SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-21326
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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
Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report.
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 the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date.
At November 12, 2001 there were 9,934,280 outstanding shares of Common
Stock, par value $.01 per share.
PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
Anika Therapeutics, Inc. and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
September 30, December 31,
2001 2000
------------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,001,142 $ 8,265,936
Marketable securities 3,957,994 10,039,849
Accounts receivable, net of allowance for doubtful
accounts of $25,000 and $124,000, respectively 2,003,398 1,692,457
Inventories 3,934,214 4,737,645
Prepaid expenses and other current assets 365,086 612,890
------------------- ------------------
Total current assets 20,261,834 25,348,777
Property and equipment, at cost 9,486,635 8,621,579
Less: accumulated depreciation (6,295,912) (5,498,455)
------------------- ------------------
3,190,723 3,123,124
Long term deposits 118,660 124,600
Notes receivable from officers 253,000 382,000
------------------- ------------------
Total assets $ 23,824,217 $ 28,978,501
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 881,100 $ 870,502
Accrued expenses 1,986,444 1,395,677
Deferred revenue 401,475 -
------------------- ------------------
Total current liabilities 3,269,019 2,266,179
------------------- ------------------
Commitments and contingencies (Note 9)
Stockholders' equity:
Redeemable convertible preferred stock, $.01 par value
authorized 750,000 shares, no shares issued and outstanding - -
Undesignated preferred stock, $.01 par value
authorized 1,250,000 shares, no shares issued and outstanding - -
Common stock, $.01 par value: authorized 30,000,000 shares;
Issued 9,991,943 shares in 2001 and 2000 99,919 99,919
Additional paid-in capital 31,640,232 31,735,660
Treasury stock (at cost, 57,663 shares) (279,756) (279,756)
Deferred compensation (5,369) (244,549)
Accumulated deficit (10,899,828) (4,598,952)
------------------- ------------------
Total stockholders' equity 20,555,198 26,712,322
------------------- ------------------
Total liabilities and stockholder's equity $ 23,824,217 $ 28,978,501
=================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
2
Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2001 2000 2001 2000
--------------- ---------------- --------------- ---------------
Product revenue $ 3,045,779 $ 2,629,807 $ 8,143,431 $ 8,919,405
Licensing revenue 8,000 100,000 8,000 300,000
--------------- ---------------- --------------- ---------------
Total revenue 3,053,779 2,729,807 8,151,431 9,219,405
Cost of product revenue 2,553,582 2,804,285 6,631,579 6,459,870
--------------- ---------------- --------------- ---------------
Gross profit 500,197 (74,478) 1,519,852 2,759,535
Operating expenses:
Research & development 826,378 516,171 3,095,573 2,737,136
Selling, general & administrative 1,100,180 1,093,841 4,347,544 3,080,464
Litigation settlement costs - - 950,716 -
--------------- ---------------- --------------- ---------------
Total operating expenses 1,926,558 1,610,012 8,393,833 5,817,600
Loss from operations (1,426,361) (1,684,490) (6,873,981) (3,058,065)
Interest and other income, net 94,324 301,666 573,105 892,665
--------------- ---------------- --------------- ---------------
Net loss $ (1,332,037) $ (1,382,824) $ (6,300,876) $ (2,165,400)
=============== ================ =============== ===============
--------------- ---------------- --------------- ---------------
Basic and diluted net loss per common share $ (0.13) $ (0.14) $ (0.63) $ (0.22)
=============== ================ =============== ===============
Shares used for computing basic and diluted net
loss per common share 9,934,280 9,934,280 9,934,280 9,870,323
=============== ================ =============== ===============
The accompanying notes are an integral part of these consolidated financial
statements.
3
Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30,
(Unaudited)
2001 2000
--------------- -------------
Cash flows from operating activities:
Net loss ($6,300,876) ($2,165,400)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 797,456 676,251
Amortization of deferred compensation 143,753 216,503
Forgiveness of debt on officer loans
Changes in operating assets and liabilities:
Accounts receivable (310,941) 256,778
Inventories 803,431 (1,072,460)
Prepaid expenses and other current assets 247,804 261,295
Accounts payable 10,598 (150,863)
Accrued expenses 590,767 (30,013)
Deferred revenue 401,475 (302,332)
--------------- -------------
Net cash used for operating activities (3,487,533) (2,310,241)
--------------- -------------
Cash flows from investing activities:
Proceeds from sale of held-to-maturity marketable securities 17,460,095 5,558,029
Purchase of held-to-maturity marketable securities (11,378,240) (4,106,973)
Purchase of property and equipment (865,056) (413,984)
Decrease in long term deposits 5,940 -
Notes receviable from officers - (29,000)
--------------- -------------
Net cash provided by investing activities 5,222,739 1,008,072
--------------- -------------
Cash flows from financing activities:
Proceeds from exercise of stock options - 539,934
--------------- -------------
Net cash provided by financing activities - 539,934
--------------- -------------
Increase/(decrease) in cash and cash equivalents 1,735,206 (762,235)
Cash and cash equivalents at beginning of period 8,265,936 6,440,705
--------------- -------------
Cash and cash equivalents at end of period $ 10,001,142 $ 5,678,470
=============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
4
ANIKA THERAPEUTICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF BUSINESS
Anika Therapeutics, Inc. ("Anika" or the "Company") develops, manufactures
and commercializes therapeutic products and devices intended to promote the
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 is being marketed in Canada, parts of Europe, Turkey, and Israel. In the
U.S., ORTHOVISC(R) is currently limited to investigational use. The Company
manufactures AMVISC(R) and AMVISC(R) Plus for Bausch & Lomb Surgical, which are
HA products used as viscoelastic supplements in ophthalmic surgery.
STAARVISC(R)II, an injectable ophthalmic viscoelastic, is produced for STAAR
Surgical Company, and ShellGel(TM) is produced for Cytosol Ophthalmics, Inc.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
the Company without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission and in accordance with accounting principles
generally accepted in the United States. In the opinion of management, these
consolidated financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
of the Company as of September 30, 2001, the results of operations for the three
and nine months ended September 30, 2001 and 2000 and the cash flows for the
nine months ended September 30, 2001 and 2000.
The accompanying consolidated financial statements and related notes should
be read in conjunction with the Company's annual financial statements filed with
the Annual Report on Form 10-K/A for the year ended December 31, 2000. The
results of operations for the three and nine months ended September 30, 2001 are
not necessarily indicative of the results to be expected for the year ending
December 31, 2001. (See "Risk Factors and Certain Factors Affecting Future
Operating Results".)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Anika Therapeutics, Inc. and its wholly owned subsidiaries, Anika Securities
Corporation and Anika Therapeutics UK, Ltd. All intercompany transactions have
been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consists of cash and investments with original
maturities of 90 days or less.
5
MARKETABLE SECURITIES
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND
EQUITY SECURITIES. Marketable securities consist of commercial paper with
maturities within twelve months of the balance sheet date. The Company
classifies these marketable securities as held to maturity, and accordingly they
are carried at amortized cost. Aggregate fair value, amortized cost and average
maturity for marketable securities held at September 30, 2001 and December 31,
2000 are as follows:
SEPTEMBER 30, 2001
-------------------------------------------------------
GROSS UNREALIZED
AMORTIZED HOLDING GAIN
COST FAIR VALUE
Commercial Paper (weighted average
maturity of 2.5 months)................... $3,957,994 $50,986 $4,008,980
========== ======= ==========
DECEMBER 31, 2000
--------------------------------------------------------
GROSS UNREALIZED
AMORTIZED HOLDING GAIN
COST FAIR VALUE
Commercial Paper (weighted average
maturity of 3.4 months)................... $10,039,849 $82,384 $10,122,233
=========== ======= ===========
During the nine months ending September 30, 2001, securities classified as
held to maturity, with an amortized cost aggregating $17,460,095, including
interest and realized gains of $440,791, matured.
FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash equivalents, marketable securities, accounts
receivable, notes receivable from officers and accounts payable. The estimated
fair values of the Company's other financial instruments approximate their
carrying values.
REVENUE RECOGNITION
Product revenue is recognized upon shipment to the customer as long as
there is persuasive evidence of an arrangement, the sales price is fixed or
determinable and collection of the related receivable is probable. Amounts
billed or collected prior to recognition of revenue is classified as deferred
revenue. ORTHOVISC(R) is sold through several distribution arrangements as well
as two outsource order processing arrangements ("logistic agents"). Sales of
product through third party logistics agents in certain markets are recognized
as revenue upon shipment by the logistics agent to the customer. The Company
recognizes non-refundable up-front or milestone payments received as part of
supply, distribution, and marketing arrangements, ratably over the terms of the
agreements to which the payments apply.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated using the
straight-line method over the estimated useful lives of the respective assets,
as follows:
Machinery and equipment............. 3-10 years
Furniture and fixtures.............. 3-5 years
Leasehold improvements.............. Shorter of estimated useful life or life of
lease
6
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF
The Company follows the provisions of SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
During the nine months ended September 30, 2001, the Company did not identify
any impairments.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company provides for income taxes in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. SFAS No. 109 requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of temporary
differences between the financial reporting and tax bases of assets and
liabilities.
REPORTING COMPREHENSIVE INCOME
SFAS No. 130, REPORTING COMPREHENSIVE INCOME establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Comprehensive income is the total of net income and all
other non-owner changes in equity including such items as unrealized holding
gains/losses on securities, foreign currency translation adjustments and minimum
pension liability adjustments. The Company had no other items of comprehensive
income for the three and nine months ended September 30, 2001 and 2000 except
for its reported net loss.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
Operating segments are identified as components of an enterprise about
which separate discrete financial information is available for evaluation by the
chief operating decision maker, or decision-makers, in making decisions
regarding how to allocate resources and assess performance. The Company's chief
decision-making group consists of two individuals: the chief executive officer
and chief financial officer, and the president and chief operating officer.
Based on the criteria established by SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF
AN ENTERPRISE AND RELATED INFORMATION, the Company has one reportable operating
segment, the results of which are disclosed in the accompanying financial
statements. Substantially all of the operations and assets of the Company have
been derived from and are located in the United States.
Revenues by geographic location in total and as a percentage of total
revenues are as follows for the three and nine months ended September 30, 2001
and 2000, respectively:
Three Months ended September 30, Nine Months ended September 30,
2001 2000 2001 2000
------------------------------------------------------ --------------------------------------------------------
Geographic location: Percent of Percent of Percent of Percent of
Revenue Revenue Revenue Revenue Revenue Revenue Revenue Revenue
------------------------------------------------------ --------------------------------------------------------
United States $ 2,272,834 74.4% $1,917,457 70.2% $ 5,669,109 69.5% $6,650,455 72.1%
Middle East 91,337 3.0% 655,000 24.0% 103,287 1.3% 2,167,500 23.5%
Other/Europe 689,608 22.6% 157,350 5.8% 2,379,035 29.2% 401,450 4.4%
------------------------------------------------------ --------------------------------------------------------
Total $ 3,053,779 100.0% $2,729,807 100.0% $ 8,151,431 100.0% $9,219,405 100.0%
====================================================== ========================================================
Since early 2001, sales of product for the Turkish market have been made to
a European-based entity and have accordingly been classified in the
"Other/Europe" category since that time.
7
Product revenue by significant customers is as follows:
Percent of Product Revenue Percent of Product Revenue
Three Months ended Nine Months ended
September 30, September 30,
2001 2000 2001 2000
---------------------- ---------------------
AMVISC(R):
Bausch & Lomb 69.3% 53.6% 60.4% 54.1%
ORTHOVISC(R):
Pharmaren AG (Biomeks in Year 2000) 13.8% 25.9% 18.6% 17.7%
Zimmer 0.0% 6.7% 0.0% 16.4%
---------------------- ---------------------
83.1% 86.2% 79.0% 88.2%
====================== =====================
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations". SFAS 141 requires all business
combinations initiated after June 30, 2001 to be accounted for using the
purchase method. The Company does not expect the adoption of this statement to
have a material impact on their operations.
In July 2001, the FASB issued Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets". With the adoption
of SFAS No. 142, goodwill will no longer be subject to amortization over its
estimated useful life, but instead goodwill will be subject to at least an
annual assessment for impairment by applying a fair-value-based test. The
Company does not expect the adoption of this statement to have a material
impact on their operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement supercedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and Transactions." Under this
statement it is required that one accounting model be used for long-lived assets
to be disposed of by sale, whether previously held and used or newly acquired,
and it broadens the presentation of discontinued operations to include more
disposal transactions. The provisions of this statement will be effective for
financial statements issued for fiscal years beginning after December 15, 2001,
and interim periods within those fiscal years, with early adoption permitted.
The Company is currently evaluating the ultimate impact of this statement on its
results of operations or financial position until such time as its provisions
are applied.
4. EARNINGS PER SHARE
The Company reports earnings per share in accordance with SFAS No. 128,
EARNINGS PER SHARE, which establishes standards for computing and presenting
earnings (loss) per share.
Basic earnings per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
earnings per share is computed by dividing net income (loss) by the weighted
average number of common shares and dilutive potential common shares outstanding
during the period. Under the treasury stock method, the dilutive unexercised
options are assumed to be exercised at the beginning of the period or at
issuance, if later. The assumed proceeds are then used to purchase common shares
at the average market price during the period. For periods where the Company has
incurred a loss, dilutive net loss per share is equal to basic net loss per
share. Accordingly, the dilutive effect of outstanding options totaling 416,500
and 1,255,809, respectively at September 30, 2001 and 2000, are excluded from
the calculation of diluted weighted average shares outstanding because to
include them would have been antidilutive for the periods presented.
8
5. INVENTORIES
Inventories consist of the following:
September 30, December 31,
2001 2000
------------------------------------
Raw materials $ 1,052,264 $ 1,386,504
Work in-process 2,786,302 3,169,358
Finished goods 95,648 181,783
------------------------------------
Total $ 3,934,214 $ 4,737,645
====================================
Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method. Work-in-process and
finished goods inventories include materials, labor, and manufacturing overhead.
6. PROPERTY & EQUIPMENT
Property and equipment is stated at cost and consists of the following:
September 30, December 31,
2001 2000
----------------------------------
Machinery and equipment $ 5,961,252 $ 6,071,812
Furniture and fixtures 696,379 670,923
Leasehold improvements 2,829,004 1,878,844
----------------------------------
9,486,635 8,621,579
----------------------------------
Less accumulated depreciation (6,295,912) (5,498,455)
----------------------------------
Total $ 3,190,723 $ 3,123,124
==================================
Costs of $835,000 for a clean room under construction had previously been
included in machinery and equipment. This amount was reclassified to leasehold
improvements upon its completion in the first quarter of 2001.
7. NOTES RECEIVABLE FROM OFFICERS
Notes receivable from officers of $253,000 consists of loans made to one
officer and two former officers. The notes receivable from the former
officers are secured by mortgages on their primary residences. Interest
accrues at annual rates between 5.54% to 6.22%. In connection with the
departure of two former officers in June 2001, notes totaling $129,000 were
forgiven. In addition, the maturity of a note in the amount of $75,000 to the
Company's former chief executive officer, which is secured by a mortgage on
his primary residence, was extended to the earlier of the sale of such
residence or March 31, 2002. The maturity of a note to another former
officer, that is secured by a mortgage on his primary residence, is due on
August 12, 2004.
8. LICENSING AND DISTRIBUTION AGREEMENT
In July 2000, the Company entered into a seven-year supply agreement (the
"BLS Agreement") with Bausch & Lomb Surgical, a unit of Bausch & Lomb. Under the
terms of the BLS Agreement, effective January 1, 2001, the Company became Bausch
& Lomb'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, superceding 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 to Bausch & Lomb by the Company. In exchange, the Company
agreed to a reduction in unit selling prices
9
effective April 1, 2000, and the elimination of minimum unit purchase
obligations by BLS. Under the terms of the agreement, the price for units sold
in a calendar year is dependent on total unit volume of sales of certain
ophthalmic products during the year. Accordingly, unit prices for sales
occurring in the nine months ended September 30, 2001 are subject to possible
retroactive price adjustments when the actual annual unit volume for 2001
becomes known. In accordance with the Company's revenue recognition policy,
revenue is not recogninized if the sale price is not fixed and determinable, and
any amounts received in excess of revenue recognized is recorded as deferred
revenue. At September 30, 2001, the deferred revenue amounted to $401,475.
In April 2001, the Company entered into a five-year supply agreement
with Cytosol Ophthalmics, Inc. Under the terms of the agreement, effective
April 11, 2001, the Company became Cytosol Ophthalmic's exclusive provider of
sterile sodium hyaluronate ophthalmic viscoelastic products, in the U.S. and
international markets. Under the agreement, in lieu of up front payments, the
Company is entitled to an increase in the price per unit of $2 per unit for
the initial 50,000 units purchased. The agreement expires April 11, 2006. The
agreement is subject to early termination and/or reversion to a non-exclusive
basis under certain circumstances. For the three and nine months ended
September 30, 2001, the Company has recognized $8,000 of the price adjustment
and has recorded this amount as license revenue.
9. LEGAL MATTERS
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. The Company
has been cooperating fully. These matters, relating to the Company's historical
accounting for and disclosures concerning sales of ORTHOVISC(R) under a
long-term supply and distribution agreement with Zimmer, 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. On
August 14, 2001, as a result of the SEC's on-going investigation, the Company,
in conjunction with its independent auditors, determined to again restate its
financial results for the fourth quarter of 1998 and the first quarter of 1999
as discussed in Note 10 herein. The Company is not in a position to predict the
probable outcome of the SEC's investigation 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, the Company's former
chief executive officer, 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.
Before the Court decided the motions to dismiss, the parties reached
agreement on the terms of a potential settlement of the action. Accordingly, the
parties negotiated and entered into a Memorandum of Understanding dated March 8,
2001 and the parties negotiated and entered into a Stipulation and Agreement of
Settlement, Compromise and
10
Release ("Stipulation") dated May 25, 2001, which contains the terms of a
settlement of the action, subject to approval by the Court.
The Stipulation was submitted to the Court and, on May 31, 2001, the Court
entered an Order of Preliminary Approval in connection with the settlement
proceedings. After preliminary approval, plaintiff's counsel sent notice of the
proposed settlement to the Class, and the Company paid $1.25 million into a
settlement fund that may, among other things, be used to pay authorized members
of the Class. The Company entered into an agreement with its directors and
officers liability insurer, under which the insurer paid the Company $400,000 in
exchange for a release of the insurer's obligations under the policy, which
policy's term was from December 1, 1999 to November 30, 2000 and which time
period covers the allegations made in the securities class action litigation as
well as the SEC investigation. The Company applied the $400,000 to the
settlement amount in the shareholder class action lawsuit.
In the Stipulation, the parties requested that the Court have a Final
Settlement Hearing at which, among other things, (i) the Court would certify,
for purposes of settlement, the Class, and certify, for purposes of settlement,
the Action as a class action; (ii) the Court would finally approve the
settlement as provided for in the Stipulation, including the release of all
claims by Class members against the Defendants; and (iii) the Court would enter
final judgment dismissing with prejudice all claims of the plaintiffs and the
Class against the Defendants. The Court originally scheduled the Final
Settlement Hearing for August 8, 2001. Pursuant to the joint request of counsel
for the plaintiffs and counsel for the Company, the hearing was extended because
of the restatement of financial results for certain prior periods as discussed
in Note 10 herein. The Final Settlement Hearing was held on October 22, 2001 and
the Court approved the Settlement.
10. RESTATEMENT
On August 14, 2001, as a result of the SEC's ongoing investigation, the
Company announced the restatement of its financial results for the fourth
quarter of 1998 and the first quarter of 1999. This restatement involves the
timing of recognition of revenues for the sale of ORTHOVISC(R) to Zimmer,
formerly an ORTHOVISC(R) distributor. The Company and its independent auditors
determined that certain revenue previously recognized in the fourth quarter of
1998 should have been recognized in the first quarter of 1999. Accordingly,
revenue for the fourth quarter of 1998 is reduced by $343,000 to $3,060,000 and
revenue for the first quarter of 1999 is increased by the same amount to
$3,679,000. The impact on earnings in the fourth quarter of 1998 is a reduction
of $119,000, or $.01 per share, to income of $489,000. The impact on earnings in
the first quarter of 1999 is an increase of $119,000, or $.01 per share, to a
loss of $3,050,000. The restated revenue for the years ended December 31, 1998
and 1999 is $12,930,000 and $13,826,000, respectively. The restated results for
the years ended December 31, 1998 and 1999 include, respectively, net income of
$3,633,000, or $.33 per share, and a net loss of $2,377,000, or $.23 per share.
On September 5, 2001, the Company filed an amended Form 10-K for the year ended
December 31, 2000 related to this restatement.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS OF ANIKA THERAPEUTICS, INC. AND THE NOTES
THERETO AS WELL AS THE "RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE
OPERATING RESULTS" HEREIN.
The Company derives a substantial portion of its revenue from the sale
of AMVISC(R) and AMVISC(R)Plus to Bausch & Lomb Surgical. For the three
months ended September 30, 2001 and 2000, AMVISC sales accounted for 69.3%
and 53.6% of product revenue, respectively. For the nine months ended
September 30, 2001 and 2000, AMVISC sales accounted for 60.4% and 54.1% of
product revenue, respectively.
RESULTS OF OPERATIONS
PRODUCT REVENUE. Product revenue for the three months ended September
30, 2001 was $3,045,779, an increase of $415,972, or 16%, from $2,629,807
recorded in the corresponding quarter of 2000. Product revenue associated
with AMVISC(R) increased by $619,215 in the third quarter of 2001 compared to
the third quarter of 2000. Product revenue for the nine months ended
September 30, 2001 was $8,143,431, a decrease of $775,974, or 9%, over the
$8,919,405 recorded in the comparable period of the prior year. The decrease
was primarily attributable to lower ORTHOVISC(R) sales due to the termination
of the ORTHOVISC(R) distribution agreement with Zimmer, as well as reduced
selling prices to another customer. The reduced selling price was negotiated
to meet competitive market conditions and is not expected to result in
increased volume to offset the price reduction in future periods. AMVISC(R)
product sales were higher compared with 2000 as a result of higher unit
volumes that partially offset lower unit prices under the BLS Agreement,
effective April 1, 2000.
LICENSING REVENUE. There was license revenue of $8,000 for the three and
nine months ended September 30, 2001 related to up-front payments on a new five
year supply agreement with a purchaser of the Company's ophthalmic products. .
For the three and nine months ended September 30, 2000, licensing revenues of
$100,000 and $300,000, respectively, represented the annual amortization of
certain milestone payments received in 1997 and 1998 in connection with the
terminated ORTHOVISC(R) distribution agreement with Zimmer.
GROSS PROFIT. Gross profit for the three months ended September 30, 2001
was $500,197, an increase of $574,675, from a gross loss of ($74,478) recorded
in the prior year corresponding quarter. Gross profit for the nine months ended
September 30, 2001 was $1,519,852 compared with $2,759,535 for the first nine
months of 2000, a decrease of 45%. These changes reflect lower sales, as well as
lower prices for ORTHOVISC(R) sales to the Company's distributor for the Turkish
market, as well as the absence of amortized license fee revenue included in the
prior year period. In addition, revenues for the first quarter of 2001 reflect
lower unit prices for the Company's sales to Bausch and Lomb. Compared with the
second quarter 2001, gross profit declined reflecting a higher proportion of
opthalmic product sales in the Company's revenues. Further, costs of sales for
the three and nine months ending September 30, 2001 includes approximately
$500,000 and $1,700,000, respectively, attributable to underutilization of
manufacturing capacity resulting from the Company's efforts to reduce
work-in-process and other inventory. The Company expects to commence early
stages of work-in-process manufacturing during the fourth quarter of 2001.
RESEARCH & DEVELOPMENT. Research and development expenses for the three
months ended September 30, 2001 increased by $310,207 to $826,378 from $516,171
recorded in the corresponding quarter of the prior year. Research and
development expenses for the nine months ended September 30, 2001 increased
$358,437, or 13%, compared to the same period in 2000. The increases are
primarily the result of costs associated with the new ORTHOVISC(R) Phase III
clinical trial. Enrollment of patients in the ORTHOVISC(R) clinical trial has
been slower than the Company had anticipated, however, the rate of enrollment
has accelerated and the Company expects clinical trial costs to increase in the
fourth quarter of 2001. Research and development costs for INCERT(R) in the
second and third quarters of 2001 were substantially lower than in the first
quarter as the Company is evaluating various development options for this
product and its underlying technology, including reconsideration of the
Company's previous plans to launch a clinical trial in 2001.
12
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three months ended September 30, 2001 increased by $6,339 or
0.5%, to $1,100,180 from $1,093,841 in the corresponding quarter of the prior
year. For the nine months ended September 30, 2001, selling, general and
administrative expenses increased $1,267,080 or 41% compared to the same period
in the prior year. This increase is attributable to several items. First,
accrued separation costs amounted to $515,000 and relate to management changes
implemented in June 2001. Costs of the management separation include the
forgiveness of officer loans totaling $129,000. Second, selling and marketing
expenses related to ORTHOVISC(R) amounted to approximately $280,000 of the
increase, and third, professional fees represent approximately $441,000 of the
increase.
LITIGATION SETTLEMENT COSTS. Litigation settlement costs for the nine
months ended September 30, 2001 included a charge of $850,000, which is the
portion of the $1.25 million settlement amount contributed by the Company, and
$100,716 in professional fees related to the putative class action suit. The
settlement received final court approval on October 22, 2001 (See Note 9 of the
financial statements provided in Item 1 herein.)
NET INTEREST INCOME. The Company's net interest income decreased by
$164,462 to $137,204 for the three months ended September 2001 from $301,666 in
the corresponding quarter of the prior year. Net interest income for the nine
months ended September 30, 2001 was $615,985 compared with $892,665 for the same
period in 2000. The decreases are attributable to reduced average cash balances
and lower interest rates during the first nine months of 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had cash, cash equivalents and short
term investments of $14.0 million and working capital of $17.0 million versus
cash, cash equivalents and short term investments of $18.3 million and working
capital of $23.1 million at December 31, 2000. Investments at September 30, 2001
consist of commercial paper of various maturities of less than one year. Since
December 31, 2000, the Company's investments have generally moved to shorter
maturities. As a result, approximately $6M in marketable securities has shifted
to cash equivalents on the balance sheet.
During the first three quarters of 2001, operating activities used $3.5
million, including the payment of $850,000 to the settlement fund in connection
with the shareholder litigation settlement. Capital expenditures were $865,056
during the nine month period ended September 30, 2001. Approximately $340,000 of
these expenditures was used for the construction of certain pilot laboratory
projects, as previously disclosed. Aggregate capital investments for 2001 are
expected to be approximately $1 million. The Company is currently negotiating an
extension of certain of its leases. If it is unable to extend such lease, there
is a risk that its aggregate capital investments may increase in the future.
As described in financial statement Note 9 - "Legal Matters", three
putative class action lawsuits have been filed against the Company and former
officers of the Company. These lawsuits have been consolidated. The parties
negotiated and entered into a Memorandum of Understanding dated March 8, 2001,
and the parties negotiated and entered into a Stipulation and Agreement of
Settlement, Compromise and Release ("Stipulation") dated May 25, 2001, which
contains the terms of a settlement of the action, subject to approval by the
Court.
The Stipulation was submitted to the Court and, on May 31, 2001, the Court
entered an Order of Preliminary Approval in connection with the settlement
proceedings. After preliminary approval, plaintiff's counsel sent notice of the
proposed settlement to the Class, and the Company paid $1.25 million into a
settlement fund that may, among other things, be used to pay authorized members
of the Class. The Company entered into an agreement with its directors and
officers liability insurer, under which the insurer paid the Company $400,000 in
exchange for a release of the insurer's obligations under the policy, which
policy's term was from December 1, 1999 to November 30, 2000 and which time
period covers the allegations made in the securities class action litigation as
well as the SEC investigation. The Company applied the $400,000 to the
settlement amount in the shareholder class action lawsuit.
In the Stipulation, the parties requested that the Court have a Final
Settlement Hearing at which, among other things, (i) the Court would certify,
for purposes of settlement, the Class, and certify, for purposes of settlement,
the Action as a class action; (ii) the Court would finally approve the
settlement as provided for in the Stipulation, including the release of all
claims by Class members against the Defendants; and (iii) the Court would enter
final judgment dismissing with prejudice all claims of the plaintiffs and the
Class against the Defendants. The Court originally scheduled the Final
Settlement Hearing for August 8, 2001. Pursuant to the joint request of counsel
for the plaintiffs and counsel for the
13
Company, the hearing was extended because of the restatement of financial
results for certain prior periods as discussed in Note 10 herein. The Final
Settlement Hearing was held on October 22, 2001 and the Court has approved the
Settlement.
The Company's future capital requirements and the adequacy of available
funds will depend 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
requirements of its efforts to manage its manufacturing capabilities and related
costs; the cost of filing, prosecuting, defending and enforcing patent claims
and other intellectual property rights; defending, negotiating, and settling
legal matters; 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" for other
factors which could affect the Company's future capital requirements and the
adequacy of available funds.
14
RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
THIS QUARTERLY REPORT ON FORM 10-Q 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,"
"ANTICIPATE," "INTEND," "WILL," "DEVELOP," "WOULD," FUTURE," "CAN," "MAY,"
"COULD," AND STATEMENTS REGARDING: POSSIBLE RETROACTIVE PRICE ADJUSTMENTS,
EXPECTATIONS OF INCREASED UNIT VOLUMES OR OTHER OFFSETS TO PRICE REDUCTIONS,
MANUFACTURING CAPACITY AND COMMENCEMENT OF WORK-IN-PROCESS MANUFACTURING, RATES
OF PATIENT ENROLLMENT IN CLINICAL TRIALS AND RELATED COSTS, FDA OR OTHER
REGULATORY APPROVALS, LEASE TERMS, AND OTHER EXPRESSIONS, THAT 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 AND PRODUCT REVENUES, NEGOTIATIONS
WITH POTENTIAL AND EXISTING CUSTOMERS, POSSIBLE DEVELOPMENT OF NEW PRODUCTS,
POSSIBLE STRATEGIC INVESTMENTS, POSSIBLE REGULATORY APPROVAL OF NEW OR POTENTIAL
PRODUCTS, THE IMPACT OF THE TERMINATION OF THE ORTHOVISC(R) DISTRIBUTION
AGREEMENT WITH ZIMMER, ACQUISITION OF NEW DISTRIBUTION AND COLLABORATION
PARTNERS, PERFORMANCE UNDER THE BLS AGREEMENT AND, THE OUTCOME, AND IMPACT OF
THE SEC INVESTIGATION. 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. IN PARTICULAR, THERE
CAN BE NO ASSURANCE THAT THE COMPANY WILL: (I) BEGIN CLINICAL TRIALS OF
INCERT(R)-S; (II) SUCCESSFULLY COMPLETE CLINICAL TRIALS OF ORTHOVISC(R) OR
INCERT(R)-S; (III) OBTAIN CLINICAL DATA TO SUPPORT A PRE-MARKET APPROVAL
APPLICATION AND/OR FDA APPROVAL OF ORTHOVISC(R) OR INCERT(R)-S; OR (IV) RECEIVE
FDA OR OTHER REGULATORY APPROVALS OF ORTHOVISC(R) OR INCERT(R)-S OR THAT SUCH
APPROVALS WILL BE OBTAINED IN A TIMELY MANNER OR WITHOUT THE NEED FOR ADDITIONAL
CLINICAL TRIALS. IN ADDITION, THERE CAN BE NO ASSURANCE THAT ANY DELAY IN
RECEIVING ANY SUCH APPROVALS WILL NOT ADVERSELY EFFECT THE COMPANY'S COMPETITIVE
POSITION OR, IF COMPLETED, MEANINGFUL SALES OF THE PRODUCTS WILL BE ACHIEVED.
THERE CAN BE NO ASSURANCE THAT THE TERMINATION OF THE DISTRIBUTION AGREEMENT
WITH ZIMMER WILL NOT CONTINUE TO HAVE A MATERIAL ADVERSE IMPACT ON SALES OR
DISTRIBUTION OF ORTHOVISC(R) OR THAT THE COMPANY WILL BE ABLE TO IDENTIFY OR
ENGAGE APPROPRIATE DISTRIBUTION OR COLLABORATION PARTNERS FOR SALES OF
ORTHOVISC(R) OR INCERT(R)-S OR EFFECTIVELY TRANSITION THE DISTRIBUTION OF
ORTHOVISC(R) OR INCERT(R)-S TO SUCH DISTRIBUTORS, IF ENGAGED. THERE CAN BE NO
ASSURANCE THAT THE COMPANY'S INVENTORY REDUCTION OR OTHER EFFORTS WILL RESULT IN
IMPROVED GROSS MARGINS DURING 2001 OR EVER. THERE CAN BE NO ASSURANCES THAT: (I)
THE COMPANY WILL ACHIEVE INCREMENTAL SALES OF ITS OPHTHALMIC PRODUCTS TO BAUSCH
& LOMB SURGICAL AND/OR OTHER COMPANIES SUFFICIENT TO OFFSET THE EFFECTS OF THE
PRICE REDUCTION AND ROYALTIES TO BE PAID TO BAUSCH & LOMB SURGICAL OR (II)
BAUSCH & LOMB SURGICAL WILL MAKE PURCHASES IN ACCORDANCE WITH ITS FORECASTS.
FURTHERMORE, THE COMPANY CANNOT MAKE ANY ASSURANCE THAT THE CURRENT LEVELS OF
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES WILL NOT CONTINUE. ADDITIONAL
FACTORS THAT MIGHT CAUSE SUCH A DIFFERENCE ARE SET FORTH HEREIN AND IN THE
"MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" BEGINNING ON PAGE 12 OF THIS QUARTERLY REPORT ON FORM 10-Q AS WELL
AS FACTORS DESCRIBED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K/AAND THE
COMPANY'S PRESS RELEASES AND OTHER FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. 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.
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 Food & Drug Administration (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, packing, storage, record keeping, and reporting
activities for such products.
Medical products regulated by the FDA are generally classified as medical
devices and/or 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 if 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's review
process of such products typically would be substantially longer and more
expensive than the review process to which they are currently subject as
devices.
15
The Company's ORTHOVISC(R) product will have to meet regulatory
requirements for a Class III device as determined 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 a PMA. The PMA process can
be expensive, uncertain anD lengthy. A number of devices for which PMAs have
been sought have never been approved for marketing. The review of an application
often occurs over a protracted time period, potentially taking two years or more
from the filing date to complete. The Company submitted a PMA application 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 Investigational Device Exemption (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 being conducted in up to 25
centers in the U.S. and Canada, with 360 patients expected to be enrolled, and
with evaluation over a six-month period following treatment. To date, enrollment
of patients in the clinical trial has been slower than the Company had
anticipated which will delay completion of the trial. 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 continue to
adversely affect the Company's competitive position. (See "Competition" below)
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; or (iii) the Company may not be able to
achieve meaningful sales of ORTHOVISC(R) in the U.S.
The Company's HA product under development, INCERT(R)-S, has 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 a PMA prior to marketing. The Company has received IDE approval
from the FDA and is evaluating product development activities, including the
prospects for conducting clinical trials for INCERT(R)-S. 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
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 the
Company's competitive position. Furthermore, even if the Company does receive
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.
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 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
16
manufacturing facility or any other change affecting the safety or effectiveness
of an approved device on a timely basis, or at all, may 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 to market products, any FDA limitations on the use of the Company's
products, or any withdrawal or suspension of approval or rescission of approval
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 the FDA's Good Manufacturing
Practices (GMP) regulations and, for medical devices, the FDA's Good
Manufacturing Practices/Quality System Regulations (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 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 its 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, 2000, and the first nine months of 2001,
the Company had incurred annual operating losses. As of September 30, 2001, the
Company had an accumulated deficit of approximately $10,900,000. 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 profitability is highly uncertain. To
achieve 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.
17
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 that may be involved in
research, development and commercialization of products. Because a number of
companies are developing or have developed HA products for similar applications,
the successful commercialization of a particular product will depend in part
upon the ability of the Company to complete clinical studies and obtain FDA
marketing and foreign regulatory approvals prior to its competitors, or, if
regulatory approval is not obtained prior to competitors, the markets for these
products will be sufficient to permit meaningful sales of the Company's
products. For example, several of our competitors have already obtained FDA and
foreign regulatory approvals for marketing HA products with applications similar
to that of ORTHOVISC(R). Thus, the successful commercialization of ORTHOVISC(R)
will depend in part on the Company's ability to effectively market ORTHOVISC(R)
against moRE established products with a longer sales history. 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 continue to hinder its ability to effectively compete in
that market. As a result, prices to our Turkish distributor have decreased.
UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of the
Company's products, including ORTHOVISC(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. The Company has received Investigational Device Exemption (IDE)
approval from the FDA for both ORTHOVISC(R) and INCERT(R)-S. There can be no
assurance that (i) any additional clinical data will support the efficacy of
ORTHOVISC(R), (ii) the Company will begin or complete clinical trials of
INCERT(R)-S or complete any additional clinical trials of ORTHOVISC(R), (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 partner will not encounter additional 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, in part, upon the efforts of its marketing partners and the
terms and conditions of the Company's relationships with such marketing
partners.
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 the Company. 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 and royalties 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 has 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 three months ended
September 30, 2001 and 2000, sales of AMVISC(R) products to Bausch & Lomb
Surgical accounted for 69.3% and 53.6% of product revenues, respectively. For
18
the nine months ended September 30, 2001 and 2000, sales of AMVISC(R) products
to Bausch & Lomb Surgical accounted for 60.4% and 54.1% of product revenues,
respectively. Although the Company intends to continue to seek new opthalmic
product customers, there can be no assurances that the Company will be
successful in obtaining new customers or to achieve meaningful sales to such new
customers.
The ORTHOVISC(R) Distribution Agreement with Zimmer 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 for an early termination of its
marketing and distribution agreement for ORTHOVISC(R). The termination may
continue to have a material adverse effect on the Company's ability to market
ORTHOVISC(R), which is likely to have a material adverse effect on the Company's
future operating results. The Company has relationships with logistics agents
(outsource order processing providers) 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
those 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 effectively transition to any such
partners. 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.
The Company will need to obtain the assistance of additional marketing
partners to bring new and existing products to market and to replace certain
marketing partners, such as Zimmer. 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 will have a material adverse effect on the Company's business,
financial condition, and results of operations.
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 payors. 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 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.
19
The Company has a policy of seeking patent protection for patentable
aspects of its proprietary technology. During 2001, the Company filed five
(5) provisional applications and one patent application. 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 were issued in the year 2000. The Company
also solely owns patents directed to certain manufacturing processes. The
Company holds a non-exclusive license 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 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 appropriate.
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 licensed
patents 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.
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
20
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 payors, 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 of its
products to secure reimbursement. Reimbursement by a third party payor may
depend on a number of factors, including the payor's determination that the use
of the Company's products are 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 payors 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 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 payors for the Company' products and services could have a material
adverse effect on the Company's business, financial condition and results of
operations.
NEED FOR ADDITIONAL FUNDS; LIQUIDITY. The Company had cash, cash
equivalents and short-term marketable securities of approximately $14.0 million
as of September 30, 2001. 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 manage its manufacturing
capabilities and related costs; 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. To the extent that funds
generated from the Company's operations, together with the Company's existing
capital resources and 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 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.
21
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 whom
could have a material adverse effect on the Company. In June 2001, Mr. Engle,
the former Chief Executive Officer and Chairman of the Board of Directors, and
Mr. Slater, the former Vice President of Operations, ceased to be employees of
the Company. There can be no assurances that such departures will not adversely
affect the Company's business. 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. 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 SALES. During the three months ended
September 30, 2001 and 2000, approximately, 25.6% and 29.8%, respectively, of
the Company's product sales were sold to international distributors. During
the nine months ended September 30, 2001 and 2000, approximately, 30.5% and
27.9%, respectively, of the Company's product sales were sold to
international distributors. The Company's representatives, agents and
distributors who sell products in international markets are subject to the
laws and regulations of the foreign jurisdictions in which they operate and
in which the 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 and/or economic instability, trade restrictions,
changes in tariffs, difficulties in managing international operations, import
restrictions and fluctuations in foreign currency exchange rates. The Company
sells its ORTHOVISC(R) product to a European sales and marketing company for
supply of the Turkish market. The Turkish economic situation has been
volatile and the impacts of this volatility on future sales of ORTHOVISC(R)
are uncertain. Such changes in the volume of sales may have a material
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 Company's announcement that the FDA had notified the Company that
its PMA for ORTHOVISC(R) was not approvable and that additional clinical data
would be required to demonstrate the effectiveness of ORTHOVISC(R). The stock
price declined again in May 2000 following the Company's announcements that
initial analysis of results from the Phase III clinical trial of ORTHOVISC(R)
did not show sufficient efficacy to support the filing of a PMA application to
obtain FDA approval, and that the SEC had issued a formal order of investigation
and required the Company to provide information in connection with certain
revenue recognition matters. The trading price of the Company's common stock
could be subject to wide fluctuations in response to quarter-to-quarter
variations in the Company's operating results, material announcements by the
Company or its competitors, governmental regulatory action, conditions in the
health care industry generally or in the medical products industry specifically,
or other events or factors, many of which are beyond the Company's control. In
addition, the stock market has experienced extreme price and volume fluctuations
which have particularly affected the market prices of many medical products
companies and which often have been unrelated to the
22
operating performance of such companies. The Company's operating results in
future quarters may be below the expectations of equity research analysts and
investors. In such event, the price of the common stock would likely decline,
perhaps substantially.
No person is under any obligation to make a market in the common stock or
to publish research reports on the Company, and any person making a market in
the common stock or publishing research reports on the Company may discontinue
market making or publishing such reports at any time without notice. There can
be no assurance that an active public market in the common stock will be
sustained.
POSSIBLE ADVERSE EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS. Certain
provisions of the Company's Restated Articles of Organization and Amended and
Restated By-laws could have the effect of discouraging a third party from
pursuing a non-negotiated takeover of the Company and preventing certain changes
in control. These provisions include a classified Board of Directors, advance
notice to the Board of Directors of stockholder proposals, limitations on the
ability of stockholders to remove directors and to call stockholder meetings,
the provision that vacancies on the Board of Directors be filled by a majority
of the remaining directors. In addition, the Board of Directors adopted a
Shareholders Rights Plan in April 1998. The Company also is subject to Chapter
110F of the Massachusetts General Laws which, subject to certain exceptions,
prohibits a Massachusetts corporation from engaging in any of a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder.
These provisions could discourage a third party from pursuing a takeover of the
Company at a price considered attractive by many stockholders, since such
provisions could have the effect of preventing or delaying a potential acquirer
from acquiring control of the Company and its Board of Directors.
SEC INVESTIGATION AND SECURITIES CLASS ACTION LITIGATION. The SEC has
issued a formal order of investigation and has required the Company to provide
information in connection with certain revenue recognition matters. The Company
has been cooperating fully. These matters, relating to the Company's historical
accounting for and disclosures concerning sales of ORTHOVISC(R) under a
long-term supply and distribution agreement with Zimmer, 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. On
August 14, 2001, as a result of the SEC's ongoing investigation, the Company, in
conjunction with its independent auditors, determined to again restate its
financial results for the fourth quarter of 1998 and the first quarter of 1999
as discussed in Note 10 of the consolidated financial statements. The Company is
not in a position to predict the probable outcome of the SEC investigation or
its potential impact on the Company's business or operations.
RELIANCE ON A SMALL NUMBER OF CUSTOMERS. The Company has historically
derived the majority of its revenues from a small number of customers, most of
whom resell its products to end users and most of whom are significantly larger
companies. The Company's failure to generate as much revenue as expected from
these customers or the failure of these customers to purchase the Company's
products would seriously harm the Company's business. For the three months ended
September 30, 2001, Bausch & Lomb Surgical accounted for 69.3% of product
revenues and 68.07% of the accounts receivable balance and Pharmaren (an
affiliate of Biomeks), the Company's distributor in Turkey, accounted for 13.8%
of product revenues and 8.45% of the accounts receivable balance. Accordingly,
if present and future customers terminate their purchasing arrangements with the
Company, significantly reduce or delay their orders or seek to renegotiate their
agreements on terms less favorable to the Company, the Company's business,
financial condition, and results of operations will be adversely affected. If
the Company accepts terms less favorable than the terms of the current
agreement, such renegotiations may have a material adverse affect on the
Company's business, financial condition, and/or results of operations.
Furthermore, the Company may be subject to the perceived or actual leverage the
customers may have given their relative size and importance to the Company in
any future negotiations. Any termination, change, reduction or delay in orders
could seriously harm the Company's business, financial condition, and results of
operations. Accordingly, unless and until the Company diversifies and expands
its customer base, the Company's future success will significantly depend upon
the timing and size of future purchases by its largest customers and the
financial and operational success of these customers. Product revenue in the
future may continue to be impacted by economic uncertainties associated with the
Turkish market.
The loss of any one of the Company's major customers or the delay of
significant orders from such customers, even if only temporary, could reduce or
delay the Company's recognition of revenues, harm its reputation in the
industry, and reduce its ability to accurately predict cash flow, and, as a
consequence, could seriously harm the Company's business, financial condition,
and results of operations.
23
The Company, through its distributors, distributes ORTHOVISC(R) in
territories such as Spain, Portugal, Turkey, and Israel. Due to the result of
the unfavorable results of the U.S. ORTHOVISC(R) Phase III clinical trial
announced on May 31, 2000, marketing efforts in these countries have been and
may continue to be negatively affected. There can be no assurance that past
ORTHOVISC(R) sales levels will be maintained or that sales will occur at all in
these countries.
24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2001, the Company did not participate in any derivative
financial instruments or other financial and commodity instruments for which
fair value disclosure would be required under SFAS No. 107. All of the Company's
investments consist of money market funds and commercial paper that are carried
on the Company's books at amortized cost, which approximates fair market value.
Accordingly, the Company has no quantitative information concerning the market
risk of participating in such investments.
PRIMARY MARKET RISK EXPOSURES
The Company's primary market risk exposures are in the areas of interest
rate risk and foreign currency exchange rate risk. The Company's investment
portfolio of cash equivalent and short-term investments is subject to interest
rate fluctuations, but the Company believes this risk is immaterial due to the
short-term nature of these investments. The Company's exposure to currency
exchange rate fluctuations is specific to certain sales to a foreign customer
and is expected to continue to be modest. The impact of currency exchange rate
movements on sales to this foreign customer was immaterial for the quarter ended
September 30, 2001. Currently, the Company does not engage in foreign currency
hedging activities.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 9, "Legal Matters" of the consolidated financial statements. The
description of such matters is incorporated herein by reference to such
financial statements.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBIT NO. DESCRIPTION
----------------------------------------------------------------------
(3) Articles of Incorporation and Bylaws:
3.1 The Amended and Restated Articles of Organization of the
Company, incorporated herein by reference to Exhibit 3.1 to
the Company's Registration Statement on Form 10 (File no.
000-21326), filed with the Securities and Exchange Commission
on March 5, 1993.
3.2 Certificate of Vote of Directors Establishing a Series of
Convertible Preferred Stock, incorporated herein by reference
to Exhibits to the Company's Registration Statement on Form 10
(File no. 000-21326), filed with the Securities and Exchange
Commission on March 5, 1993.
3.3 Amendment to the Amended and Restated Articles of Organization
of the Company, incorporated herein by reference to Exhibit
3.1 to the Company's quarterly report on Form 10-QSB for the
period ended November 30, 1996, (File no. 000-21326), filed
with the Securities and Exchange Commission on January 14,
1997.
3.4 Certificate of Vote of Directors Establishing a Series of a
Class of Stock, incorporated herein by reference to Exhibit
3.1 of the Company's Registration Statement on Form 8-AB12
(File no. 001-14027), filed with the Securities and Exchange
Commission on April 7, 1998.
3.5 Amendment to the Amended and Restated Articles of Organization
of the Company, incorporated herein by reference to the
Company's quarterly report on Form 10-QSB for the quarterly
period ending June 30, 1998 (File no. 001-14027), filed with
the Securities and Exchange Commission on August 14, 1998.
3.6 The Amended and Restated Bylaws of the Company, incorporated
herein by reference to Exhibit 3.4 to the Company's quarterly
report on Form 10-QSB for the period ended November 30, 1996
(File no. 000-21326), filed with the Securities and Exchange
Commission on January 14, 1997.
(4) Instruments Defining the Rights of Security Holders
4.1 Shareholder Rights Agreement dated as of April 6, 1998 between
the Company and Firstar Trust Company, incorporated herein by
reference to Exhibit 4.1 to the Company's Registration
Statement on Form 8-A12B (File no. 001-14027), filed with the
Securities and Exchange Commission on April 7, 1998.
(10) Material Contracts
*10.1 Amendment to Lease #3, dated November 1, 2001, between
Cummings Properties and the Company.
(11) Statement Regarding the Computation of Per Share Earnings
11.1 See Note 4 to the Financial Statements included herewith.
* Filed herewith
(b) Reports on Form 8-K: None
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in Woburn,
Massachusetts on November 14, 2001.
ANIKA THERAPEUTICS, INC.
November 14, 2001 By: /S/ DOUGLAS R. POTTER
----------------------
Douglas R. Potter
CHIEF EXECUTIVE OFFICER AND CHIEF
FINANCIAL OFFICER
(Principal Financial Officer and
Authorized Officer)
27