Anika Stands out Over Competition
Phillip is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Editor's Note: This article has been amended to better reflect Anika's product line.
Anika Therapeutics (NASDAQ: ANIK) has quietly gone from being a complete unknown to recently being picked up by six hedge fund managers. This is because of the company's stellar financials and its advanced vision in the field of tissue healing and repair.
The company is one of those hidden gems for which you spend days searching. Whenever I look for a small-cap stock to add to my portfolio, I run every company through a filter I have on my online brokerage account. This essentially narrows down the firms priced between $5 and $20 with a market cap of less than $500 million. I'm left with about 1,000 stocks to choose from.
I then go through a quantitative and qualitative analysis that less than 1% of the stocks pass. Anika Therapeutics has made the cut and will likely pass the $1 billion capitalization mark in the next 5 to 10 years.
Big things come in small capitalizations
While the firm still only has a market capitalization of about $260 million, it's rapidly growing profits. What is very alluring about this business is the increase in operating expenses compared to its increase in revenue. While revenue was up $6 million in 2012 from the previous year, operating expenses only rose by $1 million.
That resulted in a 50% increase in net income and a profit margin of 17%. Furthermore, the company has increased revenue from $40 million in 2009, to $71 million last year -- that's a 77% growth in just four years.
How the competition compares
Another attractive component of Anika is its fundamental dominance over the competition. BioTime (NYSEMKT: BTX), for example, has operating expenses that far exceed those at Anika. This is an example of a stock that doesn't pass my 10% minimum standard in profit margin. Biotime's operating expenses increased by 580% over the last 4 years, while revenue increased 100% in that period -- though it should be noted that revenue hasn't increased since 2010.
Its tough to stay in business when your operating income is negative by $25 million, even when, you're a biotech and that's mostly due to research and development. The only reason to speculate on this stock would be for its exposure to the stem cell market. It's already in an area with a huge amount of uncertainty. And that uncertainty runs wild in a company that is spending way too much on research and development compared to what it receives in revenue.
Immunomedics (NASDAQ: IMMU) also doesn't come close to the financial soundness of Anika. While the firm isn't in the red like Biotime, it only earned a $1 million profit last year. That represents about 0.3% profit margin, which doesn't come close to my 10% minimum. But Immunomedics is a bit of a tough read.
In 2010, the company's revenue doubled to $60 million, before falling the next year to $15 million, and then more than doubling again to $33 million. And that wild swing may not be for everyone especially since the firm lost $15 million in 2011. Still, the company is solidifying its balance sheet and is entering the presentation arena, which can increase exposure, and particularly investment value. But right now, an investment in Immunomedics is based purely on speculation.
Breaking it all down
Anika Therapeutics has been able to earn an attractive profit margin because of the type of healing the company does. The hyaluronic acid the firm uses is relatively cheap to manufacture. And because the firm has a lock on the process, it doesn't need to dedicate more money than it can handle to research and development, which is the source of massive expenses for most of its peers. This sets Anika apart as a solid biotech with minimal uncertainty.
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Phillip Woolgar owns shares of Anika Therapeutics. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!