ANIKA THERAPEUTICS INC, 10-Q, 1999-11-15

ANIKA THERAPEUTICS INC
10-Q, 1999-11-15
BIOLOGICAL PRODUCTS, (NO DIAGNOSTIC SUBSTANCES)

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<PAGE>

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

-----------

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, 1999

[ ] 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)

-----------

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 and 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 latest practicable date.

At November 11, 1999 there were issued and outstanding 9,787,736 shares of
Common Stock, par value $.01 per share.

1
<PAGE>

FORM 10-Q
ANIKA THERAPEUTICS, INC.

FOR QUARTER ENDED SEPTEMBER 30, 1999

THIS DOCUMENT CONTAINS CERTAIN STATEMENTS THAT ARE "FORWARD-LOOKING
STATEMENTS" AS THAT TERMS IS DEFINED UNDER THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995 (THE "ACT") AND RELEASES ISSUED BY THE SECURITIES AND
EXCHANGE COMMISSION. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND,"
"ESTIMATE," AND OTHER EXPRESSIONS, WHICH ARE PREDICTIONS OF OR INDICATE FUTURE
EVENTS AND TRENDS AND WHICH DO NOT RELATE TO HISTORICAL MATTERS, IDENTIFY
FORWARD-LOOKING STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANTICIPATED
FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. 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-Q and are
discussed in the section ENTITLED "RISK FACTORS AND CERTAIN FACTORS AFFECTING
FUTURE OPERATING RESULTS" ON PAGE 13 OF THIS FORM 10-Q.

2
<PAGE>

PART I: FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

ANIKA THERAPEUTICS, INC.
BALANCE SHEETS

SEPTEMBER 30, DECEMBER 31,
1999 1998
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents .......................................... $ 1,383,560 $ 10,712,520
Short-term investments ............................................. 13,578,826 12,007,503
Accounts receivable, net ........................................... 2,356,015 3,032,737
Inventories ........................................................ 4,186,360 3,522,019
Prepaid expenses ................................................... 640,742 250,023
------------ ------------
Total current assets ........................................... 22,145,503 29,524,802
Property and equipment ............................................... 7,799,366 6,376,405
Less: accumulated depreciation ....................................... (4,349,204) (3,809,723)
------------ ------------
Net property and equipment ..................................... 3,450,162 2,566,682
Long-term investments ................................................ 5,631,430 --
Notes receivable from officers ....................................... 312,000 193,000
Long-term deposits ................................................... 129,600 108,500
------------ ------------
Total assets ................................................... $ 31,668,695 $ 32,392,984
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable ................................................... $ 730,500 $ 891,493
Accrued expenses ................................................... 1,260,832 1,356,586
Deferred revenue .................................................. 200,000 200,000
------------ ------------
Total current liabilities ...................................... 2,191,332 2,448,079

Advance rent payment ................................................. 8,820 50,215
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;
9,991,943 shares issued in 1999 and 1998 ......................... 99,919 99,919
Additional paid-in capital ......................................... 31,986,982 34,439,676
Deferred compensation .............................................. (718,000) (1,074,699)
Treasury stock, (at cost) 204,207 and 344,500 shares in 1999
and 1998, respectively ........................................... (975,779) (1,889,794)
Accumulated deficit ................................................ (924,579) (1,680,412)
------------ ------------
Total stockholders' equity ..................................... 29,468,543 29,894,690
------------ ------------
Total liabilities and stockholders' equity ..................... $ 31,668,695 $ 32,392,984
============ ============

</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

3
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ANIKA THERAPEUTICS, INC.

INCOME STATEMENTS (UNAUDITED)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------

<S> <C> <C> <C> <C>
Product revenue .................................... $ 3,481,637 $ 3,179,901 $ 10,456,490 $ 9,030,286
Licensing payments ................................. -- -- -- 1,500,000
------------ ------------ ------------ ------------
Total revenue ................................... 3,481,637 3,179,901 10,456,490 10,530,286
Cost of product revenue ............................ 1,818,807 1,425,270 5,423,611 4,333,311
------------ ------------ ------------ ------------
Gross profit ..................................... 1,662,830 1,754,631 5,032,879 6,196,975
------------ ------------ ------------ ------------
Operating expenses:
Research and development ......................... 1,193,240 492,935 2,825,916 1,384,445
Selling, general and administrative .............. 703,194 869,228 2,265,365 2,109,442
------------ ------------ ------------ ------------
Total operating expenses ......................... 1,896,434 1,362,163 5,091,281 3,493,887
------------ ------------ ------------ ------------
Income (loss) from operations ...................... (233,604) 392,468 (58,402) 2,703,088
Interest income, net ............................. 237,897 367,586 837,926 978,154
------------ ------------ ------------ ------------
Income before provision for income taxes ........... 4,293 760,054 779,524 3,681,242
Provision for income taxes ....................... 107 19,001 23,691 101,728
------------ ------------ ------------ ------------
Net income ......................................... $ 4,186 $ 741,053 $ 755,833 $ 3,579,514
============ ============ ============ ============
Basic earnings per share ........................... $ 0.00 $ 0.07 $ 0.08 $ 0.36
============ ============ ============ ============
Shares used for computing basic earnings per share . 9,940,228 9,960,502 9,900,317 9,931,313
============ ============ ============ ============
Diluted earnings per share ......................... $ 0.00 $ 0.07 $ 0.07 $ 0.32
============ ============ ============ ============
Shares used for computing diluted earnings per share 10,374,349 11,316,539 10,191,300 11,153,554
============ ============ ============ ============

</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

4
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ANIKA THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS (UNAUDITED)

NINE MONTHS ENDED
SEPTEMBER 30,
1999 1998
------------ ------------
<S> <C> <C>

Cash flows from operating activities:
Net income .............................................. $ 755,833 $ 3,579,514
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ........................... 539,481 358,741
Amortization of deferred stock compensation ............. 263,325 162,857
Other long-term liabilities ............................. (41,395) (40,208)
Provision for doubtful accounts ......................... -- 50,000
Changes in operating assets and liabilities:
Accounts receivable ................................... 676,722 (410,542)
Inventories ........................................... (664,341) (733,722)
Prepaid expenses ...................................... (390,719) 261,166
Accounts payable and accrued expenses ................. (256,747) (466,799)
------------ ------------
Net cash provided by operating activities ................. 882,159 2,761,007
------------ ------------
Cash flows from investing activities:
Long-term deposits ...................................... (21,100) (67,135)
Increase in short-term investments, net ................. (1,571,323) (11,519,904)
Increase in long-term investments, net .................. (5,631,430) --
Purchase of property and equipment ...................... (1,422,961) (1,965,688)
Notes receivable from officers .......................... (119,000) (59,000)
------------ ------------
Net cash used in investing activities ..................... (8,765,814) (13,611,727)
------------ ------------
Cash flows from financing activities:
Expenses from issuance of common stock .................. -- (105,832)
Purchase of treasury stock .............................. (1,946,512) --
Proceeds from exercise of stock options and warrants .... 501,207 952,236
------------ ------------
Net cash (used in) provided by financing activities ....... (1,445,305) 846,404
------------ ------------
Decrease in cash and cash equivalents ..................... (9,328,960) (10,004,316)
Cash and cash equivalents at beginning of period .......... 10,712,520 22,679,820
------------ ------------
Cash and cash equivalents at end of period ................ $ 1,383,560 $ 12,675,504
============ ============

</TABLE>

SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.

5
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ITEM 1. FINANCIAL STATEMENTS

ANIKA THERAPEUTICS, INC.
NOTES TO FINANCIAL STATEMENTS

(1) NATURE OF BUSINESS

Anika Therapeutics, Inc. ("Anika" or the "Company") develops,
manufactures and commercializes therapeutic products and devices intended to
promote the repair, protection and healing of bone, cartilage and soft
tissue. These products are based on hyaluronic acid ("HA"), a
naturally-occurring, biocompatible polymer found throughout the body. Due to
its unique biophysical and biochemical properties, HA plays an important role
in a number of physiological functions such as the protection and lubrication
of soft tissues and joints, the maintenance of the structural integrity of
tissues, and the transport of molecules to and within cells. The Company's
currently marketed products consist of ORTHOVISC-Registered Trademark-,
which is an HA product used in the treatment of some forms of osteoarthritis
("OA") in humanS and HYVISC-Registered Trademark-, which is an HA product
used in the treatment of equine osteoarthritis. ORTHOVISC is currently
approved for sale and marketed in Canada, Europe, Turkey, Israel and Iceland.
In the U.S. ORTHOVISC is currently limited to investigational use only and
the Company commenced a Phase III clinical study in the U.S. and Canada in
late April 1999. The Company manufactures AMVISC-Registered Trademark- and
AMVISC-Registered Trademark- Plus, which are HA products used as viscoelastic
supplements IN ophthalmic surgery, for Bausch & Lomb Surgical, a subsidiary
of Bausch & Lomb. The Company is currently developing INCERT-Registered
Trademark-, which is an HA based product designed for use in the prevention
of post-surgical adhesions. In collaboratioN with Orquest, Inc., Anika also
has exclusive rights to produce Ossigel-TM-; 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 management, 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, 1999, the results of operations for the three and nine months
ended September 30, 1999 and 1998 and the cash flows for the nine months ended
September 30, 1999 and 1998.

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-K for the year ended December 31, 1998. The results of
operations for the nine months ended September 30, 1999 are not necessarily
indicative of the results to be expected for the full year.

(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.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consists of cash and investments with original
maturities of three months or less.

6
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INVESTMENTS IN 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.

Short-term investments consist of debt securities with original maturities
between three and twelve months, which are classified as held to maturity, and
at September 30, 1999, a trading security. Long-term investments consist of debt
securities with original maturities greater than twelve months, which are
classified as held to maturity. The held to maturity securities are carried at
amortized cost which approximates fair market value at September 30, 1999 and
December 31, 1998. Trading securities are carried at fair market value and the
unrealized loss of $62,434 is included in interest income, net for the three and
nine months ended September 30, 1999. Average maturity of long-term investments
at September 30, 1999 is 1.5 years.

INVENTORIES

Inventories are stated at the lower of cost or market, with cost being
determined using the first-in, first-out (FIFO) method.

REVENUE RECOGNITION

Product revenue is recognized upon shipment of commercial product and
represents sales of AMVISC products, HYVISC and ORTHOVISC. In the case of sales
to Zimmer Inc. ("Zimmer"), revenue may also be recognized upon invoicing and not
shipment if Zimmer has requested that the Company store the ORTHOVISC at Anika
facilities and Zimmer has agreed to take title to the product. ORTHOVISC is sold
to Zimmer for distribution in Canada and Europe. Under the distribution contract
with Zimmer, ORTHOVISC revenue is recognized based upon an estimate of the per
unit sales price to be obtained by Zimmer and is subject to adjustment based on
Zimmer's actual selling price.

License fee revenue is recognized when the related milestone has been
achieved and payment has been received as long as the license fee is
non-refundable. Revenue related to license fees that are subject to refund are
recognized ratably over the period that the refund provisions lapse.

Advanced payments received for products are recorded as deferred revenue
and are recognized when the product is shipped.

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:

<TABLE>

<S> <C>
Machinery and equipment............................... 5-10 years
Furniture and fixtures................................ 3-5 years
Leasehold improvements................................ 4-10 years

</TABLE>

Amortization on leasehold improvements is calculated using the
straight-line method over the shorter of the lease term or estimated life of the
asset.

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.

7
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(4) INVENTORIES

Inventories consist of the following:

SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Raw materials.......................... $ 693,670 $432,255
Work in-process........................ 3,386,373 3,013,930
Finished goods......................... 106,317 75,834
---------- ----------
Totals......................... $4,186,360 $3,522,019
========== ==========

</TABLE>

(5) EARNINGS PER SHARE

The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 128, Earnings per Share, which establishes standards for
computing and presenting earnings per share, simplifying previous standards and
making them comparable to international earnings per share standards. Basic
earnings per share are computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of
common shares and dilutive potential common shares outstanding during the
period.

The following illustrates a reconciliation of the number of shares used in
the calculation of basic and diluted earnings per share for the three and nine
months ended September 30, 1999 and 1998:

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------

<S> <C> <C> <C> <C>
Basic weighted average common shares outstanding ........ 9,940,228 9,960,502 9,900,317 9,931,313
Dilutive effect of assumed exercise of stock options .... 434,121 1,356,037 290,983 1,222,241
---------- ---------- ---------- ----------

Diluted weighted average common shares outstanding ...... 10,374,349 11,316,539 10,191,300 11,153,554
========== ========== ========== ==========

</TABLE>

(6) SIGNIFICANT CUSTOMERS

Sales of AMVISC products to Bausch & Lomb Surgical accounted for 66.0% and
58.5% of total product revenue for the three months ended September 30, 1999 and
1998, respectively. Sales of AMVISC products to Bausch & Lomb Surgical,
accounted for 61.8% and 70.1% of total product revenue for the nine months ended
September 30, 1999 and 1998, respectively.

Sales of ORTHOVISC to one customer accounted for 22.5% and 17.9% of total
product revenue for the nine months ended September 30, 1999 and 1998,
respectively. For the three months ended September 30, 1999, sales of ORTHOVISC
to one customer accounted for 18.6% of total product revenue and sales of
ORTHOVISC to another customer totaled 11.7% of total product revenue. For the
three months ended September 30, 1998, sales of ORTHOVISC to one customer
accounted for 17.9% of total product revenue; and ORTHOVISC sales to another
customer accounted for 10% of total product revenue.

(7) COMPREHENSIVE INCOME

The Company follows the provisions of SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in financial statements.

8
<PAGE>

Comprehensive income is the total of net income and all other nonowner changes
in equity including items such as unrealized holding gains/losses on securities
classified as available for sale, foreign currency translation adjustments and
minimum pension liability adjustments. The Company had no such items for the
nine months ended September 30, 1999 and 1998 and therefore comprehensive income
and net income are the same.

(8) NOTES RECEIVABLE FROM OFFICERS

Notes receivable from officers consists of four loans made to three
officers of the Company. The loan amounts are due at the earlier of the end of
five years from the date of the note or at the termination of the officers'
employment. Interest accrues at the annual rates between 4.42% to 6.00% and is
payable monthly over the term of the loans.

(9) STOCK REPURCHASE PLAN

In October 1998, the Board of Directors approved a stock repurchase plan
under which the Company is authorized to repurchase up to $4 million of Anika
Common Stock with the total number of shares purchased under the plan not to
exceed 9.9% of the total issued and outstanding shares. During 1999, the Company
repurchased a total of 402,600 shares at an average cost of $4.84 per share for
a total cash purchase of $1,948,989. From the inception of the program, the
Company has repurchased a total of 762,100 shares at an average cost per share
of $5.08 per share for a total cash purchase price of $3,873,000. Upon the
exercise of stock options, for which the Company received proceeds of $501,000,
a total of 557,893 of these treasury shares have been re-issued to employees.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company develops, manufactures and commercializes therapeutic
products and devices intended to promote the repair, protection and healing
of bone, cartilage and soft tissue. These products are based on hyaluronic
acid ("HA"), a naturally-occurring, biocompatible polymer found throughout
the body. Due to its unique biophysical and biochemical properties, HA plays
an important role in a number of physiological functions such as the
protection and lubrication of soft tissues and joints, the maintenance of the
structural integrity of tissues, and the transport of molecules to and within
cells. The Company's currently marketed products consist of
ORTHOVISC-Registered Trademark-, which is an HA product used in the treatment
of some forms of osteoarthritis ("OA") in humans and HYVISC-Registered
Trademark-, which is an HA product used in the treatment of equine
osteoarthritis. ORTHOVISC is currently approved for sale and marketed in
Canada, Europe, Turkey, Israel and Iceland. In the U.S. ORTHOVISC is
currently limited to investigational use only. The Company commenced a Phase
III clinical trial for ORTHOVISC in the U.S and Canada in late April 1999.
The Company manufactures AMVISC-Registered Trademark- and AMVISC-Registered
Trademark- Plus, which are HA products used as viscoelastic supplements in
ophthalmic surgery, for Bausch & Lomb Surgical, a subsidiary of Bausch &
Lomb. The Company is currently developing INCERT-Registered Trademark-, which
is an HA-based product designed for use in the prevention of post-surgical
adhesions. In collaboration with Orquest, Inc., Anika also has exclusive
rights to produce OSSIGEL-TM-; an injectable formulation of basic fibroblast
growth factor combined with HA designed to accelerate the healing of bone
fractures.

The Company receives a substantial portion of its revenue from the sale of
AMVISC and AMVISC Plus to Bausch & Lomb Surgical. Sales of AMVISC products to
Bausch & Lomb Surgical accounted for 66.0% and 58.5% of total product revenue
for the three months ended September 30, 1999 and 1998, respectively. Sales of
AMVISC products to Bausch & Lomb Surgical, accounted for 61.8% and 70.1% of
total product revenue for the nine months ended September 30, 1999 and 1998,
respectively.

9
<PAGE>

RESULTS OF OPERATIONS

PRODUCT REVENUE. Product revenue for the three months ended September 30, 1999
was $3,482,000, an increase of $302,000, or 9.5%, over the $3,180,000 recorded
in the comparable prior period. The increase for the three months ended
September 30, 1999 was attributable to an increase in sales of AMVISC product.
Sales of ORTHOVISC for the quarter declined by 10.3% due to a decrease in sales
to the Company's Turkish distributor, Biomeks Pharmaceuticals. Approximately
$500,000 of ORTHOVISC orders scheduled for delivery to Biomeks in the third
quarter of 1999 were delayed until the fourth quarter due to the catastrophic
earthquake in Turkey on August 17th 1999. Shipments to Biomeks have resumed to
pre-earthquake levels in the fourth quarter.

Product revenue for the nine months ended September 30, 1999 was $10,456,000,
an increase of $1,426,000, or 15.8%, over the $9,030,000 recorded in the
comparable prior period. The increase in sales for the nine months ended
September 30, 1999 is primarily due to an increase in ORTHOVISC sales to
Biomeks Pharmaceuticals and Zimmer. The Company has benefited during 1999
from the receipt of stocking orders from Zimmer for Zimmer's anticipated
future sales, including the European launch of ORTHOVISC. As a consequence,
Zimmer now has a substantial inventory of ORTHOVISC. Under the distribution
agreement with Zimmer, Zimmer or the Company has the right to terminate the
contract if Zimmer's sales of ORTHOVISC fail to meet specified minimums for
1998 and 1999. Zimmer was below the minimum for 1998 and the Company expects
Zimmer's sales to be below the minimum for 1999. Consequently, there can be
no assurance that Zimmer will place additional orders in the year 2000 or
that Zimmer will not terminate the contract. Even if Zimmer does not
terminate the contract, given its substantial inventory of ORTHOVISC, the
Company would not expect any additional orders until the fourth quarter of
2000, and then only to satisfy Zimmer's minimum purchase requirements. See
"RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING
RESULTS--DEPENDENCE UPON MARKETING PARTNERS."

GROSS PROFIT. The Company's gross profit as a percentage of product revenue was
47.8% for the three months ended September 30, 1999 versus 55.1% for the
comparable prior year period. The Company's gross profit as a percentage of
product revenue was 48.1% for the nine months ended September 30, 1999 versus
52.0% for the comparable prior year period. The decline in the gross margin for
the quarter was primarily attributable to unfavorable product mix and an
increase in overhead costs associated with expanding the Company's manufacturing
capacity. Sales of ORTHOVISC generate higher gross margins than sales of AMVISC
products and ORTHOVISC revenues declined by 10.3% in the third quarter. The
decline in gross profit percentage for the nine months ended September 30, 1999
was attributable to an increase in overhead costs associated with expanding the
Company's manufacturing capacity.

RESEARCH AND DEVELOPMENT. Research and development expenses for the three months
ended September 30, 1999 increased $700,000 to $1,193,000 from $493,000 recorded
in the comparable prior year period, as a result of the costs for the ORTHOVISC
Phase III clinical trial. Research and development expenses for the nine months
ended September 30, 1999 increased $1,442,000 to $2,826,000 from $1,384,000
recorded in the comparable prior year period, as a result of costs for the
ORTHOVISC Phase III clinical trial. Research and development expenses have
increased substantially during the third quarter and first nine months of 1999
due to the ORTHOVISC Phase III clinical trial, of which approximately $1,400,000
has been incurred to date during 1999. The Company expects to incur $1,300,000
in costs over the next three quarter periods to complete the trial.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses for the three months ended September 30, 1999, decreased by
$166,000, or 19.1%, to $703,000 from $869,000 in the comparable prior period.
The decrease in costs for the three months ended September 30, 1999 was
attributable to one-time recruiting and termination costs incurred in 1998.
Selling, general and administrative expenses for the nine months ended
September 30, 1999, increased $156,000, or 7.4%, to $2,265,000 from
$2,109,000 in the comparable prior period. The increased costs for the nine
months ended September 30, 1999 were primarily attributable to increases in
ORTHOVISC selling and marketing costs, additional staffing costs and the
amortization of deferred compensation expenses resulting from the issuance of
stock options.

INCOME TAXES. The Company's effective tax rate was 3% for the nine months ended
1999 and 2.5% for the comparable prior period. The Company's effective tax rate
was significantly lower than the statutory rate as a result of the utilization
of net operating loss and tax credit carryforwards.

10
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

At September 30, 1999, the Company had cash, cash equivalents, short and
long-term investments of $20.6 million and working capital of $20.0 million
versus cash, cash equivalents and short-term investments of $22.7 million and
working capital of $27.1 million at December 31, 1998. The decrease of $7.1
million in working capital was primarily due to purchases of $5.6 million of
long-term investments, purchases of property plant and equipment of $1.4
million, purchases of treasury stock of $1.9 million, net of cash provided from
operating activities and exercises of stock options.

The Company spent $1,423,000 in the first nine months of 1999 for capital
expenditures primarily related to expanding manufacturing capacity. The Company
expects to spend approximately $580,000 during the balance of 1999, primarily to
complete the expansion of its manufacturing facility. The Company expects that
after this expansion it will have adequate capacity to meet demand through at
least the end of the year 2003.

The Company believes that its cash and investments on hand will be
sufficient to meet its operating requirements for at least the next 24 months.
In the future, the Company may require additional financing to fund its
operations. 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.
Although the Company achieved profitability for the nine months ended September
30, 1999, and for the years ended 1998 and 1997 there can be no assurance that
the Company will continue to achieve profitability in future periods. For 1999
and 1998, the Company's unit sales of AMVISC have substantially exceeded the
minimum annual obligations under the AMVISC Supply Agreement. The Company can
provide no assurance that unit sales of AMVISC for the year 2000 will continue
to exceed minimum annual purchase obligations.

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 investment will be adequate to
fund operations is a forward looking statement within the meaning of the Private
Securities Litigation Reform Act of 1995 and is subject to risks and
uncertainties. Actual results may differ materially from those contemplated in
such forward-looking statements. In addition to those described above, factors
which may cause such a difference are set forth under the caption "Risk Factors
and Certain Factors Affecting Future Operating Results" as well as in this 10-Q
generally.

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YEAR 2000 READINESS DISCLOSURE

The statements in the following section include "Year 2000 readiness
disclosure" within the meaning of the Year 2000 Information and Readiness
Disclosure Act of 1998.

The Company has completed an assessment of its information systems to
verify Year 2000 readiness. The Company currently relies upon personal computers
running commercially available software applications and a mainframe computer
that runs financial applications only. The Company's manufacturing operations
are currently controlled by manual processes. The Company has recently put into
service a local area network with applications software that is Year 2000
compliant. The Company has performed an assessment of all of its applications
software running on personal computers and is in the process of upgrading all
software that is not compliant. The Company has purchased upgraded hardware and
software to run financial and manufacturing applications. The Company has
completed the installation of the upgraded hardware and has completed the
installation of the financial software applications as of the time of this
report, and the manufacturing software applications will be fully installed by
the end of 2000. In the event that the manufacturing software applications are
not completed, the Company will continue to rely on its manual processes.

The Company has conducted Year 2000 readiness surveys with its material
supply and service vendors. To date, those vendors and suppliers that have been
contacted have indicated that their hardware and software will be Year 2000
compliant in time frames that meet the Company's requirements. However, the
Company intends to continue to assess its exposure to Year 2000 noncompliance on
the part of any of its material vendors and suppliers.

The Company believes that the current personal computer software
applications and the upgrade of its financial applications will be made to allow
Year 2000 compliance in a timely manner. The Company does not anticipate that it
will incur material expenses to make the internal computer system Year 2000
compliant and believes that the Year 2000 issue will not pose significant
operational problems for the Company's systemS. There can be no assurance,
however, that the Company's internal systems or those of third parties will be
compliant in a timely manner. The failure of internal systems or third parties
to be Year 2000 compliant in a timely manner could have a material adverse
effect on the Company's business, financial conditions, and results of
operations

The preceding "Year 2000 Readiness Disclosure" contains various
"forward-looking statements" as that terms is defined under the Private
Securities Litigation Reform Act of l995 (the "Act"). These forward-looking
statements represent the Company's beliefs or expectations regarding future
events. When used in the "Year 2000 Readiness Disclosure", the words "believes,"
"expects," "estimates" and similar expressions are intended to identify forward
looking statements. Forward looking statements include, without limitation, the
Company's expectations as to when it will complete the installation and testing
of its internal systems; its estimated cost of achieving Year 2000 readiness;
and the Company's belief that its internal systems will be Year 2000 compliant
in a timely manner. All forward-looking statements involve a number of risks and
uncertainties that could cause the actual results to differ materially from the
projected results.

Factors that may cause these differences include, but are not limited to,
the availability of qualified personnel and other information technology
resources; the ability to identify and remediate all date sensitive lines of
computer code or to replace embedded computer chips in affected systems or
equipment; and the actions of third parties with respect to Year 2000 problems.

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RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

THIS FORM 10-Q CONTAINS "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE ACT. THE WORDS "BELIEVE," "EXPECT," "ANTICIPATE," "INTEND," "ESTIMATE," AND
OTHER EXPRESSIONS, WHICH ARE PREDICTIONS OF OR INDICATE FUTURE EVENTS AND TRENDS
AND WHICH DO NOT RELATE TO HISTORICAL MATTERS, IDENTIFY FORWARD-LOOKING
STATEMENTS. FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS, WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM ANTICIPATED FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. 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
FOLLOWING:

COMPREHENSIVE GOVERNMENT REGULATION; NO ASSURANCE OF FDA APPROVAL. The
Company's products, product development activities, manufacturing processes, and
current and future sales and marketing are subject to extensive and rigorous
regulation by the FDA and comparable agencies in foreign countries. In the
United States, the FDA regulates the marketing, advertising, promotion, and
distribution of medical devices, drugs, and biologics, as well as testing,
manufacturing, labeling, recordkeeping, and reporting activities for such
products.

Medical products 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 PMA
approval process can be expensive, uncertain and lengthy. A number of devices
for which pre-market approval has been sought have never been approved for
marketing. The review of an application often occurs over a protracted time
period and may take two years or more from the filing date to complete. The
Company submitted a PMA for ORTHOVISC in December 1997. In October 1998, the
Company was notified by the FDA that the Company's PMA application for ORTHOVISC
was not approvable and that additional clinical data would be required to
demonstrate the effectiveness of ORTHOVISC. The Company submitted an IDE to the
FDA in February 1999 and received approval in late March 1999 to commence a
second Phase III clinical study. The ORTHOVISC clinical trial commenced in late
April 1999. There can be no assurance that the clinical trial will demonstrate
the safety or effectiveness of ORTHOVISC or that the FDA will approve a PMA
application for ORTHOVISC, 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, has 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 or biologic, 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 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 commercial marketing and sale of OSSIGEL. OSSIGEL
will be regulated as a Class III medical

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device with the FDA's Center of Biologics Research and Review as the lead review
center. There can be no assurance that Orquest will be able to 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 FDA's Good Manufacturing Practices ("GMP")
regulations or, for medical devices, FDA's Quality System Regulations ("QSR").
Ongoing compliance with GMP, QSR 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.

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.

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HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY. From its inception up
until December 31, 1996, the Company had incurred annual operating losses. As of
September 30, 1999, the Company had an accumulated deficit of approximately
$925,000. 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. The Company incurred substantial and increasing operating losses
through December 31, 1996 and, although the Company had net income of $4,349,000
and $3,344,000 for the years ended December 31, 1998 and 1997, respectively, 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.

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.

UNCERTAINTY REGARDING SUCCESS OF CLINICAL TRIALS. Several of the Company's
products, including ORTHOVISC and INCERT, 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.

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 Bausch & Lomb Surgical
under a non-exclusive fixed price, five-year supply agreement which contains
stated minimum annual purchase obligations and terminates on December 31, 2001.
Since January 1, 1997, Bausch & Lomb Surgical 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 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 three-month
period ended September 30, 1999 and 1998, sales of AMVISC products to Bausch &
Lomb Surgical accounted for 66.0% and 58.5% of product revenues. For the nine
months ended September 30, 1999 and 1998, sales of AMVISC products to Bausch &
Lomb Surgical accounted for 61.8% and 71.0% of product revenues.

In November 1997, the Company entered into a long-term distribution
agreement with Zimmer, Inc., a subsidiary of Bristol-Myers Squibb Company, that
was subsequently amended in June 1998, (the "Zimmer Distribution Contract"). The
Zimmer Distribution Contract provides Zimmer with exclusive marketing and
distribution rights to ORTHOVISC in the United States, Canada, Latin America,
Asia and most of Europe. To date the Company has received up-front
non-refundable licensing payments totaling $4.0 million. In addition, under the
Zimmer Distribution Contract the Company has the potential to receive payments
aggregating up to an additional $19.5 million upon the achievement of certain
regulatory approvals 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 25% 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 or the Company

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has the right to terminate the agreement if ORTHOVISC is not approved by the FDA
by January 1, 2001 or if Zimmer sales of ORTHOVISC fail to meet the minimums
specified in the contract for two consecutive years beginning in 1998. Based on
Zimmer's sales of ORTHOVISC to date for 1999 and 1998 (which was below the
minimum) the Company expects Zimmer's sales will be less than the minimums for
this consecutive two-year period. There can be no assurance that any of these
events will not occur, or, if any such event does not occur, that Zimmer will
not elect to terminate the agreement. Any such termination is likely to have a
material adverse effect on the Company's ability to market ORTHOVISC, which is
likely to have a material adverse effect on the Company's future operating
results.

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. Zimmer's sales will
be less than minimum for the two consecutive year period.

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.

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 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 has been granted a Notice of Allowance from the U.S. Patent
Office for 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

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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 may 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.

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
Bausch & Lomb Surgical 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 Bausch & Lomb Surgical
will continue to use the Company to manufacture AMVISC and AMVISC 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 be materially and adversely affected.

RISKS ASSOCIATED WITH MANUFACTURING. The Company's results of operations are
dependent upon the continued operation of its manufacturing facility in Woburn,
Massachusetts. The operation of biomedical manufacturing plants involves many
risks, including the breakdown, failure or substandard performance of equipment,
natural and other disasters, and the need to comply with the requirements of
directives of government agencies, including the FDA. In addition, the Company
relies on a single supplier for syringes and a small number of suppliers for a
number of other materials required for the manufacturing and delivery of its HA
products. Furthermore, manufacturing processes and research and development
efforts of the Company involve animals and products derived from animals. The
utilization of animals in research and development and product commercialization
is subject to increasing focus by animal rights activists. The activities of
animal rights groups and other organizations that have protested animal based
research and development programs or boycotted the products resulting from such
programs could cause an interruption in the Company's manufacturing processes
and research and development efforts. The occurrence of material operational
problems, including but not limited to the events described above, could have a
material adverse effect on the Company's business, financial condition and
results of operations during the period of such operational difficulties.

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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. 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 and long-term investments of $20.6 million as of September 30, 1999. 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.

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 $5 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.

18
<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.

ENVIRONMENTAL REGULATION. The Company is subject to a variety of local, state
and federal government regulations relating to the storage, discharge, handling,
emission, generation, manufacture and disposal of toxic, or other hazardous
substances used in the manufacture of the Company's products. Any failure by the
Company to control the use, disposal, removal or storage of hazardous chemicals
or toxic substances could subject the Company to significant liabilities, which
could have a material adverse effect on the Company's business, financial
condition and results of operations.

RISKS RELATING TO INTERNATIONAL OPERATIONS. Approximately 34% of the Company's
product sales during the third quarter of 1999 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. 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 was not approvable and that additional clinical data would be required
to demonstrate the effectiveness of ORTHOVISC. To the extent the Company
experiences any other adverse developments in the process of seeking FDA
approval for ORTHOVISC, the price of the Common Stock will likely be subject to
further, and perhaps substantial, declines. 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.

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.

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, a

19
<PAGE>

Shareholder Rights Plan. 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.

20
<PAGE>

PART II: OTHER INFORMATION

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBIT NO. DESCRIPTION

27.1 Financial Data Schedule

(b) Reports on Form 8-K: None

21
<PAGE>

SIGNATURES

Pursuant to the requirements 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.

ANIKA THERAPEUTICS, INC.
DATE: NOVEMBER 15, 1999 By: /s/ J. Melville Engle
--------------------------------------------
J.Melville Engle
Chairman, Chief Executive Officer, President

DATE: NOVEMBER 15, 1999 By: /s/ Sean F. Moran
--------------------------------------------
Sean F. Moran
PRINCIPAL FINANCIAL & ACCOUNTING OFFICER

<PAGE>
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