Anika Therapeutics Inc (ANIK) is like a lot of hot small caps that have been quietly making some people rich, not only because it’s not very well known, but because it operates in a part of the health care universe that doesn’t generate a lot of sexy headlines for ANIK stock: treating knee pain.
Yes, there have been the industry blockbuster arthritis drugs like Vioxx and Celebrex, but Anika’s mainstay product — an injectable supplement for the natural synovial fluid that fills our joints, generically called a “viscosupplement” — hasn’t had that kind of an adrenaline rush breakout.
Anika’s core expertise is synthetic manufacturing of hyaluronic acid, or HA, which is an organic polymer the human body produces to help protect joints like the knee.
When cartilage is damaged by injury or arthritis, HA thins out, leading to bone pain and further injury. Injected into the joints, synthetic HA does the same job of protecting the joint. Hence, athletes who suffer serious but not career-ending knee injuries have quicker recoveries and can return to competition within a matter of weeks.
Anika’s broad strategy involves synthesizing HA and applying it in three key orthobiologic areas: palliative, restorative and regenerative.
Several companies also make synthetic HA, but what sets Anika Therapeutics apart is that it is made through a patented process that uses a species of bacteria to make a hypo-allergenic viscosupplement.
The others — such as pharma giant Sanofi SA (SNY) — make it using bird proteins, to which some people are allergic. And unless you think little Anika Therapeutics, with a market cap of just $625 million, can’t compete against a Goliath like Sanofi, the company does quite well, thank you very much, because its distribution partner in the Western hemisphere is DePuy Inc., the orthopedic products division of Johnson & Johnson (JNJ).
In total, joint health viscosupplementation has seven brands competing for space, with Anika Therapeutics holding the No. 2 spot.
ANIK Stock: Outlook
The world-class caliber of its HA supplement — marketed in 20 countries under the name Orthovisc — has brought Anika to first place in the U.S., where there is a $900 million market for the product. Globally, ANIK says there is a $2 billion market that will grow to nearly $3 billion by the end of 2018.
Anika’s goal is to capture 15% of that market, which means management is looking for global sales of nearly $450 million by year-end 2018 compared to 2013 sales of $56 million. That’s sevenfold growth over four years.
How do they plan to do it? Three ways. First, they expect sales of Orthovisc — which requires three monthly injections — to continue to grow. Second, they see growth in sales of Monovisc, a one-injection viscosupplement that launched in 2009 but only this year received FDA approval for sale in the U.S.
And third, they expect to launch a new product called Cingal in 2016. It’s an injectable combination of Anika’s patented HA and steroids that will be cheaper to buy than its other two products; Anika is targeting Asia and other third-world regions for this product, areas where its sales are relatively meager.
Anika Therapeutics seeks to expand its market share and its geographic presence not only in the U.S., but in Europe, Latin America and Asia. The overall thrust is to transform the company from a biomaterials firm into a company focused on advanced tissue healing and regenerative solutions. Pain is one thing, but to actively regenerate tissue represents the next frontier in this field.
ANIK Stock: Financial Performance
Anika’s record has been impressive. In addition to 17% annual revenue growth over the last five calendar years, its net income has grown by a remarkable 54% a year over the same period.
And over the past two years, its medical device peers have seen a shareholder return of only 25% versus Anika’s 182%. The Russell 2000 returned 42% and the Nasdaq Composite came in at 45%. That speaks well of ANIK stock.
Anika Therapeutics employs just 100 people, but in its own part of the world it’s a little powerhouse. At nearly $41, ANIK stock trades at 15 times FY2014 earnings, which compares favorably to the healthcare sector’s 24.1 multiple.
What’s more, over the past 12 months, Anika generated $35.8 in free cash flow and and raised its cash position to $58 million. And, no less impressive, Anika reported last month that its first half 2014 revenue was 67% higher than the same period last year and its six-month earnings per share, at $1.57, were more than 1.5 times last year’s six-month figure.
HA’s technology is particularly attractive because it can be applied across multiple disciplines, giving Anika Therapeutics a robust and diversified revenue stream. According to the previously linked August presentation, 75% of 2013’s total revenue came from the orthobiologic applications. However, 7% of revenues came from the surgical realm, 6% from ophthalmic, 5% from veterinary uses, and 3% from dermal application.
The orthobiologic division delivered 150% revenue growth from 2009 to 2013, rising from $22.9 million in 2009 to $56 million last year.
Other financial metrics are extremely impressive. Return of assets is 21.8% and return on equity is 25.5% — numbers that many companies would kill for. The trailing 12-month profit margin is a staggering 36.2%.
There’s a lot to like about Anika Therapeutics. The three analysts who cover ANIK stock estimate that Anika’s earnings will grow by 30% a year over the next three to five years.
Management has set the bar higher, but if the company accomplishes just half of its 2018 growth goals, investors should enjoy above-market returns from ANIK stock for the foreseeable future.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at email@example.com and follow his tweets at @ichabodscranium.