within the meaning of the federal
securities laws. These statements involve known and unknown risks,
uncertainties, and other factors that may cause the Company's actual results,
performance, or achievement to differ materially from anticipated results,
performance, or achievement, expressed or implied in such forward-looking
statements. These statements reflect our current views with respect to future
events and are based on assumptions and subject to risks and uncertainties.
We discuss many of these risks and uncertainties at the beginning of this
Annual Report on Form 10-K and under the heading "Risk Factors and Certain
Factors Affecting Future Operating Results" beginning on page 19. The
following discussion should also be read in conjunction with the Consolidated
Financial Statements of Anika Therapeutics, Inc. and the Notes thereto
appearing elsewhere herein.
Overview
The Company develops, manufactures and commercializes therapeutic products
and devices intended to promote the repair, protection and healing of bone,
cartilage and soft tissue. These products are based on hyaluronic acid ("HA"), a
naturally-occurring, biocompatible polymer found throughout the body. Due to its
unique biophysical and biochemical properties, HA plays an important role in a
number of physiological functions such as the protection and lubrication of soft
tissues and joints, the maintenance of the structural integrity of tissues, and
the transport of molecules to and within cells. The Company's currently marketed
products consist of ORTHOVISC(R), which is an HA product used in the treatment
of some forms of osteoarthritis in humans; and HYVISC(R), which is an HA product
used in the treatment of equine osteoarthritis. ORTHOVISC(R) is currently
approved for sale and marketed in Canada, Europe, Turkey, and Israel. In the
U.S., ORTHOVISC(R) is currently limited to investigational use. The Company
commenced a Phase III clinical trial in the U.S. and Canada in February 2001.
The Company manufactures AMVISC(R) and AMVISC(R)Plus, which are HA products used
as viscoelastic supplements in ophthalmic surgery, for Bausch & Lomb. The
Company is currently developing INCERT(R), which is an HA-based product designed
for use in the prevention of post-surgical adhesions, and in March 2001, the
Company received IDE approval to commence a clinical trial. In collaboration
with Orquest, Inc., Anika also has exclusive rights to produce OSSIGEL(R), an
injectable formulation of basic fibroblast growth factor combined with HA
designed to accelerate the healing of bone fractures.
The Company receives a substantial portion of its revenue from the sale of
AMVISC(R) and AMVISC(R)Plus to Bausch & Lomb. For the years ended December 31,
2000 and 1999, AMVISC(R) sales accounted for 54.1% and 63.9% of product revenue,
respectively.
The Company currently manufactures AMVISC(R) for Bausch & Lomb under the
BLS Agreement. Under the terms of the BLS Agreement, effective January 1, 2001,
the Company became Bausch & Lomb Surgical's exclusive provider of AMVISC(R) and
AMVISC(R) Plus, ophthalmic viscoelastic products, in the U.S. and certain
international markets. The BLS Agreement expires December 31, 2007, superseding
an existing supply contract with Bausch & Lomb Surgical that was set to expire
December 31, 2001. The BLS Agreement is subject to early termination and/or
reversion to a non-exclusive basis under certain circumstances. The BLS
Agreement lifts contractual restrictions on the Company's sales of certain
ophthalmic products to other companies, subject to payment of royalties by
Anika. In exchange, the Company agreed to a reduction in unit selling prices
effective to April 1, 2000 and the elimination of minimum unit purchase
obligations by BLS. (See "Risk Factors and Certain Factors Affecting Future
Operating Results--Dependence Upon Marketing Partners" beginning on page 19.)
In November 1997, the Company entered into a marketing and distribution
agreement with Zimmer, Inc., which was subsequently amended in June 1998 and
June 1999 (the "Zimmer Distribution Agreement"), and terminated in November
2000. The Zimmer Distribution Agreement provided Zimmer with exclusive marketing
and distribution rights to ORTHOVISC(R) in the United States, Canada, Latin
America, Asia and most of Europe. Following an informal inquiry by the
Securities and Exchange Commission, the Company and its independent auditors
conducted a review of its revenue recognition policy for revenue received under
the Zimmer Distribution Agreement. As a result of this review, and after
consultation with the SEC, Anika revised its revenue recognition policy for
ORTHOVISC(R) sales to Zimmer and restated its operating results for 1998 and the
first three quarters of 1999. (This restatement was previously announced on
March
13
15, 2000 and was disclosed in the Company's Form 10-K for the year ended
December 31, 1999.) Under the revised revenue recognition policy, revenue was
recognized at the time of shipment to Zimmer based upon the minimum per unit
price under the Zimmer Distribution Agreement at the time of sale to Zimmer.
Anika had previously recognized revenue for ORTHOVISC(R) sales to Zimmer based
upon an estimate of the average selling price, which was obtained by Zimmer upon
sale of ORTHOVISC(R) to its customers, as specified under the Zimmer
Distribution Agreement. Anika had also previously recognized revenue in 1998 and
the first three quarters of 1999 for ORTHOVISC(R) from sales of units which had
previously been purchased and paid for by Zimmer, but was being held in Anika's
refrigerators at Zimmer's request. Under the Company's revised revenue
recognition policy, this revenue was recorded when the ORTHOVISC(R) being held
was shipped to Zimmer from Anika's refrigerators. Amounts paid by Zimmer, in
excess of the amount recognized under the revised revenue recognition policy,
were recorded by Anika as deferred revenue.
On November 10, 2000 the Company entered into an agreement with Zimmer,
Inc. to terminate the Zimmer Distribution Agreement for ORTHOVISC(R). Under
the terms of the termination agreement, Zimmer had rights to distribute
ORTHOVISC(R) through the end of the year in the countries where it was
previously sold. As a result of the termination of the Zimmer Distribution
Agreement, Anika recognized $4,249,000 of revenue in the fourth quarter of
2000 for amounts previously received from Zimmer, which included a one-time
payment under the termination agreement. The termination eliminated all
obligations under the distribution agreement with respect to milestone
payments, minimum purchases, unit pricing adjustments based on market prices
and provided for the disposal by January 31, 2001 of all units previously
purchased by Zimmer, including units held in Anika's refrigerators at
Zimmer's request. See "Risk Factors and Certain Factors Affecting Future
Operating Results - Dependence on Marketing Partners" and "--Reliance on a
Small Number of Customers."
The Company also adopted the provisions of SEC Staff Accounting
Bulletin 101 (SAB 101) in its restated 1999 operating results. SAB 101
changed revenue recognition practices for non-refundable up-front payments
received as part of broad supply, distribution and marketing agreements, and
is applicable to $2,500,000 and $1,500,000 payments received from Zimmer in
the fourth quarter of 1997 and the second quarter of 1998, respectively.
These amounts were previously recognized in the period received. In
accordance with SAB 101, the Company recorded the cumulative effect of the
change in accounting principle of $3,625,000 as a charge in the first quarter
of 1999. Under the new revenue recognition policy prescribed by SAB 101,
these payments were recognized as revenue ratably over the 10-year term of
the Zimmer Distribution Agreement. The amount received and deferred to future
periods, $2,925,000 at September 30, 2000, was recorded as licensing revenue
in the fourth quarter of 2000 as a result of the early termination of the
Zimmer Distribution Agreement. Also, included in revenue in the fourth
quarter of 2000 is a one-time payment received from Zimmer upon termination
of the Zimmer Distribution Agreement.
14
Results of Operations
Year ended December 31, 2000 compared to year ended December 31, 1999
Statement of Operations Detail
Years ended December 31,
2000 1999
Product revenue $ 12,935,222 $ 13,082,662
Licensing revenue 3,400,000 400,000
----------------------------
Total revenue 16,335,222 13,482,662
Cost of product revenue 9,870,559 6,440,166
----------------------------
Gross profit 6,464,663 7,042,496
Operating expenses:
Research and development 3,259,984 4,154,479
Selling, general and administrative 4,188,044 3,029,394
----------------------------
Total operating expenses 7,448,028 7,183,873
----------------------------
Income (loss) from operations (983,365) (141,377)
Interest income, net 1,172,859 1,068,430
Gain on sale of securities -- 233,633
----------------------------
Income before provision for income taxes 189,494 1,160,686
Provision for Income taxes 15,940 31,412
----------------------------
Income before cumulative effect of change in accounting principle 173,554 1,129,274
Cumulative effect of change in accounting principle -- (3,625,000)
----------------------------
Net income (loss) $ 173,554 $ (2,495,726)
============================
Product Revenue. Product revenue for the year ended December 31, 2000 was
$12,935,222, a decrease of $147,440 or 1%, compared with $13,082,662 recorded in
the prior year. The decrease was partially attributable to reduced sales of
AMVISC(R) products to Bausch & Lomb of $1,363,968 compared with the prior year,
reflecting lower prices effective April 1, 2000 under the BLS Agreement. The
Company expects unit volumes to increase in 2001 but will be partially offset by
lower unit selling prices. Product revenue associated with ORTHOVISC(R)
increased by $943,484 compared to 1999 as a result of the recognition of
approximately $1.1 million of revenue upon termination of the Zimmer
Distribution Agreement as described above, and was partially offset by decreased
sales to the Company's Turkish distributor. The Company does not expect to
recognize additional revenue from Zimmer in future periods. Also, ORTHOVISC(R)
product revenue may be impacted by economic uncertainties associated with the
Turkish market. Furthermore, future sales of ORTHOVISC(R) to our Turkish
distributor will be at lower unit selling prices, as negotiations to establish a
new long-term distribution agreement for this territory are ongoing. The
Company's sales of HYVISC(R) also increased by $304,680 during 2000 as compared
with 1999.
Licensing Revenue. Licensing revenue of $3,400,000 for the year ended
December 31, 2000 includes: (i) $100,000 per quarter of amortization of
milestone payments received in 1997 and 1998 under the Zimmer Distribution
Agreement, in accordance with SAB 101; (ii) deferred revenue recapture of
$2,925,000 in the fourth quarter of 2000; and (iii) a one-time payment
received as a result of the termination of the Zimmer Distribution Agreement
referred to above. The Company does not anticipate that it will receive any
licensing revenue in 2001.
Gross Profit. Gross profit for the year ended December 31, 2000 was
$6,464,663, a decrease of $577,833 or 8% from $7,042,496 recorded in the prior
year. Excluding the effects of the termination of the Zimmer Distribution
Agreement, gross profit for 2000 was $2,765,000, or 23% of adjusted revenue,
compared with a gross profit of 52% in 1999. The decrease was primarily
attributable to two factors. First, after learning of unfavorable results from a
clinical trial of ORTHOVISC(R) announced on May 31, 2000, the Company suspended
certain manufacturing activities in an effort to reduce work in process
inventory of HA. Total inventory was reduced from $7.2 million at June 30, 2000
to $4.7 million at December 31, 2000. Cost of sales during the second half of
2000 included charges of approximately $2.1 million to reflect this
underutilization of manufacturing capacity. The company's gross margin is
expected to continue to be adversely affected
15
by underutilization of manufacturing capacity in 2001. Second, the price
reduction associated with the BLS Agreement, effective April 1, 2000, reduced
gross margin by approximately $2.2 million, as compared to the prior year. The
Company expects to continue to experience reduced gross margins through 2001,
reflective of the reduced unit selling price under the BLS Agreement and the
reduced per unit selling prices of ORTHOVISC(R) to its Turkish distributor.
Research and Development. Research and development expenses for the year
ended December 31, 2000 decreased by $894,495 to $3,259,984 from $4,154,479
recorded in the prior year. The decrease in research and development during 2000
was primarily attributable to lower clinical trial costs as the prior
ORTHOVISC(R) Phase III trial was completed during the first half of 2000. Costs
of new trials during 2000 were minimal. Research and development expenses during
2001 are expected to be approximately twice the level of spending in 2000 due to
the commencement of clinical trials for ORTHOVISC(R) and INCERT(R), as well as
expected additions to headcount.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended December 31, 2000 increased by $1,158,650 or 44% to
$4,188,044 from $3,029,394 in the prior year. The increase was primarily due to
increased professional fees associated with the SEC's investigation of certain
revenue recognition matters, a shareholder class action suit, contractual
negotiations relating to various distribution agreements and other matters.
Net Interest Income and Gain on Sale of Securities. The Company's net
interest income increased by $104,429 to $1,172,859 for the year ended December
31, 2000 from $1,068,430 in the prior year. The increase is attributable to
higher market interest rates during 2000, offset by lower average cash balances
on hand in 2000 versus 1999. During the fourth quarter of 1999, the Company
recorded a gain of approximately $233,633, net of expenses, on the sale of
equity securities purchased in the second quarter of 1999. Interest income in
2001 is expected to be adversely affected by lower market interest rates as well
as lower average cash and investment balances.
Income Taxes. The Company recorded tax expense for the year ended December
31, 2000 of $15,940, and $31,412 for the year ended December 31, 1999. The tax
provisions primarily represent state income taxes on investment income. For
federal income tax purposes, the Company has had net operating losses available
to offset otherwise taxable income. The Company has federal and state net
operating loss carry-forwards of $4,629,000 and $1,403,000, respectively that
may be available to offset future taxable income, if any. The Internal Revenue
Code (IRC) contains provisions that may limit the amount of net operating loss
and credit carry-forwards that the Company may utilize in any one year in the
event of certain cumulative changes in ownership over a three-year period. In
the event that the Company has had a change of ownership, as defined in IRC
Section 382, utilization of the carry-forwards may be restricted.
16
Year ended December 31, 1999 compared to year ended December 31, 1998
Statement of Operations Detail
Years ended December 31,
1999 1998
Product revenue $ 13,082,662 $11,773,343
Licensing revenue 400,000 1,500,000
---------------------------
Total revenue 13,482,662 13,273,343
Cost of product revenue 6,440,166 6,014,181
---------------------------
Gross profit 7,042,496 7,259,162
Operating expenses:
Research and development 4,154,479 1,955,940
Selling, general and administrative 3,029,394 2,731,142
---------------------------
Total operating expenses 7,183,873 4,687,082
---------------------------
Income (loss) from operations (141,377) 2,572,080
Interest income, net 1,068,430 1,307,825
Gain on sale of securities 233,633 --
---------------------------
Income before provision for income taxes 1,160,686 3,879,905
Provision for Income taxes 31,412 127,557
---------------------------
Income before cumulative effect of change in accounting principle 1,129,274 3,752,348
Cumulative effect of change in accounting principle (3,625,000) --
---------------------------
Net income (loss) $ (2,495,726) $ 3,752,348
===========================
Product Revenue. Product revenue for the year ended December 31, 1999 was
$13,082,662, an increase of $1,309,319 or 11.1%, over the $11,773,343 recorded
in the prior year. The increase was primarily attributable to an increase of
$805,352, or 22.0% in sales of ORTHOVISC(R). See "Risk Factors And Certain
Factors Affecting Future Operating Results--Reliance on a Small Number of
Customers." Sales of AMVISC(R) products increased by $294,606 or 3.7%.
Licensing Revenue. For the year ended December 31, 1999, licensing revenue
of $400,000 represents the annual amortization of amounts received in 1997 and
1998 in accordance with the Company's change in accounting for such fees. The
$1,500,000 included in licensing fees in 1998 was received from Zimmer for the
extension of marketing rights for ORTHOVISC(R) to include most of Europe and
Latin America under the Zimmer Distribution Agreement. This amount, along with
$2,500,000 received in 1997, underlies the charge against earnings in 1999 under
the caption "Cumulative effect of change in accounting principle."
Gross Profit. Gross profit for the year ended December 31, 1999 was
$7,042,496, a decrease of $216,666 or 3.0% from $7,259,162 recorded in the prior
year. The decrease was primarily due a the decrease in licensing fees. Gross
profit from product revenues increased as a percentage of product revenue to
50.8% for the year ended December 31, 1999 as compared to 48.9% in the prior
year. The increase in the gross profit percentage on product revenues primarily
reflects the impact of capital spending and resulting scale-up efforts during
1998 and 1999 to increase manufacturing capacity and other efforts to improve
efficiencies.
Research and Development. Research and development expenses for the year
ended December 31, 1999 increased by $2,198,539 to $4,154,479 from $1,955,940
recorded in the prior year. The increase in research and development during 1999
was primarily for the cost of ORTHOVISC(R) Phase III trials.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended December 31, 1999 increased by $298,252 or 10.9% to
$3,029,394 from $2,731,142 in the prior year. The increase was primarily
attributable to ORTHOVISC(R) selling and marketing costs, headcount increases,
and the amortization of deferred stock compensation.
17
Net Interest Income and Gain on Sale of Securities. The Company's net
interest income decreased by $239,395 to $1,068,430 for the year ended December
31, 1999 from $1,307,825 in the prior year. The decrease is attributable to
lower average cash balances on hand in 1999 versus 1998 and lower average
interest rates. During the fourth quarter of 1999, the Company recorded a gain
of approximately $233,633, net of expenses, on the sale of equity securities
purchased in the second quarter of 1999.
Income Taxes. The Company recorded tax expense for the year ended December
31, 1999 of $31,412 and $127,557 for the year ended December 31, 1998. The
Company has utilized net operating loss and credit carry-forwards to offset
taxable income earned during these years.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had cash, cash equivalents and
investments in marketable securities of $18.3 million versus cash, cash
equivalents and investments in marketable securities of $20.2 million at
December 31, 1999. During 2000, the Company's net income plus depreciation and
amortization of unearned stock compensation, less the change in deferred revenue
used $3.3 million of cash. During fiscal year 2000, this utilization of cash was
partially offset by a reduction of cash utilized in working capital items,
primarily inventories and accounts receivable, amounting to $1.4 million.
During 2000, the Company utilized $505,000 for capital expenditures.
Proceeds from the exercise of stock options were $540,000. Capital expenditures
in 2001 are expected to include approximately $500,000 to construct certain
manufacturing and laboratory facilities as well as customary capital spending
for manufacturing, laboratory, and office equipment.
In October 1998, the Board of Directors approved a stock repurchase
program under which the Company was authorized to repurchase up to $4 million of
Anika common stock with the total number of shares repurchased under the plan
not to exceed 9.9% of the total issued and outstanding shares. Through December
31, 1999, the Company had repurchased 762,100 shares at an average cost per
share of $5.08 for an aggregate cash purchase price of approximately $3,873,000.
No shares of the Company's stock were repurchased during 2000.
The Company has announced plans for increased research and product
development spending, including two clinical trials, during 2001. Such currently
planned expenditures will increase the Company's aggregate utilization of its
cash resources. In addition, as described in the section entitled "Legal
Proceedings" elsewhere in this document, the Company is a defendant in a
shareholder class action lawsuit, which if settled, may require the Company to
contribute funds. However, the Company believes that its cash and investments on
hand will be sufficient to meet its requirements through at least 2002.
The Company's future capital requirements and the adequacy of available
funds will depend, however, on numerous factors, including market acceptance of
its existing and future products; the successful commercialization of products
in development; progress in its product development efforts; the magnitude and
scope of such efforts; progress with pre-clinical studies, clinical trials and
product clearances by the FDA and other agencies; the cost, timing requirements
of its efforts to expand its manufacturing capabilities; the cost of filing,
prosecuting, defending and enforcing patent claims and other intellectual
property rights; competing technological and market developments; and the
development of strategic alliances for the marketing of certain of its products.
There can be no assurance that the Company will record profits in future
periods. See "Risk Factors and Certain Other Factors Affecting Future
Operating Results - History of Losses; Uncertainty of Future Profitability."
The terms of any future equity financings may be dilutive to the Company's
stockholders and the terms of any debt financings may contain restrictive
covenants, which limit the Company's ability to pursue certain courses of
action. The ability of the Company to obtain financing is dependent on the
status of the Company's future business prospects as well as conditions
prevailing in the relevant capital markets. No assurance can be given that any
additional financing will be made available to the Company or will be available
on acceptable terms should such a need arise. The Company's estimate of the time
period for which cash and cash equivalents will be adequate to fund operations
is a forward looking statement within the meaning of the Private Securities
Litigation Reform Act of 1995 and is subject to risks and uncertainties. Actual
results may differ materially from those contemplated in such forward-looking
statements. In addition to those described above, factors which may cause such a
difference are set forth under the caption "Risk Factors and Certain Factors
Affecting Future Operating Results" as well as in this Annual Report on Form
10-K generally.
18
Risk Factors and Certain Factors Affecting Future Operating Results
Comprehensive Government Regulation; No Assurance of FDA Approval. The
Company's products, product development activities, manufacturing processes, and
current and future sales and marketing are subject to extensive and rigorous
regulation by the FDA and comparable agencies in foreign countries. In the
United States, the FDA regulates the marketing, advertising, promotion, and
distribution of medical devices, drugs, and biologics, as well as testing,
safety, effectiveness, clearance, approval, manufacturing, labeling, packaging,
storage, record keeping, and reporting activities for such products.
Medical products regulated by the FDA are generally classified as medical
devices, drugs and/or biologics. Product development and approval within the FDA
framework takes a number of years and involves the expenditure of substantial
resources. There can be no assurance that the FDA will grant approval for the
Company's new products on a timely basis or at all, or that FDA review will not
involve delays that will adversely affect the Company's ability to commercialize
additional products or expand permitted uses of existing products, or that the
regulatory framework will not change, or that additional regulation will not
arise at any stage of the Company's product development process which may
adversely affect approval of or delay an application or require additional
expenditures by the Company. In the event the Company's future products are
regulated as human drugs or biologics, the FDA review process typically would be
substantially longer and more expensive than the review process to which they
are currently subject as devices.
The Company's ORTHOVISC(R) product will have to meet regulatory
requirements of a Class III device by the FDA. Class III devices are those that
generally must receive pre-market approval (PMA) by the FDA (e.g.
life-sustaining, life-supporting and implantable or new devices which have not
been found to be substantially equivalent to legally marketed devices) and
require clinical testing to ensure safety and effectiveness and FDA approval
prior to marketing and distribution. In order for the Company to commercially
distribute ORTHOVISC(R) in the U.S., it must obtain FDA approval of a PMA. The
PMA approval process can be expensive, uncertain and lengthy. A number of
devices for which pre-market approval has been sought have never been approved
for marketing. The review of an application often occurs over a protracted time
period and may take two years or more from the filing date to complete. The
Company submitted a PMA for ORTHOVISC(R) in December 1997. In October 1998, the
Company was notified by the FDA that the Company's PMA application for
ORTHOVISC(R) was not approvable and that additional clinical data would be
required to demonstrate the effectiveness of ORTHOVISC(R). The Company submitted
an IDE to the FDA in February 1999 and received approval in late March 1999 to
commence a second Phase III clinical study. The Company received initial results
from the Phase III clinical trial in late May 2000 that the Company determined
did not show sufficient efficacy to support the filing of a PMA application. The
Company has evaluated available information and announced its intention to
pursue further clinical trials. In February 2001, the Company commenced another
Phase III clinical trial of ORTHOVISC(R). The trial is expected to be conducted
in up to 20 centers in the U.S. and Canada, with 360 patients expected to be
enrolled, and with evaluation over a six-month period following treatment. There
can be no assurance that (i) any additional clinical data will support the
efficacy of ORTHOVISC(R), (ii) the Company will complete any additional clinical
trials of ORTHOVISC(R), (iii) the Company will be able to successfully complete
the FDA approval process, or (iv) additional clinical trials will support a PMA
application and/or FDA approval in a timely manner or at all. There also can be
no assurance that any delay in receiving FDA approvals will not adversely affect
the Company's competitive position. Furthermore, even if the Company were to
receive a PMA approval, (i) the approval may include significant limitations on
the indications and other claims sought for use for which the product may be
marketed; (ii) the approval may include other significant conditions to approval
such as post-market testing, tracking, or surveillance requirements; and (iii)
the Company may not be able to achieve meaningful sales in the U.S.
The Company's HA products under development, including INCERT(R)-S have
not obtained regulatory approval in the U.S. for commercial marketing and sale.
The Company believes that INCERT(R)-S will be regulated as a Class III medical
device and will require FDA approval of a PMA prior to marketing. The Company
has received IDE approval from the FDA and plans to commence clinical trials for
INCERT(R)-S in the first half of 2001. The planned trial is expected to
initially include up to 100 patients in up to 20 centers in the U.S. and, if
results from these patients support further development, to expand patient
recruitment to up to 380 patients. There can be no assurance that (i) the
Company will begin or successfully complete clinical trials of INCERT(R)-S; (ii)
the clinical data will support the efficacy of
19
INCERT(R)-S; (iii) it will be able to successfully complete the FDA approval
process; or (iv) additional clinical trials will support a PMA application
and/or FDA approval in a timely manner or at all. There also can be no assurance
that any delay in receiving FDA approvals will not adversely affect our
competitive position. Furthermore, even if we received FDA approval, (i) the
approval may include significant limitations on the indications and other claims
sought for use for which the product may be marketed (ii) the approval may
include other significant conditions of approval such as post-market testing,
tracking, or surveillance requirements; and /or (iii) meaningful sales of
INCERT(R)-S may never be achieved.
Orquest has not received regulatory approval in the U.S. for the
commercial marketing and sale of OSSIGEL(R). OSSIGEL(R) will be regulated as a
Class III medical device with the FDA's Center of Biologics Research and Review
as the lead review center and will require PDA approval prior to marketing.
There can be no assurance that clinical trials of OSSIGEL(R) will demonstrate
that OSSIGEL(R) is safe and effective or otherwise satisfies FDA requirements.
Once obtained, marketing approval can be withdrawn by the FDA for a number
of reasons, including, among other things, the failure to comply with regulatory
standards or the occurrence of unforeseen problems following initial approval.
The Company may be required to make further filings with the FDA under certain
circumstances. The FDA's regulations require agency approval of a PMA supplement
for certain changes if they affect the safety and effectiveness of an approved
device, including, but not limited to, new indications for use, labeling
changes, the use of a different facility to manufacture, process or package the
device, and changes in performance or design specifications. Changes in
manufacturing that effect safety and effectiveness, may be deemed approved after
a 30-day notice unless the FDA requests a supplement. Failure by the Company to
receive approval of a PMA supplement regarding the use of a different
manufacturing facility or any other change affecting the safety or effectiveness
of an approved device on a timely basis, or at all, would have a material
adverse effect on the Company's business, financial condition, and results of
operations. The FDA could also limit or prevent the manufacture or distribution
of the Company's products and has the power to require the recall of such
products. Significant delay or cost in obtaining, or failure to obtain FDA
approval on clearance to market products, any FDA limitations on the use of the
Company's products, or any withdrawal or suspension of approval or rescission of
clearance by the FDA could have a material adverse effect on the Company's
business, financial condition, and results of operations.
In addition, all FDA approved or cleared products manufactured by the
Company must be manufactured in compliance with FDA's GMP regulations and, for
medical devices, FDA's GMP/QSR. Ongoing compliance with GMP/QSR and other
applicable regulatory requirements is enforced through periodic inspection by
state and federal agencies, including the FDA. The FDA may inspect the Company
and its facilities from time to time to determine whether the Company is in
compliance with regulations relating to medical device and manufacturing
companies, including regulations concerning manufacturing, testing, quality
control and product labeling practices. There can be no assurance that the
Company will be able to comply with current or future FDA requirements
applicable to the manufacture of products.
FDA regulations depend heavily on administrative interpretation and there
can be no assurance that the future interpretations made by the FDA or other
regulatory bodies, with possible retroactive effect, will not adversely affect
the Company. In addition, changes in the existing regulations or adoption of new
governmental regulations or policies could prevent or delay regulatory approval
of the Company's products.
Failure to comply with applicable regulatory requirements could result in,
among other things, warning letters, fines, injunctions, civil penalties, recall
or seizure of products, total or partial suspension of production, refusal of
the FDA to grant pre-market clearance or pre-market approval for devices,
withdrawal of approvals and criminal prosecution.
In addition to regulations enforced by the FDA, the Company is subject to
other existing and potential future federal, state, local and foreign
regulations. International regulatory bodies often establish regulations
governing product standards, packing requirements, labeling requirements, import
restrictions, tariff regulations, duties and tax requirements. To enable the
Company to market ORTHOVISC(R) in Europe, the Company was required to receive a
"CE" marking certification, an international symbol of quality and compliance
with the applicable European medical device directive. In October 1996, the
Company received an EC Design Examination and an EC Quality System Certificate
from a European Notified Body, which entitled the Company to affix a CE marking
for ORTHOVISC(R) as a viscoelastic supplement or a replacement for synovial
fluid in human joints. There can be no assurance that the Company will be able
to achieve and/or maintain compliance required for CE marking or other foreign
regulatory approvals for any or all of its products or that it
20
will be able to produce its products in a timely and profitable manner while
complying with applicable requirements. Federal, state, local and foreign
regulations regarding the manufacture and sale of medical products are subject
to change. The Company cannot predict what impact, if any, such changes might
have on its business. The requirements relating to the conduct of clinical
trials, product licensing, pricing and reimbursement also vary widely from
country to country.
The process of obtaining approvals from the FDA and other regulatory
authorities can be costly, time consuming, and subject to unanticipated delays.
There can be no assurance that approvals or clearances of the Company's products
will be granted or that the Company will have the necessary funds to develop
certain of such products. Any failure to obtain, or delay in obtaining such
approvals or clearances could adversely affect the ability of the Company to
market its products.
History of Losses; Uncertainty of Future Profitability. From its inception
up until December 31, 1996 and in 1999 and 2000, the Company incurred annual
operating losses. As of December 31, 2000, the Company had an accumulated
deficit of $4,599,000. The continued development of the Company's products will
require the commitment of substantial resources to conduct research and
preclinical and clinical development programs and to establish sales and
marketing capabilities or distribution arrangements. The ability of the Company
to reach sustained profitability is highly uncertain. To achieve sustained
profitability the Company must, among other things, successfully complete
development of certain of its products, obtain regulatory approvals, and
establish sales and marketing capabilities or distribution arrangements for
certain of its products. Increased spending in 2001 on clinical trials and
research and development efforts is expected to result in a net loss for the
year.
Competition. The Company competes with many companies, including, among
others, large pharmaceutical companies and specialized medical products
companies. Many of these companies have substantially greater financial and
other resources, larger research and development staffs, more extensive
marketing and manufacturing organizations and more experience in the regulatory
process than the Company. The Company also competes with academic institutions,
governmental agencies and other research organizations, which may be involved in
research, development and commercialization of products. Because a number of
companies are developing HA products for similar applications, the successful
commercialization of a particular product will depend in part upon the ability
of the Company to successfully complete clinical studies and obtain FDA
marketing and foreign regulatory approvals prior to its competitors. There can
be no assurance that the Company will be able to compete against current or
future competitors or that competition will not have a material adverse effect
on the Company's business, financial condition, and results of operations. The
Company is currently experiencing pricing pressures in the Turkish market from
increased competition, which may hinder its ability to effectively compete in
that market. As a result, we have decreased our prices to our Turkish
distributor.
Uncertainty Regarding Success of Clinical Trials. Several of the Company's
products, including ORTHOVISC(R), as well as the products of the Company's
collaborative partners, including OSSIGEL(R), will require clinical trials to
determine their safety and efficacy for U.S. and international marketing
approval by regulatory bodies, including the FDA. In late May 2000, the
Company's initial analysis of the results of its second Phase III clinical trial
of ORTHOVISC(R) did not show sufficient efficacy to support the filing of a PMA
application to obtain FDA approval. The Company has evaluated available
information and announced the commencement of further clinical trials. In order
to undertake clinical trials in the U.S. to support a PMA of INCERT-S(R), the
Company has received from the FDA approval of an IDE. There can be no assurance
that (i) any additional clinical data will support the efficacy of ORTHOVISC(R),
(ii) the Company will begin clinical trials of INCERT(R)- S or complete any
additional clinical trials of ORTHOVISC(R) or INCERT(R)- S (iii) it will be able
to successfully complete the FDA approval process for either ORTHOVISC(R) or
INCERT(R)- S, or (iv) additional ORTHOVISC(R) or INCERT(R)- S clinical trials
will support a PMA application and/or FDA approval in a timely manner or at all.
There can be no assurance that the Company or its collaborative partners will
not encounter problems that will cause it to delay, suspend or terminate
clinical trials. In addition, the Company cannot provide any assurance that such
clinical trials, if completed, will ultimately demonstrate these products to be
safe and efficacious.
Dependence Upon Marketing and Distribution Partners. The Company's success
will be dependent upon the efforts of its marketing partners and the terms and
conditions of the Company's relationships with such marketing partners.
21
In addition, there can be no assurances that such marketing partners will
not seek to renegotiate their current agreements on terms less favorable to the
Company. Under the terms of the BLS Agreement, effective January 1, 2001, the
Company became Bausch & Lomb Surgical's exclusive provider of AMVISC(R) and
AMVISC(R) Plus, ophthalmic viscoelastic products, in the U.S. and international
markets. The BLS Agreement expires December 31, 2007, superseding an existing
supply contract with Bausch & Lomb Surgical that was set to expire December 31,
2001. The BLS Agreement is subject to early termination and/or reversion to a
non-exclusive basis under certain circumstances. The BLS Agreement lifts
contractual restrictions on the Company's sales of certain ophthalmic products
to other companies, subject to payment of royalties by Anika. In exchange, the
Company agreed to a reduction in unit selling prices retroactively effective to
April 1, 2000 and the elimination of minimum unit purchase obligations by BLS.
The Company has not achieved incremental sales of its ophthalmic products
to Bausch & Lomb Surgical and/or other companies sufficient to offset the
effects of the price reduction to Bausch & Lomb Surgical and there can be no
assurances that the Company will be able to do so in the future. The Company
expects that, at least through 2001, the reduction in unit prices will result in
a decrease in the Company's revenue and gross margin from Bausch & Lomb
Surgical. In addition, under certain circumstances, (i) Bausch & Lomb Surgical
may have the right to terminate the agreement and/or (ii) the agreement may
revert to a non-exclusive basis; in each case, the Company cannot make any
assurances that such circumstances will not occur. For the years ended December
31, 2000 and 1999, sales of AMVISC(R) products to Bausch & Lomb Surgical
accounted for 54.1% and 63.9% of product revenues, respectively. Although the
Company intends to seek new opthalmic product customers, there can be no
assurances that the Company will be successful in obtaining new customers and
increased sales.
The Zimmer Distribution Agreement provided Zimmer with exclusive marketing
and distribution rights to ORTHOVISC(R) in the United States, Canada, Latin
America, Asia and most of Europe. On November 10, 2000, the Company reached an
agreement with Zimmer, Inc. for an early termination of its marketing and
distribution agreement for ORTHOVISC(R). Under the terms of the termination
agreement, Zimmer had the right to distribute ORTHOVISC(R) from its existing
inventory through the end of 2000 in the countries where it was heretofore sold.
The early termination agreement also eliminated, among other things, all
obligations with respect to additional milestone payments, minimum purchases,
unit pricing adjustments and provided for the disposal of Zimmer units held on
Anika premises. The termination may have a material adverse effect on the
Company's ability to market ORTHOVISC(R), which may have a material adverse
effect on the Company's future operating results. ORTHOVISC(R) sales to Zimmer
accounted for 16.4% of product revenue for the year ended December 31, 2000. The
Company has relationships with logistics service providers in order to
distribute ORTHOVISC(R) to customers in Canada and European countries previously
served by Zimmer. The Company is seeking to establish long-term relationships
with new distribution partners in these countries where Zimmer previously sold
the product. There can be no assurance that the Company will be able to identify
or engage appropriate distribution or collaboration partners or strategic
investment opportunities.
The Company will need to obtain the assistance of additional marketing
partners for new products, which are brought to market for the replacement of
certain marketing partners, such as Zimmer, and for existing products brought to
new markets. There can be no assurance that such additional partners will be
available or that such partners will agree to market the Company's products on
acceptable terms. The failure to establish strategic partnerships for the
marketing and distribution of the Company's products on acceptable terms would
have a material adverse effect on the Company's business, financial condition,
and results of operations.
As a result of the termination of the Zimmer Distribution Agreement, the
Company will not earn any additional milestone payments under the Zimmer
Distribution Agreement. In addition, there can be no assurance that the Company
will obtain European or other reimbursement approvals or, if such approvals are
obtained, they will be obtained on a timely basis or at a satisfactory level of
reimbursement. Furthermore, Anika may experience some difficulties or delays in
the transfer of existing business relationships and reimbursement approvals from
Zimmer.
Uncertainty of Market Acceptance of Future Products. The Company's success
will depend in part upon the acceptance of the Company's future products by the
medical community, hospitals and physicians and other health care providers, and
third-party payers. Such acceptance may depend upon the extent to which the
medical community perceives the Company's products as safer, more effective or
cost-competitive than other similar products. Ultimately, for the Company's new
products to gain general market acceptance, it will also be necessary for the
Company to develop marketing partners for the distribution of its products.
There can be no assurance that the Company's new products will achieve
significant market acceptance on a timely basis, or at all. Failure of some or
all of the Company's future products
22
to achieve significant market acceptance could have a material adverse effect on
the Company's business, financial condition, and results of operations.
Dependence on Patents and Proprietary Technology. The Company's success
will depend, in part, on its ability to obtain and enforce patents, protect
trade secrets, obtain licenses to technology owned by third parties when
necessary, and conduct its business without infringing on the proprietary rights
of others. The patent positions of pharmaceutical, medical products and
biotechnology firms, including the Company, can be uncertain and involve complex
legal and factual questions. There can be no assurance that any patent
applications will result in the issuance of patents or, if any patents are
issued, whether they will provide significant proprietary protection or
commercial advantage, or will not be circumvented by others. In the event a
third party has also filed one or more patent applications for any of its
inventions, the Company may have to participate in interference proceedings
declared by the U.S. Patent and Trademark Office ("PTO") to determine priority
of invention (see below), which could result in failure to obtain or the loss of
patent protection for the inventions and the loss of any right to use the
inventions. Even if the eventual outcome is favorable to the Company, such
interference proceedings could result in substantial cost to the Company. Filing
and prosecution of patent applications, litigation to establish the validity and
scope of patents, assertion of patent infringement claims against others and the
defense of patent infringement claims by others can be expensive and time
consuming. There can be no assurance that in the event that any claims with
respect to any of the Company's patents, if issued, are challenged by one or
more third parties, that any court or patent authority ruling on such challenge
will determine that such patent claims are valid and enforceable. An adverse
outcome in such litigation could cause the Company to lose exclusivity covered
by the disputed rights. If a third party is found to have rights covering
products or processes used by the Company, the Company could be forced to cease
using the technologies or marketing the products covered by such rights, could
be subject to significant liabilities to such third party, and could be required
to license technologies from such third party. Furthermore, even if the
Company's patents are determined to be valid, enforceable, and broad in scope,
there can be no assurance that competitors will not be able to design around
such patents and compete with the Company using the resulting alternative
technology.
The Company has a policy of seeking patent protection for patentable
aspects of its proprietary technology. The Company co-owns certain United States
patents with claims relating to the chemical modification of HA and certain
adhesion prevention and drug delivery uses of HA. Two patents in this portfolio
have issued in the year 2000. The Company also solely owns patents directed to
certain manufacturing processes. The Company holds an exclusive license from
Tufts University to use technologies claimed in a United States patent
application which has been granted a Notice of Allowance from the U.S. Patent
Office for the anti-metastasis applications of HA oligosaccharides. The
Company's patents expire between 2007 and 2015 and the license expires upon
expiration of all related patents. The Company intends to seek patent protection
with respect to products and processes developed in the course of its activities
when it believes such protection is in its best interest and when the cost of
seeking such protection is not inordinate. However, no assurance can be given
that any patent application will be filed, that any filed applications will
result in issued patents or that any issued patents will provide the Company
with a competitive advantage or will not be successfully challenged by third
parties. The protections afforded by patents will depend upon their scope and
validity, and others may be able to design around the Company's patents. The
Company's issued patents and any patents, which arise from the Company's
licensed application, would provide competitive protection, if at all, only in
the United States. The Company has not, to date, pursued foreign patents
equivalent to those issued or applied for in the United States.
Other entities have filed patent applications for or have been issued
patents concerning various aspects of HA-related products or processes. There
can be no assurance that the products or processes developed by the Company will
not infringe on the patent rights of others in the future. Any such infringement
may have a material adverse effect on the Company's business, financial
condition, and results of operations. In particular, the Company received notice
from the PTO in 1995 that a third party was attempting to provoke a patent
interference with respect to one of the Company's co-owned patents covering the
use of INCERT(R) for post-surgical adhesion prevention. It is unclear whether an
interference will be declared. If an interference is declared it is not possible
at this time to determine the merits of the interference or the effect, if any,
the interference will have on the Company's marketing of INCERT(R) for this use.
The existence of the interference proceeding may have a negative impact on the
marketing of the INCERT(R) product, and no assurance can be given that the
Company would be successful in any such interference proceeding. If the
third-party interference were to be decided adversely to the Company, involved
claims of the Company's patent would be cancelled, the Company's marketing of
the INCERT(R) product may be materially and adversely affected and the third
party may enforce patent rights against the Company which could prohibit the
sale and use of INCERT(R) products, which could have a material adverse effect
on the Company's future operating results.
23
The Company also relies upon trade secrets and proprietary know-how for
certain non-patented aspects of its technology. To protect such information, the
Company requires all employees, consultants and licensees to enter into
confidentiality agreements limiting the disclosure and use of such information.
There can be no assurance that these agreements provide meaningful protection or
that they will not be breached, that the Company would have adequate remedies
for any such breach, or that the Company's trade secrets, proprietary know-how,
and technological advances will not otherwise become known to others. In
addition, there can be no assurance that, despite precautions taken by the
Company, others have not and will not obtain access to the Company's proprietary
technology. Further, there can be no assurance that third parties will not
independently develop substantially equivalent or better technology.
Pursuant to the BLS Agreement, the Company has agreed to transfer to
Bausch & Lomb Surgical, upon expiration of the term of the agreement on December
31, 2007, or in connection with earlier termination in certain circumstances,
the Company's manufacturing process, know-how and technical information, which
relate to AMVISC(R) products. Upon expiration of the BLS Agreement, there can be
no assurance that Bausch & Lomb Surgical will continue to use the Company to
manufacture AMVISC(R) and AMVISC(R) Plus. If Bausch & Lomb Surgical discontinues
the use of the Company as a manufacturer after such time, the Company's
business, financial condition, and results of operations would likely be
materially and adversely affected.
Risks Associated with Manufacturing. The Company's results of operations
are dependent upon the continued operation of its manufacturing facility in
Woburn, Massachusetts. The operation of biomedical manufacturing plants involves
many risks, including the breakdown, failure or substandard performance of
equipment, natural and other disasters, and the need to comply with the
requirements of directives of government agencies, including the FDA. In
addition, the Company relies on a single supplier for syringes and a small
number of suppliers for a number of other materials required for the
manufacturing and delivery of its HA products. Furthermore, manufacturing
processes and research and development efforts of the Company involve animals
and products derived from animals. The utilization of animals in research and
development and product commercialization is subject to increasing focus by
animal rights activists. The activities of animal rights groups and other
organizations that have protested animal based research and development programs
or boycotted the products resulting from such programs could cause an
interruption in the Company's manufacturing processes and research and
development efforts. The occurrence of material operational problems, including
but not limited to the events described above, could have a material adverse
effect on the Company's business, financial condition, and results of operations
during the period of such operational difficulties.
No Assurance of Growth or Ability to Manage Growth. The Company's future
success depends on substantial growth in product sales. There can be no
assurance that such growth can be achieved or, if achieved, can be sustained.
There can be no assurance that even if substantial growth in product sales and
the demand for the Company's products is achieved, the Company will be able to
(i) develop the necessary manufacturing capabilities; (ii) obtain the assistance
of additional marketing partners; (iii) attract, retain and integrate the
required key personnel; or (iv) implement the financial, accounting and
management systems needed to manage growing demand for its products, should it
occur. Failure of the Company to successfully manage future growth could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Third Party Reimbursement and Health Care Cost Containment Initiatives. In
the U.S. and other markets, health care providers, such as hospitals and
physicians, that purchase health care products, such as the Company's products,
generally rely on third party payers, including Medicare, Medicaid and other
health insurance and managed care plans, to reimburse all or part of the cost of
the health care product. The Company depends upon the distributors for its
products to secure reimbursement and reimbursement approvals. Reimbursement by
third party payers may depend on a number of factors, including the payer's
determination that the use of the Company's products is clinically useful and
cost-effective, medically necessary and not experimental or investigational.
Since reimbursement approval is required from each payor individually, seeking
such approvals can be a time consuming and costly process which, in the future,
could require the Company or its marketing partners to provide supporting
scientific, clinical and cost-effectiveness data for the use of the Company's
products to each payor separately. Significant uncertainty exists as to the
reimbursement status of newly approved health care products, and third party
payers are increasingly attempting to contain the costs of health care products
and services by limiting both coverage and the level of reimbursement for new
therapeutic products and by refusing in some cases to provide coverage for uses
of approved products for disease indications for which the FDA has not granted
marketing approval. In addition, Congress and certain state legislatures have
considered reforms that may affect current reimbursement practices, including
controls on health care spending through limitations on the growth of Medicare
24
and Medicaid spending. There can be no assurance that third party reimbursement
coverage will be available or adequate for any products or services developed by
the Company. Outside the U.S., the success of the Company's products is also
dependent in part upon the availability of reimbursement and health care payment
systems. Lack of adequate coverage and reimbursement provided by governments and
other third party payers for the Company' products and services could have a
material adverse effect on the Company's business, financial condition, and
results of operations.
Needs for Additional Funds; Liquidity. The Company had cash, cash
equivalents and short-term investments of $18.3 million as of December 31, 2000.
The Company's future capital requirements and the adequacy of available funds
will depend, however, on numerous factors, including market acceptance of its
existing and future products; the successful commercialization of products in
development; progress in its product development efforts; the magnitude and
scope of such efforts; progress with preclinical studies, clinical trials and
product clearances by the FDA and other agencies; the cost and timing of its
efforts to improve its manufacturing capabilities and cost efficiency; the cost
of filing, prosecuting, defending and enforcing patent claims and other
intellectual property rights; costs associated with shareholder litigation
matters; competing technological and market developments; and the development of
strategic alliances for the marketing of certain of its products. To the extent
that funds generated from the Company's operations, together with the Company's
existing capital resources are insufficient to meet future requirements, the
Company will be required to obtain additional funds through equity or debt
financings, strategic alliances with corporate partners and others, or through
other sources. The terms of any future equity financings may be dilutive to the
Company's stockholders and the terms of any debt financings may contain
restrictive covenants, which may limit the Company's ability to pursue certain
courses of action. The ability of the Company to obtain financing is dependent
on the status of the Company's future business prospects as well as conditions
prevailing in the relevant capital markets. No assurance can be given that any
additional financing will be made available to the Company or will be available
on acceptable terms should such a need arise.
Exposure to Product Liability Claims. The testing, marketing and sale of
human health care products entail an inherent risk of allegations of product
liability, and there can be no assurance that substantial product liability
claims will not be asserted against the Company. Although the Company has not
received any material product liability claims to date and has an insurance
policy of $5,000,000 per occurrence and $5,000,000 in the aggregate to cover
such claims should they arise, there can be no assurance that material claims
will not arise in the future or that the Company's insurance will be adequate to
cover all situations. Moreover, there can be no assurance that such insurance,
or additional insurance, if required, will be available in the future or, if
available, will be available on commercially reasonable terms. Any product
liability claim, if successful, could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Dependence upon Key Personnel. The Company is highly dependent on the
members of its management and scientific staff, the loss of one or more of
who could have a material adverse effect on the Company. In addition, the
Company believes that its future success will depend in large part upon its
ability to attract and retain highly skilled, scientific, managerial and
manufacturing personnel. The Company faces significant competition for such
personnel from other companies, research and academic institutions,
government entities and other organizations. There can be no assurance that
the Company will be successful in hiring or retaining the personnel it
requires. In particular, the Company can provide no assurances that the
results from the recent Phase III clinical trial of ORTHOVISC(R) will not
impact its ability to attract the personnel it requires. The failure to hire
and retain such personnel could have a material adverse effect on the
Company's business, financial condition, and results of operations.
Environmental Regulation. The Company is subject to a variety of local,
state and federal government regulations relating to the storage, discharge,
handling, emission, generation, manufacture and disposal of toxic, or other
hazardous substances used in the manufacture of the Company's products. Any
failure by the Company to control the use, disposal, removal or storage of
hazardous chemicals or toxic substances could subject the Company to significant
liabilities, which could have a material adverse effect on the Company's
business, financial condition, and results of operations.
Risks Relating to International Operations. During the year ended December
31, 2000 and 1999, approximately 20% and 30%, respectively, of the Company's
product sales were generated in international markets through marketing
partners. The Company's representatives, agents and distributors, which sell
products in international markets, are subject to the laws and regulations of
the foreign jurisdictions in which they operate and in which the
25
Company's products are sold. A number of risks are inherent in international
sales and operations. For example, the volume of international sales may be
limited by the imposition of government controls, export license
requirements, political instability, trade restrictions, changes in tariffs,
difficulties in managing international operations, import restrictions and
fluctuations in foreign currency exchange rates. Furthermore, the economic
conditions in Turkey may have a material adverse effect on the volume of
sales of our Turkish distributor, who accounted for 17.7% of product revenues
in 2000. Such changes in the volume of sales by any of our customers may have
an adverse effect on the Company's business, financial condition, and results
of operations.
Potential Volatility of Stock Price; No Control Over Market Making. The
market price of shares of the Company's Common Stock may be highly volatile.
Factors such as announcements of new commercial products or technological
innovations by the Company or its competitors, disclosure of results of clinical
testing or regulatory proceedings, governmental regulation and approvals,
developments in patent or other proprietary rights, public concern as to the
safety of products developed by the Company and general market conditions may
have a significant effect on the market price of the Company's Common Stock. In
particular, the Company's stock price declined significantly in October 1998
following the C