<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
X Quarterly report under Section 13 or 15 (d) of the
- ------- Securities Exchange Act of 1934
For quarterly period ended September 30, 1997
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Transition report under Section 13 or 15 (d) of the
Exchange Act
For the transition period from to
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Commission file number 000-21326
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Anika Therapeutics, Inc.
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(Exact Name of Small Business Issuer as Specified in Its Charter)
Massachusetts 04-3145961
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
236 West Cummings Park, Woburn, Massachusetts 01801
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(Address of Principal Executive Offices)
(781) 932-6616
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(Issuer's Telephone Number, Including area code)
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(Former Name, Former Address and Former Fiscal Year, If Changed
Since Last Report)
Check whether the issuer: (1) filed all reports required to be
filed by Section 13 and 15 (d) of the Exchange Act during the past
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 past 90 days.
Yes X No
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State the number of shares outstanding of each of the issuer's
classes of common equity, as of the latest practicable date:
On November 12, 1997, 5,170,454 shares of common stock, par value
$0.01 per share, were outstanding.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE>
This Form 10-QSB 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 Company's actual
results could differ materially from those set forth in the
forward-looking statements. Certain factors that might cause such
a difference are discussed throughout this Form 10-QSB and are
discussed in the section entitled "Certain Factors Affecting Future
Operating Results" of this Form 10-QSB and under the caption "Risk
Factors" beginning on page 7 of Pre-Effective Amendment No. 1 to
the Company's Registration Statement on Form SB-2 filed with the
Securities and Exchange Commission on November 10, 1997 (File no.
333-38993), which discussion is incorporated herein by reference
thereto.
<PAGE>
PART 1: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
ANIKA THERAPEUTICS, INC.
<TABLE>
<CAPTION>
Balance Sheets as of September 30, 1997 December 31, 1996
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $3,055,045 $2,704,665
Accounts receivable 1,020,825 539,004
Inventories 2,733,363 2,481,646
Prepaid expenses 525,666 306,537
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Total current assets 7,334,899 6,031,852
Property and equipment 3,879,615 3,865,330
Less accumulated depreciation 3,246,606 3,046,286
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Net property and equipment 633,009 819,044
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Loan receivable from officer 75,000 -
Long term deposits 87,765 68,765
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Total Assets $8,130,673 $6,919,661
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $781,617 $550,314
Accrued expenses 1,167,512 1,055,234
Deferred revenue 200,000 200,000
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Total current liabilities 2,149,129 1,805,548
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Advance rent payment 117,015 142,775
Redeemable convertible preferred stock; $.01 par
value: authorized 750,000 shares; issued and
outstanding 130,211 shares and 126,259 shares, respectively;
at cost of $20.00 per share plus accrued dividends 2,705,563 2,602,527
Stockholders' equity:
Undesignated preferred stock, $.01 par value: authorized
1,250,000 shares; no shares issued and outstanding
Common stock, $.01 par value: authorized 15,000,000
shares; issued and outstanding 5,123,051 shares and
4,930,719 shares, respectively 51,231 49,307
Additional paid-in capital 12,195,385 11,693,070
Accumulated deficit (9,087,650) (9,373,566)
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Total stockholders' equity 3,158,966 2,368,811
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Total Liabilities and Stockholders' Equity $8,130,673 $6,919,661
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</TABLE>
See accompanying notes to financial statements.
<PAGE>
ANIKA THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
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<S> <C> <C> <C> <C>
Net sales $1,584,301 $1,092,111 $5,961,723 $3,630,535
Cost of sales 808,741 969,355 3,015,952 3,404,406
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Gross profit 775,560 122,756 2,945,771 226,129
Operating expenses:
Research and development 644,836 503,700 1,477,093 1,348,092
Selling, general and administrative 441,313 603,040 1,271,733 1,241,045
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Total operating expenses 1,086,149 1,106,740 2,748,826 2,589,137
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Income (loss) from
operations (310,589) (983,984) 196,945 (2,363,008)
Interest income, net (45,428) (48,098) (105,230) (123,391)
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Income (loss) before
income taxes (265,161) (935,886) 302,175 (2,239,617)
Income taxes 2,335 - 16,259 -
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Net income (loss) ($267,496) ($935,886) $285,916 ($2,239,617)
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Earnings (loss) per common share and
common share equivalents ($0.05) ($0.21) $0.03 ($0.54)
Common share and common share equivalents
outstanding 5,098,102 4,846,175 6,357,978 4,479,000
</TABLE>
See accompanying notes to financial statements.
<PAGE>
ANIKA THERAPEUTICS, INC.
Statements of Cash Flows
<TABLE>
<CAPTION>
Nine months ended,
September 30,
1997 1996
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $285,916 ($2,239,618)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 200,320 472,804
Amortization of unearned stock compensation - 187,501
Common stock issued to 401(k) plan and Board of
directors 150,998 57,627
Other long-term liabilities (25,760) (320,757)
Changes in operating assets and liabilities:
Accounts receivable (481,821) 37,549
Inventories (251,717) 466,343
Prepaid expenses (219,129) (273,671)
Loan receivable from officer (75,000) -
Accounts payable and accrued expenses 343,582 467,516
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Net cash used for operating activities (72,611) (1,144,706)
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Cash flows used for investing activities:
Long term deposits (19,000) -
Additions to property and equipment (14,286) (167,440)
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Net cash used for investing activities (33,286) (167,440)
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Cash flows provided by financing activities:
Payments on debt - (800,000)
Expenses from issuance of preferred stock - (22,583)
Proceeds from issuance of common stock - 3,543,835
Proceeds from exercise of stock options 456,277 247,250
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Net cash provided by financing activities 456,277 2,968,502
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Increase in cash and cash equivavalents 350,380 1,656,356
Cash and cash equivalents at beginning of period 2,704,665 1,742,637
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Cash and cash equivalents at end of period $3,055,045 $3,398,993
====================================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $2,771 $18,536
=======================
Supplemental disclosure of non cash items:
Repayment of debt through future deferred sublease
payments - $200,000
Dividend on redeemable preferred stock $103,036 $171,314
=======================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
PART I: FINANCIAL INFORMATION
Item 1: Financial Statements (Continued)
Anika Therapeutics, Inc.
Notes to Financial Statements
(1) Nature of Business
Anika Therapeutics, Inc. (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 has
been developing HA and HA based products since 1983. The
Company's currently marketed products consist of ORTHOVISC ,
which is an HA product used in the treatment of some forms of
osteoarthritis ("OA") in humans and HYVISC , which is an HA
product used in the treatment of equine osteoarthritis.
ORTHOVISC is currently approved for marketing in Canada and
Europe; in the U.S., ORTHOVISC is limited to investigational
use only. The Company manufactures AMVISC (1) and AMVISC Plus ,
which are HA products used as viscoelastic supplements in
ophthalmic surgery, for Chiron Vision, a subsidiary of Chiron
Corporation. The Company is currently developing INCERT ,
which is an HA based product designed for use in the
prevention of post-surgical adhesions. In addition, the
Company is collaborating with Orquest, Inc. to develop
OSSIGEL , an injectable formulation of basic fibroblast growth
factor combined with HA designed to accelerate the healing of
bone fractures.
(2) Basis of Presentation
The accompanying financial statements have been prepared by
the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. In the
opinion of the Company, these 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, 1997 and December 31, 1996, the
results of operations for the three and nine months ended
September 30, 1997 and 1996 and the cash flows for nine months
ended September 30, 1997 and 1996.
1) AMVISC and AMVISC Plus are registered trademarks of Chiron Vision
<PAGE>
The accompanying 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-KSB for the
year ended August 31, 1996. The results of operations for the
three and nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the
full year.
On December 31, 1996, the Company changed its fiscal year end
from August 31 to December 31.
(3) Earnings Per Share
Earnings per common share and common share equivalents
(E.P.S.) is computed based on the weighted average number of
common and dilutive common equivalent shares outstanding.
Fully diluted earnings per share, when not determined to be
antidilutive, is computed using the most dilutive assumptions
and by adjusting the primary earnings per share data for the
potential effect of the conversion of the Series A redeemable
convertible Preferred Stock.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings per Share" ("SFAS 128"), which requires presentation
of basic earnings per share ("Basic EPS") and per diluted
earnings per share ("Diluted EPS") by all entities that have
publicly traded common stock or potential common stock
(options, warrants, convertible securities or contingent stock
arrangements). SFAS 128 also requires a presentation of
earnings per share by an entity that has made a filing or is
in the process of filing with a regulatory agency in
preparation for the sale of those securities in a public
market. Basic EPS is computed by dividing income available to
common stockholders by the weighted-average number of common
shares outstanding during the period. Diluted EPS gives effect
to all dilutive potential common shares outstanding during the
period. The computation of Diluted EPS does not assume
conversion, exercise or contingent exercise of securities that
would have an antidilutive effect on earnings. SFAS 128 is
effective for both interim and annual periods ending after
December 15, 1997. The Company does not believe that the
effect on the Company's earnings per share resulting from the
adoption of SFAS 128 will be material.
(4) Loan Receivable from Officer
Loan receivable consists of a loan to an officer. The entire
balance is due at the earlier of the end of five years or at
the termination of employment. Interest accrues at an annual
rate of 6% and is payable monthly over the term of the loan.
<PAGE>
(5) Redeemable Convertible Preferred Stock
Each share of the Series A Preferred Stock ("Series A stock")
is entitled to receive an annual dividend on May 1 of each
year, at a rate of $1.80 per share, payable in additional
shares of Series A stock, with the number of dividend shares
determined by the price of the Company's underlying common
stock. The Company may elect to pay the dividend in cash if
certain financial covenants are met. During each consecutive
ninety day period in which the average quarterly price of the
Company's common stock remains above $6.00 per share, no
dividend will accrue. As of June 5, 1997, the Company ceased
accruing dividends. For the period May 1, 1996 to April 30,
1997, the Company issued 3,952 additional shares of Series A
stock to the preferred shareholders as a dividend payment.
The total recorded value of the dividend payment was $227,266.
(6) Series A Stock Warrants
In connection with the sale of Series A stock, the Company
issued warrants to the holders of Series A stock to purchase
60,485 shares of Series A stock, exercisable at $20.00 per
share. The warrants expire on May 17, 2000. If the price of
the Company's stock is in excess of $6.00 per share for a
consecutive ninety day period, the Company can require the
exercise of the warrants. At October 22, 1997, the notice for
the mandatory exercise of the warrants by the Company was sent
in accordance with this provision.
(7) Subsequent Events
On October 29, 1997, the Company filed a registration
statement with the United States Securities and Exchange
Commission for a public offering of 3,000,000 shares of Common
Stock, of which 2,500,000 will be sold by the Company and
500,000 shares will be sold by stockholders of the Company.
On October 28, 1997, the Company amended the 1993 Stock Option
Plan (the "Stock Option Plan") to reserve an additional
1,000,000 shares of Common Stock for issuance under the Stock
Option Plan, and granted to certain executive officers and
employees options to acquire 235,000 shares of Common Stock at
an exercise price of $7.625 per share, vesting over a four-
year period. Such grants are subject to the completion of
this offering and stockholders' approval of the amendment of
the Stock Option Plan. The amendment of the Plan will be
submitted for stockholders' approval at the Company's next
annual meeting of stockholders. If the amendment is approved
by the stockholders, the Company will be required to record
compensation expense with respect to the 235,000 options
granted October 28, 1997 over the four-year vesting period
equal to the difference, if any, between the exercise price
and the market value of the Common Stock at the time of such
approval.
<PAGE>
In November 1997, the Company entered into a long-term
distribution agreement with Zimmer, Inc., a subsidiary of
Bristol-Myers Squibb Company (the "Zimmer Distribution
Contract"). The Zimmer Distribution Contract provides Zimmer
with exclusive marketing and distribution rights to ORTHOVISC
in the United States, Canada, Australia, Hong Kong, Indonesia,
Malaysia, New Zealand, the Philippines, Singapore, Taiwan and
Thailand. Zimmer also has the option under the agreement to
seek regulatory approval for and market ORTHOVISC in Japan and
has a right of first offer with respect to China. Upon
signing of the agreement, the Company received an up-front
non-refundable payment of $2.5 million. Zimmer has also
agreed to make payments aggregating up to $20.5 million upon
the achievement of certain regulatory approval and enumerated
sales milestones. As an alternative to a $2.5 million
milestone payment, Zimmer has the right to elect to acquire
shares of the Company's Common Stock equal to the greater of
$2.5 million or 9.9% of the then outstanding Common Stock (but
not to exceed 19.9% of the then outstanding Common Stock) at
a premium to the then current market price. There can be no
assurance that any of such milestones will be met on a timely
basis or at all. In addition, Zimmer has the right to
terminate the agreement on August 1, 1998 if certain specified
events occur prior to that date and upon payment to the
Company of $1.0 million in cash. These circumstances include
(i) the failure of Zimmer to sell a stated minimum number of
units of ORTHOVISC during the second quarter of 1998 or the
failure of a competitor of the Company to report enumerated
sales minimums during the first two quarters of 1998, (ii) an
FDA requirement of additional clinical trials for ORTHOVISC or
the FDA acceptance for filing by a party other than the
Company or its primary competitors of a Pre-Market Approval
Application ("PMA") for an injectable HA product for the
treatment of OA in humans without requiring submission of an
Investigation Device Exemption ("IDE") clinical study to
support the application, (iii) both Synvisc and Hylagan are
either voluntarily or involuntarily withdrawn from the U.S.
market, or (iv) if Zimmer undergoes a company-wide
restructuring prior to June 30, 1998 which results in Zimmer's
determination that the knee implant product line is not a core
product. There can be no assurance that any of these events
will not occur or , if any such event does occur, that Zimmer
will not elect to terminate the agreement. Any such
termination would have a material adverse effect on the
Company's ability to market ORTHOVISC, which may have a
material adverse effect on the Company's future operating
results.
<PAGE>
PART I: FINANCIAL INFORMATION
Item 2: Management's Discussion and Analysis or Plan of
Operations
Results of Operations
Net sales for the three months ended September 30, 1997
totalled $1,584,000, an increase of $492,000 over the
$1,092,000 in net sales recorded for the same period last
year. Sales of AMVISC as measured in units declined by 25%
from the three month period of the prior year, which was more
than offset by a 87% increase in the current comparable period
average unit selling price of AMVISC under the AMVISC Supply Contract.
Sales of ORTHOVISC as measured in units increased over the three month
period of the prior year. For the nine months ended September
30, 1997 net sales totalled $5,961,000, an increase of
$2,331,000, or 64%, over the $3,631,000 recorded in net sales
for the same period in the prior year. A majority of the
increase in sales in each of the periods in 1997 was
attributable to an increase in AMVISC unit selling prices to
Chiron Vision and an increase sales volume for ORTHOVISC.
Sales of AMVISC as measured in units declined by 9% from the
nine month period of the prior period, which was more than
offset by a 67% increase in the average unit selling price of
AMVISC under the AMVISC Supply Contract. Future increases in
selling prices under the AMVISC Supply Contract will be
limited to annual adjustments based on changes in the producer
price index during the term of the contract, which expires
December 31, 2001. Sales of ORTHOVISC as measured in units
increased 475% over the nine month period of the prior year.
ORTHOVISC sales began in late 1996. Customer orders received
for units of AMVISC and ORTHOVISC scheduled for delivery
during the nine months ended September 30, 1997 exceeded the
prior year by 11%. At September 30, 1997, the Company had
$1.0 million of AMVISC and ORTHOVISC customer back orders that
were not shipped in September due to a quality problem in
syringes supplied by a third party used to deliver the
Company's HA products which resulted in a shortage of these
syringes. The Company and the supplier have rectified the
quality problem, the supplier replaced the faulty syringes
and the Company anticipates that all of the $1.0 million in
customer back orders will be shipped during the fourth quarter
of 1997.
The Company's gross profit as a percentage of net sales was
49% for the three months ended September 30, 1997, an increase
from the 11% gross profit recorded for the same period last
year. For the nine months ended September 30, 1997, the
Company's gross profit as a percentage of net sales was 49%,
compared to a gross profit as a percentage of net sales of
6.0% recorded over the same period in 1996. The increase for
the three and nine months ended is primarily due to a 87% and
to a 67% increase, in each of the respective periods, in the
average unit selling price of AMVISC and AMVISC Plus under the
new AMVISC Supply Contract and increased sales volume, in each
of the respective periods, of ORTHOVISC which has a higher
gross margin per unit than AMVISC.
<PAGE>
Research and development expenses for the three months ended
September 30, 1997 increased by $141,000 to $645,000 from
$504,000 for the same period last year. For the nine months
ended September 30, 1997 research and development expenses
increased by $129,000 to $1,477,000 from $1,348,000 for the
same period last year. The increase for the three and nine
months ended is primarily attributable to expenses associated
with ORTHOVISC clinical trial.
Selling, general and administrative expenses for the three
months ended September 30, 1997 decreased by $162,000 to
$441,000 from $603,000 for the same period last year. For the
three month period, the staffing level was substantially the
same, but the comparable three month period of 1996 includes a loss on
impairment that had been recorded in the amount of $200,000.
For the nine months ended September 30, 1997, selling, general
and administrative expenses increased by $31,000 to $1,272,000
from $1,241,000 for the same period last year. For the nine
months period, the staffing level was substantially the same
and the increase was due primarily to salary increases.
Liquidity and Capital Resources
The Company has incurred annual operating losses since its
inception on May 1, 1993 that have resulted in an accumulated
deficit of $9.1 million as of September 30, 1997. The Company
has funded these operating losses from the sale of $5.8
million in equity securities and the receipt of $5.9 million
in equity capital from MedChem on May 1, 1993 when the Company
was spun-off to the shareholders of MedChem.
In March 1996, the Company completed a financing involving the
private placement of 1,455,000 shares of newly issued Common
Stock to institutional and private accredited investors.
Total gross proceeds were approximately $4.0 million and net
proceeds to the Company after fees and expenses were
approximately $3.5 million. In connection with the private
placement, the Company issued to the private placement agent
warrants to purchase 57,036 shares of Common Stock at $4.00
per share and warrants to purchase 146,664 shares of Common
Stock at $3.00 per share. The proceeds from the private
placement were used to repay $1.0 million of indebtedness and
for working capital.
On May 17, 1995, the Company raised through a private
placement $2,235,642, net of offering costs, from the issuance
of 120,970 shares of Series A stock at a selling price of
$20.00 per share. Each share of the Series A stock is entitled
to receive an annual dividend on May 1 of each year at a rate
of $1.80 per share, payable in additional shares of Series A
stock, with the number of dividend shares determined by the
<PAGE>
price of the Company's Common Stock. The Company may elect to
pay the dividend in cash if certain financial covenants are
met. During each consecutive ninety (90) day period in which
the average quarterly price of the Company's Common Stock
remains above $6.00 per share, no dividend will accrue.
At September 30, 1997, the Company had cash and cash
equivalents of $3.1 million and working capital of $5.2
million. The Company believes that the $2.5 million payment
received upon signing of the Zimmer Distribution Contract,
cash from operations and current cash balances will be
sufficient to meet its operating requirements for at least the
next 12 months from the date of this Form 10-QSB. Thereafter,
the Company may require additional financing to fund its
operations and for the construction of a new manufacturing
facility. 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 expand its manufacturing capabilities, the cost of filing,
prosecuting, defending and enforcing patent claims and other
intellectual property rights, competing technological and
market developments, and the development of strategic
alliances for the marketing of certain of its products. To
the extent that funds generated from the Company's operations,
together with the Company's existing capital resources are
insufficient to meet future requirements, the Company will be
required to obtain additional funds through equity or debt
financings, strategic alliances with corporate partners and
others, or through other sources. The terms of any future
equity financings may be dilutive to the Company's
stockholders and the terms of any debt financings may contain
restrictive covenants which limit the Company's ability to
pursue certain courses of action. The ability of the Company
to obtain financing is dependent on the status of the
Company's future business prospects as well as conditions
prevailing in the relevant capital markets. No assurance can
be given that any additional financing will be made available
to the Company or will be available on acceptable terms should
such a need arise. The Company's estimate of the time period
for which cash and cash equivalents and cash from operations
will be adequate to fund operations is a forward looking
statement within the meaning of the Private Securities
Litigation Reform Act of 1995 and is subject to risks and
uncertainties. Actual results may differ materially from
those contemplated in such forward looking statements. In
addition to those described above, factors which may cause
such a difference are set forth under the caption "Certain
Factors Affecting Future Operating Results" and under the
caption "Risk Factors" beginning on page 7 of Pre-Effective
<PAGE>
Amendment No. 1 to the Company's Registration Statement on
Form SB-2 filed with the Securities and Exchange Commission on
November 10, 1997 (File no. 333-38993), which discussion is
incorporated herein by reference thereto.
CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS
This Form 10-QSB 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
Company's actual results could differ materially from those
set forth in the forward-looking statements. Certain factors
that might cause such a difference, among other factors noted
herein and under the caption "Risk Factors" beginning on page
7 of Pre-Effective Amendment No. 1 to the Company's
Registration Statement on Form SB-2 filed with the Securities
and Exchange Commission on November 10, 1997 (File no. 333-
38993), which discussion is incorporated herein by reference
thereto, include the following:
Need for Additional Funds; Liquidity. The Company anticipates
that its cash and cash equivalents on hand of approximately
$3,055,000 plus the additional $2,500,000 received from Zimmer
upon signing the Zimmer Distribution Contract, will fund
operating expenses for approximately the next 12 months. 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. To the extent that funds generated from the
Company's operations, together with the Company's existing
capital resources are insufficient to meet future
requirements, the Company will be required to obtain
additional funds through equity or debt financings, strategic
alliances with corporate partners and others, or through other
sources. The terms of any future equity financings may be
dilutive to the Company's stockholders and the terms of any
debt financings may contain restrictive covenants which 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.
Competition. The Company competes with many companies,
including large pharmaceutical companies, specialized medical
products companies, academic institutions, governmental
agencies and other research organizations which may be
involved in research, development and commercialization of HA
<PAGE>
products. Because a number of companies are developing HA
products for similar applications, the successful
commercialization of a particular HA product will depend in
large part upon the ability of the Company to complete
clinical studies and obtain FDA marketing and foreign
regulatory approvals prior to its competitors. There can be
no assurance that the Company will be able to compete against
current or future competitors or that competition will not
have a material adverse effect on the Company's business,
financial conditions and results of operations.
History of Losses; Uncertainty of Future Profitability. The
Company has incurred annual operating losses since its
inception in May 1993 and has accumulated deficit of
$9,088,000 as of September 30, 1997. The continued
development of the Company's products will require the
commitment of substantial resources to conduct research,
preclinical and clinical development programs, and to
establish sales and marketing capabilities. The Company
incurred substantial and increasing operating losses through
December 31, 1996 and although the Company has net income of
$286,000 for the nine months ended September 30, 1997, the
ability of the Company to reach sustained profitability is
highly uncertain. To achieve sustained profitability, the
Company must among other things, successfully complete
development of certain of its products, obtain regulatory
approvals and establish sales and marketing capabilities for
certain of its products. There can be no assurance that the
Company will be able to achieve sustained profitability.
Comprehensive Government Regulation; No Assurance of FDA
Approval. The Company's research, development, manufacturing
activities and the future marketing of products by the Company
are subject to regulation for safety and efficacy by numerous
governmental authorities in the United States, including
without limitation the Food and Drug Administration ("FDA"),
and other countries. These regulations can be costly,
regulatory approvals may take many years, and they can be
subject to change and unanticipated delays. The Company
cannot predict what impact, if any, such changes might have on
its business.
There can be no assurance that approvals of the Company's
products, processes or facilities will be granted or that the
Company will obtain the financing needed to develop certain
products. Any failure to obtain, or delay in obtaining, such
approvals could adversely affect the ability of the Company to
market its products.
<PAGE>
Significant delay or cost in obtaining, or failure to obtain
regulatory approval clearance to market products, any
regulatory agency limitations on the use of the Company's
products, or any withdrawal or suspension of clearance by the
regulatory agency could have a material adverse effect on the
Company's business, financial condition and results of
operations.
In addition, requirements relating to the conduct of clinical
trials, product licensing, pricing and reimbursement vary
widely from country to country. The Company or the FDA may
suspend clinical trials at any time upon a determination that
the subjects or patients are being exposed to an unacceptable
adverse health risk ascribable to the Company's products. If
clinical studies are suspended, the Company may be unable to
continue the development of the investigational products
affected.
FDA regulations depend heavily on administrative
interpretation and there can be non 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.
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 of the Company's products will be granted or
that the Company will have the necessary funds to develop
certain of such products. Any failure to obtain, or delay in
obtaining, such approvals could adversely affect the ability
of the Company to market its products.
Dependence on Patents and Proprietary Technology. The Company
has a policy of seeking patent protection for patentable
aspects of its proprietary technology. However, no assurance
can be given that any application filings or issued patents
will provide the Company with a competitive advantage or will
not be successfully challenged by third parties. Other
entities have filed patent applications for or have been
issued patents concerning various aspects of HA-related
products or processes. There can be no assurance that the
products or processes developed by the Company will not
infringe the patent rights of others in the future.
<PAGE>
The Company also relies upon trade secrets and proprietary
know-how. However, there can be no assurance that
confidentiality agreements, which the Company employees
generally sign, will be effective in protecting trade secrets
or that third parties will not independently develop
substantially equivalent or better technology.
Dependence Upon Marketing Partners. The Company does not plan
to directly market and sell its products to customers.
Therefore, the Company's success will be dependent upon the
efforts of its marketing partners and the terms and conditions
of the Company's relationships with such marketing partners.
In addition, the Company will need to obtain the assistance of
additional marketing partners for new products which are
brought to market and existing products brought to new
markets, and there can be no assurance that such additional
partners will be available or that such partners will agree to
market the Company's products on acceptable terms. The
failure to establish strategic partnerships for the marketing
and distribution of the Company's products on acceptable terms
would have a material adverse effect on the Company's
business, financial condition and results of operations.
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
a $1 million insurance policy 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 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.
<PAGE>
Part II: OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit No. Description
11 Computation of earnings per share.
27.1 Financial Data Schedule.
99.1 Certain portions of Pre-Effective
Amendment No.1 to the Company's
Registration Statement on Form SB-2 filed
with the Securities and Exchange
Commission on November 10, 1997 (File no.
333-38993), which have been incorporated
in this report by reference thereto.
(b) Reports on Form 8-K: None
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
ANIKA THERAPEUTICS, INC.
DATE: November 14, 1997 BY: /s/ J. Melville Engle
-------------------------
J. Melville Engle
Chief Executive Officer
DATE: November 14, 1997 BY: /s/ Sean F. Moran
-------------------------
Sean F. Moran
Chief Financial Officer
<PAGE>
EXHIBIT 11
Anika Therapeutics, Inc.
Computation of Primary and Fully Diluted Earnings per Share
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY :
Net income (loss): ($267,496)($935,886) $285,916 ($2,239,617)
Dividend on preferred - 59,608 103,035 171,314
-------------------- ------------------------
Net income (loss) per common share: (267,496) (995,494) 182,881 (2,410,931)
Weighted average number of common
shares outstanding 5,098,102 4,846,175 5,046,794 4,479,000
Dilutive effect of :
Outstanding stock options - - 811,799 -
Warrants for redeemable convertible
preferred stock - - 405,686 -
Warrants for common stock - - 93,699 -
-------------------- --------------------------
Weighted average number of common
shares as adjusted 5,098,102 4,846,175 6,357,978 4,479,000
-------------------- --------------------------
Primary earnings (loss) per share ($0.05) ($0.21) $0.03 ($0.54)
==================== ==========================
FULLY DILUTED:
Net income (loss): ($267,496)($935,886) $285,916 ($2,239,617)
Dividend on preferred - 59,608 * 171,314
-------------------- ------------------------
Net income (loss) per common share: (267,496) (995,494) 285,916 (2,410,931)
Weighted average number of common
shares outstanding 5,098,102 4,846,175 5,046,794 4,479,000
Dilutive effect of :
Redeemable convertible preferred stock - - 1,302,110 -
Outstanding stock options - - 1,033,597 -
Warrants for redeemable convertible
preferred stock - - 459,322 -
Warrants for common stock - - 123,323 -
------------------- -------------------------
Weighted average number of common
shares as adjusted 5,098,102 4,846,175 7,965,146 4,479,000
-------------------- -------------------------
Fully diluted earnings(loss) per share ($0.05) ($0.21) $0.04 ** ($0.54)
==================== =========================
</TABLE>
* Inclusion of amounts in calculation would be antidilutive; therefore not
included.
** Calculation results in antidiluted earnings per share, as such, presentation
on statement of operations reverts back to primary.
<PAGE>
RISK FACTORS
The following risk factors should be considered carefully in addition to the
other information contained in this Prospectus before purchasing the Common
Stock offered hereby. This Prospectus 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. Discussions containing such
orward-looking statements may be found in the material set forth under the
headings ''Management's Discussion and Analysis of Financial Condition and
Results of Operations'' and ''Business,'' as well as in this Prospectus
generally. Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties. The Company's actual results could differ materially from those
set forth in the forward-looking statements. Certain factors that might cause
such a difference include, among other factors noted herein, the factors set
forth below.
History of Losses; Uncertainty of Future Profitability
The Company has incurred annual operating losses since its inception in May 1993
and had an accumulated deficit of approximately $9.1 million as of September 30,
1997. 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. The Company incurred substantial and increasing operating
losses through December 31, 1996 and, although the Company had net income of
$286,000 for the nine months ended September 30, 1997, the ability of the
Company to reach sustained profitability is highly uncertain. To achieve
sustained profitability the Company must, among other things, successfully
complete development of certain of its products, obtain regulatory approvals and
establish sales and marketing capabilities for certain of its products. There
can be no assurance that the Company will be able to achieve sustained
profitability. See ''Selected Financial Data'' and ''Management's Discussion and
Analysis of Financial Condition and Results of Operations Results of
Operations.''
Competition
The Company competes with many companies, including large pharmaceutical
companies and specialized medical products companies. Many of these companies
have substantially greater financial and other resources, larger research and
development staffs, more extensive marketing and manufacturing organizations
and more experience in the regulatory process than the Company. The Company also
competes with academic institutions, governmental agencies and other research
organizations which may be involved in research, development and
commercialization of products. Because a number of companies are developing HA
products for similar applications, the successful commercialization of a
particular product will depend in part upon the ability of the Company to
complete clinical studies and obtain FDA marketing and foreign regulatory
approvals prior to its competitors. There can be no assurance that the Company
will be able to compete against current or future competitors or that
competition will not have a material adverse effect on the Company's business,
financial condition and results of operations. See ''Business Competition.''
<PAGE>
Fluctuations in Quarterly Operating Results
The Company's quarterly operating results may fluctuate as a result of a number
of factors, including timing of approvals of new products of the Company, its
competitors or its customers, slower-than-anticipated market penetration
rates of current products, temporary delays in obtaining certain product
components from suppliers and the ability of the Company to establish
marketing and distribution arrangements with strategic partners. A significant
portion of the Company's expenses is relatively fixed in nature and the Company
may not be able to reduce spending in response to shortfalls or delays in
revenues. Such shortfalls or delays may result in a material adverse effect
on the Company's business, financial condition and results of operations. As a
result, the Company believes that period-to-period comparisons of its results of
operations are not necessarily meaningful and should not be relied upon as
indicators of future performance. Due to the foregoing factors, it is likely
that in one or more future fiscal quarters the Company's operating results may
be below the expectations of equity research analysts and investors. Such an
occurrence could have a material adverse effect on the market price of the
Common Stock. See ''Management's Discussion and Analysis of Financial
Condition and Results of Operations Quarterly Results of Operations.''
Comprehensive Government Regulation; No Assurance of FDA Approval
The Company's product development activities, manufacturing processes, and
current and future sales and marketing are subject to extensive and rigorous
regulation by the FDA and comparable agencies in foreign countries. In the
United States, the FDA regulates the marketing, advertising, promotion, and
distribution of medical devices, drugs, and biologics, as well as testing,
manufacturing, labeling, recordkeeping, and reporting activities for such
products.
Medical proucts regulated by the FDA are generally classified as 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
typically would be substantially longer and more expensive than the review
process for devices.
The Company's ORTHOVISC product is currently regulated as a Class III device by
the FDA. Class III devices are those that generally must receive pre-market
approval by the FDA to ensure their safety and effectiveness (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 in the U.S., it must obtain FDA approval of a PMA. The
Company is currently preparing a PMA for ORTHOVISC and plans to submit it by
the end of 1997. The PMA approval process can be expensive, uncertain and
lengthy. A number of devices for which pre-market approval has been sought have
never been approved for marketing. The review of an application often occurs
over a protracted time period and may take two years or more from the filing
date to complete. There can be no assurance that the FDA will approve a PMA
<PAGE>
application for ORTHOVISC on a timely basis, if at all, or that the FDA review
will not involve delays that will affect the Company's ability to
commercialize additional products or expand permitted uses of existing products.
Furthermore, even if granted, the approval may include significant limitations
on the indications for use for which the product may be marketed.
The Company's developmental HA products, including INCERT and HA
oligosaccharides, have not obtained regulatory approval in the U.S. for
investigational use and/or commercial marketing and sale. The Company
believes that INCERT will be regulated as a Class III medical device and HA
oligosaccharides will be regulated as a drug, although there can be no
assurance that such products will not be otherwise classified. Before
undertaking clinical trials in the U.S. to support a PMA, the Company must
apply for and obtain FDA and/or institutional review board (''IRB'') approval
of an investigation device exemption (''IDE''). There can be no assurance that
the Company will be permitted to undertake clinical trials of these or other
future products in the U.S. or that clinical trials will demonstrate that the
products are safe and effective or otherwise satisfy the FDA's pre-market
approval requirements. Orquest has not received regulatory approval in the U.S.
for the investigational use and/or commercial marketing and sale of OSSIGEL.
OSSIGEL may be regulated as a Class III medical device, a biologic, a drug or
a combination thereof. There can be no assurance that Orquest will be
permitted to undertake clinical trials of OSSIGEL or, if clinical trials are
permitted, that such clinical trials will demonstrate that OSSIGEL is safe and
effective or otherwise satisfy FDA requirements.
Once obtained, marketing clearance can be withdrawn by the FDA due to failure to
comply with regulatory standards or the occurrence of unforeseen problems
following initial clearance. The Company may be required to make further
filings with the FDA under certain circumstances. The FDA's regulations require
agency approval of a PMA supplement for certain changes if they affect the
safety and effectiveness of an approved device, including, but not limited
to, new indications for use, labeling changes, the use of a different facility
to manufacture, process or package the device, changes in manufacturing methods
or quality control systems and changes in performance or design
specifications. Failure by the Company to receive approval of a PMA supplement
regarding the use of a different manufacturing facility or any other change
affecting the safety or effectiveness of an approved device on a timely
basis, or at all, would have a material adverse effect on the Company's
business, financial condition and results of operations. The FDA could also
limit or prevent the manufacture or distribution of the Company's products
and has the power to require the recall of such products. Significant delay or
cost in obtaining, or failure to obtain FDA clearance to market products, any
FDA limitations on the use of the Company's products, or any withdrawal or
suspension of clearance by the FDA could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, all FDA-approved products manufactured by the Company must be
manufactured in compliance with the standards established by the FDA's Good
Manufacturing Practices (''GMP'') regulations. Ongoing compliance with GMP
and other applicable regulatory requirements is monitored 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.
<PAGE>
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 its products 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 entitles the Company to affix a
CE marking on ORTHOVISC for the treatment of osteoarthritis in synovial 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 of the Company's products will be granted or that
the Company will have the necessary funds to develop certain of such products.
Any failure to obtain, or delay in obtaining, such approvals could adversely
affect the ability of the Company to market its products. See ''Business
Government Regulation.''
<PAGE>
Uncertainty Regarding Success of Clinical Trials
Several of the Company's products, including INCERT and HA oligosaccharides, as
well as the products of the Company's collaborative partners, including
OSSIGEL, will require clinical trials to determine their safety and efficacy
in humans for various conditions. There can be no assurance that the Company or
its collaborative partners will not encounter problems that will cause it to
delay or suspend clinical trials of any of these products. In addition,
there can be no assurance that such clinical trials, if completed, will
ultimately demonstrate these products to be safe and efficacious.
See ''Business Clinical Applications.''
Dependence Upon Marketing Partners
The Company does not plan to directly market and sell its current products to
customers. Therefore, the Company's success will be dependent upon the
efforts of its marketing partners and the terms and conditions of the
Company's relationships with such marketing partners. The Company currently
manufactures AMVISC and AMVISC Plus for Chiron Vision under a non-exclusive
fixed price, five-year supply agreement which contains stated minimum annual
purchase obligations and terminates on December 31, 2001. Bausch & Lomb, Inc.
recently announced that it has signed definitive agreements to acquire Chiron
Vision, as well as Storz Instrument Company, a subsidiary of American Home
Products and a competitor of Chiron Vision. Since January 1, 1997, Chiron Vision
has purchased AMVISC and AMVISC Plus in amounts substantially in excess of the
minimum purchase obligations set forth in the AMVISC supply contract. There
can be no assurance that the acquisitions will be consummated or if
consummated, that Bausch & Lomb, Inc. will continue to purchase AMVISC and
AMVISC Plus at levels beyond the stated minimum annual purchase obligations. Any
such decrease in orders under the AMVISC supply contract could have a
material adverse effect on the Company's business, financial condition and
results of operations. For the nine months ended September 30, 1997 and 1996,
AMVISC and AMVISC Plus sales through Chiron Vision accounted for 84% and 90%
of net sales, respectively.
On November 7, 1997, the Company entered into a distribution agreement with
Zimmer for the exclusive marketing and distribution of ORTHOVISC in the
United States, Canada and selected countries in the Asia-Pacific region.
While the agreement provides for future payments to the Company of up to
$20.5 million (which includes the right upon attaining certain milestones, at
Zimmer's election, to make an equity investment in the Company equal to the
greater of $2.5 million or 9.9% of the then outstanding Common Stock (but not
to exceed 19.9% of the then outstanding Common Stock) at a premium to the
then current market price), such payments are contingent upon the achievement
of certain enumerated regulatory approval and sales milestones. There can be
no assurance that such milestones will be met on a timely basis or at all and,
accordingly, that any such payments will be received by the Company. In
addition, Zimmer has the right to terminate the agreement on August 1, 1998
if certain specified events occur prior to that date and upon payment to Anika
of $1.0 million in cash. These circumstances include (i) the failure of
Zimmer to sell a stated minimum number of units of ORTHOVISC during the
second quarter of 1998 or the failure of a competitor of the Company to report
enumerated sales minimums during the first two quarters of 1998, (ii) an FDA
requirement of additional clinical trials for ORTHOVISC or the FDA's
acceptance for filing by a party other than Anika or its primary competitors of
a PMA for an injectable HA product for the treatment of OA in humans without
requiring submission of an IDE clinical study to support the application,
(iii) both Synvisc and Hyalgan are either voluntarily or involuntarily
withdrawn from the U.S. market, or (iv) if Zimmer undergoes a company-wide
restructuring prior to June 30, 1998 which results in Zimmer's determination
that the knee implant product line is not a core product. There can be no
<PAGE>
assurance that any of these events will not occur or, if any such event does
occur, that Zimmer will not elect to terminate the agreement. Any such
termination would have a material adverse effect on the Company's ability to
market ORTHOVISC, which may have a material adverse effect on the Company's
future operating results. See ''Management's Discussion and Analysis of
Financial Condition and Results of Operations Overview.''
The Company will need to obtain the assistance of additional marketing partners
for new products which are brought to market and existing products brought to
new markets. There can be no assurance that such additional partners will be
available or that such partners will agree to market the Company's products on
acceptable terms. The failure to establish strategic partnerships for the
marketing and distribution of the Company's products on acceptable terms
would have a material adverse effect on the Company's business, financial
condition and results of operations.
Uncertainty of Market Acceptance of New Products
The Company's success will depend in part upon the acceptance of the
Company's new 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 new products to achieve significant market acceptance could have a
material adverse effect on the Company's business, financial condition and
results of operations. See ''Business Competition.''
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 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
<PAGE>
enforceable. An adverse outcome in such litigation could cause the Company
to lose exclusivity covered by the disputed rights. If a third party is found
to have rights covering products or processes used by the Company, the
Company could be forced to cease using the technologies or marketing the
products covered by such rights, could be subject to significant liabilities to
such third party, and could be required to license technologies from such
third party. Furthermore, even if the Company's patents are determined to be
valid, enforceable, and broad in scope, there can be no assurance that
competitors will not be able to design around such patents and compete with
the Company using the resulting alternative technology.
The Company has a policy of seeking patent protection for patentable aspects of
its proprietary technology. The Company co-owns certain United States patents
and a patent application which claim certain adhesion prevention uses and
certain drug delivery uses of HA, and solely owns patents directed to certain
manufacturing processes. The Company also holds an exclusive license from
Tufts University to use technologies claimed in a United States patent
application which relate to the anti-metastasis applications of HA
oligosaccharides. The Company's issued patents expire between 2007 and 2015
and the license expires upon expiration of all related patents. The Company
intends to seek patent protection with respect to products and processes
developed in the course of its activities when it believes such protection
is in its best interest and when the cost of seeking such protection is not
inordinate. However, no assurance can be given that any patent application will
be filed, that any filed applications will result in issued patents or that
any issued patents will provide the Company with a competitive advantage or will
not be successfully challenged by third parties. The protections afforded by
patents will depend upon their scope and validity, and others may be able to
design around the Company's patents. The Company's issued patents and any
patents which arise from the Company's licensed application would provide
competitive protection, if at all, only in the United States. The Company
has not, to date, pursued foreign patents equivalent to those issued or
applied for in the United States.
Other entities have filed patent applications for or have been issued patents
concerning various aspects of HA-related products or processes. There can be
no assurance that the products or processes developed by the Company will
not infringe 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 has received
notice from the PTO that a third party is attempting to provoke a patent
interference with respect to one of the Company's co-owned patents covering
the use of INCERT for post-surgical adhesion prevention. Although the
Company believes that an interference will be declared by the PTO, it
is too early to determine the merits of the interference or the effect, if
any, the interference will have on the Company's marketing of INCERT for this
use. The existence of the interference proceeding may have a negative impact on
the marketing of the INCERT 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 product may be materially and adversely affected and the third
party may enforce patent rights against the Company which could prohibit the
sale and use of the INCERT products, which could have a material adverse effect
on the Company's future operating results. See ''Business Patents and
Proprietary Rights.''
<PAGE>
The Company also relies upon trade secrets and proprietary know-how for certain
unpatented 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 AMVISC supply contract the Company has agreed to grant Chiron
Vision a royalty-free, worldwide, exclusive license to the Company's
manufacturing and product inventions which relate to AMVISC products,
effective on December 31, 2001, the termination date of the AMVISC supply
contract which became effective on January 1, 1997. Upon expiration of the
AMVISC supply contract, there can be no assurance that Chiron Vision will
continue to use the Company to manufacture AMVISC and AMVISC Plus. If Chiron
Vision discontinues the use of the Company as a manufacturer after such time,
the Company's business, financial condition and results of operations could 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. See ''Management's Discussion and Analysis of Financial Condition
and Results of Operations Results of Operations Nine months ended
September 30, 1997 compared to nine months ended September 30, 1996.''
Furthermore, manufacturing processes and research and development efforts
of the Company involve animals and products derived from animals. The
utilization of animals in research and development and product
commercialization is subject to increasing focus by animal rights activists.
The activities of animal rights groups and other organizations that have
protested animal based research and development programs or boycotted the
products resulting from such programs could cause an interruption in the
Company's manufacturing processes and research and development efforts. The
occurrence of material operational problems, including but not limited to
the events described above, could have a material adverse effect on the
Company's business, financial condition and results of operations during the
period of such operational difficulties. See ''Business Manufacturing of
Hyaluronic Acid.''
<PAGE>
No Assurance of 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 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. 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 government and other third party payors for
the Company's products and services could have a material adverse effect on
the Company's business, financial condition and results of operations.
See ''Business Third Party Reimbursement.''
<PAGE>
Need for Additional Funds; Liquidity
The Company anticipates that its cash and cash equivalents of approximately $3.1
million on September 30, 1997, together with the $2.5 million payment received
upon signing of the distribution agreement with Zimmer, the net proceeds from
the offering and cash flow from operations will be adequate to fund its
operations for 24 months from the date of this Prospectus. 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
expand its manufacturing capabilities, the cost of filing, prosecuting,
defending and enforcing patent claims and other intellectual property rights,
competing technological and market developments, and the development of
strategic alliances for the marketing of certain of its products. To the
extent that funds generated from the Company's operations, together with the
Company's existing capital resources and the net proceeds of this offering 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. See ''Use of
Proceeds'' and ''Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources.''
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 a $1 million insurance policy 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.
See ''Business Product Liability.''
<PAGE>
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 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.
Uncertainty of Estimates
To assist investors in evaluating the Company, this Prospectus contains certain
estimates of market size and market share for the Company's and its
competitors' HA products. These estimates have been derived by the Company
on the basis of its analysis of industry reports, press releases and market
research reports compiled by independent third-party sources which the
Company believes to be reliable. However, all such estimates are inherently
subject to uncertainties, and the Company is unable to determine with a degree
of certainty the size of the market for certain HA based products and the
market share held by its products.
This Prospectus also reflects the Company's estimates regarding future
regulatory submission dates. Regulatory submissions can be delayed, or plans
to submit applications for product approvals can be canceled, for a number
of reasons, including the receipt of unfavorable preclinical or clinical
study results, changes in regulations, adoption of new or unanticipated
enforcement of existing regulations, technological developments and competitive
developments. Accordingly, no assurances can be given that the Company's
anticipated submissions will be made on their target dates, or at all. Delays
in such submissions could have a material adverse effect on the Company's
business, financial condition and results of operations.
Broad Management Discretion as to Use of Proceeds
The Company expects to use most of the net proceeds of this offering for
expansion of its manufacturing facilities, to fund its research and
development efforts, including clinical trials, and for working capital and
general corporate purposes. A portion of the net proceeds of the offering may
also be used to acquire or invest in products, technologies or other
businesses. There are no current agreements or understandings with respect to
any acquisitions, investments or other transactions. Accordingly, the
Company's management will retain broad discretion as to the allocation of a
substantial portion of the net proceeds from this offering. Pending such uses,
the Company intends to invest the net proceeds in short-term, investment-grade,
interest-bearing securities. See ''Use of Proceeds.''
<PAGE>
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. See ''Business Environmental Laws.''
Risks Relating to International Operations
Approximately 10% of the Company's product sales during 1996 were generated in
international markets through marketing partners. The Company's
representatives, agents and distributors which sell products in international
markets are subject to the laws and regulations of the foreign jurisdictions in
which they operate and in which the Company's products are sold. A number of
risks are inherent in international sales and operations. For example, the
volume of international sales may be limited by the imposition of government
controls, export license requirements, political instability, trade
restrictions, changes in tariffs, difficulties in managing international
operations, import restrictions and fluctuations in foreign currency exchange
rates. Such changes in the volume of sales may have an adverse effect on the
Company's business, financial condition and results of operations.
Potential Volatility of Stock Price; No Control Over Market Making
The market price of shares of the Company's Common Stock may be highly volatile.
Factors such as announcements of new commercial products or technological
innovations by the Company or its competitors, disclosure of results of
clinical testing or regulatory proceedings, governmental regulation and
approvals, developments in patent or other proprietary rights, public concern
as to the safety of products developed by the Company and general market
conditions may have a significant effect on the market price of the Company's
Common Stock. 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 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.
<PAGE>
No person is under any obligation to make a market in the Common Stock or
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 develop or, if developed, will be sustained.
Lack of Payment of Dividends on Common Stock
The Company has never paid cash dividends on its Common Stock and does not
anticipate paying such dividends in the foreseeable future. The Company
currently intends to retain any future earnings for use in the Company's
business. See ''Price Range of Common Stock and Dividend Policy.''
Control by Principal Stockholders, Directors and Officers
Upon completion of this offering, the present directors, executive officers and
principal stockholders of the Company and their affiliates will beneficially
own approximately 24.8% of the outstanding shares of Common Stock. As a
result, these stockholders may be able to exercise significant influence
over matters requiring shareholder approval, including the election of
directors and approval of significant corporate transactions. Such
concentration of ownership may have the effect of delaying or preventing
a change in control of the Company. See ''Principal and Selling Stockholders.''
Risks Involving Shares Eligible for Future Sale
Sales of substantial amounts of Common Stock (including shares issued upon
the exercise of outstanding options and warrants) in the public market after
this offering, or the perception that such sales may occur, could adversely
affect prevailing market prices for the Common Stock following this offering.
Upon completion of this offering, the Company will have a total of 9,381,879
of Common Stock outstanding (assuming the exercise of all outstanding
warrants to purchase Series A Preferred Stock). Of these shares, 8,123,051
shares of Common Stock, including the 3,000,000 offered hereby, will be
freely tradable without restriction or registration under the Securities Act of
1933 (''Securities Act'') by persons other than ''affiliates'' of the Company,
as that term is defined in Rule 144 (''Rule 144'') promulgated under the
Securities Act (''Affiliates''). The remaining 1,258,828 shares of Common
Stock, and an additional 203,700 shares of Common Stock issuable from time
to time upon the exercise of outstanding warrants, are ''restricted''
securities that may be sold only if registered under the Securities Act,
or sold in accordance with an applicable exemption from registration, such
as Rule 144. As of October 31, 1997, 3,000,000 shares of Common Stock were
reserved for issuance under the Stock Option Plan of which 1,871,495 shares were
issuable upon the exercise of outstanding stock options, and 40,000 shares
of Common Stock were reserved for issuance under the Directors' Plan, of
which 22,500 shares were issuable upon the exercise of outstanding stock
options. In June 1993 and June 1996, the Company filed registration statements
on Form S-8 under the Securities Act to register all shares of Common Stock
reserved for issuance under the Stock Option Plan and the Directors' Plan.
Shares of Common Stock issued upon the exercise of options under either
plan generally are available for sale in the open market, subject to
Rule 144 limitations with respect to affiliates, and subject to the lock-up
arrangements described below.
<PAGE>
The Company's executive officers, directors and certain other stockholders who,
in the aggregate, will hold upon completion of this offering 1,279,880 shares
of the outstanding Common Stock have entered into lock-up agreements which
provide that, for a period of 180 days from the effective date of the
Registration Statement of which this Prospectus is a part, they will not,
directly or indirectly, offer, sell, offer to sell, contract to sell, or
otherwise dispose of (or enter into any transaction which is designed to,
or could be expected to, result in the disposition by any such person of) any
shares of Common Stock or any securities convertible into or exercisable
for Common Stock, or any right to purchase or acquire Common Stock
without the prior written consent of Furman Selz LLC. Furman Selz LLC
will have complete discretion in determining whether to consent to early
releases from the lock-up agreements delivered in connection with the
offering, and there can be no assurance that it will not consent to the
early release of all or a portion of the shares of Common Stock and
options covered by such lock-up agreements. See ''Shares Eligible for
Future Sale.''
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, the ability
of the Board of Directors to issue, without further stockholder approval,
preferred stock with rights and privileges which could be senior to the
Common Stock and the ability of the Board of Directors to adopt a
shareholder rights plan without seeking stockholder approval. 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
acquiror from acquiring control of the Company and its Board of Directors.
See ''Description of Capital Stock.''
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