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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-K

(Mark One)


ý

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 000-21326


Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

Massachusetts
(State or Other Jurisdiction of
Incorporation or Organization)
  04-3145961
(I.R.S. Employer
Identification No.)

160 New Boston Street, Woburn, Massachusetts
(Address of Principal Executive Offices)

 

01801
(Zip Code)

(Registrant's Telephone Number, Including Area Code): (781) 932-6616

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes o     No ý

        The aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant as of June 30, 2003, the last day of the Registrant's most recently completed second fiscal quarter, was $19,074,000 based on the average bid and ask price per share of Common Stock of $3.22 as of such date as reported on the NASDAQ National Market. Shares of our Common Stock held by each executive officer, director and each person or entity known to the registrant to be an affiliate have been excluded in that such persons may be deemed to be affiliates; such exclusion shall not be deemed to constitute an admission that any such person is an "affiliate" of the registrant. At March 18, 2004, there were issued and outstanding 9,990,530 shares of Common Stock, par value $.01 per share.

DOCUMENTS INCORPORATED BY REFERENCE

        Certain information required in response to Items 10, 11, 12, 13 and 14 of Part III are hereby incorporated by reference from the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on June 10, 2004. Such Proxy Statement shall not be deemed to be "filed" as part of this Annual Report on Form 10-K except for the parts therein which have been specifically incorporated by reference herein.





FORM 10-K
ANIKA THERAPEUTICS, INC.
For Fiscal Year Ended December 31, 2003

        This Annual Report on Form 10-K, including the documents incorporated by reference into this Annual Report on Form 10-K, 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, including, without limitation, statements regarding:

        Furthermore, additional statements identified by words such as "seek", "designed," "believe," "expect," "anticipate," "intend," "will," "develop," "would," future," "can," "may," "could," and other expressions that are predictions of, or indicate future events and trends and which do not relate to historical matters identify forward-looking statements.

        You should not rely on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, some of which are beyond our control, including those factors described in the section titled "Risk Factors and Certain Factors Affecting Future Operating Results," in this Annual Report on Form 10-K. These risks, uncertainties and other factors may cause our actual results, performance or

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achievement to be materially different from the anticipated future results, performance or achievement, expressed or implied by the forward-looking statements. These forward-looking statements are based upon the current assumptions of our management and are only expectations of future results. You should carefully review all of these factors, and you should be aware that there may be other factors that could cause these differences, including those factors discussed in the sections titled "Business" and "Management's Discussions and Analysis of Financial Condition and Results of Operations" elsewhere in this Annual Report on Form 10-K. We undertake no obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, future events or other changes.


PART I

ITEM 1.    BUSINESS

Overview

        Anika Therapeutics 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. Our currently marketed products consist of ORTHOVISC®, which is an HA product used in the treatment of some forms of osteoarthritis in humans, and HYVISC®, which is an HA product used in the treatment of equine osteoarthritis. In December 2003 we entered into a licensing, distribution, supply and marketing agreement with Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of companies, for ORTHOVISC covering the U.S. and Mexico, and in February 2004 we received marketing approval from the U.S. Food and Drug Administration (FDA) for ORTHOVISC. ORTHOVISC has been approved for sale and marketed internationally since 1996. HYVISC is marketed in the U.S. through Boehringer Ingelheim Vetmedica, Inc. We manufacture AMVISC® and AMVISC® Plus, HA viscoelastic supplement products used in ophthalmic surgery, for Bausch & Lomb Incorporated. We also manufacture CoEase™ for Advanced Medical Optics, Inc., STAARVISC®II, for STAAR Surgical Company, and ShellGel™ for Cytosol Ophthalmics, Inc., each an injectable ophthalmic viscoelastic product.

        Our current strategy is to:

        In 2003, approximately 51% of our revenue was from the sale of ophthalmic viscoelastic products to Bausch & Lomb. Sales to new distributors of our ophthalmic products added in 2001 and 2002 amounted to approximately 18% of our total revenue in 2003. ORTHOVISC contributed approximately 20% of our total revenue in 2003 and HYVISC contributed approximately 11% of our total revenue in 2003. We continue to seek distributors for ORTHOVISC to expand our international markets.

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        The following sections provide more specific information on our products and related activities:

ORTHOVISC®

        ORTHOVISC is indicated for the treatment of pain in osteoarthritis of the knee in patients who have failed to respond adequately to conservative non-pharmacologic therapy and to simple analgesics, such as acetaminophen. It is a sterile, non-pyrogenic, clear, viscoelastic solution of hyaluronan contained in a single-use syringe. ORTHOVISC consists of high molecular weight, ultra-pure natural hyaluronan dissolved in physiological saline. A natural complex sugar of the glycosaminoglycan family, hyaluronan is a high molecular weight polysaccharide composed of repeating disaccharide units of sodium glucuronate and N-acetylglucosamine. ORTHOVISC is injected into the knee joint in a series of three intra-articular injections one week apart.

        Osteoarthritis is a debilitating disease causing pain, inflammation and restricted movement in joints. It occurs when the cartilage in a joint gradually deteriorates due to the effects of mechanical stress, which can be caused by a variety of factors including the normal aging process. In an osteoarthritic joint, particular regions of articulating surfaces are exposed to irregular forces, which result in the remodeling of tissue surfaces that disrupt the normal equilibrium or mechanical function. As osteoarthritis advances, the joint gradually loses its ability to regenerate cartilage tissue and the cartilage layer attached to the bone deteriorates to the point where eventually the bone becomes exposed. Advanced osteoarthritis often requires surgery and the possible implantation of artificial joints. The current treatment options for osteoarthritis before joint replacement surgery include viscosupplementation, analgesics, non-steroidal anti-inflammatory drugs and steroid injections.

        In February 2004, we received marketing approval from the FDA for ORTHOVISC based on integrated effectiveness data from two randomized, controlled, double-blind, multi-center, pivotal U.S. clinical studies encompassing a total of 458 patients suffering from osteoarthritis of the knee. Safety data from a third U.S. trial were also included in the FDA review. Our third pivotal clinical trial for ORTHOVISC commenced in February 2001. In May 2002 we completed patient enrollment of our third trial which included 373 patients in 26 centers in the U.S. and Canada. In accordance with trial protocol, we took six months to complete the follow-up on the final patients and in May 2003 we filed a Pre-Market Approval (PMA) application with the FDA.

        The objective of the studies was to assess the effectiveness of ORTHOVISC for the treatment of joint pain. Patients were divided into three and four ORTHOVISC injection regimen groups and two control groups: arthrocentesis and saline injection. Patients were evaluated for improvement in pain as measured by the Western Ontario and McMaster Universities Osteoarthritis Index (WOMAC) at four follow-up assessments over weeks 7 through 22 of the studies. The primary effectiveness analysis compared the proportion of ORTHOVISC patients achieving a greater improvement from baseline in WOMAC pain score versus controls. Patients in both groups experienced a statistically significant improvement as measured by change in WOMAC pain scores. An integrated safety analysis, which included 562 patients treated with ORTHOVISC, had an extremely low rate of adverse events. There were no serious adverse events associated with ORTHOVISC.

        In December 2003 we entered into a ten-year licensing and supply agreement (the OBI Agreement) with Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement, Ortho Biotech will perform sales, marketing and distribution functions. Additionally, Ortho Biotech licensed the right to further develop and commercialize ORTHOVISC as well as other new products for the treatment of pain associated with osteoarthritis based on our proprietary viscosupplementation technology. In support of the license, the OBI Agreement provides that Ortho Biotech will fund post-marketing clinical trials for new indications of ORTHOVISC. We received an initial payment of $2.0 million upon entering into the OBI Agreement and a milestone payment of $20 million in February 2004, as a result of obtaining FDA approval of

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ORTHOVISC. Under the OBI Agreement, we will be the exclusive supplier of ORTHOVISC to Ortho Biotech. The OBI Agreement provides for additional performance- and sales-based milestone payments to us contingent upon planned manufacturing upgrades, insurance reimbursement approval, and achieving specified sales targets, in addition to royalty and transfer fees. The OBI Agreement is subject to early termination in certain circumstances and is otherwise renewable by Ortho Biotech for consecutive five-year terms.

        We have a number of distribution relationships servicing international markets including Canada, the U.K., Italy, Germany and other European countries, Turkey, and parts of the Middle East. We are continuing to seek to establish long-term distribution relationships in other regions, but can make no assurances that we will be successful in doing so. See the section captioned "Management's Discussion and Analysis of Financial Condition and Results of Operations Overview" and "Risk Factors and Certain Factors Affecting Future Operating Results."

HYVISC®

        HYVISC is a high molecular weight injectable HA product for the treatment of joint dysfunction in horses due to non-infectious synovitis associated with equine osteoarthritis. HYVISC has viscoelastic properties that lubricate and protect the tissues in horse joints. HYVISC is distributed by Boehringer Ingelheim Vetmedica, Inc. in the United States.

OPHTHALMIC PRODUCTS

        The ophthalmic products we manufacture include the AMVISC and AMVISC Plus product line, CoEase, STAARVISC-II, and ShellGel. Our injectable ophthalmic viscoelastic products are high molecular weight HA products used as viscoelastic agents in ophthalmic surgical procedures such as cataract extraction and intraocular lens implantation. These products coat, lubricate and protect sensitive tissues such as the endothelium and maintain the space between them, thereby facilitating ophthalmic surgical procedures.

        Anika manufactures the AMVISC product line for Bausch & Lomb. We entered into a supply agreement (the B&L Agreement) with Bausch & Lomb Surgical, a unit of Bausch & Lomb, in July 2000. Bausch & Lomb Surgical was subsequently merged into Bausch & Lomb. Under the terms of the B&L Agreement, effective January 1, 2001, we became Bausch & Lomb's exclusive provider of AMVISC and AMVISC Plus in the U.S. and international markets. The B&L Agreement expires December 31, 2007 and supersedes the prior supply agreement with Bausch & Lomb that was set to expire December 31, 2001. The B&L Agreement is subject to early termination and/or reversion to a non-exclusive basis under certain circumstances. The B&L Agreement lifted certain contractual restrictions on our sales of certain ophthalmic products to other companies, subject to the payment of royalties to Bausch & Lomb for these sales. In exchange, we agreed to a reduction in unit selling prices that was retroactively effective to April 1, 2000 and the elimination of minimum unit purchase obligations by Bausch & Lomb. See also the section captioned "Risk Factors and Certain Factors Affecting Future Operating Results—Dependence on Marketing Partners" and "—Reliance on a Small Number of Customers."

Research and Development of Potential Products

        As discussed below in the section titled "Risk Factors and Certain Factors Affecting Future Operating Results," we have not obtained FDA approval for the sales and marketing in the U.S. of the potential products described below.

INCERT®

        INCERT is a family of chemically modified, cross-linked forms of HA designed to prevent surgical adhesions. Surgical adhesions occur when fibrous bands of tissues form between adjacent tissue layers

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during the wound healing process. Although surgeons attempt to minimize the formation of adhesions, they nevertheless occur quite frequently after surgery. Adhesions in the abdominal and pelvic cavity can cause particularly serious problems such as intestinal blockage following abdominal surgery, and infertility following pelvic surgery. Fibrosis following spinal surgery can complicate re-operation and may cause pain.

        INCERT-S is our product designed to reduce post-surgical fibrosis following spinal surgery. We are planning to initiate a pilot human clinical trial in Europe in the second quarter of 2004 involving patients undergoing spinal surgery. We cannot assure you that: (1) we will begin or successfully complete clinical trials of INCERT-S; (2) if completed, regulatory approval for sales in the U.S. or internationally will be obtained; or (3) if regulatory approvals are obtained, meaningful sales of INCERT-S will be achieved.

        Anika co-owns issued U.S. patents covering the use of INCERT for adhesion prevention. See the section captioned "Patent and Propriety Rights."

Cosmetic Tissue Augmentation

        Our products for cosmetic tissue augmentation are based on a family of chemically modified, cross-linked forms of HA designed for longer duration in the body. Cosmetic tissue augmentation is a therapy designed as a soft tissue filler for facial wrinkles, scar remediation and lip augmentation. This new class of tissue filler technology based on HA is intended to supplant collagen-based products currently on the market.

        We are evaluating various development options for these products and are assessing a worldwide commercialization strategy which includes seeking to establish a relationship with a corporate partner. We plan to initiate a pivotal clinical trial in the U.S. in the second quarter of 2004. We cannot assure you that: (1) we will establish a relationship with a corporate partner; (2) we will begin or successfully complete clinical trials of our products for cosmetic tissue augmentation; (3) if completed, regulatory approval for sales in the U.S. or internationally will be obtained; or (4) if regulatory approvals are obtained, meaningful sales of our products will be achieved.

Manufacturing of Hyaluronic Acid

        We have been manufacturing HA since 1983 in our facility located in Woburn, Massachusetts. This facility is approved by the FDA for the manufacture of medical devices and drugs. We have developed a proprietary manufacturing process for the extraction and purification of HA from avian combs, a source of high molecular weight HA. We have taken steps to minimize risks associated with the availability of raw materials by obtaining regulatory approval in 2003 to outsource certain key intermediates for some of our products. We believe that sufficient supplies of these materials are generally available, or maintained in inventory, to meet anticipated demand.

Patent and Proprietary Rights

        We have a policy of seeking patent protection for patentable aspects of our proprietary technology. Our issued patents expire between 2009 and 2022. We co-own certain U.S. patents and a patent application with claims relating to the chemical modification of HA and certain adhesion prevention uses and certain drug delivery uses of HA. We also solely own patents covering composition of matter and certain manufacturing processes. We also hold a license from Tufts University to use technologies claimed in a U.S. patent for the anti-metastasis applications of HA oligosaccharides. The license expires upon expiration of the underlying patent. We intend to seek patent protection for products and processes developed in the course of our activities when we believe such protection is in our best interest and when the cost of seeking such protection is not inordinate relative to the potential benefits. See also the section captioned "Risk Factors and Certain Factors Affecting Future Operating Results—We may be unable to adequately protect our intellectual property."

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        Other entities have filed patent applications for or have been issued patents concerning various aspects of HA-related products or processes. In addition, the products or processes we develop may infringe the patent rights of others in the future. Any such infringement may have a material adverse effect on our business, financial condition, and results of operations. See also the section captioned "Risk Factors and Certain Factors Affecting Future Operating Results—We may be unable to adequately protect our intellectual property."

        We also rely upon trade secrets and proprietary know-how for certain non-patented aspects of our technology. To protect such information, we require all employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. These agreements, however, may not provide adequate protection. See also the section captioned "Risk Factors and Certain Factors Affecting Future Operating Results—We may be unable to adequately protect our intellectual property."

        We have granted Bausch & Lomb a royalty-free, worldwide, exclusive license to our manufacturing inventions which relate to the AMVISC products, effective upon the earlier of (1) the termination date of the B&L Agreement or (2) the loss of exclusivity there under.

        We have granted Ortho Biotech an exclusive, non-transferable royalty bearing license to use and sell ORTHOVISC (and other products developed pursuant to the OBI Agreement) in the U.S. and Mexico, as well as a license to manufacture and have manufactured such products in the event that we are unable to supply Ortho Biotech with products in accordance with the terms of the OBI Agreement.

Government Regulation

United States Regulation

        Our research (including clinical research), development, manufacture, and marketing of products are subject to regulation by numerous governmental authorities in the U.S. and other countries. In the U.S., medical devices are subject to extensive and rigorous regulation by the FDA and by other federal, state and local authorities. The Federal Food, Drug and Cosmetic Act (FDC Act) governs the testing, safety, effectiveness, clearance, approval, manufacture, labeling, packaging, distribution, storage, record keeping, reporting, marketing, advertising, and promotion of our products. Noncompliance with applicable requirements can result in, among other things, fines, injunctions, civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance or approval of products, withdrawal of clearances and approvals, and criminal prosecution.

        Medical products regulated by the FDA are generally classified as drugs, biologics, and/or medical devices. AMVISC, ShellGel, CoEase and STAARVISC are approved as Class III medical devices in the U.S. for ophthalmic surgical procedures in intraocular use in humans. ORTHOVISC is approved as a Class III medical device in the U.S. for treatment of pain resulting from osteoarthritis of the knee in humans. HYVISC is approved as an animal drug for intra-articular injection in horse joints to treat degenerative joint disease associated with synovitis. In the past, most HA products for human use have been regulated as medical devices. We believe that the our products for CTA and INCERT will have to meet the regulatory requirements of Class III devices, including premarket approval (PMA).

        Unless a new device is exempted from premarket notification, its manufacturer must obtain marketing clearance from the FDA through a premarket notification (510(k)) or approval through a PMA before the device can be introduced into the market. Product development and approval within the FDA regulatory framework takes a number of years and involves the expenditure of substantial resources. This regulatory framework may change or additional regulation may arise at any stage of our product development process and may affect approval of, or delay an application related to, a product, or require additional expenditures by us. There is no assurance that the FDA review of marketing applications will result in product approval on a timely basis, or at all.

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        In the U.S., medical devices intended for human use are classified into three categories (Class I, II or III), on the basis of the controls deemed reasonably necessary by the FDA to assure their safety and effectiveness. Class I devices are subject to general controls, for example, labeling and adherence to the FDA's Good Manufacturing Practices/Quality System Regulation (GMP/QSR). Most Class I devices are exempt from premarket notification. Class II devices are subject to general and special controls (for example, performance standards, postmarket surveillance, and patient registries). Most Class II devices are subject to premarket notification and may be subject to clinical testing for purposes of premarket notification and clearance for marketing. Class III is the most stringent regulatory category for medical devices. Most Class III devices require PMA approval from the FDA.

        The PMA approval process is lengthy, expensive, and typically requires, among other things, valid scientific evidence which typically includes extensive data such as pre-clinical and clinical trial data to demonstrate a reasonable assurance of safety and effectiveness.

        Human clinical trials for significant risk devices must be conducted under an Investigational Device Exemption (IDE), which must be submitted to the FDA and either be approved or be allowed to become effective before the trials may commence. There can be no assurance that submission of an IDE will result in the ability to commence clinical trials. In addition, the IDE approval process could result in significant delay. Even if the FDA approves an IDE or allows an IDE for a clinical investigation to become effective, clinical trials may be suspended at any time for a number of reasons, including, among others, failure to comply with applicable requirements, if there is reason to believe that the risks to clinical subjects are not outweighed by the anticipated benefits to clinical subjects and the importance of the knowledge to be gained, informed consent is inadequate, the investigation is scientifically unsound, there is reason to believe that the device, as used, is ineffective. A trial may be terminated if an unanticipated adverse device effect presents an unreasonable risk to subjects. If clinical studies are suspended or terminated, we may be unable to continue the development of the investigational products affected.

        Upon completion of required clinical trials, for Class III medical devices, results are presented to the FDA in a PMA application. In addition to the results of clinical investigations, the PMA applicant must submit other information relevant to the safety and effectiveness of the device, including, among other things, the results of non-clinical tests; a full description of the device and its components; a full description of the methods, facilities and controls used for manufacturing; and proposed labeling. The FDA usually also conducts an on-site inspection to determine whether an applicant conforms with the FDA's current GMP/QSR. FDA review of the PMA may not result in timely or any PMA approval, and there may be significant conditions on approval, including limitations on labeling and advertising claims and the imposition of post-market testing, tracking, or surveillance requirements.

        Product changes after approval where such change affects safety and effectiveness as well as the use of a different facility for manufacturing, could necessitate additional FDA review and approval by the FDA. Post approval changes in labeling, packaging or promotional materials may also necessitate further FDA review and approval by the FDA.

        Legally marketed products are subject to continuing requirements by the FDA relating to manufacturing, quality control and quality assurance, maintenance of records and documentation, reporting of adverse events, and labeling and promotion. The FDC Act requires device manufacturers to comply with GMP/QSR. The FDA enforces these requirements through periodic inspections of device manufacturing facilities. In complying with standards set forth in the GMP/QSR regulations, manufacturers must continue to expend time, money and effort in the area of production and quality control to ensure full technical compliance. Other federal, state, and local agencies may inspect manufacturing establishments as well.

        A set of regulations known as the Medical Device Reporting regulations obligates manufacturers to inform FDA whenever information reasonably suggests that one of their devices may have caused or contributed to a death or serious injury, or when one of their devices malfunctions and if the malfunction

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were to recur, the device or a similar device would be likely to cause or contribute to a death or serious injury.

        In addition to regulations enforced by the FDA, we are subject to regulation under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource Conservation and Recovery Act and other existing and future federal, state and local laws and regulations as well as those of foreign governments. Federal, state and foreign regulations regarding the manufacture and sale of medical products are subject to change. We cannot predict what impact, if any, such changes might have on our business.

        The process of obtaining approvals from the FDA and foreign regulatory authorities can be costly, time consuming, and subject to unanticipated delays. Approvals of our products, processes or facilities may not be granted on a timely basis or at all, and we may not have available resources or be able to obtain the financing needed to develop certain of such products. Any failure or delay in obtaining such approvals could adversely affect our ability to market our products in the U.S. and in other countries.

Foreign Regulation

        In addition to regulations enforced by the FDA, we and our products are subject to certain foreign regulations. International regulatory bodies often establish regulations governing product standards, packing requirements, labeling requirements, import restrictions, tariff regulations, duties and tax requirements. ORTHOVISC is approved for sale and is marketed in Canada, Europe, Turkey, and Israel. In Europe, ORTHOVISC is sold under Conformité Européene (CE mark) authorization, a certification required under European Union (EU) medical device regulations. The CE mark allows ORTHOVISC to be marketed without further approvals in most of the EU nations as well as other countries that recognize EU device regulations. In October 1996, we received an EC Design Examination and an EC Quality System Certificate from a European Notified Body, which entitled us to affix the CE mark to ORTHOVISC as a viscoelastic supplement or a replacement for synovial fluid in human joints. We may not be able to achieve and/or maintain compliance required for CE marking or other foreign regulatory approvals for any or all of our products. The requirements relating to the conduct of clinical trials, product licensing, marketing, pricing, advertising, promotion and reimbursement also vary widely from country to country.

Competition

        We compete with many companies, including, among others, large pharmaceutical firms 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 us. We also compete with academic institutions, governmental agencies and other research organizations, which may be involved in research, development and commercialization of products. Many of our competitors also compete against us in securing relationships with collaborators for their research and development and commercialization programs.

        General competition in our industry is based primarily on product efficacy, safety, timing and scope of regulatory approvals, availability of supply, marketing and sales capability, reimbursement coverage, product pricing and patent protection. Some of the principal factors that may affect our ability to compete in our HA development and commercialization market include:

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        We are aware of several companies that are developing and/or marketing products utilizing HA for a variety of human applications. In some cases, competitors have already obtained product approvals, submitted applications for approval or have commenced human clinical studies, either in the U.S. or in certain foreign countries. There exists major competing products for the use of HA in ophthalmic surgery. In addition, certain HA products for the treatment of osteoarthritis in the knee have received FDA approval and have been marketed in the U.S. since 1997, as well as select markets in Canada, Europe and other countries. In December 2003, the FDA approved an HA product for the treatment of facial wrinkles which has been marketed internationally since 1996. There is a risk that we will be unable to compete effectively against our current or future competitors.

Research and Development

        Our research and development efforts primarily consist of the development of new medical applications for our HA-based technology and the management of clinical trials for certain product candidates and the preparation and processing of applications for regulatory approvals at all relevant stages of development. Our development of new products is presently accomplished primarily through in-house research and development personnel and resources as well as through collaboration with other companies and scientific researchers. As of December 31, 2003, we had six employees engaged primarily in research and development and engineering and two employees engaged in regulatory matters. For the years ended December 31, 2003, 2002 and 2001, research and development expenses were $2.6 million, $3.9 million, and $4.3 million, respectively. We anticipate that we will continue to commit significant resources to research and development, including clinical trials, in the future.

        Under the OBI Agreement, Ortho Biotech has the right (1) to file for regulatory approval to market ORTHOVISC in Mexico at its sole cost and expense and (2) to further develop ORTHOVISC by carrying out clinical trials. Under the OBI Agreement, Ortho Biotech has agreed to begin a clinical trial for a new indication for ORTHOVISC or a Phase IV clinical trial within twelve months of the FDA approval of ORTHOVISC.

        In the second quarter of 2004 we are planning to initiate a pilot human clinical trial in Europe for INCERT-S, our product designed to reduce post-surgical fibrosis following spinal surgery. We also are planning to initiate a pivotal clinical trial in the U.S. in the second quarter of 2004 for our product for CTA. We cannot assure you that: (1) we will begin or successfully complete clinical trials of our INCERT-S or CTA products; (2) if completed, regulatory approval for sales in the U.S. or internationally will be obtained; or (3) if regulatory approvals are obtained, meaningful sales of our products will be achieved

        There is a risk that our efforts will not be successful in (1) developing our existing product candidates, (2) expanding the therapeutic applications of our existing products, or (3) resulting in new applications for our HA technology. There is also a risk that we may choose not to pursue development of potential product candidates. We may not be able to obtain regulatory approval for any new applications we develop. Furthermore, even if all regulatory approvals are obtained, there can be no assurances that we will achieve meaningful sales of such products or applications.

Employees

        As of December 31, 2003, we had approximately 62 full-time employees. We consider our relations with our employees to be good. None of our employees are represented by labor unions.

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Environmental Laws

        We believe that we are in compliance with all federal, state and local environmental regulations with respect to our manufacturing facilities and that the cost of ongoing compliance with such regulations does not have a material effect on our operations. Our leased manufacturing facility is located within the Wells G&H Superfund site in Woburn, MA. We have not been named and are not a party to any such legal proceedings regarding the Wells G&H Superfund site.

Product Liability

        The testing, marketing and sale of human health care products entail an inherent risk of allegations of product liability, and we cannot assure you that substantial product liability claims will not be asserted against us. Although we have not received any material product liability claims to date and have coverage under our insurance policy of $5,000,000 per occurrence and $5,000,000 in the aggregate, we cannot assure you that if material claims arise in the future, our insurance will be adequate to cover all situations. Moreover, we cannot assure you 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 our business, financial condition, and results of operation.

Recent Developments

        On February 5, 2004, we announced that we had received marketing approval from the FDA for ORTHOVISC. We also announced that pursuant to the OBI Agreement we would receive a milestone payment of $20 million from Ortho Biotech related to the FDA approval.

Available Information

        Our Annual Reports on Form 10-K, including our consolidated financial statements, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information, including amendments and exhibits to such reports, filed or furnished pursuant to the Securities Exchange Act of 1934, are available free of charge in the "SEC Filings" section of our website located at http://www.anikatherapeutics.com, as soon as reasonably practicable after the reports are filed with or furnished to the Securities and Exchange Commission.


ITEM 2.    PROPERTIES

        Our corporate headquarters is located in Woburn, Massachusetts, where we lease approximately 10,000 square feet of administrative and research and development space. We extended our lease for this facility in 2003 for an initial one-year term ending in October 2004. We also lease approximately 37,000 square feet of space at a separate location in Woburn, Massachusetts, for our manufacturing facility and warehouse. This facility has received all FDA and state regulatory approvals to operate as a sterile device and drug manufacturer. We extended our lease for this facility in 2003 for an additional five-year term ending in February 2009. For the year ended December 31, 2003, we had aggregate lease costs of approximately $685,000.


ITEM 3.    LEGAL PROCEEDINGS

        Securities and Exchange Commission Investigation.    In May 2000, the Securities and Exchange Commission (SEC) issued a formal order of investigation in connection with certain revenue recognition matters. On January 13, 2003 we announced that we had entered into a settlement with the SEC concluding and resolving this investigation, which pertained to the company's historical accounting for and disclosures concerning sales of ORTHOVISC under a long-term supply and distribution agreement with Zimmer, Inc. To conclude this matter, we consented to the entry of an order to comply with sections 13(a),

11


13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. The settlement did not impose any monetary sanctions against us, and it is not expected to affect our results of operations or financial condition. We neither admitted nor denied the findings in the SEC's administrative cease and desist order resolving the matter.


ITEM 4.    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        No matter was submitted to a vote of the security holders during the fourth quarter of the fiscal year covered by this report.


PART II

ITEM 5.    MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK INFORMATION

        Our common stock has traded on the Nasdaq National Market since November 25, 1997, under the symbol "ANIK." The following table sets forth, for the periods indicated, the high and low bid prices of our common stock on the Nasdaq National Market. These prices represent prices between dealers and do not include retail mark-ups, markdowns, or commissions and may not necessarily represent actual transactions.

 
  Bid Range
Year Ended December 31, 2003

  High
  Low
First Quarter   $ 1.82   $ 0.97
Second Quarter     4.17     1.45
Third Quarter     6.75     2.64
Fourth Quarter     11.65     5.67
 
  Bid Range
Year Ended December 31, 2002

  High
  Low
First Quarter   $ 1.54   $ 0.99
Second Quarter     1.42     1.01
Third Quarter     1.30     0.83
Fourth Quarter     1.35     0.88

        At December 31, 2003, the closing price per share of our common stock was $9.74 as reported on the Nasdaq National Market and there were approximately 297 holders of record.

        We have never declared or paid any cash dividends on our common stock. We currently intend to retain earnings, if any, for use in our business and do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment of future dividends, if any, on our common stock will be at the discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, anticipated cash needs, and plans for expansion.

ITEM 6.    SELECTED FINANCIAL DATA

        The following selected consolidated financial data should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Annual Report. The Balance Sheet Data at December 31, 2003 and 2002 and the Statement of Operations Data for each of the three years ended December 31, 2003 have been derived from the audited Consolidated Financial Statements for such years, included elsewhere in this Annual Report. The Balance Sheet Data at December 31, 2001, 2000 and 1999, and the Statement of Operations Data for each of the two years in the period ended

12



December 31, 2000 have been derived from the audited Consolidated Financial Statements for such years, not included in this Annual Report.

        The Consolidated Financial Statements for fiscal years 1999 through 2001 were audited by Arthur Andersen LLP (Andersen) who has ceased operations. A copy of the report previously issued by Andersen on our financial statements as of December 31, 2001 and for each of the two years in the period ended December 31, 2001 is included elsewhere in this Annual Report. Such report has not been reissued by Andersen.


Statement of Operations Data
(In thousands, except per share data)

 
  Years ended December 31,
 
 
  2003
  2002
  2001
  2000
  1999
 
Product revenue   $ 15,330   $ 13,129   $ 11,299   $ 12,935   $ 13,426  
Licensing revenue     74     58     13     3,400     400  
   
 
 
 
 
 
  Total revenue     15,404     13,187     11,312     16,335     13,826  
Cost of product revenue     8,005     8,109     8,229     9,871     6,664  
Gross profit     7,399     5,078     3,083     6,464     7,162  
   
 
 
 
 
 
Total operating expenses     6,804     8,353     10,494     7,448     7,184  
Income (loss) before cumulative effect of change in accounting principle     827     (3,040 )   (6,758 )   174     1,248  
Cumulative effect of change in accounting principle                     (3,625 )
   
 
 
 
 
 
Net income (loss)   $ 827   $ (3,040 ) $ (6,758 ) $ 174   $ (2,377 )
   
 
 
 
 
 
Diluted income (loss) per common share:                                
  Income (loss) before cumulative effect of change in accounting principle   $ 0.08   $ (0.31 ) $ (0.68 ) $ 0.02   $ 0.12  
  Cumulative effect of change in accounting principle                     (0.35 )
   
 
 
 
 
 
Net income (loss)   $ 0.08   $ (0.31 ) $ (0.68 ) $ 0.02   $ (0.23 )
   
 
 
 
 
 
Diluted common shares outstanding     10,850     9,934     9,934     10,042     10,221  


Balance Sheet Data
(In thousands)

 
  December 31,
 
 
  2003
  2002
  2001
  2000
  1999
 
Cash and cash equivalents   $ 14,592   $ 11,002   $ 9,065   $ 8,266   $ 6,441  
Marketable securities         2,500     3,994     10,040     13,743  
Working capital     18,450     14,921     16,756     23,083     18,973  
Total assets     21,873     20,087     22,916     28,979     32,511  
Accumulated deficit     (13,569 )   (14,396 )   (11,357 )   (4,599 )   (4,773 )
Treasury stock     (27 )   (280 )   (280 )   (280 )   (960 )
Stockholders' equity     17,984     17,064     20,104     26,712     25,712  

13



ITEM 7.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following section of this Annual Report on Form 10-K titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" contains statements that are not statements of historical fact and are forward-looking statements within the meaning of the federal securities laws. These statements involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievement to differ materially from anticipated results, performance, or achievement, expressed or implied in such forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. We discuss many of these risks and uncertainties at the beginning of this Annual Report on Form 10-K and under the heading "Business" and "Risk Factors and Certain Factors Affecting Future Operating Results." The following discussion should also be read in conjunction with the Consolidated Financial Statements of Anika Therapeutics, Inc. and the Notes thereto appearing elsewhere in this report.

Management Overview

        Anika Therapeutics 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. Our marketed products include therapies used in eye surgery and for the treatment of joint diseases such as osteoarthritis. Products in development include chemically modified, cross-linked forms of HA to prevent surgical adhesions and for cosmetic tissue augmentation (CTA).

        Our Products    Since we primarily focus on the development and marketing of our products, we have historically entered into various agreements for the distribution of our marketed products. ORTHOVISC®, our product for the treatment of osteoarthritis of the knee in humans, has been marketed internationally since 1996. Sales of ORTHOVISC, which to-date have been only to international customers, contributed approximately 20% of our revenue in 2003. In December 2003, we entered into the OBI Agreement with Ortho Biotech for the marketing of ORTHOVISC in the U.S. and Mexico. In February 2004 we received marketing approval from the FDA for ORTHOVISC and in March 2004 launched ORTHOVISC in the U.S. We market HYVISC®, our product for the treatment of joint dysfunction in horses associated with equine osteoarthritis, through an exclusive agreement with Boehringer Ingelheim Vetmedica, Inc. Sales of HYVISC contributed approximately 11% of our revenue in 2003. Our ophthalmic business includes HA viscoelastic products used in ophthalmic surgery. Our ophthalmic products included CoEase®, STAARVISC™-II and Shellgel™ distributed by Advanced Medical Optics, Inc., STAAR Surgical Company, and Cytosol Ophthalmics, Inc., respectively. Those three products contributed approximately 18% of revenue in 2003. We also manufacture AMVISC® and AMVISC® Plus, also ophthalmic products, for Bausch & Lomb under an exclusive supply agreement. These sales to Bausch & Lomb contributed approximately 51% to our revenue in 2003.

14



 
   
  2003
  2002
  2001
 
Opthalmic products   U.S.   69 % 75 % 67 %

ORTHOVISC

 

Turkey

 

14

%

10

%

16

%
    Canada   2 % 2 % 4 %
    Europe   3 % 4 % 7 %
    Middle East   1 % 2 % 1 %
       
 
 
 
        20 % 18 % 28 %

HYVISC

 

U.S.

 

11

%

7

%

5

%

        Our current pre-clinical products include INCERT®, a product for the prevention of post surgical adhesions, and a product for cosmetic tissue augmentation (CTA). We plan to begin human clinical trials for both of these products in the second quarter of 2004.

        Orthovisc® U.S.    We received marketing approval from the FDA for ORTHOVISC in February 2004. ORTHOVISC is indicated for the treatment of pain in osteoarthritis of the knee in patients who have failed to respond adequately to conservative non-pharmacologic therapy and to simple analgesics, such as acetaminophen. The current treatment options for osteoarthritis before joint replacement surgery include viscosupplementation, analgesics, non-steroidal anti-inflammatory drugs and steroid injections. ORTHOVISC, our viscosupplement, is injected into the knee joint in a series of three intra-articular injections one week apart. In May 2003 we filed a Pre-Market Approval (PMA) application for ORTHOVISC with the FDA. In November 2003 we received an approvable letter from the FDA for ORTHOVISC and in February 2004 we received marketing approval from the FDA.

        Under the OBI Agreement, Ortho Biotech will perform sales, marketing and distribution functions for ORTHOVISC in the U.S. and Mexico. Additionally, Ortho Biotech licensed the right to further develop and commercialize ORTHOVISC as well as other new products for the treatment of pain associated with osteoarthritis based on our proprietary viscosupplementation technology. In support of the license, the OBI Agreement provides that Ortho Biotech is required to fund post-marketing clinical trials for new indications of ORTHOVISC. Under the OBI Agreement, we will be the exclusive supplier of ORTHOVISC to Ortho Biotech. The OBI Agreement provides for additional performance- and sales-based milestone payments to us contingent upon planned manufacturing upgrades, insurance reimbursement approval, and achieving specified sales targets in addition to royalty and transfer fees. The OBI Agreement is subject to early termination in certain circumstances and it otherwise is renewable by Ortho Biotech for consecutive five-year terms.

        We received an initial payment of $2.0 million in December 2003 upon entering into the agreement with Ortho Biotech and a milestone payment of $20 million in February 2004 as a result of obtaining FDA approval for ORTHOVISC. In accordance with our revenue recognition policy, these payments will be recognized ratably over the initial ten-year term of the OBI Agreement beginning with the first quarter of 2004. The OBI Agreement also provides for additional performance-based milestone payments to us contingent upon planned manufacturing upgrades and insurance reimbursement approval. We expect to recognize these milestone payments, if achieved, ratably over the remaining term of the agreement. Sales-based milestone payments to us provided for in the OBI Agreement are based on Ortho Biotech achieving specified annual sales levels.

        On an on-going and long-term basis, the OBI Agreement also provides for us to receive royalty and transfer fees. Our unit transfer price to Ortho Biotech is determined based on a fixed percentage of Ortho Biotech's net sales per unit, subject to a minimum. This transfer pricing is fixed each quarter based upon Ortho Biotech's net sales of ORTHOVISC for the quarter ended two quarters prior. As a result, we expect

15



to experience fluctuating unit pricing of our sales of ORTHOVISC to Ortho Biotech each quarter. Royalties are to be paid to us quarterly based upon a percentage of Ortho Biotech's yearly net sales.

        Our agreement with Ortho Biotech has provisions for maintaining certain inventory levels affecting raw materials and work-in-process. As a result, we expect to reflect an increase in these inventory levels in 2004 as compared with 2003. We may also benefit from improved gross profit margins partially due to increased manufacturing volumes as a result of initial stocking orders by Ortho Biotech required for the launch of ORTHOVISC in addition to the increased overall sales volume.

        Financial Overview    In 2003, we achieved net income of $827,000, or $.08 per share, and revenue of $15.4 million. We increased sales in each of our product groups primarily due to the full year impact of new distribution agreements or through expanded relationships with existing customers. Sales of AMVISC and AMVISC Plus to Bausch & Lomb were relatively flat in 2003 compared to 2002 and contributed 51% of total revenue in 2003 compared to 59% in 2002. We expect sales of AMVISC products to Bausch & Lomb to be relatively level in 2004 compared to 2003 and for their percentage contribution to our total revenue to decline.

        Cost of product revenue    Our cost of product revenue includes material, labor and manufacturing overhead costs, obsolescence charges, packaging and shipping costs. Our costs of product revenue may vary over time based on the mix of products sold. Over the past three years we have experienced a decrease in the cost of product revenue as a percentage of product revenue primarily due to increased manufacturing efficiencies and product volume combined with cost cutting efforts. We expect to see continued improvement in 2004 due to further manufacturing efficiencies and increased product volume.

        Research and development    Our research and development costs consists primarily of salaries and related expenses for personnel and fees paid to outside consultants and outside service providers. Our research and development costs decreased in 2003 primarily due to lower fees paid to outside service providers associated with our clinical trial for ORTHOVISC. We expect to incur costs associated with human clinical trials for our product candidates in 2004 and to increase personnel-related expenses as we expand our research and development efforts. As a result, we expect an increase in research and development costs in 2004 compared to 2003.

        Selling, general and administrative    Selling, general and administrative costs consists primarily of salaries and related expenses for personnel in executive, finance and accounting, human resources, information technology, and sales and marketing functions. Other costs include professional fees for legal and accounting, fees for consulting and outside services, and insurance costs.

        2004 Strategy    Our strategy for 2004 is to continue to focus on our strengths and to build on our accomplishments. Our focus, therefore, is to build on our existing products and advance our preclinical programs. The key strategy is to:

16


Summary of Critical Accounting Policies; Significant Judgments and Estimates

        Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We monitor our estimates on an on-going basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

        We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see Note 2 in the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K for the year ended December 31, 2003.

        Revenue Recognition and Allowance for Doubtful Accounts.    Product revenue is recognized upon confirmation of regulatory compliance and shipment to the customer as long as there is (1) persuasive evidence of an arrangement, (2) delivery has occurred and risk of loss has passed, (3) the sales price is fixed or determinable and (4) collection of the related receivable is probable. Amounts billed or collected prior to recognition of revenue are classified as deferred revenue. When determining whether risk of loss has transferred to customers on product sales or if the sales price is fixed or determinable we evaluate both the contractual terms and conditions of our distribution and supply agreements as well as our business practices. Under our agreement with Bausch & Lomb, the price for units sold in a calendar year is dependent on total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in interim quarters are subject to possible retroactive price adjustments when the actual annual unit volume for the year becomes known. In accordance with our revenue recognition policy, the amount of revenue subject to the contracted price adjustment is recorded as deferred revenue until the annual unit volume becomes known and the sales price becomes fixed. ORTHOVISC has been sold through several distribution arrangements as well as outsource order-processing arrangements (logistic agents). Sales of product through third party logistics agents in certain markets are recognized as revenue upon shipment by the logistics agent to the customer.

        We recognize non-refundable upfront payments received as part of supply, distribution, and marketing arrangements, ratably over the terms of the arrangements to which the payments apply. Milestone payments received as part of supply, distribution, and marketing arrangements are evaluated under Emerging Issues Task Force No. 00-21, "Revenue Arrangements with Multiple Deliverables," to determine whether the delivered item has value to the customer on a stand-alone basis and whether objective and reliable evidence of the fair value of the undelivered item exists. We recognize milestone payments as revenue upon achievement of the milestone only if (1) it represents a separate unit of accounting as defined in EITF 00-21, (2) the milestone payments are non-refundable, (3) substantive effort is involved in achieving the milestone, and (4) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. If any of these conditions are not met, we defer the milestone payments and recognize them as revenue over the remaining term of the contract as we complete its performance obligations. In February 2004, as part of the OBI agreement, we received a milestone payment of $20 million as a result of obtaining FDA approval for ORTHOVISC. We evaluated the terms of the OBI Agreement and the circumstances under which the milestone was paid and determined that the milestone payment did not meet all of the conditions to be recognized upon

17



achievement, therefore, we expect to defer the milestone payment of $20 million and recognize it ratably over the initial ten-year term of the OBI Agreement beginning with the first quarter of 2004.

        Reserve for Obsolete/Excess Inventory.    Inventories are stated at the lower of cost or market. We regularly review our inventories and record a provision for excess and obsolete inventory based on certain factors that may impact the realizable value of our inventory including, but not limited to, technological changes, market demand, inventory cycle time, regulatory requirements and significant changes in our cost structure. If ultimate usage varies significantly from expected usage or other factors arise that are significantly different than those anticipated by management, additional inventory write-down or increases in obsolescence reserves may be required.

        We generally produce finished goods based upon specific orders or in anticipation of specific orders. As a result, we generally do not establish reserves against finished goods. Under certain circumstances we may purchase raw materials or manufacture work-in-process or finished goods inventory in anticipation of receiving regulatory approval for the use of the raw materials in our manufacturing process or sale of the finished goods inventory. We evaluate the value of inventory on a quarterly basis and may, based on future changes in facts and circumstances, determine that a write-down of inventory is required in future periods.

Restatement of Results

        On January 28, 2003, we announced a restatement of our previously-reported results for the three- and nine-month periods ended September 30, 2002. The restatement involved revenue recognized for the sale in the third quarter of 2002 of certain units of HYVISC. A new "clean room" at our facility that at the time did not have a required regulatory approval for the manufacture of HYVISC from the FDA was used in the production of these units. Because the product was shipped in the absence of this regulatory approval, we determined, and our independent accountants concurred, that revenue from that sale should not have been recognized. As a result of the restatement, revenue for the three and nine months ended September 30, 2002 was reduced by $326,000 and the net loss for those periods increased by $170,000, or $0.02 per share. Total HYVISC inventory at September 30, 2002, was $173,000, which included $157,000 in HYVISC inventory from the restated transaction, and $17,000 in HYVISC inventory produced in the new clean room which was previously included in our pre-restatement inventory. Included in our inventory at December 31, 2002 was $293,000 in HYVISC inventory produced in the new clean room.

        In June 2003, we received regulatory approval to use the new clean room for the manufacture of HYVISC. In addition, we received regulatory approval for the re-release of the HYVISC inventory manufactured using the new clean room prior to receipt of the regulatory approval. The re-release of the HYVISC inventory was subject to certain conditions, including testing of the material and maintenance of certain records, which conditions were met. In June we began shipping the re-released HYVISC inventory and as of December 31, 2003 none of the re-released inventory remained in inventory.

        We had previously obtained all required regulatory approvals for the use of the new clean room in the manufacture of our products designed for human use: ORTHOVISC (at the time, not approved for sale in the U.S.), AMVISC, AMVISC Plus, STAARVISC-II, Shellgel, and CoEase.

18



Results of Operations

Year ended December 31, 2003 compared to year ended December 31, 2002

Statement of Operations Detail

 
  Year Ended December 31,
 
 
  2003
  2002
 
Product revenue   $ 15,330,000   $ 13,129,000  
Licensing revenue     74,000     58,000  
   
 
 
Total revenue     15,404,000     13,187,000  
Cost of product revenue     8,005,000     8,109,000  
   
 
 
Gross profit     7,399,000     5,078,000  
Operating Expenses:              
Research and development     2,595,000     3,928,000  
Selling, general and administrative     4,209,000     4,425,000  
   
 
 
Total operating expenses     6,804,000     8,353,000  
   
 
 
Income (loss) from operations     595,000     (3,275,000 )
Interest income, net     144,000     240,000  
   
 
 
Income (loss) before provision for income taxes     739,000     (3,035,000 )
Provision for Income taxes     (88,000 )   5,000  
   
 
 
Net income (loss)   $ 827,000   $ (3,040,000 )
   
 
 

        Product revenue.    Product revenue for the year ended December 31, 2003 was $15,330,000, an increase of $2,201,000, or 17%, compared with $13,129,000 for the year ended December 31, 2002.

 
  Year Ended December 31,
 
  2003
  2002
Ophthalmic Products   $ 10,512,000   $ 9,907,000
ORTHOVISC     3,073,000     2,307,000
HYVISC     1,745,000     915,000
   
 
    $ 15,330,000   $ 13,129,000
   
 

        Ophthalmic products sales increased $605,000, or 6%, to $10,512,000 compared with sales of $9,907,000 in 2002. The increase is primarily attributable to one new distributor added in the second quarter of 2002 which reflected a full year of sales in 2003. Sales of AMVISC to Bausch and Lomb for 2003 were relatively level with sales for 2002. Under the terms of the B&L Agreement, the price for units sold in a calendar year is dependent on the total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in the nine months ended September 30, 2003 and 2002 were subject to possible retroactive price adjustments when the actual annual unit volume became known. In accordance with the Company's revenue recognition policy, the amount of revenue reasonably subject to the price adjustment is recorded as deferred revenue until the annual unit volume becomes known and the sales price becomes fixed. During the fourth quarter of each year the actual annual unit volume, and therefore the final sales price, became known and determinable. In the fourth quarter of 2003 and 2002, product revenue included the recognition of $846,000 and $839,000, respectively, of revenue related to sales of AMVISC to Bausch & Lomb, which had been previously deferred during the first three quarters of the respective years. Our sales of ORTHOVISC increased $766,000, or 33%, to $3,073,000 in 2003 as compared with $2,307,000 in 2002. The increase was primarily due to increased sales to our Turkey distributor partially offset by a net decrease in sales among our European distributors. We expect sales of

19



ORTHOVISC to grow in 2004 compared to 2003 reflecting the FDA marketing approval of ORTHOVISC and the OBI Agreement partially offset by lower sales in Turkey. We expect to continue to experience volatility in our international sales of ORTHOVISC including ongoing competitive factors as well as economic and reimbursement issues, and potential regional conflict and political uncertainties. Sales of HYVISC increased $830,000, or 91%, to $1,745,000 for 2003 as compared with $915,000 for 2002. Sales of HYVISC are made to a single customer under an exclusive agreement which expires in May 2006. The increase in sales of HYVISC included distributor inventory replenishment for certain units shipped without regulatory approval in the third quarter of 2002.

        Licensing revenue.    Licensing revenue for the year ended December 31, 2003 increased $16,000, or 28%, to $74,000 from $58,000 in the prior year. Licensing revenue includes up-front and maintenance payments on certain supply agreements with purchasers of our ophthalmic products which are recognized ratably over the remaining term of the related agreement. The increase relates to a full year impact from a new distribution agreement effective in 2002. Licensing revenue in 2004 is expected to include partial amortization of each of the $2 million received in connection with the signing of the OBI Agreement in December 2003 and the $20 million milestone payment received in February 2004 as a result of the FDA approval. These amounts will be recognized in income ratably over the ten-year term of the agreement, or approximately $550,000 per quarter, beginning in the first quarter of 2004. In addition, the OBI Agreement provides for additional payments to us contingent on achieving certain performance milestones which, if met, the related payment is expected to be recognized in income ratably over the remaining term, beginning in the period in which the milestones are met.

        Gross profit.    Gross profit for the year ended December 31, 2003 was $7,399,000, or 48% of revenue, compared with $5,078,000, or 39% of revenue, for the year ended December 31, 2002.    The increase in gross profit is mainly due to a higher margin product mix combined with efficiency gains in our manufacturing process. We may experience further improvement in our gross profit margins with further unit volume growth as we continue to reduce cycle times by introducing outsourced intermediates in our manufacturing process.

        Research and development.    Research and development expenses for the year ended December 31, 2003 decreased by $1,333,000, or 34%, to $2,595,000 from $3,928,000 for the prior year. Research and development expenses include those costs associated with our in-house research and development efforts for the development of new medical applications for our HA-based technology, the management and cost of clinical trials, and the preparation and processing of applications for regulatory approvals at all relevant stages of development. The decrease in research and development expenses during 2003 is primarily attributable to a decrease in costs associated with the pivotal clinical trial for ORTHOVISC which was substantially complete in the first quarter of 2003. During 2003 expenditures associated with our pivotal clinical trial for ORTHOVISC decreased approximately $1,500,000 compared to 2002 expenditures. In late May 2003 we completed compilation of the clinical data and submitted a PMA application to the FDA as a requirement for seeking U.S. market approval.

        Our in-house research and development efforts relate to INCERT, a product designed to prevent surgical adhesions and products for the CTA market. Our ongoing focus will include second-generation versions of our existing ophthalmic and osteoarthritis products, as well as other therapeutics applications of HA. We intend to enter a pilot human clinical trial for INCERT in the second quarter of 2004 as well as a clinical trial for our product for CTA in the second quarter of 2004. As a result of these ongoing efforts, we expect research and development expenses will increase in 2004 compared to 2003.

        Selling, general and administrative.    Selling, general and administrative expenses for the year ended December 31, 2003 decreased by $216,000 or 5%, to $4,209,000 from $4,425,000 in the prior year. The decrease in selling, general and administrative expenses during 2003 is primarily due to a decrease in outside services fees of $121,000 combined with a decrease in professional service fees of $112,000 compared with 2002. These decreases reflect lower consulting and selling expenses in addition to lower

20



legal expenses partially offset by an increase in accounting fees. We expect selling, general and administrative expenses to increase in 2004 compared to 2003 as a result of increased personnel related costs as well as expanded marketing efforts for ORTHOVISC.

        Interest income, net.    Interest income, net, decreased $96,000, or 40%, to $144,000 for the year ended December 31, 2003, from $240,000 in 2002. The decrease is attributable to lower average cash and investment balances and lower interest rates during 2003. Interest income in 2004 is expected to increase as a result of higher average cash and investment balances primarily due to the $20 million milestone payment received in February 2004.

        Income taxes.    We recorded an income tax benefit of $88,000 for the year ended December 31, 2003 compared to income tax expense of $5,000 for the year ended December 31, 2002. In 2002 federal tax law changed to allow for a five year carryback period and a suspension of certain limitations on the use of alternative minimum tax losses. We filed an income tax carryback claim to carry our 2001 tax loss back to prior tax years. As a result of the carryback claim, in the first quarter of 2003, we received a refund of approximately $154,000 of taxes paid in prior years. The tax benefit was partially offset by a provision for income taxes in the amount of $64,000 recorded for 2003 federal alternative minimum tax and $2,000 for state taxes paid on investment income. For federal and state income tax purposes, net operating loss carryforwards offset the taxable income which included the $2.0 million received in December 2003. As of December 31, 2003, we have federal and state net operating loss carryforwards of approximately $9,686,000, and $9,462,000, respectively, which may be available to offset future taxable income. As provided in Section 382 of the Internal Revenue Code (IRC) the amount of net operating loss and credit carryforwards that we may utilize in any one year may be restricted in the event of certain changes in ownership. We expect to recognize the $20.0 million milestone payment received in February 2004 as taxable income in the first quarter of 2004. As a result, we expect that we will be able to utilize the loss carryforwards, in 2004, in their entirety to offset part of our taxable income. As a result of our expected taxable income in 2004, we will reevaluate the positive and negative evidence regarding the realizability of our deferred tax assets and consider whether a release of the valuation allowance is appropriate.

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Year ended December 31, 2002 compared to year ended December 31, 2001

Statement of Operations Detail

 
  Year Ended December 31,
 
 
  2002
  2001
 
Product revenue   $ 13,129,000   $ 11,299,000  
Licensing revenue     58,000     13,000  
   
 
 
Total revenue     13,187,000     11,312,000  
Cost of product revenue     8,109,000     8,229,000  
   
 
 
Gross profit     5,078,000     3,083,000  
Operating Expenses:              
Research and development     3,928,000     4,280,000  
Selling, general and administrative     4,425,000     5,263,000  
Litigation settlement costs         951,000  
   
 
 
Total operating expenses     8,353,000     10,494,000  
   
 
 
Loss from operations     (3,275,000 )   (7,411,000 )
Interest income, net     240,000     662,000  
   
 
 
Loss before provision for income taxes     (3,035,000 )   (6,749,000 )
Provision for Income taxes     5,000     9,000  
   
 
 
Net loss   $ (3,040,000 ) $ (6,758,000 )
   
 
 

        Product revenue.    Product revenue for the year ended December 31, 2002 was $13,129,000, an increase of $1,830,000, or 16%, compared with $11,299,000 recorded in the prior year.

 
  Year Ended December 31,
 
  2002
  2001
Ophthalmic Products   $ 9,907,000   $ 7,604,000
ORTHOVISC®     2,307,000     3,159,000
HYVISC®     915,000     536,000
   
 
    $ 13,129,000   $ 11,299,000
   
 

        The increase was primarily attributable to an increase in ophthalmic products sales and sales of HYVISC and was partially offset by lower ORTHOVISC sales. Ophthalmic product sales increased $2,303,000, or 30%, compared with 2001 as a result of higher unit sales volume from existing customers, including a full year from customers added during 2001, and a new customer added in the second quarter of 2002, partially offset by lower unit prices under the B&L Agreement. Under the terms of the B&L Agreement, the price for units sold in a calendar year is dependent on the total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in the nine months ended September 30, 2002 and 2001, were subject to possible retroactive price adjustments when the actual annual unit volume became known. In accordance with our revenue recognition policy, revenue is not recognized if the sale price is not fixed or determinable, and any amounts received in excess of revenue recognized is recorded as deferred revenue. In the fourth quarter of 2002 and 2001, product revenue included the recognition of $839,000 and $401,000, respectively, of revenue related to sales of AMVISC to Bausch & Lomb, which had been previously deferred during the first three quarters of the respective years. During the fourth quarter of each year the actual annual unit volume became fixed or determinable. Our sales of HYVISC increased by $379,000, or 71%, for 2002 as compared with 2001. Sales of HYVISC were made to a single customer under an exclusive agreement which we renewed in May 2002

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for a term of four years. Our sales of ORTHOVISC decreased $852,000, or 27%, in 2002 as compared with 2001 primarily due to erosion in our market share in Turkey and pricing pressures in Spain and Portugal as well as decreased sales in other parts of Europe. We expect to continue to experience volatility in our international sales of ORTHOVISC including ongoing competitive factors as well as economic issues, and potential regional conflict and political uncertainties.

        Licensing revenue.    Licensing revenue for the year ended December 31, 2002 increased $45,000, or 346%, to $58,000 for the year ended December 31, 2002 from $13,000 in the prior year. Licensing revenue includes up-front and maintenance payments on certain supply agreements with purchasers of our ophthalmic products. The increase relates to a full year impact from new distribution agreements effective in 2001, combined with a new distribution agreement effective in 2002. We expect licensing revenue in 2003 to be consistent with results for 2002.

        Gross profit.    Gross profit for the year ended December 31, 2002 was $5,078,000, or 39% of revenue, compared with $3,083,000, or 27% of revenue, for the year ended December 31, 2001.    Gross profit for 2002, as compared with same period last year, benefited from improved manufacturing cost performance as a result of cost cutting initiatives we implemented during the latter half of 2001, which continued into 2002, combined with increased sales volumes and our efforts over the past year to reduce work-in-process inventories. Work-in-process inventory was reduced from $1,971,000 at December 31, 2001 to $1,354,000 at December 31, 2002. We had suspended certain manufacturing efforts in 2000 through late in 2001 in an effort to reduce work-in-process inventory levels of HA as a result of learning of unfavorable results from a clinical trial of ORTHOVISC which we announced on May 31, 2000. As a result of the suspended manufacturing activities, work-in-process inventory was reduced from $3,169,000 at December 31, 2000 to $1,971,000 at December 31, 2001. During periods of reduced manufacturing activity, certain fixed costs of manufacturing were not fully absorbed into the cost of product manufactured and sold. Rather, such costs were charged to expense and amounted to approximately $2.0 million during the full year of 2001. Benefits resulting from manufacturing efficiencies were partially offset by lower prices for our sales of ophthalmic products under the B&L Agreement effective April 1, 2001 and lower prices of ORTHOVISC reflecting competitive market conditions.

        Research and development.    Research and development expenses for the year ended December 31, 2002 decreased by $352,000, or 8%, to $3,928,000 from $4,280,000 for the prior year. Research and development expenses include those costs associated with our in-house research and development efforts for the development of new medical applications for our HA-based technology, the management of clinical trials, and the preparation and processing of applications for regulatory approvals at all relevant stages of development. The decrease in research and development expenses during 2002 is primarily attributable to a decrease in personnel-related costs of $653,000 due to lower headcount partially offset by increased costs of $348,000 associated with the pivotal clinical trial for ORTHOVISC. We expect that research and development expenses for 2003 will decrease compared to 2002 primarily due to a decrease in costs associated with the clinical trials for ORTHOVISC which we expect will conclude in the first half of 2003, partially offset by an increase in research and development efforts associated with new medical applications for our HA-based technology.

        Selling, general and administrative.    Selling, general and administrative expenses for the year ended December 31, 2002 decreased by $838,000 or 16%, to $4,425,000 from $5,263,000 in the prior year. The decrease in selling, general and administrative expenses during 2002 is primarily due a decrease in professional service fees of $552,000 combined with the impact of separation costs of $545,000 related to management changes which were included in the results for 2001. These decreases were partially offset by increases in personnel-related costs of $178,000 and royalty expenses of $93,000. We expect sales and marketing expenses to increase in 2003 compared to 2002 related to expanded marketing efforts for ORTHOVISC. We expect general and administrative expenses to decrease in 2003 compared to 2002 as a

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result of lower professional service fees. As a result, we expect our aggregate selling, general and administrative expenses to remain approximately the same in 2003 compared to 2002.

        Litigation settlement costs.    Litigation settlement costs for the year ended December 31, 2002 was $0. Litigation settlement costs for the year ended December 31, 2001 included a charge of $850,000, which is the portion of the $1.25 million settlement amount we contributed and $101,000 in professional fees related to the putative class action suit. (See Note 18 of the financial statements included in Item 8 herein.)

        Interest income, net.    Interest income, net, decreased $422,000, or 64%, to $240,000 for the year ended December 31, 2002, from $662,000 in the prior year. The decrease is attributable to lower average cash and investment balances and lower interest rates during 2002. Interest income in 2003 is also expected to be adversely affected by lower market interest rates as well as lower average cash and investment balances.

        Income taxes.    Income tax expense was $5,000 for the year ended December 31, 2002 compared to $9,000 for the year ended December 31, 2001. The tax provisions primarily represent state income taxes paid on investment income. For federal income tax purposes, we have had net operating losses available to offset otherwise taxable income. As of December 31, 2002, we have federal and state net operating loss carryforwards of $12,943,000 and $10,669,000, respectively, which may be available to offset future taxable income, if any. As provided in Section 382 of the Internal Revenue Code (IRC) the amount of net operating loss and credit carryforwards that we may utilize in any one year may be restricted in the event of certain changes in ownership.

Liquidity and Capital Resources

        We require cash to fund our operating expenses and to make capital expenditures. We expect that our requirement for cash to fund these uses will increase as the scope of our operations expand. Historically we have funded our cash requirements from available cash and investments on hand. At December 31, 2003, cash and cash equivalents totaled $14.6 million compared to cash, cash equivalents and marketable securities of $13.5 million at December 31, 2002 and $13.1 million at December 31, 2001.

        We received an initial payment of $2.0 million in December 2003 upon entering into the OBI Agreement and a milestone payment of $20 million in February 2004 as a result of obtaining FDA approval for ORTHOVISC. The OBI Agreement also provides for additional performance-based milestone payments to us contingent upon planned manufacturing upgrades and insurance reimbursement approval. On an on-going and long-term basis, the OBI Agreement also provides for us to receive royalty and transfer fees.

        Cash provided by operating activities was $2,012,000 for the year ended December 31, 2003 compared with cash provided by operating activities of $332,000 and cash used in operating activities of $4,314,000 for the years ended December 31, 2002 and 2001, respectively. Cash provided by operating activities in 2003 resulted primarily from net income of $827,000 plus non-cash expenses of $1,000,000 and an increase in deferred revenue of $2,031,000, offset by an increase in inventories of $703,000 and a decreases in customer deposit of $327,000, accounts payable of $497,000 and accrued expenses of $406,000. The increase in deferred revenue includes the $2.0 million upfront payment received in December 2003 associated with the OBI Agreement. The increase in inventories reflects an increase in raw materials of $298,000 primarily to meet manufacturing requirements for 2004, including the launch of ORTHOVISC in the U.S., and an increase in finished goods of $314,000, primarily due to customer product demand requirements early in the first quarter of 2004. The customer deposit of $327,000 is related to the payment received from a customer for a sale in the third quarter of 2002 of certain units of HYVISC which was applied to new shipments of product during the first quarter of 2003. In connection with our restatement of results for the three- and nine-month periods ended September 30, 2002, we determined that revenue from a certain third quarter 2002 sale should not have been recognized and as of December 31, 2002 recorded

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the payment related to the sale as a customer deposit to be applied against subsequent shipments to the customer. See the section captioned "Restatement of Results on January 28, 2003" discussed above.

        Cash provided by investing activities was $1,485,000, $1,605,000, and $5,113,000 for 2003, 2002 and 2001, respectively. Net cash flows from investing activities for 2003 includes proceeds from the maturity of marketable securities of $2,500,000 partially offset by an increase in restricted cash of $818,000 and in increase in property and equipment of $256,000. In connection with the issuance of an irrevocable letter of credit to one of our vendors we had deposited $818,000 with our bank to collateralize the letter of credit which amount is recorded in restricted cash. These funds are restricted from our use during the term of the letter of credit which is set to expire in April 2004. We expect to make additional purchases in 2004 requiring the issuance of one or more irrevocable letters of credit which may require us to deposit cash as collateral with our bank. The increase in property and equipment of $256,000 is primarily due to expenditures for manufacturing equipment and computers and software. We expect to increase our capital expenditures in 2004 for upgrading and expanding our manufacturing and packaging equipment as well as our computer systems.

        Cash provided by financing activities of $93,000 reflects the proceeds from the exercise of stock options.

Off Balance Sheet Arrangements

        We do not use special purpose entities or other off-balance sheet financing techniques except for operating leases as disclosed in the contractual obligations table below that we believe have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity or capital resources.

Contractual Obligations and Other Commercial Commitments

        We have no material commitments for purchases of inventories or property and equipment. We expect to incur additional investments in our operations through increased inventory levels and balances in accounts receivable for 2004 compared to 2003 in addition to capital expenditures in 2004 for manufacturing equipment to meet anticipated higher volume requirements and computers and software and furniture and fixtures associated with normal operations. To the extent that funds generated from our operations, together with our existing capital resources are insufficient to meet future requirements, we will be required to obtain additional funds through equity or debt financings, strategic alliances with corporate partners and others, or through other sources. No assurance can be given that any additional financing will be made available to us or will be available on acceptable terms should such a need arise.

        Our future capital requirements and the adequacy of available funds will depend, on numerous factors, including:

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        We expect to recognize the $20.0 million milestone payment received in February 2004 from Ortho Biotech as taxable income in the first quarter of 2004. As a result, we expect that we will be able to utilize the loss carryforwards, in 2004, in their entirety to offset part of our taxable income. As a result of our expected taxable income in 2004, we will reevaluate the positive and negative evidence regarding the realizability of our deferred tax assets and consider whether a release of the valuation allowance is appropriate.

        We cannot assure you that we will record profits in future periods. However, we believe that based on our current strategy, our cash and investments on hand will be sufficient to meet our cash flows requirements through the end of 2005 and possibly beyond. See the section captioned "Risk Factors and Certain Other Factors Affecting Future Operating Results—History of Losses; Uncertainty of Future Profitability."

        The terms of any future equity financings may be dilutive to our stockholders and the terms of any debt financings may contain restrictive covenants, which could limit our ability to pursue certain courses of action. Our ability to obtain financing is dependent on the status of our future business prospects as well as conditions prevailing in the relevant capital markets. No assurance can be given that any additional financing may be made available to us or may be available on acceptable terms should such a need arise.

        The table below summarizes our contractual obligations of non-cancelable operating leases and other commitments at December 31, 2003:

 
  Amount
2004   $ 1,429,000
2005     602,000
2006     605,000
2007     617,000
2008     617,000
Thereafter     103,000
   
Total   $ 3,973,000
   

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RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS

Our business is subject to comprehensive and varied government regulation and, as a result, failure to obtain FDA or other governmental approvals for our products may materially adversely affect our business, results of operations and financial condition.

        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 our new products on a timely basis if at all, or that FDA review will not involve delays that will adversely affect our 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 our product development process which may adversely affect approval of or delay an application or require additional expenditures by us. In the event our future products are regulated as human drugs or biologics, the FDA's review process of such products typically would be substantially longer and more expensive than the review process to which they are currently subject as devices.

        Our HA products under development, including a product for the cosmetic tissue augmentation market, INCERT®, a product designed to prevent surgical adhesions, and second- generation versions of our existing ophthalmic and osteoarthritis products, have not obtained U.S. or foreign regulatory approval for commercial marketing and sale. We believe that these products will be regulated as Class III medical devices in the U.S. and will require a PMA prior to marketing. We cannot assure you that:

        We also cannot assure you that any delay in receiving FDA approvals will not adversely affect our competitive position. Furthermore, even if we do receive FDA approval:


        Once obtained, marketing approval can be withdrawn by the FDA for a number of reasons, including, among others, the failure to comply with regulatory standards, or the occurrence of unforeseen problems following initial approval. We may be required to make further filings with the FDA under certain circumstances. The FDA's regulations require a PMA supplement for certain changes if they affect the safety and effectiveness of an approved device, including, but not limited to, new indications for use, labeling changes, the use of a different facility to manufacture, process or package the device, and changes in performance or design specifications. Changes in manufacturing procedures or methods of manufacturing that may affect safety and effectiveness may be deemed approved after a 30-day notice unless the FDA requests a 135-day supplement. Our failure 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, may have a material adverse effect on our business, financial condition, and results of operations. The FDA could also limit or prevent the manufacture or distribution of our products and has the power to require the recall of such products.

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Significant delay or cost in obtaining, or failure to obtain FDA approval to market products, any FDA limitations on the use of our products, or any withdrawal or suspension of approval or rescission of approval by the FDA could have a material adverse effect on our business, financial condition, and results of operations.

        In addition, all FDA approved or cleared products manufactured by us must be manufactured in compliance with the FDA's Good Manufacturing Practices (GMP) regulations and, for medical devices, the FDA's Quality System Regulations (QSR). Ongoing compliance with QSR and other applicable regulatory requirements is enforced through periodic inspection by state and federal agencies, including the FDA. The FDA may inspect us and our facilities from time to time to determine whether we are in compliance with regulations relating to medical device and manufacturing companies, including regulations concerning manufacturing, testing, quality control and product labeling practices. We cannot assure you that we 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 we cannot assure you that the future interpretations made by the FDA or other regulatory bodies, with possible retroactive effect, will not adversely affect us. In addition, changes in the existing regulations or adoption of new governmental regulations or policies could prevent or delay regulatory approval of our 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, we are subject to other existing and 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. We cannot assure you that we will be able to achieve and/or maintain compliance required for Conformité Européenne marking (CE marking) or other foreign regulatory approvals for any or all of our products or that we will be able to produce our 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. We cannot predict what impact, if any, such changes might have on our business.

        The process of obtaining approvals from the FDA and other regulatory authorities can be costly, time consuming, and subject to unanticipated delays. We cannot assure you that approvals or clearances of our products will be granted or that we will have the necessary funds to develop certain of our products. Any failure to obtain, or delay in obtaining such approvals or clearances, could adversely affect our ability to market our products.

We have historically incurred operating losses and we cannot make any assurances about our future profitability.

        From our inception through December 31, 1996 and 1999 through 2002 we have incurred annual operating losses. For the year ended December 31, 2003, we recorded net income of $827,000 and as of December 31, 2003, we had an accumulated deficit of approximately $13.6 million. Our ability to maintain profitability is uncertain. The continued development of our products will require the commitment of substantial resources to conduct research and preclinical and clinical development programs, and the establishment of sales and marketing capabilities or distribution arrangements either by us or our partners. We cannot assure you that we will be able to develop these products or new medical applications of our existing products or technology, or that if developed, the necessary regulatory approvals will be obtained, or if obtained, that sales, marketing and distribution capabilities and arrangements will be established in order to permit us to maintain profitability.

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Substantial competition could materially affect our financial performance.

        We compete with many companies, including, among others, large pharmaceutical companies and specialized medical products companies. Many of these companies have substantially greater financial and other resources, larger research and development staffs, more extensive marketing and manufacturing organizations and more experience in the regulatory process than us. We also compete with academic institutions, governmental agencies and other research organizations that may be involved in research, development and commercialization of products. Because a number of companies are developing or have developed HA products for similar applications and have received FDA approval, the successful commercialization of a particular product will depend in part upon our ability to complete clinical studies and obtain FDA marketing and foreign regulatory approvals prior to our competitors, or, if regulatory approval is not obtained prior to competitors, to identify markets for our products that may be sufficient to permit meaningful sales of our products. For example, several of our competitors obtained FDA and foreign regulatory approvals before us for marketing HA products with applications similar to that of ORTHOVISC. Thus, the successful commercialization of ORTHOVISC will depend in part on our ability to effectively market ORTHOVISC against more established products with a longer sales history. There can be no assurance that we will be able to compete against current or future competitors or that competition will not have a material adverse effect on our business, financial condition and results of operations. In the past we have experienced volatility in our international sales of ORTHOVISC including ongoing competitive factors as well as economic issues, and potential regional conflict and political uncertainties. As a result, we are uncertain of the extent of our future sales in these markets.

We are uncertain regarding the success of our clinical trials.

        Several of our products will require clinical trials to determine their safety and efficacy for U.S. and international marketing approval by regulatory bodies, including the FDA. We plan to begin a pilot human clinical trial in Europe for INCERT-S and a pivotal clinical trial for our product for CTA in the second quarter of 2004. There can be no assurance that we will successfully complete clinical trials of INCERT-S or our CTA product or that we will be able to successfully complete the FDA approval process for either INCERT-S or our CTA product. In addition, there can be no assurance that we will not encounter additional problems that will cause us to delay, suspend or terminate the clinical trials. In addition, we cannot make any assurance that such clinical trials, if completed, will ultimately demonstrate these products to be safe and efficacious.

We are dependent upon marketing and distribution partners and the failure to maintain strategic alliances on acceptable terms will have a material adverse effect on our business, financial condition and results of operations.

        Our success will be dependent, in part, upon the efforts of our marketing partners and the terms and conditions of our relationships with such marketing partners.

        We cannot assure you that such marketing partners will not seek to renegotiate their current agreements on terms less favorable to us. Under the terms of the B&L Agreement, effective January 1, 2001, we became Bausch & Lomb's exclusive provider of AMVISC and AMVISC Plus ophthalmic viscoelastic products, in the U.S. and international markets. The B&L Agreement expires December 31, 2007, and superceded an existing supply contract with Bausch & Lomb that was set to expire December 31, 2001. The B&L Agreement is subject to early termination and/or reversion to a non-exclusive basis under certain circumstances. The B&L Agreement lifts contractual restrictions on our ability to sell certain ophthalmic products to other companies, subject to our payment of royalties. In exchange, we agreed to a reduction in unit selling prices retroactively effective to April 1, 2000 and the elimination of minimum unit purchase obligations by Bausch & Lomb.

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        We have not achieved incremental sales of our ophthalmic products to Bausch & Lomb and/or other companies sufficient to offset the effects of the price reduction and royalties to Bausch & Lomb and there can be no assurances that we will be able to do so in the future. The reduction in unit prices resulted in a decrease in our revenue and gross profit from the sale of AMVISC to Bausch & Lomb. We expect revenue from Bausch & Lomb in 2004 to be relatively consistent with 2003. In addition, under certain circumstances, Bausch & Lomb has the right to terminate the agreement, and/or the agreement may revert to a non-exclusive basis; in each case, we cannot make any assurances that such circumstances will not occur. For the years ended December 31, 2003, 2002 and 2001, sales of AMVISC products to Bausch & Lomb accounted for 51%, 59% and 65% of product revenues, respectively. Although we intend to continue to seek new ophthalmic product customers, there can be no assurances that we will be successful in obtaining new customers or to achieve meaningful sales to such new customers.

        We have entered into various agreements for the distribution of ORTHOVISC internationally which are subject to termination under certain circumstances. We are continuing to seek to establish long-term distribution relationships in regions not covered by existing agreements, but can make no assurances that we will be successful in doing so. There can be no assurance that we will be able to identify or engage appropriate distribution or collaboration partners or effectively transition to any such partners. There can be no assurance that we will obtain European or other reimbursement approvals or, if such approvals are obtained, they will be obtained on a timely basis or at a satisfactory level of reimbursement.

        In December 2003 we entered into a ten-year licensing and supply agreement with Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement Ortho Biotech will perform sales, marketing and distribution functions. Additionally, Ortho Biotech licensed the right to further develop and commercialize ORTHOVISC as well as new products for the treatment of pain associated with osteoarthritis. We cannot assure you that Ortho Biotech will be able to market ORTHOVISC effectively or to establish sales levels to the extent that us and Ortho Biotech believe are possible in the timeframes expected, or at all, nor can we assure you that we will be able to achieve the performance-and sales- based milestones provided in the OBI Agreement. Furthermore, we cannot predict whether the license granted to Ortho Biotech in the OBI Agreement to further develop and commercialize ORTHOVISC as well as new products for the treatment of pain associated with osteoarthritis based on our proprietary viscosupplementation technology will result in any new products or indications for use.

        We will need to obtain the assistance of additional marketing partners to bring new and existing products to market and to replace certain marketing partners. The failure to establish strategic partnerships for the marketing and distribution of our products on acceptable terms will have a material adverse effect on our business, financial condition, and results of operations.

Our future success depends upon market acceptance of our existing and future products.

        Our success will depend in part upon the acceptance of our existing and future products by the medical community, hospitals and physicians and other health care providers, and third-party payers. Such acceptance may depend upon the extent to which the medical community perceives our products as safer, more effective or cost-competitive than other similar products. Ultimately, for our new products to gain general market acceptance, it will also be necessary for us to develop marketing partners for the distribution of our products. There can be no assurance that our new products will achieve significant market acceptance on a timely basis, or at all. Failure of some or all of our future products to achieve significant market acceptance could have a material adverse effect on our business, financial condition, and results of operations.

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We may be unable to adequately protect our intellectual property rights.

        Our success will depend, in part, on our ability to obtain and enforce patents, protect trade secrets, obtain licenses to technology owned by third parties when necessary, and conduct our business without infringing on the proprietary rights of others. The patent positions of pharmaceutical, medical products and biotechnology firms, including ours, 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, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office (PTO) to determine priority of invention, 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 us, such interference proceedings could result in substantial cost to us, and diversion of management's attention away from our operations. 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 our 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 us to lose exclusivity covered by the disputed rights. If a third party is found to have rights covering products or processes used by us, we 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 our 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 us using the resulting alternative technology.

        We have a policy of seeking patent protection for patentable aspects of our proprietary technology. We intend to seek patent protection with respect to products and processes developed in the course of our activities when we believe such protection is in our 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 us 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 our patents.

        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 us will not infringe on the patent rights of others in the future. Any such infringement may have a material adverse effect on our business, financial condition, and results of operations. In particular, we received notice from the PTO in 1995 that a third party was attempting to provoke a patent interference with respect to one of our co-owned patents covering the use of INCERT for post-surgical adhesion prevention. It is unclear whether an interference will be declared. If an interference is declared it is not possible at this time to determine the merits of the interference or the effect, if any, the interference will have on our marketing of INCERT for this use. No assurance can be given that we would be successful in any such interference proceeding. If the third-party interference were to be decided adversely to us, involved claims of our patent would be cancelled, our marketing of the INCERT product may be materially and adversely affected and the third party may enforce patent rights against us which could prohibit the sale and use of INCERT products, which could have a material adverse effect on our future operating results.

        We also rely upon trade secrets and proprietary know-how for certain non-patented aspects of our technology. To protect such information, we require all employees, consultants and licensees to enter into confidentiality agreements limiting the disclosure and use of such information. There can be no assurance

31



that these agreements provide meaningful protection or that they will not be breached, that we would have adequate remedies for any such breach, or that our trade secrets, proprietary know-how, and our technological advances will not otherwise become known to others. In addition, there can be no assurance that, despite precautions taken by us, others have not and will not obtain access to our proprietary technology. Further, there can be no assurance that third parties will not independently develop substantially equivalent or better technology.

        Pursuant to the B&L Agreement, we have agreed to transfer to Bausch & Lomb, upon expiration of the term of the B&L agreement on December 31, 2007, or in connection with earlier termination in certain circumstances, our manufacturing process, know-how and technical information, which relate to only AMVISC products. Upon expiration of the B&L Agreement, there can be no assurance that Bausch & Lomb will continue to use us to manufacture AMVISC and AMVISC Plus. If Bausch & Lomb discontinues the use of us as a manufacturer after such time, our business, financial condition, and results of operations would likely be materially and adversely affected.

Our manufacturing processes involve inherent risks and disruption could materially adversely affect our business, financial condition and results of operations.

        Our results of operations are dependent upon the continued operation of our manufacturing facility in Woburn, Massachusetts. The operation of biomedical manufacturing plants involves many risks, including the risks of breakdown, failure or substandard performance of equipment, the occurrence of natural and other disasters, and the need to comply with the requirements of directives of government agencies, including the FDA. In addition, we rely 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 our HA products. Although we believe that alternative sources for many of these and other components and raw materials that we use in our manufacturing processes are available, any supply interruption could harm our ability to manufacture our products until a new source of supply is identified and qualified. We may not be able to find a sufficient alternative supplier in a reasonable time period, or on commercially reasonable terms, if at all, and our ability to produce and supply our products could be impaired.

        Furthermore, our manufacturing processes and research and development efforts involve animals and products derived from animals. We procure our animal-derived raw materials from qualified vendors, control for contamination and have processes that effectively inactivate infectious agents; however, we cannot assure you that we can completely eliminate the risk of transmission of infectious agents and in the future regulatory authorities could impose restrictions on the use of animal-derived raw materials that could impact our business.

        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 our 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 our business, financial condition, and results of operations during the period of such operational difficulties.

Our financial performance depends on the continued growth and demand for our products and we may not be able to successfully manage the expansion of our operations

        Our 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. We expect sales of ORTHOVISC to grow in 2004 as a result of FDA approval and the entering into of the OBI Agreement with Ortho Biotech. There

32



can be no assurance that even if substantial growth in product sales and the demand for our products is achieved, we will be able to:

        Our failure to successfully manage future growth could have a material adverse effect on our business, financial condition, and results of operations.

If we engage in any acquisition as a part our growth strategy, we will incur a variety of costs, and may never realize the anticipated benefits of the acquisition.

        Our business strategy may include the future acquisition of businesses, technologies, services or products that we believe are a strategic fit with our business.     If we undertake any acquisition, the process of integrating an acquired business, technology, service or product may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of our business. Moreover, we may fail to realize the anticipated benefits of any acquisition as rapidly as expected or at all. Future acquisitions could reduce stockholders' ownership, cause us to incur debt, expose us to future liabilities and result in amortization expenses related to intangible assets with definite lives. In addition, acquisitions involve other risks, including diversion of management resources otherwise available for ongoing development of our business and risks associated with entering new markets with which we have limited experience or where experienced distribution alliances are not available. Our future profitability may depend in part upon our ability to develop further our resources to adapt to these new products or business areas and to identify and enter into satisfactory distribution networks. We may not be able to identify suitable acquisition candidates in the future or consummate future acquisitions.

Sales of our products are largely dependent upon third party reimbursement and our performance may be harmed by 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 our products, generally rely on third party payers, including Medicare, Medicaid and other health insurance and managed care plans, to reimburse all or part of the cost of the health care product. We depend upon the distributors for our products to secure reimbursement and reimbursement approvals. Reimbursement by third party payers may depend on a number of factors, including the payer's determination that the use of our products is clinically useful and cost-effective, medically necessary and not experimental or investigational. Since reimbursement approval is required from each payer individually, seeking such approvals can be a time consuming and costly process which, in the future, could require us or our marketing partners to provide supporting scientific, clinical and cost-effectiveness data for the use of our products to each payer separately. Significant uncertainty exists as to the reimbursement status of newly approved health care products, and third party payers 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 us. Outside the U.S., the

33



success of our 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 payers for our products and services could have a material adverse effect on our business, financial condition, and results of operations.

We may seek financing in the future, which could be difficult to obtain and which could dilute your ownership interest or the value of your shares.

        We had cash and cash equivalents of approximately $14.6 million as of December 31, 2003 and received an additional $20.0 million milestone payment in February 2004 in connection with the OBI Agreement. Our future capital requirements and the adequacy of available funds will depend, however, on numerous factors, including:


        To the extent that funds generated from our operations, together with our existing capital resources are insufficient to meet future requirements, we 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 you and the terms of any debt financings may contain restrictive covenants, which limit our ability to pursue certain courses of action. Our ability to obtain financing is dependent on the status of our 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 us or will be available on acceptable terms should such a need arise.

We could become subject to product liability claims, which, if successful, could materially adversely affect our business, financial condition and results of operations.

        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 us. Although we have not received any material product liability claims to date and have an insurance policy of $5,000,000 per occurrence and $5,000,000 in the aggregate to cover such claims should they arise, there can be no assurance that material claims will not arise in the future or that our 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

34



commercially reasonable terms. Any product liability claim, if successful, could have a material adverse effect on our business, financial condition and results of operations.

Our business is dependent upon hiring and retaining qualified management and scientific personnel.

        We are highly dependent on the members of our management and scientific staff, the loss of one or more of whom could have a material adverse effect on us. We believe that our future success will depend in large part upon our ability to attract and retain highly skilled, scientific, managerial and manufacturing personnel. We face significant competition for such personnel from other companies, research and academic institutions, government entities and other organizations. There can be no assurance that we will be successful in hiring or retaining the personnel we require. The failure to hire and retain such personnel could have a material adverse effect on our business, financial condition and results of operations.

We are subject to environmental regulation and any failure to comply with applicable laws could subject us to significant liabilities and harm our business.

        We are 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 our products. Any failure by us to control the use, disposal, removal or storage of hazardous chemicals or toxic substances could subject us to significant liabilities, which could have a material adverse effect on our business, financial condition, and results of operations.

Our future operating results may be harmed by economic, political and other risks relating to international sales.

        During the years ended December 31, 2003 and 2002, approximately, 20% and 18%, respectively, of our product sales were to international distributors. Our representatives, agents and distributors who sell products in international markets are subject to the laws and regulations of the foreign jurisdictions in which they operate and in which our products are sold. A number of risks are inherent in international sales and operations. For example, the volume of international sales may be limited by the imposition of government controls, export license requirements, political and/or economic instability, trade restrictions, changes in tariffs, difficulties in managing international operations, import restrictions and fluctuations in foreign currency exchange rates. Such changes in the volume of sales may have a material adverse effect on our business, financial condition, and results of operations.

Our stock price has been and may remain highly volatile, and we cannot assure you that market making in our common stock will continue.

        The market price of shares of our common stock may be highly volatile. Factors such as announcements of new commercial products or technological innovations by us or our 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 us and general market conditions may have a significant effect on the market price of our common stock. The trading price of our common stock could be subject to wide fluctuations in response to quarter-to-quarter variations in our operating results, material announcements by us or our 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 our 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. Our operating results in future quarters may be below the expectations of equity research analysts and investors. In such event, the price of our common stock would likely decline, perhaps substantially.

35



        No person is under any obligation to make a market in the common stock or to publish research reports on us, and any person making a market in the common stock or publishing research reports on us may discontinue market making or publishing such reports at any time without notice. There can be no assurance that an active public market in our common stock will be sustained.

Our charter documents contain anti-takeover provisions that may prevent or delay an acquisition of us.

        Certain provisions of our 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 us and preventing certain changes in control. These provisions include a classified Board of Directors, advance notice to the Board of Directors of stockholder proposals, limitations on the ability of stockholders to remove directors and to call stockholder meetings, the provision that vacancies on the Board of Directors be filled by a majority of the remaining directors. In addition, the Board of Directors adopted a Shareholders Rights Plan in April 1998. We are also 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 us at a price considered attractive by many stockholders, since such provisions could have the effect of preventing or delaying a potential acquirer from acquiring control of us and our Board of Directors.

Our revenues are derived from a small number of customers, the loss of which could materially adversely affect our business, financial condition and results of operations.

        We have historically derived the majority of our revenues from a small number of customers, most of whom resell our products to end users and most of whom are significantly larger companies than us. For the year ended December 31, 2003, Bausch & Lomb accounted for 51% of product revenues and 65% of our accounts receivable balance and three other customers, combined, accounted for 39% of product revenues and 20% of our accounts receivable balance. While it is expected that our ability to market ORTHOVISC in the U.S. as a result of the receipt of FDA approval in February 2004, and our entering into the OBI Agreement, will reduce our dependence on Bausch & Lomb for revenues we will still be dependent on a small number of large customers for the majority of our revenues. Our failure to generate as much revenue as expected from these customers or the failure of these customers to purchase our products would seriously harm our business. In addition, if present and future customers terminate their purchasing arrangements with us, significantly reduce or delay their orders, or seek to renegotiate their agreements on terms less favorable to us, our business, financial condition, and results of operations will be adversely affected. If we accept terms less favorable than the terms of the current agreement, such renegotiations may have a material adverse effect on our business, financial condition, and/or results of operations. Furthermore, we may be subject to the perceived or actual leverage the customers may have given their relative size and importance to us in any future negotiations. Any termination, change, reduction or delay in orders could seriously harm our business, financial condition, and results of operations. Accordingly, unless and until we diversify and expand our customer base, our future success will significantly depend upon the timing and size of future purchases by our largest customers and the financial and operational success of these customers. The loss of any one of our major customers or the delay of significant orders from such customers, even if only temporary, could reduce or delay our recognition of revenues, harm our reputation in the industry, and reduce our ability to accurately predict cash flow, and, as a consequence, could seriously harm our business, financial condition, and results of operations.

        We, through our international distributors, distribute ORTHOVISC in Canada, Turkey and certain countries in Europe and the Middle East. Due to unfavorable results of the U.S. ORTHOVISC pivotal clinical trial announced on May 31, 2000, marketing efforts in these countries have been negatively

36



affected. There can be no assurance that as a result receiving FDA marketing approval for ORTHOVISC in the U.S. marketing efforts will improve or that international sales levels for ORTHOVISC will improve, maintain historical levels or that sales will occur at all in these countries.

Additional costs for complying with recent and proposed future changes in Securities and Exchange Commission, Nasdaq Stock Market and accounting rules could adversely affect our profits.

        Recent and proposed future changes in the Securities and Exchange Commission and Nasdaq rules, as well as changes in accounting rules, will cause us to incur additional costs including professional fees, as well as additional personnel costs, in order to keep informed of the changes and operate in a compliant manner. In addition, we expect to incur additional general and administrative expense as we implement Section 404 of the Sarbanes-Oxley Act of 2002, which requires management to report on, and our independent auditors to attest to, our internal controls. These additional costs may be significant enough to cause our financial position and results of operation to be negatively impacted. In addition, compliance with these new rules could also result in continued diversion of management's time and attention, which could prove to be disruptive to our normal business operations. Failure to comply with any of the new laws and regulations could adversely impact market perception of our company, which could make it difficult to access the capital markets or otherwise finance our operations in the future.

With new rules, including the Sarbanes-Oxley Act of 2002, we may have difficulty in retaining or attracting directors for the board and various sub-committees thereof or officers.

        The recent and proposed changes in SEC and Nasdaq rules, including those resulting from the Sarbanes-Oxley Act of 2002, may result in our being unable to attract and retain the necessary board directors and members of sub-committees thereof or officers, to effectively provide for our management. The perceived increased personal risk associated with these recent changes, may deter qualified individuals from wanting to participate in these roles.

We may have difficulty obtaining adequate directors and officers insurance and the cost for coverage may significantly increase.

        We may have difficulty in obtaining adequate directors' and officers' insurance to protect us and our directors and officers from claims made against them. Additionally, even if adequate coverage is available, the costs for such coverage may be significantly greater than current costs. This additional cost may have a significant effect on our profits and as a consequence our results of operations may be adversely affected.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        As of December 31, 2003, we did not utilize any derivative financial instruments, market risk sensitive instruments or other financial and commodity instruments for which fair value disclosure would be required under SFAS No. 107. All of our investments consist of money market funds, commercial paper and municipal bonds that are carried on our books at amortized cost, which approximates fair market value.

Primary Market Risk Exposures

        Our primary market risk exposures are in the areas of interest rate risk and foreign currency exchange rate risk. Our investment portfolio of cash equivalent and short-term investments is subject to interest rate fluctuations, but we believe this risk is immaterial due to the short-term nature of these investments. Our exposure to currency exchange rate fluctuations is specific to the extent that certain sales were effected through logistics agents in foreign currencies. The impact of currency exchange rate movements on sales through logistics agents was immaterial for the year ended December 31, 2003. Currently, we do not engage in foreign currency hedging activities.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors   39

Consolidated Balance Sheets as of December 31, 2003 and 2002

 

41

Consolidated Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001

 

42

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2003, 2002 and 2001

 

43

Consolidated Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001

 

44

Notes to Consolidated Financial Statements

 

45

38



Report of Independent Auditors

The Board of Directors and Shareholders of
Anika Therapeutics, Inc.:

        In our opinion, the accompanying consolidated balance sheet and the related consolidated statement of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Anika Therapeutics, Inc. and subsidiaries at December 31, 2003 and 2002, and the results of operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

        The consolidated financial statements of Anika Therapeutics, Inc. and subsidiaries as of December 31, 2001, and for the year then ended, were audited by other independent accountants who have ceased operations. Those independent accountants expressed an unqualified opinion on those financial statements in their report dated February 12, 2002.

    /s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
February 20, 2004

39



Report of Independent Accountants

THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.

The Board of Directors and Shareholders of
Anika Therapeutics, Inc.:

        We have audited the accompanying consolidated balance sheets of Anika Therapeutics, Inc. (the "Company") and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

        We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

        In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Anika Therapeutics, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States.

    /s/ ARTHUR ANDERSEN LLP

Boston, Massachusetts
February 12, 2002

40



Anika Therapeutics, Inc. and Subsidiaries
Consolidated Balance Sheets

 
  December 31,
 
 
  2003
  2002
 
ASSETS  
Current assets:              
  Cash and cash equivalents   $ 14,592,000   $ 11,002,000  
  Restricted cash     818,000      
  Marketable securities         2,500,000  
  Accounts receivable, net of reserves of $29,000 and $35,000 at December 31, 2003 and 2002, respectively     1,421,000     1,198,000  
  Inventories     3,627,000     2,924,000  
  Prepaid expenses and other receivables     81,000     320,000  
   
 
 
    Total current assets     20,539,000     17,944,000  
Property and equipment, at cost     9,875,000     9,619,000  
Less: accumulated depreciation     (8,684,000 )   (7,678,000 )
   
 
 
      1,191,000     1,941,000  
Long-term deposits     143,000     143,000  
Notes receivable from officers         59,000  
   
 
 
Total Assets   $ 21,873,000   $ 20,087,000  
   
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY  
Current liabilities:              
  Accounts payable   $ 349,000   $ 846,000  
  Income taxes payable     65,000      
  Accrued expenses     1,297,000     1,703,000  
  Customer deposit         327,000  
  Deferred revenue     378,000     147,000  
   
 
 
    Total current liabilities     2,089,000     3,023,000  
Long-term deferred revenue     1,800,000      
Commitments and contingencies (Note 11)              
Stockholders' equity              
  Preferred stock, $.01 par value; 1,250,000 shares authorized, no shares issued and outstanding at December 31, 2003 and 2002          
  Common stock, $.01 par value: 30,000,000 shares authorized, 9,991,943 shares issued at December 31, 2003 and 2002, 9,986,405 and 9,934,280 shares outstanding at December 31, 2003 and 2002, respectively     100,000     100,000  
  Additional paid-in-capital     31,480,000     31,640,000  
  Treasury stock, at cost, 5,538 and 57,663 shares at December 31, 2003 and 2002, respectively     (27,000 )   (280,000 )
  Accumulated deficit     (13,569,000 )   (14,396,000 )
   
 
 
    Total stockholders' equity     17,984,000     17,064,000  
   
 
 
Total Liabilities and Stockholders' Equity   $ 21,873,000   $ 20,087,000  
   
 
 

The accompanying notes are an integral part of these consolidated financial statements.

41



Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended December 31,

 
  2003
  2002
  2001
 
Product revenue   $ 15,330,000   $ 13,129,000   $ 11,299,000  
Licensing revenue     74,000     58,000     13,000  
   
 
 
 
  Total revenue     15,404,000     13,187,000     11,312,000  
Cost of product revenue     8,005,000     8,109,000     8,229,000  
   
 
 
 
  Gross profit     7,399,000     5,078,000     3,083,000  
Operating expenses:                    
  Research & development     2,595,000     3,928,000     4,280,000  
  Selling, general & administrative     4,209,000     4,425,000     5,263,000  
  Litigation settlement costs (Note 19)             951,000  
   
 
 
 
Total operating expenses     6,804,000     8,353,000     10,494,000  
   
 
 
 
Income (loss) from operations     595,000     (3,275,000 )   (7,411,000 )
  Interest income     144,000     240,000     662,000  
   
 
 
 
Income (loss) before provision for income taxes     739,000     (3,035,000 )   (6,749,000 )
Provision for income taxes     (88,000 )   5,000     9,000  
   
 
 
 
  Net income (loss)   $ 827,000   $ (3,040,000 ) $ (6,758,000 )
   
 
 
 
Basic net income (loss) per share:                    
  Net income (loss)   $ 0.08   $ (0.31 ) $ (0.68 )
   
 
 
 
  Basic weighted average common shares outstanding     9,953,733     9,934,280     9,934,280  
   
 
 
 
Diluted net income (loss) per share:                    
  Net income (loss)   $ 0.08   $ (0.31 ) $ (0.68 )
   
 
 
 
  Diluted weighted average common shares outstanding     10,849,610     9,934,280     9,934,280  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

42


Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity

 
  Common Stock
   
   
  Treasury Stock
   
   
 
 
  Number of
Shares

  $.01 Par
Value

  Additional
Paid-in
Capital

  Deferred
Compensation

  Number of
Shares

  Cost
  Accumulated
Deficit

  Total
Stockholders'
Equity

 
Balance, December 31, 2000   9,991,943   $ 100,000   $ 31,735,000   $ (244,000 ) 57,663   $ (280,000 ) $ (4,598,000 ) $ 26,713,000  
Amortization of deferred compensation               149,000               149,000  
Reversal of deferred compensation           (95,000 )   95,000                
Net loss                             (6,758,000 )   (6,758,000 )
   
 
 
 
 
 
 
 
 
Balance, December 31, 2001   9,991,943     100,000     31,640,000       57,663     (280,000 )   (11,356,000 )   20,104,000  
Net loss                         (3,040,000 )   (3,040,000 )
   
 
 
 
 
 
 
 
 
Balance, December 31, 2002   9,991,943     100,000     31,640,000       57,663     (280,000 )   (14,396,000 )   17,064,000  
Exercise of common stock options           (160,000 )     (52,125 )   253,000         93,000  
Net income                         827,000     827,000  
   
 
 
 
 
 
 
 
 
Balance, December 31, 2003   9,991,943   $ 100,000   $ 31,480,000   $   5,538   $ (27,000 ) $ (13,569,000 ) $ 17,984,000  
   
 
 
 
 
 
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

43



Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Cash Flows

 
  For the Years Ended December 31,
 
 
  2003
  2002
  2001
 
Cash flows from operating activities:                    
Net income (loss)   $ 827,000   $ (3,040,000 ) $ (6,758,000 )
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:                    
  Depreciation and amortization     1,006,000     1,095,000     1,085,000  
  Amortization of deferred compensation             149,000  
  Forgiveness of note receivable from officer             129,000  
  Provision for doubtful accounts     (6,000 )   10,000      
  Changes in operating assets and liabilities:                    
    Accounts receivable     (217,000 )   1,033,000     (548,000 )
    Inventories     (703,000 )   802,000     1,011,000  
    Prepaid expenses     239,000     221,000     72,000  
    Accounts payable     (497,000 )   (109,000 )   84,000  
    Customer deposit     (327,000 )   327,000      
    Accrued expenses     (406,000 )   (139,000 )   447,000  
    Deferred revenue     2,031,000     132,000     15,000  
    Income taxes payable     65,000          
   
 
 
 
Net cash provided by (used in) operating activities     2,012,000     332,000     (4,314,000 )
   
 
 
 
Cash flows from investing activities:                    
  Proceeds from the redemption of marketable securities     2,500,000     8,995,000     19,423,000  
  Purchase of marketable securities         (7,500,000 )   (13,378,000 )
  Restricted cash     (818,000 )        
  Purchase of property and equipment     (256,000 )   (89,000 )   (908,000 )
  Proceeds from repayment of notes receivable from officers     59,000     194,000      
  Long-term deposits         5,000     (24,000 )
   
 
 
 
Net cash provided by investing activities     1,485,000     1,605,000     5,113,000  
   
 
 
 
Cash flows from financing activities:                    
  Proceeds from exercise of stock options     93,000          
   
 
 
 
Net cash provided by financing activities     93,000          
   
 
 
 
Increase in cash and cash equivalents     3,590,000     1,937,000     799,000  
Cash and cash equivalents at beginning of year     11,002,000     9,065,000     8,266,000  
   
 
 
 
Cash and cash equivalents at end of year   $ 14,592,000   $ 11,002,000   $ 9,065,000  
   
 
 
 
Supplemental disclosure of cash flow information:                    
  Cash paid for income taxes   $ 3,000   $ 1,000   $ 5,000  
   
 
 
 

The accompanying notes are an integral part of these consolidated financial statements.

44



ANIKA THERAPEUTICS, INC.

NOTES TO CONSOLIDATED 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 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®, which is an HA product used in the treatment of some forms of osteoarthritis in humans, and HYVISC®, which is an HA product used in the treatment of equine osteoarthritis. In December 2003 the Company entered into a licensing, distribution, supply and marketing agreement with Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of companies, for ORTHOVISC covering the U.S. and Mexico, and in February 2004 the Company received marketing approval from the U.S. Food and Drug Administration (FDA) for ORTHOVISC. ORTHOVISC has been approved for sale and marketed internationally since 1996. HYVISC is marketed in the U.S. through Boehringer Ingelheim Vetmedica, Inc. The Company manufactures AMVISC® and AMVISC® Plus, HA viscoelastic supplement products used in ophthalmic surgery, for Bausch & Lomb Incorporated. The Company also manufactures CoEase™ for Advanced Medical Optics, Inc., STAARVISC®II, for STAAR Surgical Company, and ShellGel™ for Cytosol Ophthalmics, Inc., each an injectable ophthalmic viscoelastic product.

        The Company is subject to risks common to companies in the biotechnology and medical device industries including, but not limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, commercialization of existing and new products, and compliance with FDA government regulations and approval requirements as well as the ability to grow the Company's business.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

        The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Principles of Consolidation

        The accompanying consolidated financial statements include the accounts of Anika Therapeutics, Inc. and its wholly owned subsidiaries, Anika Securities, Inc. (a Massachusetts Securities Corporation) and Anika Therapeutics UK, Ltd. All intercompany balances and transactions have been eliminated in consolidation. There was no activity by the UK subsidiary during the years ended December 31, 2003, 2002 and 2001. As of March 2003 the UK subsidiary was dissolved.

Cash and Cash Equivalents

        Cash and cash equivalents consists of cash and highly liquid investments with original maturities of 90 days or less.

45



Marketable Securities

        The Company follows the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Marketable securities consists of municipal bonds and commercial paper with initial maturities of twelve months or less from date of issuance. The Company has the positive intent and ability to hold these marketable securities to maturity and accordingly classifies these marketable securities as held-to-maturity. Marketable securities are carried at amortized cost.

Financial Instruments

        SFAS No. 107, "Disclosures About Fair Value of Financial Instruments", requires disclosure about fair value of financial instruments. Financial instruments consist of cash equivalents, marketable securities, accounts receivable, notes receivable from officers and accounts payable. The estimated fair value of the Company's financial instruments approximate their carrying values.

Revenue Recognition

        Product revenue is recognized upon confirmation of regulatory compliance and shipment to the customer as long as there is (1) persuasive evidence of an arrangement, (2) delivery has occurred and risk of loss has passed, (3) the sales price is fixed or determinable and (4) collection of the related receivable is probable. Amounts billed or collected prior to recognition of revenue are classified as deferred revenue. When determining whether risk of loss has transferred to customers on product sales or if the sales price is fixed or determinable the Company evaluates both the contractual terms and conditions of its distribution and supply agreements as well as its business practices. Under our agreement with Bausch and Lomb, the price for units sold in a calendar year is dependent on total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in interim quarters are subject to possible retroactive price adjustments when the actual annual unit volume for the year becomes known. In accordance with the Company's revenue recognition policy, the amount of revenue subject to the contracted price adjustment is recorded as deferred revenue until the annual unit volume becomes known and the sales price becomes fixed. ORTHOVISC has been sold through several distribution arrangements as well as outsource order-processing arrangements ("logistic agents"). Sales of product through third party logistics agents in certain markets are recognized as revenue upon shipment by the logistics agent to the customer.

        The Company recognizes non-refundable upfront payments received as part of supply, distribution, and marketing arrangements, ratably over the terms of the arrangements to which the payments apply. Milestone payments received as part of supply, distribution, and marketing arrangements are evaluated under Emerging Issues Task Force No. 00-21, "Revenue Arrangements with Multiple Deliverables," to determine whether the delivered item has value to the customer on a stand-alone basis and whether objective and reliable evidence of the fair value of the undelivered item exists. The Company recognizes milestone payments as revenue upon achievement of the milestone only if (1) it represents a separate unit of accounting as defined in EITF 00-21, (2) the milestone payments are non-refundable, (3) substantive effort is involved in achieving the milestone, and (4) the amount of the milestone is reasonable in relation to the effort expended or the risk associated with achievement of the milestone. If any of these conditions are not met, the Company will defer the milestone payments and recognize them as revenue over the remaining term of the contract as it completes its performance obligations. In February 2004, as part of the

46



OBI agreement, the Company received a milestone payment of $20 million as a result of obtaining FDA approval for ORTHOVISC. The Company evaluated the terms of the OBI Agreement and the circumstances under which the milestone was paid and determined that the milestone payment did not meet all of the conditions to be recognized upon achievement, therefore, the Company expects to defer the milestone payment of $20 million and recognize it ratably over the initial ten-year term of the OBI Agreement beginning with the first quarter of 2004.

Property and Equipment

        Property and equipment are carried at cost less accumulated depreciation. Costs of major additions and betterments are capitalized; maintenance and repairs that do not improve or extend the life of the respective assets are charged to operations. On disposal, the related accumulated depreciation or amortization is removed from the accounts and any resulting gain or loss is included in results of operations. Depreciation is computed using the straight-line method over the estimated useful lives of the assets as follows:

Machinery and equipment   3-7 years
Furniture and fixtures   3-5 years
Leasehold improvements   Shorter of lease term or estimated useful life

        The Company accounts for impairment of long-lived assets in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 establishes a uniform accounting model for long-lived assets to be disposed of. This Statement also requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to estimated undiscounted future net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. As of December 31, 2003 and 2002, long-lived assets consisted of property and equipment.

        During the years ended December 31, 2003, 2002, and 2001 the Company did not record losses on impairment.

Research and Development

        Research and development costs consists primarily of salaries and related expenses for personnel and fees paid to outside consultants and outside service providers. Research and development costs are expensed as incurred.

Income Taxes

        The Company provides for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial reporting and tax basis of assets and liabilities.

47



Stock-Based Compensation

        Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," requires that companies either recognize compensation expense for grants of stock options and other equity instruments based on fair value, or provide pro forma disclosure of net income (loss) and net income (loss) per share in the notes to the financial statements. At December 31, 2003, the Company has stock options outstanding under three stock-based compensation plans, which are described more fully in Note 11. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, no compensation cost has been recognized under SFAS 123 for the Company's employee stock option plans. Had compensation cost for the awards under those plans been determined based on the grant date fair values, consistent with the method required under SFAS 123, the Company's net income (loss) and net income (loss) per share would have been reduced to the pro forma amounts indicated below:

 
  December 31,
 
 
  2003
  2002
  2001
 
Net income (loss)                    
  As reported   $ 827,000   $ (3,040,000 ) $ (6,758,000 )
  Add: Stock-based employee compensation expense included in reported net income (loss)             149,000  
  Deduct: Total stock-based employee compensation under the fair-value-based method for all awards     (439,000 )   (356,000 )   (509,000 )
   
 
 
 
  Pro forma net income (loss)   $ 388,000   $ (3,396,000 ) $ (7,118,000 )
   
 
 
 
Basic net income (loss) per share                    
  As reported   $ 0.08   $ (0.31 ) $ (0.68 )
  Proforma   $ 0.04   $ (0.34 ) $ (0.72 )
Diluted net income (loss) per share                    
  As reported   $ 0.08   $ (0.31 ) $ (0.68 )
  Proforma   $ 0.04   $ (0.34 ) $ (0.72 )

        The Company has determined that it will continue to account for stock-based compensation for employees under APB Opinion No. 25 as modified by FIN 44 and elect the disclosure-only alternative under SFAS No. 123 for stock-based compensation awarded in 2003, 2002, and 2001 using the Black-Scholes option pricing model prescribed by SFAS No. 123. The underlying assumptions used are as follows:

 
  December 31,
 
 
  2003
  2002
  2001
 
Risk-Free interest rate   2.69 % 5.14 % 5.13 %
Expected dividend yield   0.00 % 0.00 % 0.00 %
Expected lives   4   4   4  
Expected volatility   101.66 % 86.52 % 71.40 %

48


Concentration of Credit Risk and Significant Customers

        SFAS No. 105, "Disclosure of Information About Financial Instruments with Off-Balance-Sheet-Risk and Financial Instruments with Concentrations of Credit Risk", requires disclosure of any significant off-balance-sheet-risk, or concentrations of credit risk. The Company has no significant off-balance sheet or concentrations of credit risk such as foreign exchange contracts, option contracts or other foreign hedging arrangements. The Company, by policy, limits the amount of credit exposure to any one financial institution, and routinely assesses the financial strength of its customers. As a result, the Company believes that its accounts receivable credit risk exposure is limited and has not experienced significant write-downs in its accounts receivable balances.

        The Company maintains allowance for doubtful accounts for estimated losses resulting from the inability of its customers to pay amounts due. If the financial condition of the Company's customers was to deteriorate, resulting in an impairment in their ability to make payments, additional allowances may be required which could affect future earnings.

Reporting Comprehensive Income

        SFAS No. 130, "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income and its components in the financial statements. Comprehensive income is the total of net income and all other non-owner changes in equity including such items as unrealized holding gains/losses on securities, foreign currency translation adjustments and minimum pension liability adjustments. The Company had no such items for the years ended December 31, 2003, 2002, and 2001 and as a result, comprehensive income (loss) is the same as reported net income (loss) for all periods presented.

Disclosures About Segments of an Enterprise and Related Information

        Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions regarding how to allocate resources and assess performance. The Company's chief decision-making group consists of its four officers including the chief executive officer and the chief financial officer. Based on the criteria established by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Company has one reportable operating segment, the results of which are disclosed in the accompanying consolidated financial statements. Substantially all of the operations and assets of the Company have been derived from and are located in the United States.

New Accounting Pronouncements

        Effective July 1, 2003, the Company adopted EITF 00-21, Accounting For Revenue Arrangements with Multiple Deliverables, which establishes criteria for whether revenue on a deliverable can be recognized separately from other deliverables in a multiple deliverable arrangement. The criteria considers whether the delivered item has stand-alone value to the customer, whether the fair value of the delivered item can be reliably determined and the customer's right of return for the delivered item. The adoption of EITF 00-21 did not have a material impact on the Company's financial statements.

        On December 17, 2003, the Staff of the Securities and Exchange Commission (SEC or the Staff) issued SAB 104, Revenue Recognition, which amends SAB 101, Revenue Recognition in Financial Statements. SAB 104's primary purpose is to rescind accounting guidance contained in SAB 101 related to

49



multiple element revenue arrangements, superseded as a result of the issuance of EITF 00-21. Additionally, SAB 104 rescinds the SEC's Revenue Recognition in Financial Statements Frequently Asked Questions and Answers (the FAQ) issued with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition. Selected portions of the FAQ have been incorporated into SAB 104. While the wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the revenue recognition principles of SAB 101 remain largely unchanged by the issuance of SAB 104. The adoption of SAB 104 did not have a material impact on the Company's financial statements.

3. NET INCOME (LOSS) PER COMMON SHARE

        The Company reports earnings per share in accordance with SFAS No. 128, "Earnings per Share," which establishes standards for computing and presenting earnings (loss) per share. Basic earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and the number of dilutive potential common share equivalents during the period. Under the treasury stock method, unexercised "in-the-money" stock options are assumed to be exercised at the beginning of the period or at issuance, if later. The assumed proceeds are then used to purchase common shares at the average market price during the period. For periods where the Company has incurred a loss, dilutive net loss per share is equal to basic net loss per share.

        Shares used in calculating basic and diluted earnings per share for each of the years ended December 31, 2003, 2002 and 2001, are as follows:

 
  2003
  2002
  2001
 
Net income (loss)   $ 827,000   $ (3,040,000 ) $ (6,758,000 )
   
 
 
 
Basic weighted average common shares outstanding     9,953,733     9,934,280     9,934,280  
Dilutive effect of assumed exercised of stock options and warrants     895,877          
   
 
 
 
Diluted weighted average common and potential common shares outstanding     10,849,610     9,934,280     9,934,280  
   
 
 
 

        Outstanding stock options to purchase approximately 233,000 shares at December 31, 2002 and 61,000 shares at December 31, 2001, are excluded from the calculation of diluted weighted average shares outstanding because the Company incurred a loss for each of these years and to include them would have been anitdilutive. Options to purchase approximately 728,000, 1,115,000 and 1,378,000 shares were outstanding at December 31, 2003, 2002, and 2001, respectively, but not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price during the period.

50



4. MARKETABLE SECURITIES

        The Company had no marketable securities at December 31, 2003. Marketable securities classified as hold-to-maturity consists of the following at December 31, 2002:

 
  Amortized Cost
  Gross Unrealized
Holding Gains

  Fair Value
Municipal bond (due in one year or less)   $ 2,500,000   $ 2,000   $ 2,502,000
   
 
 

        During 2002, marketable securities classified as held-to-maturity, with an amortized cost aggregating $8,994,000, including interest and realized gains of $115,000, matured.

5. RESTRICTED CASH

        At December 19, 2003, in connection with the issuance of an irrevocable letter of credit to one of the Company's vendors the Company had deposited $818,000 with its bank to collateralize the letter of credit. These funds are restricted from the Company's use during the term of the letter of credit, which by its terms is to expire in April 2004, although the Company is entitled to all interest earned on the funds. A portion of the letter of credit was drawn upon by the Company's vendor in January 2004 and the restriction on the funds equivalent to the amount drawn was released. The remainder of the letter of credit is expected to be drawn upon by the Company's vendor prior to its expiration at which time the remainder of the restricted funds will be released.

6. ALLOWANCE FOR DOUBTFUL ACCOUNTS

        A summary of the allowance for doubtful account activity is as follows:

 
  December 31,
 
 
  2003
  2002
  2001
 
Balance, beginning of the year   $ 35,000   $ 25,000   $ 124,000  
Amounts provided         10,000      
Amounts written off     (6,000 )       (99,000 )
   
 
 
 
Balance, end of the year   $ 29,000   $ 35,000   $ 25,000  
   
 
 
 

7. INVENTORIES

        Inventories consists of the following:

 
  December 31,
 
  2003
  2002
Raw Materials   $ 1,537,000   $ 1,239,000
Work-in-Process     1,445,000     1,354,000
Finished Goods     645,000     331,000
   
 
  Total   $ 3,627,000   $ 2,924,000
   
 

51


        Inventories are stated at the lower of cost or market, with cost being determined using the first-in, first-out (FIFO) method. Work-in-process and finished goods inventories include materials, labor, and manufacturing overhead.

8. PROPERTY & EQUIPMENT

        Property and equipment is stated at cost and consists of the following:

 
  December 31,
 
 
  2003
  2002
 
Machinery and equipment   $ 5,802,000   $ 5,546,000  
Furniture and fixtures     699,000     699,000  
Leasehold improvements     3,374,000     3,374,000  
   
 
 
      9,875,000     9,619,000  
Less accumulated depreciation     (8,684,000 )   (7,678,000 )
   
 
 
Total   $ 1,191,000   $ 1,941,000  
   
 
 

        Depreciation expense was $1,006,000, $1,095,000 and $1,085,000 for the years ended December 31, 2003, 2002 and 2001, respectively.

9. NOTES RECEIVABLE FROM OFFICERS

        Notes receivable from officers of $59,000 at December 31, 2002, consisted of a loan made to one officer and was repaid in full in July 2003. The note receivable from the officer accrued interest at 6.22%.

10. ACCRUED EXPENSES

        Accrued expenses consists of the following:

 
  December 31,
 
  2003
  2002
Payroll and benefits   $ 939,000   $ 682,000
Professional fees     218,000     112,000
Clinical trial         621,000
Other     140,000     288,000
   
 
  Total   $ 1,297,000   $ 1,703,000
   
 

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11. COMMITMENTS AND CONTINGENCIES

        The Company's corporate headquarters is located in Woburn, Massachusetts, where it leases approximately 10,000 square feet of administrative and research and development space. The lease on this facility terminates in October 2004. The Company also leases approximately 37,000 square feet of space at a separate location in Woburn, Massachusetts, for its manufacturing facility and warehouse. The lease for this facility terminates in February 2009. Net rental expense in connection with the leases, totaled $685,000, $657,000, and $647,000, for the years ended December 31, 2003, 2002, and 2001, respectively.

        Future minimum lease payments under noncancelable operating leases at December 31, 2003 are as follows:

 
  Amount
2004   $ 685,000
2005     602,000
2006     605,000
2007     617,000
2008     617,000
Thereafter     103,000
   
Total   $ 3,229,000
   

        Guarantor Arrangements.    In certain of its contracts, the Company warrants to its customers that the products it manufactures conform to the product specifications as in effect at the time of delivery of the product. The Company may also warrant that the products it manufactures do not infringe, violate or breach any U.S. patent or intellectual property rights, trade secret or other proprietary information of any third party. On occasion, the Company contractually indemnifies its customers against any and all losses arising out of or in any way connected with any claim or claims of breach of its warranties or any actual or alleged defect in any product caused by the negligence or acts or omissions of the Company. The Company maintains a products liability insurance policy that limits its exposure. Based on the Company's historical activity in combination with its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal. The Company has no accrued warranties and has no history of claims.

12. STOCK OPTION PLAN

        The Company had reserved 3,485,000 shares of common stock for the grant of stock options to employees, directors, consultants and advisors under the Anika Therapeutics, Inc. 1993 Stock Option Plan, as amended (the "1993 Plan"). In addition, the Company also established the Directors' Stock Option Plan (the "Directors' Plan") and reserved 40,000 shares of the Company's common stock for issuance to the Board of Directors. On October 28, 1997, the Board of Directors granted to certain executive officers and employees of the Company options to acquire 269,000 shares of common stock at an exercise price of $7.625 per share, vesting over a four-year period. Such grants received stockholder approval upon the amendment to the Plan on June 3, 1998. When the amendment was approved by the shareholders, the Company recorded deferred compensation of $1,490,000, which represented the difference between the exercise price of the option and the fair market value of the common stock at the time of such approval. During 2001 the remaining deferred compensation balance of $149,000 was amortized to expense.

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        On March 3, 2003, the 1993 Plan expired in accordance with its terms and approximately 662,000 shares reserved under the plan were released. On April 4, 2003 the Board of Directors approved the 2003 Anika Therapeutics, Inc. Stock Option and Incentive Plan (the "2003 Plan"). The Company has reserved 1,500,000 shares of common stock for grant of stock options to employees, directors, consultants and advisors under the 2003 Plan, which was approved by stockholders on June 4, 2003.

        Combined stock option activity under the three plans is summarized as follows:

 
  2003
  2002
  2001
 
  Number of
Shares

  Weighted
Average
Exercise
Price per
Share

  Number of
Shares

  Weighted
Average
Exercise
Price per
Share

  Number of
Shares

  Weighted
Average
Exercise
Price per
Share

Outstanding at beginning of period   1,347,647   $ 2.48   1,439,722   $ 3.37   1,721,122   $ 4.77
  Granted   811,400     4.99   472,400     1.11   489,800     1.12
  Canceled   (39,625 )   1.34   (563,200 )   3.61   (771,200 )   5.07
  Expired         (1,275 )   4.47      
  Exercised   (52,125 )   1.78            
   
 
 
 
 
 
Outstanding at end of period   2,067,297   $ 3.51   1,347,647   $ 2.48   1,439,722   $ 3.37
   
 
 
 
 
 
Options exercisable at end of period   969,473   $ 2.91   785,947   $ 3.11   574,039   $ 4.41
Weighted average fair value of options granted at fair value       $ 3.53       $ 0.82       $ 1.96

        Generally, options vest in equal, annual installments up to four years after the date of grant and have an expiration date no later than ten years after the date of grant. There are 1,001,600 options available for future grant at December 31, 2003.

        The following table summarizes significant ranges of outstanding options under both Plans at December 31, 2003:

 
  Options Outstanding
  Options Exercisable
Ranges of
Exercise Price

  Number
Outstanding

  Weighted
Average
Remaining
Contractual Life

  Weighted
Average
Exercise
Price

  Number
Exercisable

  Weighted
Average
Exercise
Price

$0.90—$1.19   905,750   8.02   $ 1.07   407,688   $ 1.06
1.23—3.00   400,833   6.08     1.80   209,071     2.13
3.13—6.94   310,334   4.42     4.84   281,084     4.87
$7.63—$9.75   450,380   9.22     9.01   71,630     8.05
   
           
     
    2,067,297   7.37   $ 3.51   969,473   $ 2.91
   
           
     

13. SHAREHOLDER RIGHTS PLAN

        On April 6, 1998, the Board of Directors adopted a shareholder rights agreement (the "Rights Plan") which was subsequently amended as of November 5, 2002. In connection with the adoption of the Rights Plan, the Board of Directors declared a dividend distribution of one preferred stock purchase right (a

54



"Right") for each outstanding share of common stock to stockholders of record as of the close of business on April 23, 1998. Currently, these Rights are not exercisable and trade with the shares of the Company's Common Stock.

        Under the Rights Plan, the Rights generally become exercisable if: (1) a person becomes an "Acquiring Person" by acquiring 15% or more of the Company's Common Stock, (2) a person commences a tender offer that would result in that person owning 15% or more of the Company's Common Stock, or (3) the Board of Directors deems a person to be an "Adverse Person," as defined under the Rights Plan. In the event that a person becomes an "Acquiring Person," or an "Adverse Person," each holder of a Right (other than the Acquiring Person or Adverse Person) would be entitled to acquire such number of units of preferred stock (which are equivalent to shares of the Company's Common Stock) having a value of twice the exercise price of the Right. If, after any such event, the Company enters into a merger or other business combination transaction with another entity, each holder of a Right would then be entitled to purchase, at the then-current exercise price, shares of the acquiring company's common stock having a value of twice the exercise price of the Right. The current exercise price per Right is $45.00.

        The Rights will expire at the close of business on April 6, 2008 (the "Expiration Date"), unless previously redeemed or exchanged by the Company as described below. The Rights may be redeemed in whole, but not in part, at a price of $0.01 per Right (payable in cash, shares of the Company's Common Stock or other consideration deemed appropriate by the Board of Directors) by the Board of Directors only until the earlier of (1) the time at which any person becomes an "Acquiring Person" or an "Adverse Person", or (2) the Expiration Date. At any time after any person becomes an "Acquiring Person" or an "Adverse Person", the Board of Directors may, at its option, exchange all or any part of the then outstanding and exercisable Rights for shares of the Company's Common Stock at an exchange ratio specified in the Rights Plan. Notwithstanding the foregoing, the Board of Directors generally will not be empowered to affect such exchange at any time after any person becomes the beneficial owner of 50% or more of the Company's Common Stock.

        Until a Right is exercised, the holder will have no rights as a stockholder of the Company (beyond those as an existing stockholder), including the right to vote or to receive dividends.

        In connection with the establishment of the Rights Plan, the Board of Directors approved the creation of Preferred Stock of the Company designated as Series B Junior Participating Cumulative Preferred Stock with a par value of $0.01 per share. The Board also reserved 150,000 shares of preferred stock for issuance upon exercise of the Rights.

14. STOCK REPURCHASE PLAN

        In October 1998, the Board of Directors approved a stock repurchase plan under which the Company is authorized to purchase up to $4,000,000 of the Company's Common Stock, with the total number of shares repurchased not to exceed 9.9% of the total number of shares issued and outstanding. Under the plan, shares may be repurchased from time to time and in such amounts as market conditions warrant, subject to regulatory considerations. As of December 31, 2003, the Company had repurchased a total of 762,100 shares at a net cost of approximately $3,873,000 and has reissued 756,562 shares upon exercise of employee stock options. No shares were purchased in 2003 or 2002.

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15. EMPLOYEE BENEFIT PLAN

        Employees are eligible to participate in the Company's 401(k) savings plan. Employees may elect to contribute a percentage of their compensation to the plan, and the Company will make matching contributions up to a limit of 5% of an employee's compensation. In addition, the Company may make annual discretionary contributions. For the years ended December 31, 2003, 2002, and 2001, the Company made matching contributions of $157,000, $150,000, and $187,000 respectively.

16. LICENSING AND DISTRIBUTION AGREEMENTS

        In December 2003 the Company entered into a ten-year licensing and supply agreement (the OBI Agreement) with Ortho Biotech Products, L.P., a member of the Johnson & Johnson family of companies, to market ORTHOVISC in the U.S. and Mexico. Under the OBI Agreement, Ortho Biotech will perform sales, marketing and distribution functions and licensed the right to further develop and commercialize ORTHOVISC as well as other new products for the treatment of pain associated with osteoarthritis based on the Company's proprietary viscosupplementation technology. In support of the license, the OBI Agreement provides that Ortho Biotech will fund post-marketing clinical trials for new indications of ORTHOVISC. The Company received an initial payment of $2.0 million upon entering into the OBI Agreement and a milestone payment of $20 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC. Under the OBI Agreement, the Company will be the exclusive supplier of ORTHOVISC to Ortho Biotech. The OBI Agreement provides for additional performance- and sales-based milestone payments to the Company contingent upon planned manufacturing upgrades, insurance reimbursement approval, and achieving specified sales targets, in addition to royalty and transfer fees. The OBI Agreement is subject to early termination in certain circumstances and is otherwise renewable by Ortho Biotech for consecutive five-year terms.

        In July 2000, the Company entered into a seven-year supply agreement (the "B&L Agreement") with Bausch & Lomb Surgical, a unit of Bausch & Lomb. Bausch & Lomb Surgical was subsequently merged into Bausch & Lomb Incorporated. Under the terms of the B&L Agreement, effective January 1, 2001, the Company became Bausch & Lomb's exclusive provider of AMVISC and AMVISC Plus, ophthalmic viscoelastic products, in the U.S. and international markets. The B&L Agreement is subject to early termination and/or reversion to a non-exclusive basis under certain circumstances. The B&L Agreement lifts contractual restrictions on the Company's ability to sell certain ophthalmic products to other companies, subject to payment of royalties to Bausch & Lomb by the Company. In exchange, the Company agreed to a reduction in unit selling prices effective April 1, 2000, and the elimination of minimum unit purchase obligations by B&L. Under the new agreement with Bausch and Lomb, the price for units sold in a calendar year is dependent on total unit volume of sales of certain ophthalmic products during the year. Accordingly, unit prices for sales occurring in interim quarters are subject to possible retroactive price adjustments when the actual annual unit volume for the year becomes known. In accordance with the Company's revenue recognition policy, the amount of revenue reasonably subject to the price adjustment is recorded as deferred revenue until the annual unit volume becomes known and the sales price becomes fixed. In the fourth quarters of 2003, 2002 and 2001, product revenue included the recognition of $846,000, $839,000 and $401,000, respectively, of revenue related to sales of AMVISC and AMVISC Plus to Bausch & Lomb, which had been previously deferred during the first three quarters of the respective years until the actual annual unit volume became fixed or determinable. During the years ended December 31, 2003, 2002, and 2001, the Company recognized revenues of $7,801,000, $7,811,000, and $7,389,000, respectively, under this agreement and the prior Bausch & Lomb agreement. Additionally, during the years

56



ended December 31, 2003, 2002 and 2001, the Company incurred royalties of $52,000, $109,000 and $13,000, respectively, to Bausch & Lomb under this agreement.

        In April 2001, the Company entered into a five-year supply agreement with Cytosol Ophthalmics, Inc. Under the terms of the agreement, effective April 11, 2001, the Company became Cytosol Ophthalmic's exclusive provider of sterile sodium hyaluronate ophthalmic viscoelastic products, in the U.S. and international markets. Under the agreement, in lieu of an up-front payment, the Company is entitled to an increase in the price per unit of $2 per unit for the initial 50,000 units purchased. As a result, the Company will recognize $100,000 of revenue under this agreement ratably over the term of the agreement or as units are shipped, if longer. The agreement expires April 11, 2006. For the years ended December 31, 2003, 2002 and 2001, the Company has recognized $23,000, $16,000 and $8,000, respectively, of the $100,000 price adjustment as license revenue.

17. REVENUE BY SIGNIFICANT CUSTOMER AND BY GEOGRAPHIC REGION

        Product revenue by significant customers as a percent of total revenues is as follows

 
  Percent of Product Revenue
Year Ended December 31,

 
 
  2003
  2002
  2001
 
Bausch & Lomb Incorporated   50.6 % 59.2 % 65.3 %
Pharmaren AG/Biomeks   14.3 % 10.0 % 15.7 %
Advanced Medical Optics   13.4 % 8.8 %  
Boehringer Ingelheim Vetmedica   11.3 % 6.9 % 4.7 %
   
 
 
 
    89.6 % 84.9 % 85.7 %
   
 
 
 

        As of December 31, 2003, two customers represented 85% of the Company's accounts receivable balance.

        Revenues by geographic location in total and as a percentage of total revenues are as follows:

 
  Year Ended December 31,
 
 
  2003
  2002
  2001
 
 
  Revenue
  Percent of
Revenue

  Revenue
  Percent of
Revenue

  Revenue
  Percent of
Revenue

 
Geographic location:                                
United States   $ 12,331,000   80.1 % $ 10,880,000   82.5 % $ 8,152,000   72.1 %
Turkey     2,208,000   14.3 %   1,320,000   10.0 %   1,772,000   15.7 %
Middle East     169,000   1.1 %   171,000   1.3 %   134,000   1.2 %
Other/Europe     696,000   4.5 %   816,000   6.2 %   1,254,000   11.0 %
   
 
 
 
 
 
 
Total   $ 15,404,000   100.0 % $ 13,187,000   100.0 % $ 11,312,000   100.0 %
   
 
 
 
 
 
 

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18. INCOME TAXES

        The Company records a deferred tax asset or liability based on the difference between the financial statement and tax bases of assets and liabilities, as measured by the enacted tax rates assumed to be in effect when these differences reverse.

        As of December 31, 2003, the Company had net operating loss carryforwards for federal and state tax purposes of approximately $9,686,000, and $9,462,000, respectively. These carryforwards begin to expire in 2012 and 2005, respectively, and are subject to review and possible adjustment. As of December 31, 2003, the Company has tax credit carryforwards for federal and state tax purposes of approximately $965,000 and $640,000, respectively. These credit carryforwards begin to expire in 2009. The Internal Revenue Code (IRC) contains provisions that may limit the amount of net operating loss and tax credit carryforwards that the Company may utilize in any one year in the event of certain cumulative changes in ownership over a three-year period. In the event that the Company has had a change of ownership, as defined in IRC Section 382, utilization of the carryforwards may be restricted.

        The approximate income tax effect of each type of temporary difference and carryforward is as follows:

 
  Years ended December 31,
 
 
  2003
  2002
 
Deferred tax assets:              
  Depreciation   $ 584,000   $ 436,000  
  Accrued expenses and other     292,000     245,000  
  Inventory reserves     66,000     92,000  
  Net operating loss carryforwards     3,878,000     5,070,000  
  Deferred revenue     832,000      
  Credit carryforwards     1,387,000     1,399,000  
   
 
 
Gross deferred tax assets     7,039,000     7,242,000  
  Less: valuation allowance     (7,039,000 )   (7,242,000 )
   
 
 
Net deferred tax asset   $   $  
   
 
 

        As of December 31, 2003, management determined that it is more likely than not that the deferred tax assets will not be realized and, therefore, a valuation allowance has reduced all of the deferred tax assets to zero.

        In February 2004, the Company achieved a milestone under the OBI Agreement and received payment of $20.0 million which it expects will be recognized as taxable income in the first quarter of 2004. As a result, the Company expects that it will be able to utilize the loss carryforwards, in 2004, in their entirety to offset part of its taxable income. As a result of the Company's expected taxable income in 2004, it will reevaluate the positive and negative evidence regarding the realizability of its deferred tax assets and consider whether a release of the valuation allowance is appropriate.

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        Income tax (benefit) expense was ($88,000), $5,000, and $9,000 for the years ended December 31, 2003, 2002, and 2001, respectively. The provision for income taxes differs from the amounts computed by applying the U.S. Federal income tax rate to pretax income as a result of the following:

 
  Years ended December 31,
 
 
  2003
  2002
  2001
 
Computed expected tax (benefit) expense   $ 251,000   $ (1,032,000 ) $ (2,295,000 )
State tax expense (net of federal benefit)     48,000     2,000     9,000  
Nondeductible expenses     4,000     3,000     4,000  
Federal and state research and development credits         (224,000 )   (263,000 )
Alternative minimum tax benefit from carryback     (154,000 )        
Alternative minimum tax liability     64,000          
Alternative minimum tax credit     (64,000 )        
Other     (34,000 )   2,000     (5,000 )
Change in valuation allowance related to income tax (benefit) expense     (203,000 )   1,254,000     2,559,000  
   
 
 
 
Tax (benefit) expense   $ (88,000 ) $ 5,000   $ 9,000  
   
 
 
 

19. LEGAL MATTERS

        Securities and Exchange Commission Investigation.    In May 2000, the Securities and Exchange Commission (SEC) issued a formal order of investigation in connection with certain revenue recognition matters. On January 13, 2003 the Company announced that it had entered into a settlement with the SEC concluding and resolving this investigation, which pertained to the company's historical accounting for and disclosures concerning sales of ORTHOVISC® under a long-term supply and distribution agreement with Zimmer, Inc. To conclude this matter, the Company consented to the entry of an order to comply with sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 and rules 12b-20, 13a-1 and 13a-13 promulgated thereunder. The settlement did not impose any monetary sanctions against the Company, and it is not expected to affect its results of operations or financial condition. The Company neither admitted nor denied the findings in the SEC's administrative cease and desist order resolving the matter.

        Settled Class Action Litigation.    Between April 15, 1998 and August 2, 1998, three putative class action complaints were filed against the Company, J. Melville Engle, the Company's former chief executive officer, and Sean Moran, the Company's former chief financial officer, in the United States District Court for the District of Massachusetts (the "Court") on behalf of all purchasers of the Company's shares between April 15, 1998 and May 30, 2000 (the "Class"). On or about September 13, 2000, the Court appointed lead plaintiffs, and consolidated and recaptioned the cases In re Anika Therapeutics, Inc. Securities Litig., Civil Action No. 00-11127-WGY. On or about October 30, 2000, lead plaintiffs filed a consolidated amended complaint, which alleged that the Company and the individual defendants violated the federal securities laws by, among other things, making material misrepresentations and omissions in certain public disclosures relating to the Company's historical revenue recognition policies and its restatement of revenues for 1998 and the first three quarters of 1999. On December 14, 2000, the

59



Company, Mr. Engle and Mr. Moran each filed motions to dismiss the consolidated amended complaint, and plaintiffs opposed those motions. Before the Court decided the motions to dismiss, the parties reached agreement on the terms of a settlement of the action. Accordingly, the parties negotiated and entered into a Stipulation and Agreement of Settlement, Compromise and Release ("Stipulation") dated May 25, 2001, which contained those terms, conditioned on Court approval. In the Stipulation, the parties requested, among other things, that the Court (1) certify, for purposes of settlement, the Class and the action as a class action; (2) finally approve the settlement as provided for in the Stipulation, including the release of all claims by Class members against the Defendants; and (3) enter final judgment dismissing with prejudice all claims of the plaintiffs and the Class against the Defendants. The Court preliminarily approved the settlement on May 31, 2001. Thereafter, plaintiff's counsel sent notice of the proposed settlement to the Class, and the Company, pursuant to the Stipulation, paid $1.25 million into a settlement fund that was to be used, among other things, to pay authorized members of the Class. The Court held a Final Settlement Hearing on October 22, 2001 during which the Court finally approved the Settlement. In addition, the Company entered into an agreement with the insurance company that issued the Company's directors and officers liability policy for the period from December 1, 1999 to November 30, 2000. Under that agreement, the insurer paid the Company $400,000 in exchange for a release of the insurer's obligations under the policy. The Company applied the $400,000 to the settlement amount in the shareholder class action lawsuit.

20. QUARTERLY FINANCIAL DATA (Unaudited)

Year 2003

  Quarter
ended
December 31,

  Quarter
ended
September 30,

  Quarter
ended
June 30,

  Quarter
ended
March 31,

 
Total Revenue   $ 5,014,000   $ 3,688,000   $ 3,318,000   $ 3,384,000  
Cost of Product Revenue     2,260,000     1,930,000     1,846,000     1,969,000  
Gross Profit     2,754,000     1,758,000     1,472,000     1,415,000  
Net Income (Loss)   $ 801,000   $ 420,000   $ (81,000 ) $ (313,000 )
Per common share information                          
  Basic net income (loss) per share   $ 0.08   $ 0.04   $ (0.01 ) $ (0.03 )
  Basic common shares outstanding     9,979,068     9,959,904     9,941,121     9,934,280  
  Diluted net income (loss) per share   $ 0.07   $ 0.04   $ (0.01 ) $ (0.03 )
  Diluted common shares outstanding     11,188,042     10,422,066     9,941,121     9,934,280  
Year 2002

  Quarter
ended
December 31,

  Quarter
ended
September 30,

  Quarter
ended
June 30,

  Quarter
ended
March 31,

 
Total Revenue   $ 4,471,000   $ 2,905,000   $ 3,421,000   $ 2,390,000  
Cost of Product Revenue     1,845,000     1,975,000     2,202,000     2,087,000  
Gross Profit     2,626,000     930,000     1,219,000     303,000  
Net Income (Loss)   $ 829,000   $ (908,000 ) $ (1,157,000 ) $ (1,804,000 )
Per common share information                          
  Basic net income (loss) per share   $ 0.08   $ (0.09 ) $ (0.12 ) $ (0.18 )
  Basic common shares outstanding     9,934,280     9,934,280     9,934,280     9,934,280  
  Diluted net income (loss) per share   $ 0.08   $ (0.09 ) $ (0.12 ) $ (0.18 )
  Diluted common shares outstanding     9,948,072     9,934,280     9,934,280     9,934,280  

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        In the fourth quarters of 2003 and 2002 product revenue included the recognition of $846,000 and $839,000, respectively, of revenue related to sales of AMVISC® and AMVISC® Plus to Bausch & Lomb, which had been previously deferred during the first three quarters of the respective years until the actual annual unit volume became fixed or determinable. See Note 16.

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ITEM 9.    CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

        In July 2002, we changed our independent accountants as reported in our Current Report on Form 8-K dated July 2, 2002.

ITEM 9A CONTROLS AND PROCEDURES

(a)
Evaluation of disclosure controls and procedures.

        As required by Rule 13a-15 under the Securities Exchange Act of 1934 (Exchange Act), the Company carried out an evaluation under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that they believe that the Company's disclosure controls and procedures are reasonably effective to ensure that material information relating to the Company required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In designing and evaluating the disclosure controls and procedures, the Company's management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objectives, and management necessarily was required to apply its judgment in designing and evaluating the controls and procedures. The Company currently is in the process of further reviewing and documenting its disclosure controls and procedures, and its internal control over financial reporting, and may from time to time make changes aimed at enhancing their effectiveness and to ensure that our systems evolve with our business.

(b)
Changes in internal controls.

        There were no changes in our internal control over financial reporting during the fourth quarter of fiscal year 2003 that have materially affected, or that are reasonably likely to materially affect, our internal controls over financial reporting.


PART III

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

        The information required by Item 10 is hereby incorporated by reference to the Registrant's Proxy Statement (the "Proxy Statement") for the Annual Meeting of Stockholders to be held on June 10, 2004 under the heading "Election of Directors."

ITEM 11.    EXECUTIVE COMPENSATION

        The information required by Item 11 is hereby incorporated by reference to the Proxy Statement under the heading "Executive Compensation."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

        The information required by Item 12 is hereby incorporated by reference to the Proxy Statement under the headings "Beneficial Ownership of Common Stock" and "Equity Compensation Plan Information."

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ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

        The information required by Item 13 is hereby incorporated by reference to the Proxy Statement under the headings "Agreements with Named Executive Officers" and "Certain Relationships and Related Transactions."

ITEM 14.    PRINCIPAL ACCOUNTING FEES AND SERVICES

        The information required by Item 14 is hereby incorporated by reference to the Proxy Statement under the headings "Principal Accounting Fees and Services."


PART IV

ITEM 15.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)
Documents filed as part of Form 10-K.

(1)
Financial Statements

Report of Independent Public Accountant   39
Consolidated Balance Sheets   41
Consolidated Statements of Operations   42
Consolidated Statements of Stockholder's Equity   43
Consolidated Statements of Cash Flows   44
Notes to Consolidated Financial Statements   45-61
(b)
Reports on Form 8-K

1.
Form 8-K filed November 7, 2003—furnishing of press release of Anika Therapeutics issued on November 6, 2003, announcing its financial results for the quarter ended September 30, 2003.

2.
Form 8-K filed December 3, 2003—announcing that Anika Therapeutics had received an approvable letter from the U.S. Food and Drug Administration regarding its ORTHOVISC® osteoarthritis product.

3.
Form 8-K filed December 24, 2003—announcing the signing of an exclusive, multi-year U.S. licensing and supply agreement with Ortho Biotech Products, L.P., a subsidiary of Johnson & Johnson, for Anika Thereapeutic's ORTHOVISC® osteoarthritis product.

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Exhibit No.
  Description
(3)   Articles of Incorporation and Bylaws:
3.1   The Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form 10 (File no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993.
3.2   Certificate of Vote of Directors Establishing a Series of Convertible Preferred Stock, incorporated herein by reference to Exhibits to the Company's Registration Statement on Form 10 (File no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993.
3.3   Amendment to the Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.1 to the Company's quarterly report on Form 10-QSB for the period ended November 30, 1996, (File no. 000-21326), filed with the Securities and Exchange Commission on January 14, 1997.
3.4   Certificate of Vote of Directors Establishing a Series of a Class of Stock, incorporated herein by reference to Exhibit 3.1 of the Company's Registration Statement on Form 8-AB12 (File no. 001-14027), filed with the Securities and Exchange Commission on April 7, 1998.
3.5   Intentionally Omitted.
3.6   Intentionally Omitted.
3.7   Amendment to the Amended and Restated Articles of Organization of the Company, incorporated herein by reference to Exhibit 3.3 of the Company's report on Form 10-Q for the quarterly period ending June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange n on August 14, 2002.
3.8   The Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3.6 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.
(4)   Instruments Defining the Rights of Security Holders
4.1   Shareholder Rights Agreement dated as of April 6, 1998 between the Company and Firstar Trust Company, incorporated herein by reference to Exhibit 4.1 to the Company's Registration Statement on Form 8-A12B (File no. 001-14027), filed with the Securities and Exchange Commission on April 7, 1998.
4.2   Amendment to Shareholder Rights Agreement dated as of November 5, 2002 between the Company and American Stock Transfer and Trust Company, as successor to Firstar Trust Company incorporated hering by reference to Exhibit 4.2 to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on November 13, 2002.
(10)   Material Contracts
10.1   Supply Agreement dated as of July 25, 2000 by and between the Company and Bausch & Lomb, Inc., incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on November 14, 2000. Confidential treatment was granted to certain portions of this Exhibit.
     

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10.4   1993 Stock Option Plan, as amended, incorporated herein by reference to Annex A of the Company's Proxy Statement (File no. 001-14027), filed with the Securities and Exchange Commission on April 28, 2000.
10.5   License Agreement dated as of July 22, 1992 between the Company and Tufts University, incorporated herein by reference to Exhibit 10.4 to the Company's Registration Statement on Form 10 (File no. 000-21326), filed with the Securities and Exchange Commission on March 5, 1993.
10.6   Lease dated March 10, 1995 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.
10.7   First Amendment to Lease dated December 11, 1997 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.9 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.
10.8   Extension of Lease dated November 23, 1999 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.10 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.
10.9   Second Amendment to Lease dated November 23, 1998 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.11 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.
10.10   Lease dated September 23, 1999 between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.12 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.
10.11   Termination Agreement and Mutual Release dated as of November 10, 2000 by and between the Company and Zimmer, Inc., incorporated herein by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on November 14, 2000. Confidential treatment was granted to certain portions of this Exhibit.
10.13   Promissory Note for $75,000 dated as of March 17, 1997 between the Company and J. Melville Engle, incorporated herein by reference to Exhibit 10.25 to the Company's Registration Statement on Form SB-2 (File no. 333-38993), filed with the Securities and Exchange Commission on October 29, 1997.
10.15   Letter Agreement dated April 15, 1998 between the Company and Charles H. Sherwood, incorporated herein by reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.
10.17   Non-Disclosure and Non-Competition Agreement dated May 5, 1998 between the Company and Charles H. Sherwood, incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.
     

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10.18   Promissory Note for $59,000 dated May 26, 2000 between the Company and Charles H. Sherwood, incorporated herein by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.
10.19   Letter Agreement dated March 30, 2000 by and between the Company and Douglas R. Potter, incorporated herein by reference to Exhibit 10.5 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.
10.20   Non-Disclosure and Non-Competition Agreement dated April 3, 2000 by and between the Company and Douglas R. Potter, incorporated herein by reference to Exhibit 10.6 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.
10.21   Change in Control, Bonus and Severance Agreement dated April 26, 2000 by and between the Company and Douglas R. Potter, incorporated herein by reference to Exhibit 10.7 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.
10.22   Non-Disclosure and Non-Competition Agreement dated December 2, 1996 by and between the Company and Edward Ross, Jr., incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2000 (File no. 001-14027), filed with the Securities Exchange Commission on April 2, 2001.
10.23   Change in Control, Bonus and Severance Agreement dated April 26, 2000 by and between the Company and Edward Ross, Jr., incorporated herein by reference to Exhibit 10.8 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2000 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2000.
10.25   Stipulation and Agreement of Compromise, Settlement and Release dated May 25, 2001 in connection with In Re Anika Therapeutics, Inc. Securities Litigation, incorporated herein by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2001 (File no. 001-14027), filed with the Securities and Exchange Commission on August 14, 2001.
10.26   Amendment to Lease #3 dated November 1, 2001 by and between the Company and Cummings Properties, incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 2001 (File no. 001-14027), filed with the Securities and Exchange Commission on November 14, 2001.
10.28   Sublease effective as of November 2001, between MedChem Products, Inc. and the Company, incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on May 14, 2002.
10.29   Separation Agreement dated April 2, 2002 by and between the Company and Edward Ross, Jr., incorporated herein by reference to Exhibit 10.1 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.
     

66


10.30   Letter Agreement dated June 25, 2002 by and between the Company and William J. Knight incorporated herein by reference to Exhibit 10.2 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.
10.31   Change in Control, Bonus and Severance Agreement dated July 8, 2002 by and between the Company and William J. Knight incorporated herein by reference to Exhibit 10.3 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.
10.32   Amended and Restated Change in Control, Bonus and Severance Agreement dated July 8, 2002 by and between the Company and Charles H. Sherwood incorporated herein by reference to Exhibit 10.4 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2002 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2002.
10.33   Letter Agreement dated February 21, 2003 by and between the Company and Roger C. Stikeleather, incorporated herein by reference to Exhibit 10.33 to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on May 15, 2003.
10.34   Change in Control, Bonus and Severance Agreement dated March 17, 2003 by and between the Company and Roger C. Stikeleather, incorporated herein by reference to Exhibit 10.34 to the Company's quarterly report on Form 10-Q for the quarterly period ended March 31, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on May 15, 2003.
10.35   Change in Control, Bonus and Severance Agreement dated June 9, 2003 by and between the Company and Francesco J. Luppino, incorporated herein by reference to Exhibit 10.35 to the Company's quarterly report on Form 10-Q for the quarterly period ended June 30, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on August 14, 2003.
10.36   Lease Extension dated October 8, 2003 by and between the Company and Cummings Properties, LLC, incorporated herein by reference to Exhibit 10.36 to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on November 14, 2003.
10.37   Lease Amendment dated October 8, 2003 by and between the Company and MedChem Products, Inc., incorporated herein by reference to Exhibit 10.36 to the Company's quarterly report on Form 10-Q for the quarterly period ended September 30, 2003 (File no. 000-21326), filed with the Securities and Exchange Commission on November 14, 2003.
**10.38   License Agreement dated as of December 20, 2003 by and between the Company and Ortho Biotech Products, L.P.
*10.39   Separation Agreement dated January 19, 2004 by and between the Company and Roger C. Stikeleather.
(11)   Statement Regarding the Computation of Per Share Earnings
11.1   See Note 2 to the Financial Statements included herewith.
(21)   Subsidiaries of the Registrant
     

67


*21.1   List of Subsidiaries of the Registrant.
(23)   Consent of Experts
*23.1   Consent of PricewaterhouseCoopers llp.
*31.1   Certification of Chief Financial Officer of Anika Therapeutics, Inc., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
*31.2   Certification of Chief Executive Officer of Anika Therapeutics, Inc., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
***32.1   Certification of Chief Executive Officer and Chief Financial Officer of Anika Therapeutics, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(99)   Additional Exhibits
None    

*
Filed herewith.

**
Certain portions of this document have been omitted pursuant to a confidential treatment request filed with the Commission. The omitted portions have been filed separately with the Commission.

***
Furnished herewith.

68



SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized in Woburn, Massachusetts on March 29, 2004.

    ANIKA THERAPEUTICS, INC.

Date: March 29, 2004

 

By:

 

/s/  
CHARLES H. SHERWOOD, PH.D.      
Charles H. Sherwood, Ph.D.
Chief Executive Officer


SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature
  Title
  Date

 

 

 

 

 
/s/  CHARLES H. SHERWOOD, PH.D.      
Charles H. Sherwood, Ph.D.
  Chief Executive Officer and Director
(Principal Executive Officer)
  March 29, 2004

/s/  
WILLIAM J. KNIGHT      
William J. Knight

 

Chief Financial Officer
(Principal Accounting Officer)

 

March 29, 2004

/s/  
JOSEPH L. BOWER      
Joseph L. Bower

 

Director

 

March 29, 2004

/s/  
EUGENE A. DAVIDSON, PH.D.      
Eugene A. Davidson, Ph.D.

 

Director

 

March 29, 2004

/s/  
SAMUEL F. MCKAY      
Samuel F. McKay

 

Director

 

March 29, 2004

/s/  
HARVEY S. SADOW, PH.D.      
Harvey S. Sadow, Ph.D.

 

Director

 

March 29, 2004

/s/  
STEVEN E. WHEELER      
Steven E. Wheeler

 

Director

 

March 29, 2004

69




QuickLinks

FORM 10-K ANIKA THERAPEUTICS, INC. For Fiscal Year Ended December 31, 2003
PART I
PART II
Statement of Operations Data (In thousands, except per share data)
Balance Sheet Data (In thousands)
Statement of Operations Detail
Statement of Operations Detail
ANIKA THERAPEUTICS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Auditors
Report of Independent Accountants
Anika Therapeutics, Inc. and Subsidiaries Consolidated Balance Sheets
Anika Therapeutics, Inc. and Subsidiaries Consolidated Statements of Operations For the Years Ended December 31,
Anika Therapeutics, Inc. and Subsidiaries Consolidated Statements of Cash Flows
ANIKA THERAPEUTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART III
PART IV
SIGNATURES
SIGNATURES


                                                                   EXHIBIT 10.38
                                                       Confidential Treatment(1)


                                     LICENSE
                                    AGREEMENT
                                     BETWEEN
                            ANIKA THERAPEUTICS, INC.
                                       AND
                          ORTHO BIOTECH PRODUCTS, L.P.


- ----------
(1)  Redacted portions have been marked with brackets containing asterisks
([***]). The redacted portions are subject to a request for confidential
treatment and have been filed seperately with the Securities and Exchange
Commission.



                                TABLE OF CONTENTS

PAGE ---- ARTICLE I - DEFINITIONS..........................................................2 ARTICLE II - PRODUCT DEVELOPMENT.................................................8 ARTICLE III - COMMERCIALIZATION.................................................10 ARTICLE IV - INTELLECTUAL PROPERTY LICENSE GRANTS...............................13 ARTICLE V - PAYMENTS............................................................13 ARTICLE VI - MANUFACTURE........................................................18 ARTICLE VII - PUBLICATIONS; TRANSFER OF DATA; CONFIDENTIALITY...................27 ARTICLE VIII - OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS.............29 ARTICLE IX - REPRESENTATIONS AND WARRANTIES.....................................32 ARTICLE X - ANIKA'S GENERAL OBLIGATIONS AND COVENANTS...........................34 ARTICLE XI - OBI's GENERAL OBLIGATIONS..........................................36 ARTICLE XII - TERM AND TERMINATION..............................................37 ARTICLE XIII - INDEMNIFICATION..................................................40 ARTICLE XIV - ADDITIONAL APPLICATIONS AND INDICATIONS...........................43 ARTICLE XV - STEERING COMMITTEE.................................................45 ARTICLE XVI - DISPUTE RESOLUTION................................................46 ARTICLE XVII - HSR FILING.......................................................46 ARTICLE XVIII - MISCELLANEOUS...................................................48
(i) This License Agreement (this "Agreement") is made effective as of December 20, 2003 by and between Anika Therapeutics, Inc., a Massachusetts corporation, having a place of business at 160 New Boston Street, Woburn, Massachusetts 01801 ("ANIKA"), and Ortho Biotech Products, L.P., a New Jersey limited partnership, having a place of business at Route 22 East, P.O. Box 6914, Bridgewater, New Jersey, 08807-0914 ("OBI"). ANIKA and OBI are each referred to by name or as a "Party" or, collectively, as the "Parties." References to "ANIKA" and "OBI" shall include their respective Affiliates (hereinafter defined), where appropriate under the terms of this Agreement. RECITALS 1. ANIKA develops, manufactures and commercializes therapeutic products and devices intended to promote the repair, protection and healing of bone, cartilage and soft tissue. 2. On May 30, 2003, ANIKA submitted the third and final module of a PMA to the FDA for HA for the treatment of pain associated with osteoarthritis of the knee by intra-articular injection of such preparation. 3. OBI possesses research, development and commercialization capabilities, as well as proprietary technology in a broad range of therapeutic fields. 4. ANIKA desires to license its hyaluronic acid preparation marketed as Orthovisc(R) to OBI so that OBI may develop, commercialize, distribute and sell such preparation for indications and applications within the Field and in the Territory as provided herein. 5. ANIKA also desires to supply Orthovisc(R) to OBI on an exclusive basis for use by OBI in the commercialization of Orthovisc(R) pursuant to the terms of this Agreement. 6. ANIKA and Pharmaceutical Sourcing Group Americas, an affiliate of OBI, are entering into the Quality Agreement, in the form attached hereto as Exhibit E, as of the date hereof. 7. Unless defined elsewhere in this Agreement, capitalized terms used in this Agreement shall have the meanings set forth in Article I. NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto agree as follows: ARTICLE I - DEFINITIONS When used in this Agreement, each of the following terms, when capitalized in their initials, shall have the meaning set forth below. The term shall have the same meaning whether the singular or plural form is used. "Active Ingredient" shall have the meaning set forth in Section 6.10(ii) of this Agreement. "Adverse Knowledge" shall have the meaning set forth in Section 6.10(iv) of this Agreement. "Affiliate" of a Party means any company or entity which controls, is controlled by or is under common control with such Party, where control, for purposes of this definition, means (i) the possession, directly or indirectly, of the power to direct the management or policies of a Person or to veto any material decision relating to the management or policies of a Person or a majority of the composition of the board of directors (or similar governing body), in each case, whether through the ownership of voting securities, by contract or otherwise, or (ii) the Beneficial Ownership, directly or indirectly, of at least 50% of the voting securities of a Person. "Beneficial Ownership" shall be determined in compliance with Rule 13d-3 of the Securities Exchange Act of 1934. "Agreement" shall have the meaning set forth in the first paragraph hereto. "Alternative Supplier" shall have the meaning set forth in Section 6.10(i) of this Agreement. "Alternative Supplier Agreement" shall have the meaning set forth in Section 6.10(i) of this Agreement. "ANIKA Area" shall have the meaning set forth in Section 3.3 of this Agreement. "ANIKA Disclosure Date" shall have the meaning set forth in Section 14.1(b) of this Agreement. "ANIKA Know-How" means Information in ANIKA's Control, which is developed or acquired by ANIKA, either as of the Effective Date or at any time during the Term of this Agreement, which relates to the use of a Licensed Product in the Field. Notwithstanding anything herein to the contrary, ANIKA Know-How excludes ANIKA Patents. "ANIKA Patents" means any patent granted by any governmental authority in any jurisdiction within the Territory relating to a Licensed Product, which Patent is Controlled by ANIKA during the term of this Agreement. "ANIKA Potential Product" shall have the meaning set forth in Section 14.1(a) of this Agreement. "ANS" or "Annual Net Sales" means the Net Sales in a Calendar Year excluding sales between Affiliates, and to distributors outside the United States. 2 "Audit" has the meaning set forth in Section 5.6(d) of this Agreement. "Average Sales Price" shall have the meaning set forth in Section 6.2(a)(iii) of this Agreement. "Bankruptcy Code" has the meaning set forth in Section 18.16 of this Agreement. "Branding Materials" has the meaning set forth in Section 3.2(j) of this Agreement. "Business Day" means a day on which banking institutions in New York, New York are open for business. "Calendar Quarter" means a quarter in a Calendar Year and as defined by the J&J Universal Calendar. "Calendar Year" means those twelve months as defined by the J&J Universal Calendar. "Claiming Party" shall have the meaning set forth in Section 13.6 of this Agreement. "CMS" means Center for Medicare Services. "Competing Product" has the meaning set forth in Article XI (i) of this Agreement. "Confidential Information" shall have the meaning set forth in Section 7.1 of this Agreement. "Control" or "Controlling" means owned by or possesses the right to grant a license or sublicense without violating the terms of any agreement with any Third Party. "Customers" has the meaning set forth in the definition of Net Sales in this Article I. "Date of First Sale" means the date on which OBI (or an Affiliate or any of their distributors) first sells a Licensed Product to an unaffiliated Third Party in an arms length commercial transaction. "Develop" or "Development" means all activities relating to obtaining Regulatory Approval of Licensed Products within the Field and Territory, including, but not limited to, preclinical testing, toxicology, formulation, manufacturing process development, quality assurance and quality control, pharmacokinetics, clinical studies, Phase IV, development of kits and/or development of indications, applications and/or formulations to the extent formulation development is limited to optimization of the Licensed Product formulation such as formulation modifications to reduce specific adverse events, to reduce volume of Licensed Product per injection and to reduce the total number of injections by for example increasing the concentration of HA or viscosity of HA solution; provided that "Development" shall also mean any developments, inventions, processes, methods or works of authorship which is created, developed, invented or reduced to practice in connection with performing the foregoing described activities. "Development Invention" shall have the meaning set forth in Section 8.1 of this Agreement. 3 "Dispute" shall have the meaning set forth in Section 16.2 of this Agreement. "Diverted Product" has the meaning set forth in Article X(a)(iii) of this Agreement. "DOJ" shall have the meaning set forth in Section 17.1 of this Agreement. "Dollars" or "$" means lawful money of the United States in immediately available funds. "Domain Name Marks" shall have the meaning set forth in Section 3.3 of this Agreement. "Drug Approval Application" means an application for Regulatory Approval required before commercial sale or use of a Licensed Product as a drug in a regulatory jurisdiction. "Effective Date" means the last date of execution of this Agreement referred to above. "Failure to Supply" shall have the meaning set forth in Section 6.10(i) of this Agreement. "FDA" means the United States Food and Drug Administration or any successor agency. "Field" means the treatment of pain in humans associated with osteoarthritis by intra-articular injection. "Filing Party" shall have the meaning set forth in Section 8.4(b) of this Agreement. "FTC" shall have the meaning set forth in Section 17.1 of this Agreement. "GMP" means Good Manufacturing Practices as such term is generally understood in the medical device industry. "Governmental Antitrust Authority" shall have the meaning set forth in Section 17.1 of this Agreement. "Gray Market Product" has the meaning set forth in Article X (a)(ii) in this Agreement. "HA" means a hyaluronic acid whether as an acid, a pharmaceutically acceptable salt, or a mixture thereof, in any solid or solution phase form thereof, including, but not limited to, a sterile, nonpyrogenic solution of sodium hyaluronate in physiologic saline solution. "HSR Act" shall have the meaning set forth in Section 17.4(a) of this Agreement. "HSR Clearance Date" shall have the meaning set forth in Section 17.4(c) of this Agreement. "HSR Filing" shall have the meaning set forth in Section 17.4(b) of this Agreement. "Information" means technical information, techniques and data, whether in writing or not, generally not known to the public, relating to the use of Licensed Product in the Field and including techniques and data, including, but not limited to, screens, models, inventions, 4 practices, methods, knowledge, know-how, skill, experience, test data including pharmacological, toxicological and clinical test data, analytical and quality control data, marketing, pricing, distribution, sales, manufacturing data, and patent and legal data or descriptions. "Initial Estimated Transfer Price" shall have the meaning set forth in Section 6.2(a)(i) of this Agreement. "Initial Period" shall have the meaning set forth in Section 6.2(a)(i) of this Agreement. "Initial Report" shall have the meaning set forth in Section 6.2(a)(i) of this Agreement. "J Code" means a code issued pursuant to the HCFA Command Procedure Coding System (HCPCS) recognized by Medicare carriers and Medicare agencies. "J&J Universal Calendar means the annual calendar put forth by Johnson & Johnson describing scheduled monthly, quarterly and yearly accounting periods for the purposes of calculating net sales, royalty payments and sales based milestone payments. "Joint Patents" shall have the meaning set forth in Section 8.4(a) of this Agreement. "Licensed Product(s)" means products covered by ANIKA's PMA No. P030019 (i.e. Orthovisc(R)), or products whose characteristics satisfy the Specifications. For purposes of this Agreement, Licensed Product shall also include any product Developed pursuant to Section 2.1(c). "License Period" shall have the meaning set forth in Section 6.10(iii) of this Agreement. "Modified Licensed Product" shall have the meaning set forth in Section 8.9 of this Agreement. "Net Sales" means, consistent with, in the United States, generally accepted accounting principles and, in the rest of the Territory, OBI worldwide practices and procedures, and in each such case as consistently applied with respect to all Licensed Products, the amount invoiced by OBI, its Affiliates, and its distributors and sub-licensees to Customers for sales of Licensed Product in the Territory, less accruals estimated, credits taken, and actual payments (to the extent not previously accrued) made for: (i) discounts, including, but not limited to, cash discounts, discounts to managed care or similar organizations or government organizations, rebates paid, credited, accrued or actually taken, including government rebates such as Medicaid charge backs or rebates, and retroactive price reductions or allowances actually allowed or granted from the billed amount, and commercially reasonable and customary fees paid to wholesalers, buying groups, hospitals or physicians, excluding any distributors or sub-licensees ("Customers"), (ii) credits or allowances actually granted upon claims, rejections or returns of such sales of Licensed Products, including recalls (provided such recalls are in accordance with Section 6.9 of this Agreement and except to the extent ANIKA has otherwise paid for such recall), (iii) taxes, duties or other governmental charges levied on or measured by the billing amount when included in billing, as adjusted for rebates, charge-backs, and refunds (and similar adjustments), (iv) actual 5 write-offs for uncollectable accounts, PROVIDED, HOWEVER, that if collected at a later date, such amounts will be added to Net Sales, and (v) freight, postage, shipping and insurance charges paid for delivery of such Licensed Products, to the extent billed and reflected on the invoices. For purposes of calculating "Net Sales," a Licensed Product shall be considered "sold" upon the invoicing of such Licensed Product by OBI to a Third Party (other than to any of its Affiliates), or upon invoicing of such Licensed Product by any of OBI's Affiliates or distributors or sub-licensees to a Third Party. "OBI Area" shall have the meaning set forth in Section 3.3 of this Agreement. "OBI Disclosure Date" shall have the meaning set forth in Section 14.2(b) of this Agreement. "OBI Potential Products" shall have the meaning set forth in Section 14.2(a) of this Agreement. "OBI Sellers" means OBI, its Affiliates, sub-licensees and distributors. "Patent" means (i) valid and enforceable patent, including any extension, registration, confirmation, reissue, continuation, divisional, continuation-in-part, re-examination or renewal thereof, and (ii) pending applications for Letters Patents, in any jurisdiction within the Territory. "Patent Costs" means the reasonable fees and expenses paid to outside legal counsel and other Third Parties, and filing and maintenance expenses, incurred in connection with the establishment and maintenance of rights under Patents. "Person" shall mean any natural person, corporation, firm, limited liability corporation, limited liability partnership, business trust, joint venture, association, organization, company, partnership or other business entity, or any government or any agency or political subdivision thereof. "Per Unit Overpayment" shall have the meaning set forth in Section 6.2(a)(i) of this Agreement. "Per Unit Underpayment" shall have the meaning set forth in Section 6.2(a)(i) of this Agreement. "Phase IV" shall mean product support clinical trials of the Licensed Product with an approved label claim commenced after receipt of Regulatory Approval in the country where such trial is being conducted. "PMA" means a premarket approval application filed with the FDA, or if a PMA is not the appropriate filing, then the suitable filing required to obtain Regulatory Approval. "PMA" includes the "Currently Filed PMA", which is ANIKA's PMA No. P030019 for ORTHOVISC(R) presently under consideration by the FDA, as may be supplemented, amended or augmented from time to time. "Quality Agreement" has the meaning set forth in the recitals to this Agreement. "R&D Pipeline" shall mean the research and development projects developed by ANIKA. 6 "Raw Materials" shall mean the materials, components, and packaging required to manufacture and package the Licensed Product in accordance with the Specifications. "Reference Quarter" shall have the meaning set forth in Section 6.2(a)(iii) of this document. "Regulatory Approval" shall mean all regulatory agency registrations and approvals by government, pricing or health authorities in a country which are required for first use or sale of a medical device or drug, including, importation, manufacture (where manufacture is required) or use, in each case, in the Field in the Territory. "Replacement Product" shall have the meaning set forth in Section 5.2(a) of this Agreement. "Retained Sample" shall have the meaning set forth in Section 6.8 of this Agreement "Rolling Annual Forecast" shall have the meaning set forth in Section 6.3(a) of this Agreement. "Second Period" shall have the meaning set forth in Section 6.2(a)(ii) of this Agreement. "Second Period Per Unit Overpayment" shall have the meaning set forth in Section 6.2(a)(ii) of this Agreement. "Second Period Per Unit Underpayment" shall have the meaning set forth in Section 6.2(a)(ii) of this Agreement. "Second Period Average Sales" shall have the meaning set forth in Section 6.2(a)(ii) of this Agreement. "Second Report" shall have the meaning set forth in Section 6.2(a)(ii) of this Agreement. "Second Source Qualification" shall have the meaning set forth in Section 6.10(ii) of this Agreement. "Shipping Point" shall have the meaning set forth in Section 6.6(b) of this Agreement. "Site" shall have the meaning set forth in Section 3.3 of this Agreement. "Specifications" shall mean the specifications for the composition, manufacture, packaging, and/or quality control of all Licensed Product, as set forth on EXHIBIT A, attached hereto and made a part hereof, as the same may hereafter be modified by mutual agreement of the Parties in writing and attached hereto as a replacement for, or as an addition to, EXHIBIT A. "Steering Committee" has the meaning set forth in Article 15 of this Agreement. "Supply Year" shall mean Calendar Year. 7 "Term" shall mean the period commencing on the Effective Date and terminating on the latest to expire of the effective periods of this Agreement with respect to any country in the Territory as may be extended pursuant to Section 12.1 of this Agreement. "Territory" means the United States of America ("U.S."), and Mexico. "Third Party" means any entity other than ANIKA, OBI or any Affiliates of ANIKA or OBI. "Total Initial Units" shall have the meaning set forth in Section 6.2(a)(i) of this Agreement. "Total Second Period Units" shall have the meaning set forth in Section 6.2(a)(ii) of this Report. "Trademark" has the meaning set forth in Section 3.2(a)(i) of this Agreement. "Unit" shall mean each syringe containing Licensed Product. "Unit Price" shall have the meaning set forth in Section 6.2(a) of this Agreement. "Validity Challenge Claim" shall have the meaning set forth in Section 8.6(i) of this Agreement. "Vision System" means an automated system that reads information (either printing or bar codes). ARTICLE II - PRODUCT DEVELOPMENT 2.1. DEVELOPMENT RESPONSIBILITIES. (a) UNITED STATES. With respect to the Currently Filed PMA for Licensed Product by ANIKA, ANIKA shall use commercially reasonable efforts consistent with its normal business practices to obtain Regulatory Approval with the FDA. ANIKA shall be solely responsible for obtaining such Regulatory Approval, at its sole cost and expense. ANIKA shall on a regular basis report to OBI on the progress of its efforts in obtaining such Regulatory Approval. (b) MEXICO. OBI shall have the right but not the obligation to file a Drug Approval Application in Mexico, at its sole cost and expense. Prior to making any decision on whether to file for Regulatory Approval in Mexico of Licensed Product, OBI shall discuss the matter through the Steering Committee. A decision of whether to file for Regulatory Approval and/or launch Licensed Product in Mexico is required to be mutually agreed upon by the Parties in advance of any filing. Subject to the foregoing, should OBI proceed with such filing of a Drug Approval Application in Mexico, ANIKA shall cooperate with the preparation and execution of such Drug Approval Application. OBI agrees to name ANIKA as the approved supplier of the Licensed Product in any such filings. ANIKA shall have sole ownership rights in any such Drug Approval Application in Mexico, notwithstanding OBI's participation in the filing thereof. If by the end of the second quarter of 2005 OBI has failed to commence material and concerted efforts to market and commercialize Licensed Product in Mexico, and if the Steering Committee has 8 determined that commercialization of Licensed Product will not materially impair the sales of Licensed Product in the United States, then OBI shall immediately forfeit its rights and licenses under this Agreement with respect to any Licensed Product in Mexico, all such rights and licenses (including distribution rights), with respect to such Licensed Product in Mexico shall revert to or remain with ANIKA (as the case maybe), and all references to "Territory" herein will automatically exclude Mexico. (c) GENERAL. OBI shall have the exclusive right to Develop Licensed Product in the Territory in the Field by carrying out clinical trials in the Territory. Prior to making any decision on whether to so Develop Licensed Product, OBI shall discuss the matter through the Steering Committee. OBI agrees to carry out such Development of any Licensed Product in the Territory and Field consistent with its normal business practices regarding a product of similar commercial potential. OBI hereby grants ANIKA the exclusive right to copy, modify, distribute and use any such new Developments or Information created or Development in connection with such Development outside the Territory including the right to cross reference any OBI Regulatory Approvals and use the data and Information contained therein at a cost equal to half of OBI's fully allocated Development costs associated with any such new Development used by ANIKA. OBI agrees to in good faith begin a clinical trial for a new indication for such Licensed Product or a Phase IV clinical trial within 12 months from receipt of approval of the Currently Filed PMA from the FDA unless otherwise mutually agreed to by the Parties. 2.2. OWNERSHIP AND OBTAINING OF DRUG APPROVAL APPLICATIONS AND REGULATORY APPROVALS. With respect to all Regulatory Approvals, including the Currently Filed PMA and supplements thereto directed to new indications and formulations Developed by OBI hereunder, ANIKA shall have sole ownership rights in any Regulatory Approval received and all relevant documents associated with the Regulatory Approval and corresponding Drug Approval Application materials; provided, however, that ANIKA shall be permitted to assign or license such ownership rights to OBI in ANIKA's sole discretion. Except to the extent explicitly provided for in this Agreement, ANIKA will not be required to conduct any clinical trials and or other studies in connection with any Regulatory Approval and ANIKA's only obligation in connection herewith is to use commercially reasonably efforts to prepare and file applicable agency registrations and approvals. Notwithstanding anything to the contrary contained herein, upon reasonable request by OBI, ANIKA agrees to set up a meeting or initiate contact with the FDA in connection with Licensed Product. In such meeting or contact, OBI shall be permitted to communicate and interact directly with the FDA in connection with obtaining a Regulatory Approval from the FDA; provided that (a) OBI shall, notify ANIKA in advance of such desired communications or interaction (including the probable substance thereof); (b) ANIKA facilitates and coordinates such communications or interaction; and (c) a representative of Anika shall be present for and participate during such communications or interaction. 9 ARTICLE III - COMMERCIALIZATION 3.1. OBI'S MARKETING OBLIGATIONS FOR LICENSED PRODUCTS. All business decisions related to, the sale, price and promotion of Licensed Products under this Agreement and the decisions whether to market or not market any particular Licensed Product shall be within the sole discretion of OBI. To the extent permitted in Section 15(e), the Steering Committee shall review and comment on the relevant marketing and sales activities. Any marketing or commercialization of a Licensed Product in one country within the Territory shall not obligate OBI to market or commercialize said Licensed Product in any other country. Furthermore, subject to Article IX and XI of this Agreement, OBI makes no representation, warranty or covenant that the marketing of a Licensed Product shall be the exclusive means by which OBI will participate in any therapeutic field. In commercializing any Licensed Product, OBI will use reasonable commercial efforts that are consistent with the efforts it uses in commercializing its own pharmaceutical products. 3.2. TRADEMARKS. (a) (i) ANIKA hereby grants to OBI for the Term of this Agreement the exclusive, royalty-free right to use the trademark "Orthovisc(R)" (the "Trademark") only in connection with the marketing, distribution and sale of Licensed Product in the Territory and only in the Field. OBI expressly agrees that it will label all packaging containing the Licensed Product with the following designation, "Orthovisc(R) is a trademark of ANIKA Therapeutics, Inc.," and will sell all Licensed Product only under the trademark "Orthovisc(R)." ANIKA agrees that it will not use or give rights to a Third Party to use the Trademark in the Territory in connection with any other product. OBI agrees that all of its use of the Trademark will inure to the benefit of ANIKA. (ii) OBI shall not use any trademark, service mark, trade name, logo, internet domain name or design which is the same or substantially similar to Trademark as such to cause confusion in the mind of a reasonable person. (iii) All costs and expenses incurred with respect to the preparation of Trademark applications, and with respect to the filing and/or maintenance of Trademark registrations and other documentation required by government agencies shall be paid by ANIKA. OBI shall assist and cooperate with ANIKA in connection with the filing and/or maintenance of any such Trademark registrations and other documentation required by government agencies in the Territory as may be reasonably requested by ANIKA from time to time. (iv) In the event OBI desires to market the Licensed Product under a trademark other than "Orthovisc," utilization of such alternative trademark shall be subject to the approval of ANIKA. OBI shall be fully responsible at its sole cost for obtaining such 10 alternative trademark and shall own such trademark. ANIKA shall have no rights to use such trademark outside the Territory. (b) OBI will supply ANIKA with samples of its use of Trademark upon ANIKA's request. (c) OBI shall use the Trademark only in a manner and form designed to maintain the high quality of the Trademark. If ANIKA at any time finds that OBI's or any of its sublicensee's or distributor's use of the Trademark is not consistent with standards of quality acceptable to ANIKA, ANIKA may notify OBI in writing of such deficiencies, and if OBI fails to correct such deficiencies within sixty days after receipt of such notice, ANIKA, may, at its election, terminate the license granted in Section 3.2(a)(i) immediately. (d) OBI may not sublicense, other than to an Affiliate of OBI, the Trademark to any Third Party without ANIKA's prior written consent; provided that any permitted sublicensee must agree to be bound by the terms and conditions of this Section 3.2. (e) ANIKA reserves all other rights in and to the Trademark, including, without limitation, the right to license the Trademark in all countries outside the Territory. (f) OBI shall never challenge ANIKA's ownership of or right to license, or the validity of, the Trademark or any application for registration thereof or any trademark registration thereof. OBI shall never file any application for a registration for the Trademark in any office or agency anywhere in the world. (g) Each of the Parties shall promptly notify the other Party of any infringement of the Trademark by a Third Party in the Territory and cooperate with each other in deciding how to proceed. If the Trademark is infringed by a Third Party in the Territory, ANIKA shall either (i) bring an action for infringement, at its sole expense, against such third party, in which case ANIKA shall be entitled to any and all proceeds resulting from such action, and shall keep OBI informed as to the prosecution of the action; or (ii) notify OBI in writing that it will not pursue an infringement action against the Third Party. In the event ANIKA exercises option (ii) in the immediately preceding sentence, OBI shall either (i) bring an action for infringement, at its sole expense, against such Third Party, in which case OBI shall be entitled to any and all proceeds resulting from such action, and shall keep ANIKA informed as to the prosecution of the action; or (ii) notify ANIKA in writing that it will not pursue an infringement action against the third party. In the event OBI exercises option (ii) in the immediately preceding sentence, the Steering Committee shall meet within ten (10) days of OBI's receipt of ANIKA's notification to determine whether the third party infringement prevents OBI from competing effectively in the affected market(s) and, if so, how best to proceed. (h) If a Third Party asserts that a trademark owned by it is infringed by the use of Orthovisc(R) by OBI in the Territory in accordance with this Agreement, ANIKA a has an obligation under to defend against such assertion or resulting litigation within thirty (30) days after receiving written notice thereof, and OBI shall assist and cooperate with ANIKA in the 11 defense of such suit. ANIKA shall bear the full costs and expenses of such defense and shall assume full responsibility for the payment of any award for damages, or any amount due pursuant to any settlement entered into by ANIKA. ANIKA shall not enter into any settlement, consent decree or other voluntary final disposition of the suit without the prior written notice to OBI, and OBI is not responsible in any way whatsoever for any such settlement or compromise entered into without such prior written consent. (i) Upon termination of this Agreement for any reason, the license granted in this Section 3.2 shall immediately terminate, and OBI and all of its sublicensees shall immediately cease all use of the Trademark. (j) BRANDING MATERIALS. OBI shall bear the costs associated with its efforts to establish and promote the Orthovisc(R) brand in the Territory, as set out in any marketing plan(s) reviewed by the Steering Committee. The Parties agree that the materials and information developed by OBI for this purpose (the "Branding Materials"), are the sole property of OBI. As used herein, the term "Branding Materials" includes without limitation promotional, training, and public relations materials, trademarks, slogans, advertising tag lines, logos and other trade dress, whether in print, video or other format (including, without limitation, the content contained in the website referred to in Section 3.3), but expressly excludes the Trademark, any logo, and "trade dress" of the Licensed Product's package, which is licensed to OBI hereunder, which Trademark, logo and trade dress shall be the sole property of ANIKA. ANIKA may elect to purchase from OBI a paid-up perpetual license to sell, sublicense, reproduce, modify distribute any or all of the Branding Materials for use outside the Territory, provided ANIKA shall have no right to purchase OBI trademarks and logos, and other Branding Materials, which Branding Materials are used to promote other OBI products. If ANIKA so elects, OBI shall provide one copy of the digital file containing the Branding Materials ANIKA has selected, and ANIKA shall pay to OBI within 45 days after receipt of the digital file a one-time fee equal ten percent (10%) of OBI's documented Third Party hard costs for conceptualization, preproduction, and production of the selected Branding Materials (excluding printing costs). 3.3. Subject to the terms and conditions of this Agreement, ANIKA hereby grants to OBI for the Term of this Agreement the exclusive, non-sublicensable, royalty-free right to use the domain name orthovisc.com. OBI shall have the sole authority to create and post content on the Territory portion of any website identified by the orthovisc.com domain name, and all such content, including copyrights therein, shall belong to OBI. ANIKA shall maintain the orthovisc.com domain name registration in good order for the duration of this Agreement and any extensions thereof. OBI will, at its cost, design, develop, host, operate and maintain a web site located at www.orthovisc.com, (the "Site") which will, among other things, market and promote Licensed Product. ANIKA shall have the right, at its cost, to develop, launch and update an ANIKA branded area on the Site (the "ANIKA Area") which targets users outside of the Territory. OBI will cooperate with ANIKA in connection with the development, launch and updating of the ANIKA Area, including, but not limited to modifying the Site from time to time to incorporate ANIKA Area content delivered by ANIKA. The orthovisc.com website will be constructed in a manner so as to allow visitors to be directed to either the OBI portion of the website, which will relate to the Territory (the "OBI Area"), and to the ANIKA Area, which will relate to the ANIKA 12 regions of the world excluding the Territory. Reference herein to OBI's authority to create and post content on the orthovisc.com website only relates to the portion or link relating to the OBI Area. OBI acknowledges and agrees that (a) OBI has no right, title and/or interest in the orthovisc.com domain name, or any trademarks, trade names and service marks that may be contained in the orthovisc.com domain name (collectively, "Domain Name Marks"), other than the limited license granted in this Section 3.3, (b) all rights arising from OBI's use of the Domain Name Marks inure to the benefit of ANIKA, (c) OBI will only use the orthovisc.com domain name and any website identified by such domain name for lawful purposes only and (d) upon termination of this Agreement, OBI shall immediately discontinue all use of the orthovisc.com domain name. ARTICLE IV - INTELLECTUAL PROPERTY LICENSE GRANTS 4.1. ANIKA hereby grants to OBI an exclusive, non-transferable royalty bearing, license under ANIKA Know-How and ANIKA Patents in the Territory solely to use and sell Licensed Products in the Field in the Territory, with a right to grant sublicenses (to sublicensees and distributors), provided, however, (a) in the United States, OBI may only grant sublicenses to Affiliates or, if approved in advance in writing by ANIKA, to Third Parties and, (b) OBI may grant sublicenses in Mexico to its Affiliates or to Third Parties who are OBI's customary historical normal course distributors in accordance with past practice, without prior notice or approval by ANIKA, and to non-customary distributors only upon prior written notice or approval by ANIKA, which will not be unreasonably withheld; provided, however, that any such sublicensee or distributor shall be responsible for marketing and promotion of such Licensed Product within the distribution territory. With respect to any such sublicensees or distributors, OBI shall be responsible for making any payments due under this Agreement to ANIKA resulting from sales made by such sublicensees or distributors and the compliance by sublicensees or distributors with all applicable terms of this Agreement. ARTICLE V - PAYMENTS In consideration of the rights and licenses granted under this Agreement, OBI agrees to pay ANIKA the following non-refundable amounts: 5.1. UPFRONT PAYMENT. OBI agrees to pay to ANIKA a non-refundable upfront payment of two million dollars ($2,000,000) within 5 Business Days of the Effective Date. 5.2. PAYMENT EVENTS (a) OBI agrees to make the following non-refundable payments to ANIKA under this Section 5.2 upon the first occurrence of each event for the first Licensed Product. If the first Licensed Product is replaced by another Licensed Product (a "Replacement Product"), OBI shall not be obligated to make the same event payments for the Replacement Product as it already 13 made in connection with the first Licensed Product which was replaced. It is understood that in no event shall OBI be obligated to make the payment due on any event more than once with respect to the same Licensed Product (or its Replacement Product) in connection with any indication, application, formulation, and/or use, regardless of the number of any of such indications, applications, formulations and/or uses. (b) Within twenty (20) Business Days following receipt from ANIKA of a notice and invoice regarding the achievement of each of the following events in connection with the Currently Filed PMA for Licensed Product as follows: (i) [***************************************************** ************************************]; (ii) [***************************************************** ************************************]; (iii) [***************************************************** ************************************] (iv) [***************************************************** ************************************************************************ ************************************************************************ *****************] For avoidance of doubt, if each of the items (i)-(iv) above were achieved, ANIKA would receive a total of thirty two million five-hundred thousand dollars ($32,500,000). (c) Provisions (i)-(iii) in this subsection 5.2(c) as set forth below refer to Annual Net Sales ("ANS") in the Territory: (i) Referring to the 2005 ANS, either, and only one of, (i)(1) if such 2005 ANS exceed [***************************** ****], OBI agrees to pay ANIKA [**************************************** ****], or (i)(2) if such 2005 ANS exceed [***************************** *****], OBI agrees to pay ANIKA [*************************************** *********** *********], within thirty (30) Business Days from the end of the 2005 Calendar Year; (ii) Referring to the 2006 ANS, either, and only one of, (ii)(1) if such 2006 ANS exceed [***************************** ****], OBI agrees to pay ANIKA [**************************************** ********* ************], or 14 (ii)(2) if such 2006 ANS exceed [***************************** *], OBI agrees to pay ANIKA [******************************************* ****], within thirty (30) Business Days from the end of the 2006 Calendar Year; and (iii) Referring to the 2008 ANS, either, and only one of, (iii)(1) if such 2008 ANS exceed [**************************** **], OBI agrees to pay ANIKA [****************************************** *], or (iii)(2) if such 2008 ANS exceed [***************************** **], OBI agrees to pay ANIKA [****************************************** ****], within thirty (30) Business Days from the end of the 2008 Calendar Year. 5.3. EARNED ROYALTIES FOR LICENSED PRODUCTS. In addition to any payments pursuant to Section 5.2 of this Agreement, ANIKA shall be entitled to the following royalty payments: (a) With respect to each Calendar Year (including 2004), OBI shall pay ANIKA a royalty according to the following Net Sales: (i) For the portion of ANS in the Territory up to [*****************], a royalty of [******************] on such portion of Net Sales during such Calendar Year; PLUS (ii) For the portion of ANS in the Territory that is in excess of [***********] up to and including [******************], a royalty of [***********************] on such portion of Net Sales during such Calendar Year; PROVIDED HOWEVER, if [**********************], such royalty shall be [*****************************] on such portion of Net Sales during such Calendar Year and each subsequent Calendar Year; PLUS (iii) For the portion of ANS in the Territory that is in excess of [**********], a royalty of [**********************] on such portion of Net Sales during such Calendar Year. (b) Royalties shall be paid in respect of all Licensed Products in the Territory for the entire Term of this Agreement, including extensions or renewals thereof. 5.4. THIRD PARTY PATENTS. If a Patent or Patents of a Third Party should be in force in any country in the Territory during the term of this Agreement covering the use or sale of any Licensed Product, and if after receiving such notice from such Third Party it should prove in OBI's reasonable judgment after consultation with ANIKA, impractical or impossible for OBI or any OBI Affiliate to continue performing the activity or activities licensed hereunder without obtaining a royalty bearing 15 license from such Third Party under such Patent or Patents in said country, then OBI shall promptly notify ANIKA in writing. If ANIKA agrees that a license is required it shall use commercially reasonable efforts to procure such license from the Third Party at its cost paying any compensation to such Third Party for such license. If ANIKA disagrees that such a license is required, the Parties shall submit the issue to an independent patent attorney selected mutually by the Parties to determine whether a license is needed. The decision of such patent attorney shall be final and to the extent that such patent attorney decides that a license is required, ANIKA will use commercially reasonable efforts to procure such license from the Third Party at its cost. The cost of such patent attorney shall be borne by the non-prevailing party in the disagreement. 5.5. CURRENCY RESTRICTIONS. Except as herein provided in this Section 5.5, all royalties and milestones shall be paid in Dollars. If, at any time, legal restrictions prevent the prompt remittance of part of or all royalties and milestones with respect to any country where Licensed Products are sold, OBI shall document such restrictions to ANIKA and shall then have the right and option to make such payments by depositing the amount thereof in local currency to ANIKA's accounts in a bank or depository designated by ANIKA in such country. 5.6. REPORTS AND RECORDS. (a) During the Term of this Agreement and commencing with the Date of First Sale of a Licensed Product, OBI shall furnish, or cause to be furnished to ANIKA, written reports, including the calculation of royalty payment due, within thirty (30) Business Days following the end of each Calendar Quarter, showing: (i) the Net Sales of each Licensed Product sold by each of OBI, its Affiliates and its Sublicensees in each country of the Territory, during the Calendar Quarter and the total for all quarters of the current Calendar Year; (ii) the Units of each Licensed Product sold by each of OBI, its Affiliates and its Sublicensees in each country of the Territory, during the Calendar Quarter and the total for all quarters of the current Calendar Year; (iii) the royalties payable in Dollars, which shall have accrued hereunder in respect to such Net Sales for the current Calendar Year; and (iv) a detailed calculation of Net Sales for the Calendar Quarter and the total amount of Net Sales for the current Calendar Year through the most recently completed Calendar Quarter. (b) All royalty payments to be made by OBI to ANIKA under Section 5.3 shall be made in Dollars by same day wire transfer no later than forty (40) Business Days from the end of the applicable Calendar Quarter. 16 (c) In the case of sales outside the United States, for the purpose of this Article 5, such sales shall be converted to Dollars in accordance with OBI's current customary and usual procedures for calculating same which are the following: the rate of currency conversion shall be calculated using a simple monthly period average of the end "spot rates" provided by Brown Brothers Harriman, 59 Wall Street, NY, NY 10005, for each Calendar Quarter, or if such rates are not available, the same computation using the spot rates as published by a leading United States commercial bank for such accounting period. These methods of conversion are consistent with OBI's current accounting methods. OBI shall give ANIKA prompt written notice of any proposed changes to OBI's customary and usual procedures for currency conversion, which shall only apply after such notice has been delivered to and approved by ANIKA, provided that such changes continue to maintain a set methodology for currency conversion. (d) Each report shall be made within thirty (30) Business Days from the end of each calendar quarter. OBI shall keep accurate records in sufficient detail to enable royalties and other payments payable hereunder to be determined. OBI shall be responsible for all royalties and late payments that are due to ANIKA that have not been paid by OBI, its Affiliates, its sublicensees and distributors. All costs of enforcing or collecting payment hereunder, including attorney's fees and court costs, shall be paid by the non-prevailing Party. OBI shall maintain complete and accurate records, in accordance with U.S. generally accepted accounting practices, which are relevant to costs, expenses and payments under this Agreement and such records shall be open during reasonable business hours for a period of five (5) years from creation of individual records for examination at ANIKA's expense and not more often than once each year by a certified public accountant or other representative selected by ANIKA and acceptable to OBI for the sole purpose of verifying the correctness of calculations or such costs, expenses or payments made under this Agreement (the "Audit"). If OBI disagrees with the calculation of the Audit, and OBI and ANIKA cannot resolve their disagreement, the matter shall be submitted to arbitration in accordance with Article XVI. In the absence of material discrepancies (in excess of 5% of the disputed amount) in any request for reimbursement resulting from such audit, the accounting expense shall be paid by ANIKA. If material discrepancies do result, OBI shall bear the reasonable audit expense. Any records or accounting information received from OBI shall be Confidential Information for purposes of Article VII. 5.7. TAXES. (a) OBI will make all payments to ANIKA under this Agreement without deduction or withholding for taxes except, solely with respect to sales of Licensed Product in Mexico, to the extent that any such deduction or withholding is required by law in effect at the time of payment. (b) Solely with respect to sales of Licensed Product in Mexico, any tax required to be withheld on amounts payable under this Agreement will promptly be paid by OBI on behalf of ANIKA to the appropriate governmental authority, and OBI will furnish ANIKA with proof of 17 payment of such tax. Any such tax required to be withheld will be an expense of and borne by ANIKA. (c) OBI and ANIKA will cooperate with respect to all documentation required by any taxing authority or reasonably requested by OBI or ANIKA to secure a reduction in the rate of applicable withholding taxes solely with respect to sales of Licensed Product in Mexico. (d) If OBI had a duty to withhold taxes in connection with any payment it made to ANIKA under this Agreement but OBI failed to withhold, and such taxes were assessed against and paid by OBI, then ANIKA will indemnify and hold harmless OBI from and against such taxes. If OBI makes a claim under this Section 5.7(d), it will comply with the obligations imposed by Section 5.7(b) as if OBI had withheld taxes from a payment to ANIKA. ARTICLE VI - MANUFACTURE 6.1. SUPPLY OF PRODUCTS. Subject to the Terms of this Agreement, during the term of this Agreement, ANIKA agrees to supply OBI with those quantities of Licensed Product as ordered by OBI pursuant to this Agreement, and OBI shall purchase from ANIKA 100% of OBI's requirements for Licensed Products to be sold in the Territory subject to the ordering procedures set forth in Article VI. 6.2. PRICES FOR PRODUCT. (a) TRANSFER PRICES. The price for each Unit of Licensed Product sold by ANIKA to OBI shall be set at [***] of the Unit Price (as defined below); PROVIDED, HOWEVER, in no event shall [***] of the Unit Price be less than [***]. "Unit Price" is hereby defined as follows: (i) FIRST CALENDAR QUARTER. The Unit Price for the period from the Date of First Sale until the last day of the first Calendar Quarter ended immediately following the Date of First Sale (the "Initial Period"), shall be the Initial Average Sales Price for such Initial Period where "Initial Average Sales Price" shall mean the fraction the NUMERATOR of which is the total Net Sales during such Initial Period and the DENOMINATOR of which is the total Units sold by the OBI Sellers during such Initial Period (the "Total Initial Units"). As the Unit Price for such Initial Period cannot be determined until after the end of such Initial Period, ANIKA shall invoice OBI at a transfer price equal to [***] of OBI's published list price ("Initial Estimated Transfer Price") for Units sold during such Initial Period. Within ten (10) days following the end of such Initial Period, OBI will provide ANIKA with a report containing the Net Sales for such Initial Period and the total Units sold during such Initial Period (the "Initial Report"). Within ten (10) days following the receipt of the Initial Report, (A) if the Initial Average Sales Price is greater than the Initial Estimated Transfer Price (such difference, the "Per Unit Underpayment"), OBI shall pay to ANIKA the product of (1) the Per Unit Underpayment and (2) the Total Initial Units, 18 and (B) if the Initial Estimated Transfer Price is greater than the Initial Average Sales Price (such difference, the "Per Unit Overpayment"), ANIKA shall pay to OBI the product of (a) the Per Unit Overpayment and (b) the Total Initial Units, but in no event shall ANIKA pay any such amount to the extent such payment would result in ANIKA retaining a Unit Price of less than [***]. (ii) SECOND CALENDAR QUARTER. The Unit Price for the Calendar Quarter immediately succeeding the Initial Period (the "Second Period") shall be the Second Period Average Sales Price for such Second Period where "Second Period Average Sales Price" shall mean the fraction the NUMERATOR of which is the total Net Sales during such Second Period and the DENOMINATOR of which is the total Units sold by the OBI Sellers during such Second Period (the "Total Second Period Units"). As the Unit Price for such Second Period cannot be determined until after the end of such Second Period, ANIKA shall invoice OBI at a transfer price equal to Initial Estimated Transfer Price for Units sold during such Second Period. Within ten (10) days following the end of such Second Period, OBI will provide ANIKA with a report containing the Net Sales for such Second Period and the total Units sold during such Second Period (the "Second Report"). Within ten (10) days following the receipt of the Second Report, (A) if the Second Period Average Sales Price is greater than the Initial Estimated Transfer Price (such difference, the "Second Period Per Unit Underpayment"), OBI shall pay to ANIKA the product of (1) the Second Period Per Unit Underpayment and (2) the Total Second Period Units, and (B) if the Initial Estimated Transfer Price is greater than the Second Period Average Sales Price (such difference, the "Second Period Per Unit Overpayment"), ANIKA shall pay to OBI the product of (a) the Second Period Per Unit Overpayment and (b) the Total Second Period Units, but in no event shall ANIKA pay any such amount to the extent such payment would result in ANIKA retaining a Unit Price of less than [***]. (iii) SUBSEQUENT CALENDAR QUARTERS. The Unit Price for each Calendar Quarter ended after the Second Period shall be the Average Sales Price determined from the Calendar Quarter ended two Calendar Quarters immediately preceding such Calendar Quarter (the "Reference Quarter") (for instance, in the case of Q4, the Calendar Quarter ended two Calendar Quarters immediately preceding would be Q2), where "Average Sales Price" shall mean the fraction the NUMERATOR of which is the total Net Sales during such Reference Quarter and the DENOMINATOR of which is the total Units sold by the OBI Sellers during such Reference Quarter. Within five (5) Business Days following the end of each Calendar Quarter, OBI shall provide ANIKA with a preliminary and unaudited report containing the Net Sales for each such Calendar Quarter. These preliminary and unaudited reports will be superceded by the reports under Section 5.6(a) at the time those reports are required to be furnished. (b) PAYMENT TERMS. Payment terms on all orders of Licensed Product shall be forty-five (45) days net of invoice date. OBI shall keep accurate records in sufficient detail to enable 19 transfer fees and other payments payable hereunder to be determined. OBI shall be responsible for all transfer prices and late payments that are due to ANIKA. Any past due amounts will be subject to a late fee of 1% per month, or the highest rate allowed by law, whichever is less, with such interest accrual commencing on the thirtieth day after the end of the month such payment was due. All costs of enforcing or collecting payment hereunder, including attorney's fees and court costs, shall be paid by the non-prevailing Party. Breach for non-payment commences on the forty-sixth day following shipment of the Product by ANIKA, assuming all invoice data from ANIKA is accurate. 6.3. FORECASTS, ORDERS. (a) Prior to the beginning of each Calendar Quarter during the term of this Agreement, OBI shall provide ANIKA with a non-binding written forecast of OBI's expected requirements for Licensed Products during the following twelve months, designated M1-M12 and broken down by months and which shall include order dates, quantity and shipping dates ("Rolling Annual Forecasts"). As pertains for each Rolling Annual Forecast, the forecast for months designated M7-M9, once set, may only be increased or decreased by up to 50% in the aggregate from the original forecast for such month as the forecast is rolled forward at the beginning of the next quarters, unless otherwise agreed to by ANIKA. By way of example, assume the following four annual rolling forecast.
FORECAST M1-M3 M4-M6 M7-M9 M10-M12 - ---------------------------------------------------------------------------------------------------- 1 Jan - March April - June JULY - SEPT Oct. - Dec. 2 April - June July - Sept OCT. - DEC. Jan - March 3 July - Sept Oct. - Dec. JAN - MARCH April - June 4 Oct. - Dec. Jan - March APRIL - JUNE July - Sept
Assume during Forecast 1, the forecast for July - September was 100 Units. Accordingly, in each of Forecasts 2 and 3, the maximum forecast for July-September is 150 Units and the minimum forecast for July-September is 50 Units. The initial Rolling Annual Forecast shall be delivered by OBI within 2 weeks of the Effective Date of the Agreement. (b) ORDERS. The initial launch and inventory build quantities will be exempt from this schedule, and determined by mutual agreement between ANIKA and OBI. OBI shall place any binding orders for Licensed Product by written or electronic purchase order (or by any other means agreed to by the Parties) to ANIKA, which shall be placed at least 3 months prior to the desired date of delivery and shall be consistent with the forecast provided for such Calendar Quarter in the latest Rolling Annual Forecast. The Parties acknowledge that OBI is not obligated to buy any specific amount of Licensed Product under this Agreement, except for the quantities which OBI shall actually order through such binding purchase orders in compliance with this Section 6.3(b). 20 (c) CONFLICTS. To the extent of any conflict or inconsistency between this Agreement and any purchase order, purchase order release, confirmation, acceptance or any similar document, the terms of this Agreement shall govern. 6.4. MOST FAVORED CUSTOMER. In consideration of the arrangements provided in this Agreement for the OBI to purchase Licensed Product exclusively from ANIKA, ANIKA agrees that during the term of this Agreement OBI shall be treated with "most favored nation" status in connection with allocation of HA for manufacturing Licensed Product, and, accordingly, if ANIKA is unable to supply all of the quantities of Licensed Product ordered by OBI pursuant to binding orders in accordance with this Agreement, ANIKA shall not provide any other customer (which customer is similarly situated or purchases equivalent or less volume of products from ANIKA than OBI in the aggregate) with preferential or more favorable treatment with respect to allocation of Licensed Product (taking into account reasonable forecasts, past sales and sales performance against forecast). 6.5. IMPROVEMENTS. (a) CHANGE IN SPECIFICATIONS. Either Party shall have the right to request a change to the Specifications or packaging of Licensed Product during the Term of this Agreement. In such event, the Party wishing to request a change shall notify the other Party of its request in writing. If the receiving Party agrees to such request, the Parties shall cooperate with each other to have such change to the Specifications or packaging of Licensed Product approved by the FDA, if such approval is necessary. ANIKA shall not be obligated to make any changes to the Specifications or packaging of Licensed Product requested by OBI. If the FDA requires a change to the Specifications or packaging of Licensed Product (other than changes requested by the OBI), ANIKA shall use commercially reasonable efforts to make such change with respect to the Licensed Product sold in the Territory, and the costs for making such change as required by such regulatory agency shall be born by ANIKA. OBI shall reimburse ANIKA for the actual, documented expenses incurred by ANIKA in connection with changes to the Specifications or the packaging of product requested by OBI, including, without limitations, any necessary Regulatory Approval costs. Notwithstanding any other terms of this paragraph, if the change to the Specifications or packaging of the Licensed Product creates obsolescence in existing inventory held by ANIKA or OBI or any other person or entity, the actual costs of such obsolescence, together with any actual hard disposal costs, shall be the responsibility of OBI. ANIKA shall have the right to appoint an independent certified accountant mutually acceptable to both parties to audit and review OBI's financial records pertaining directly to such costs for obsolescence. Any disputes arising from a request for cost-sharing or reimbursement of expenses incurred in connection with a change in Specifications or packaging of the Licensed Product under this Section 6.5(a) and not resolved informally within 30 days shall be referred to the Steering Committee for resolution. If the Steering Committee does not resolve the matter within 60 days, either Party may submit the matter to arbitration as provided in Article XVI. 21 (b) RECORDS. ANIKA shall keep complete and accurate records pertaining to the manufacture, including quality control, of the Licensed Product. OBI shall keep complete and accurate records pertaining to the use, sale and other disposition of the Licensed Product, including for each lot number of Licensed Product, the quantity shipped and where the lot was shipped. Each party shall keep its respective records for at least five (5) years or for such longer period if and as required by law. Each party shall make available such records to the other party for such lawful purpose as such other party may reasonably request in writing. 6.6. DELIVERY. (a) All charges for packing, hauling, storage, bar coding and transportation to the Shipping Point are included in the transfer price as set forth in Section 6.2 hereunder unless otherwise agreed to by the Parties. OBI will pay all freight, shipping, insurance, duties, forwarding and handling charges, taxes, storage and all other charges applicable to Licensed Product after it is delivered by ANIKA to the Shipping Point. All shipments will be accompanied by a packing slip which describes the articles, states the purchase order number and shows the shipment's destination. ANIKA agrees to promptly forward the original bill of lading or other shipping receipt for each shipment in accordance with OBI's instructions. (b) SHIPMENT. The risk of loss with respect to Licensed Product shall remain with ANIKA through production until Licensed Product is delivered to OBI FOB ANIKA's manufacturing facility (currently located in Woburn, Massachusetts), or other manufacturing facility that has received Regulatory Approval from the FDA (the "Shipping Point"). ANIKA will pack all Licensed Product ordered hereunder in a manner suitable for shipment and sufficient to enable the Licensed Product to withstand the normal effects of shipping, including handling during loading and unloading. OBI is responsible for designating the carrier(s) and negotiating terms for shipment of Licensed Product, and is responsible for payment of all shipping insurance, handling, storage and custom duties and fees. (c) INVENTORY. ANIKA and OBI agree to reasonably cooperate to improve the process for ordering Licensed Product with the mutual objectives of expediting the supply process to a just-in-time process and reducing inventory costs. 6.7. INSPECTIONS. (a) During the Term, OBI shall have the right, upon reasonable notice to ANIKA and during regular business hours, to inspect and audit the facilities being used by ANIKA (or any Third Party) for production and storage of the Licensed Product to assure compliance by ANIKA (and its suppliers) with GMP and applicable FDA rules and regulations pertaining to Licensed Product and with other provisions of this Agreement. (b) ANIKA shall have the right to visit OBI's facilities where the Licensed Product is stored or delivered from time to time during the term of this Agreement to perform a quality audit of OBI's records concerning storage and distribution (including shipping and handling) of the Licensed Product. Such visits shall be conducted during normal business hours upon at least 22 ten (10) days prior written notice and each party shall be limited to not more than one visit per year, except in the event of a recall of the Licensed Product or governmental action involving the Licensed Product. 6.8. NON-CONFORMING PRODUCT. OBI shall evidence any claims of nonconformity of Licensed Product with an analysis of the allegedly nonconforming Licensed Product that shall have been prepared by OBI or its agent. Such report shall be accompanied with a copy of the records pertaining to such testing and a sample of the Licensed Product from the batch analyzed. If, after its own analysis of a sample stored by ANIKA from such lot of Licensed Product (which such sample ANIKA is required to retain) (the "Retained Sample"), ANIKA confirms such nonconformity, ANIKA shall, at ANIKA's election, either replace the nonconforming Licensed Product with conforming Licensed Product as soon as reasonably practicable at ANIKA's expense or refund to OBI the entire transfer price therefore. The foregoing, and the rights under this Section 6.8, shall be OBI's sole and exclusive remedy with respect to such nonconformity. The nonconforming Licensed Product shall either be returned to ANIKA, at ANIKA's request and its expense, or destroyed, at ANIKA's expense. If, after ANIKA's own analysis, ANIKA does not confirm conformance to the Specifications or whether the Licensed Product has such a defect, either Party may deliver the Licensed Product to an independent Third-Party laboratory, mutually and reasonably acceptable to both Parties, for analytical testing to confirm the Licensed Product's conformance to the Specifications or the presence or absence of defects. All costs associated with such Third-Party testing shall be at OBI's expense unless the tested Licensed Product is deemed by such Third-Party to be materially defective or not in compliance with the Specifications, in which case all such costs, including reimbursement of freight and disposition costs, shall be promptly paid by ANIKA. No inspection or testing of or payment for Licensed Product by OBI or any Third-Party agent of OBI shall constitute acceptance by OBI thereof, nor shall any such inspection or testing be in lieu or substitution of any obligation of ANIKA for testing, inspection and quality control as provided in the Specifications or under applicable local, state, or federal laws, rules, regulations, standards, codes or statutes. In the event that any such shipment or batch thereof is ultimately agreed or found to meet the specifications, OBI shall retain such shipment or batch, and all the terms and conditions of this Agreement shall continue to apply to such Licensed Product. 6.9. CORRECTIVE ACTION. (a) REPORTABLE EVENTS. ANIKA shall be responsible for notifying all applicable regulatory authorities of reportable events (including without limitation complaints) involving the Licensed Product for which ANIKA receives written notification, as required by applicable laws. OBI shall notify ANIKA of potentially reportable events promptly but in no event later than twenty-four (24) hours after the event. In addition, all such notices by OBI shall be consistent with the requirements of law in the applicable jurisdictions. 23 (b) LICENSED PRODUCT COMPLAINTS. OBI shall promptly communicate to ANIKA by facsimile, telephone or email (and confirm any such telephone communication as instructed at the time) any complaint received from users of the Licensed Product, in the configuration supplied by ANIKA. Each notification of a complaint shall contain, but not be limited to, the lot number, dosage size, expiration date, indication for actual use and description of circumstances involved in the failure of the Unit(s) in question. Each complaint notification will contain all the information available to OBI at that time, including all information then available which is required in the ANIKA Complaint Form attached hereto as Exhibit F, and a summary of the proposed action to be taken by OBI to comply with its legal obligations. OBI will provide additional information promptly as it becomes available. OBI acknowledges that complaint investigation is the responsibility of ANIKA, but OBI reserves the right to directly contact its customers. (c) SAFETY OR EFFICACY CONCERNS. Each party agrees to notify the other party as soon as practicable of any information of which it becomes aware which relates to the safety or efficacy claims of the Licensed Product. Upon receipt of any such information, the parties shall consult with each other in an effort to arrive at a mutually agreeable course of action that is consistent with the obligations of the parties under this Agreement and constant with applicable laws. (d) LICENSED PRODUCT RECALLS. If (i) the Licensed Product is subjected to a recall by any governmental agency, or (ii) ANIKA after notification to OBI elects to make a Licensed Product recall or (iii) in the event either Party, after notification to, and consultation with, the other, elects to make a Licensed Product withdrawal or corrective action, the expense of such recall, withdrawal or corrective action shall be borne as provided below. If (i) it is established that the Licensed Product was nonconforming pursuant to Section 6.8 upon delivery by ANIKA to a common carrier at ANIKA's Shipping Point, or (ii) such recall, withdrawal or corrective action arises from any breach by ANIKA of the provisions of this Agreement, then ANIKA, subject to Article XII, shall hold OBI harmless and shall bear all expenses related to the recall, withdrawal or corrective action, including the replacement of the recalled or withdrawn Licensed Product, which shall be replaced as soon as reasonably practicable. If such recall, withdrawal or corrective action arises as a result of actions or omissions on the part of OBI or its Affiliates, distributors or sublicensees, or from any breach by OBI, its Affiliates, distributors or sublicensees of the provisions of this Agreement, then OBI, subject to Article XII, shall hold ANIKA harmless and shall bear all costs and expenses in connection with such recall, withdrawal or corrective action. OBI shall keep, and will use its reasonable efforts to the extent required by law to cause its Affiliates, distributors and sublicensees to keep, detailed distribution records for each lot number detailing the quantity shipped and the location where the lot was shipped, so that in event of a recall, OBI will be able to contact all physicians and/or end users. 6.10. FAILURE TO SUPPLY: LICENSE TO MANUFACTURE. (i) If ANIKA fails, for a period of three consecutive months, to deliver eighty percent (80%) of the aggregate cumulative quantity of all Licensed Products which ANIKA has agreed to deliver to OBI pursuant to binding purchase orders pursuant to Section 6.3(b) of this Agreement during that period, without being able to complete the 24 delivery requirements along with any other scheduled delivery requirement in the next subsequent two months (including a failure caused by a force majeure) (hereinafter referred to as a "Failure to Supply"), then during any such License Period (as defined), OBI shall be permitted (with no obligation or liability to ANIKA) to obtain such Licensed Product from another supplier (an "Alternative Supplier"), to use, sell, make and have made Licensed Product pursuant to the license granted in this Section 6.10; provided, however, OBI shall use commercially reasonable efforts to ensure that the term of any agreement with an Alternative Supplier (the "Alternative Supplier Agreement") is as short as possible; provided further however, in no event shall the term of any Alternative Supplier Agreement extend beyond 30 months inclusive of any termination notice requirements under the terms of such Alternative Supplier Agreement. Upon the occurrence of any such Failure to Supply and through and until the later of such time as ANIKA fully resumes its supply obligations hereunder: ANIKA shall make available to OBI or its designee access to all Information, ANIKA Patents and ANIKA Know-How for OBI to procure required raw materials or product or arrange an alternative supplier of Licensed Product and (b) ANIKA shall provide reasonable advice and consultation in connection therewith and (c) ANIKA will not be entitled to implied royalties or compensation for lost profits as a result of Licensed Product obtained from such Alternative Supplier and (d) OBI shall bear all costs necessary to relocate manufacturing to an Alternative Supplier's facility in accordance with this Section 6.10. Notwithstanding anything to the contrary contained in this Agreement, in the event that OBI shall manufacture or have manufactured the Licensed Product, pursuant to this Section 6.10(i), (1) OBI shall be permitted to disclose to any Third Party any Confidential Information as is reasonably necessary in connection with such activities (subject to such Third Party agreeing in writing to be bound by the terms of Article VII hereof), and (2) ANIKA shall supply on commercially reasonable terms the Active Ingredient (as defined below) if requested by OBI.. (ii) From and after the Effective Date ANIKA will use commercially reasonable efforts to identify and qualify a second source of the hyaluronic acid active ingredient (the "Active Ingredient") in Licensed Products (the "Second Source Qualification"). Until such time as the Second Source Qualification, ANIKA will maintain a minimum inventory of the Active Ingredient for a 12-month period sufficient to manufacture Licensed Products as set forth in the Rolling Annual Forecast. OBI shall pay all administrative and regulatory fees in connection with the Second Source Qualification in an amount not to exceed [*****************************]. (iii) ANIKA hereby grants to OBI a fully paid up license, with the right to grant sub-licenses to its Affiliates, to manufacture and have manufactured Licensed Products solely in the Field and Territory; PROVIDED, HOWEVER, that the license granted hereunder shall be effective only during the period of time commencing upon the occurrence of a Failure to Supply and continuing through and until such time as ANIKA fully resumes its supply obligations hereunder (such period is hereinafter referred to as a "License Period") and OBI shall not exercise its rights to make or have made the 25 Licensed Products pursuant to such license other than during such a License Period. For the avoidance of doubt, the license granted hereunder shall automatically be terminated upon the end of the License Period. (iv) In the event that either OBI or ANIKA has actual knowledge of any facts or circumstances that are likely to result in a material disruption to the manufacture or sale of Licensed Products ("Adverse Knowledge"), such Party that has such Actual Knowledge shall give prompt notice to the other Party, and such Parties or the Steering Committee shall work together in good faith to address such Adverse Knowledge. 6.11. INSURANCE. Each Party agrees to procure and maintain in full force and effect during the term of this Agreement valid and collectible insurance policies in connection with its activities as contemplated hereby which ANIKA policies shall be in compliance with Exhibit F attached hereto. Upon the other Party's request, each Party shall provide the other with a certificate of coverage or other written evidence reasonably satisfactory to the requesting Party of such insurance coverage. 6.12. Packaging. OBI shall have the right to determine the appearance and text of any labeling and packaging consistent with the approved label used in connection with the Licensed Product in the Territory or any finished product containing or contained in the Licensed Product in the Territory. OBI shall pay all of the costs associated with the design of the labeling and packaging for the Licensed Product. Once the initial labeling and packaging has been decided upon and confirmed in writing, ANIKA shall not be required to make subsequent changes to such labeling unless OBI agrees to pay all additional costs associated with the implementing of changes and to pay ANIKA's out of pocket costs associated with all packaging inventory rendered obsolete by the change in labeling. Notwithstanding the foregoing, if any changes are required to be made to the packaging or labeling as a result of the changes required by ANIKA, ANIKA shall bear the expenses thereof. 6.13. CLINICAL TRIAL SUPPLIES ANIKA agrees to supply up to 1000 Units of Licensed Product per clinical trial at no cost only if, and to the extent, both the Steering Committee and ANIKA have approved such clinical trial. For approved clinical trials requiring more than 1000 units, ANIKA will provide Licensed Products at a price of [****] per unit, subject to Section 6.2(b). 26 ARTICLE VII - PUBLICATIONS; TRANSFER OF DATA; CONFIDENTIALITY 7.1. CONFIDENTIALITY; EXCEPTIONS. The Parties acknowledge that discussions between ANIKA and OBI will necessarily require the exchange of information (including detailed financial and product information) that is considered confidential and proprietary by the disclosing Party. The Parties agree that any information relating to the business of the disclosing Party which such Party discloses to the other Party pursuant to this Agreement shall be considered "Confidential Information" and shall include, without limitation, (i) the ANIKA Know-How; (ii) earnings, costs, and other financial information; (iii) drawings, formulations, samples, technical data, photographs, specifications, manufacturing methods, testing procedures; (iv) marketing, sales and customer information relating to the disclosing Party's business; (v) all clinical studies and data developed by either party in connection with this Agreement; and (vi) all other Information related to Licensed Product in the Field. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, for the time royalties are due and for five (5) years thereafter, subject to and except as permitted by Section 7.4 of this Agreement, each Party shall keep confidential (and shall cause the directors, officers, employees and agents of such Party or its Affiliates and sublicensors and distributors) to keep completely confidential and shall not publish or otherwise disclose or use for any purpose other than as provided for in this Agreement the Confidential Information, except to the extent the receiving Party's (and their Affiliates) employees and/or agents (including consultants) need to know such Confidential Information in order to discharge such Party's obligations and exercise its rights hereunder. Each Party will protect the other Party's Confidential Information from unauthorized use, access or disclosure in the same manner that it protests it own similar Confidential Information. Confidential Information shall not include information which: (i) was in the lawful knowledge and possession of the receiving Party prior to the time it was disclosed to, or learned by, the receiving Party, or was otherwise developed independently by the receiving Party, as evidenced by written records kept in the ordinary course of business, or other documentary proof of actual use by the receiving Party; (ii) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the receiving Party; (iii) became generally available to the public or otherwise part of the public domain after its disclosure and other than through any act or omission of the receiving Party in breach of this Agreement; (iv) was disclosed to the receiving Party, other than under an obligation of confidentiality, by a Third Party who had no obligation to the disclosing Party not to disclose such information to others; or 27 (v) was or is required to be disclosed as a result of a judicial order or decree or applicable law or regulation; provided, however, that the Party whose Confidential Information is the subject of such judicial order or decree is given the opportunity (to the extent not violative of applicable law) to contest the judicial order or decree prior to any disclosure. Each Party will be responsible and liable for all breaches of the confidentiality provisions of this Agreement by its directors, officers, employees, agents and Affiliates, and shall indemnify the other for any breaches thereof. 7.2. AUTHORIZED DISCLOSURE. Except as expressly provided otherwise in this Agreement, each Party may disclose Confidential Information as follows: To Third Parties (including without limitation investors and potential investors of ANIKA, Affiliates, sublicensees, distributors and suppliers of ANIKA and Affiliates of OBI) under appropriate terms and conditions that include confidentiality provisions substantially equivalent to those in this Agreement as is reasonably necessary to exercise the rights granted herein. 7.3. PUBLICATIONS. Notwithstanding any other provision of this Agreement, including, but not limited to the provisions of Section 7.4, ANIKA may not publish the results of any of OBI's Development activities relating to Licensed Products in the Field without the prior written consent of OBI. ANIKA may publish without the prior written consent of OBI results of its Development activities relating to Licensed Products for use outside the Territory. 7.4. PUBLIC ANNOUNCEMENTS. Neither Party shall originate any publicity, press release or public announcements, written or oral, whether to the public or press, relating to this Agreement, including its existence, the subject matter to which it relates, performance under it or any of its terms, to any amendment hereto or performances hereunder without the prior written consent of the other Party (not to be unreasonably withheld), save only such announcements that are required by applicable law or any securities exchange or Nasdaq to be made or that are otherwise agreed by the Parties. In the event of such publication, press release or public announcement (other than those required by applicable law or any securities exchange or Nasdaq), the Party making the announcement will give the other Party at least reasonable advance notice, where possible, of the text of the announcement so that the other Party will have an opportunity to comment upon the announcement. Notwithstanding anything contained in this Agreement to the contrary, (i) upon execution of this Agreement, ANIKA may issue a press release in the form of Exhibit C, and (ii) OBI acknowledges that ANIKA is permitted to file this Agreement with the Securities and Exchange Commission. 28 Notwithstanding the foregoing, however, where urgent, unusual and rare circumstances require immediate disclosure in the opinion of the Party's counsel, the Party will, unless impossible because of legal reasons, provide at least one (1) Business Day's advance written notice. ARTICLE VIII - OWNERSHIP OF INTELLECTUAL PROPERTY AND PATENT RIGHTS 8.1. TITLE. Title to all Patents claiming inventions made solely by an employee of a Party in the course of performing Development ("Development Invention") shall be owned by such Party. Title to Patents claiming inventions made jointly by employees of OBI and ANIKA shall be jointly owned by OBI and ANIKA. The laws of the United States with respect to joint ownership of inventions shall apply in all jurisdictions; accordingly, except as expressly provided in this Agreement, neither Party shall have any obligation to account to the other for profits, or to obtain any approval of the other party to license a jointly-owned patent, by reason of joint ownership thereof. 8.2. LICENSE TO OBI DEVELOPMENT INVENTIONS. OBI hereby grants ANIKA and its Affiliates a perpetual, royalty-free, fully paid-up, exclusive, worldwide license to use the OBI Development Inventions, with the right to sublicense, to use, manufacture, have manufactured, sell, offer for sale, import, have imported, offer to import, Licensed Products outside the Territory for a cost equal to half of OBI's fully allocated direct Development costs associated with any such OBI Development Invention used by ANIKA. 8.3. DISCLOSURE OF PATENTABLE INVENTIONS. Each Party shall provide to the other any invention disclosure submitted in the normal course of disclosing an invention arising in the course of the Development or relating to Licensed Product. Such invention disclosures shall be provided to the other Party promptly after creation. 8.4. PATENT FILINGS. (a) Each Party may prepare, file, prosecute and maintain Patents to cover discoveries and inventions made solely by its own employees or consultants relating to any Licensed Products being developed or sold hereunder by OBI and use reasonable efforts to file initially all such applications in the United States. Inventions relating to the discovery, evaluation, manufacture, use or sale of Licensed Products that are made jointly by OBI and ANIKA in the course of this Agreement (hereinafter referred to as "Joint Patents") may be filed, prosecuted and maintained by ANIKA. The determination of the countries in which to file Joint Patents shall be made by ANIKA, provided, however, ANIKA agrees to file in the United States and Mexico. ANIKA shall have the right to direct or control all material actions relating to the prosecution or maintenance of Joint Patents. 29 (b) The Party who is responsible for filing a Patent, will be termed the "Filing Party". In the case of a solely owned invention the Filing Party shall bear all Patent Cost associated therewith. With respect to a joint patent each of the Parties shall bear one half of all Patent Cost associated therewith. The filing Party shall keep the other Party apprised of the status of each Joint Patent, and shall seek the advice of the other Party with respect to patent strategy and drafting applications and shall give reasonable consideration to any suggestions or recommendations of the other Party concerning the preparation, filing, prosecution, maintenance and defense thereof. The Parties shall cooperate reasonably in the prosecution of all Joint Patents and shall share all material information relating thereto, including all material communications from patent offices, promptly after receipt of such information. If, during the term of this Agreement, the filing Party intends to allow any Joint Patent to lapse or leave abandoned, the filing Party shall, whenever practicable, notify the non-filing Party of such intention at least sixty (60) business days prior to the date upon which such Patent shall lapse or become abandoned, and the non-filing Party shall thereupon have the right, but not the obligation, to assume responsibility for the prosecution, maintenance and defense thereof and all expenses related thereto. 8.5. INFRINGEMENT BY THIRD PARTIES. (i) If any ANIKA, OBI or Joint Patent covering a Licensed Product is infringed by a Third Party in any country in connection with the manufacture, use and sale of a Licensed Product in such country, the Party to this Agreement first having knowledge of such infringement shall promptly notify the other in writing. The notice shall set forth the known facts of that infringement in reasonable detail. (ii) ANIKA shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to such infringement of the Joint Patent, by counsel of its own choice, and at its own expense. If ANIKA fails to bring an action or proceeding within a period of one hundred eighty (180) days after a request by OBI to do so, OBI shall have the right to bring and control any such action by counsel of its own choice, and at its own expense. (iii) The Party bringing suit under this Paragraph 8.5 regarding a Joint Patent shall bear all costs and expenses of the suit, with any damages or other monetary awards recovered being split with 70% to OBI and 30% to ANIKA after costs of the prosecuting Party are reimbursed.. (iv) A settlement or consent judgment or other voluntary final disposition of a suit brought by a Party related to a joint patent under this Paragraph 8.5 may be entered into without the consent of the other Party; provided that such settlement, consent judgment or other disposition does not admit the invalidity or unenforceability of any Joint Patent; and provided further that any rights to continue the infringing activity in such settlement, consent judgment or other disposition shall be limited to the product or activity that was the subject of the suit. 30 (v) Each Party shall have the sole and exclusive right, but no obligation, to enforce any Patent that it solely owns against infringement or alleged infringement thereof by a Third Party. 8.6. VALIDITY CHALLENGE CLAIMS. (i) In the event that any person shall assert any claim that any of ANIKA, OBI or Joint Patents are invalid or unenforceable, or seeks to limit the scope of enforcement thereof (each a "Validity Challenge Claim"), whether in defense against an enforcement action brought by a party, by a separate action for declaratory judgment, or otherwise, the party receiving notice of such claim shall promptly notify the other party. (ii) ANIKA shall have the primary right, but not the obligation, to institute, prosecute, and control any action or proceeding with respect to any Validity Challenge Claim relating to a Joint Patent, by counsel of its own choice, and at its own expense. If ANIKA fails to bring an action or proceeding within a period of one hundred eighty (180) days after a request by OBI to do so, OBI shall have the right to bring and control any such action by counsel of its own choice, and at its own expense. (iii) The Party bringing suit under this Paragraph 8.6 regarding a Joint Patent shall bear all costs and expenses of the suit, with any damages or other monetary awards recovered being split with 70% to OBI and 30% to ANIKA after costs of the prosecuting Party are reimbursed. The other party will reasonably cooperate with and use commercially reasonable efforts to assist the Party bringing suit under this Paragraph 8.6, and the Party bringing such suit shall reimburse the other Party for its out-of-pocket expenses incurred as a result of such cooperation. (iv) A settlement or consent judgment or other voluntary final disposition of a suit brought by a Party relating to a Joint Patent under this Paragraph 8.6 may be entered into without the consent of the other Party; provided that such settlement, consent judgment or other disposition does not admit the invalidity or unenforceability of any Joint Patent. (v) Each Party shall have the sole and exclusive right, but no obligation, to institute, prosecute and control any action or proceeding with respect to any Validity Challenge Claim relating to any Patent that it solely owns. 8.7. PATENT ASSIGNMENT. Neither Party may assign, license or otherwise transfer its rights under any Joint Patent except with the prior written consent of the other Party; provided, however, that either Party may assign such rights without consent to permitted assignee under this Agreement in connection with a merger or similar reorganization or the sale of all or substantially all of its assets. 31 8.8. NOTICES RELATING TO THE ACT. ANIKA shall notify OBI of (a) the issuance of each U.S. and Mexican Patent included among the ANIKA Patents, giving the date of issue and patent number for each such patent. 8.9. DEFENSE AND SETTLEMENT OF THIRD PARTY CLAIMS If a Third Party asserts that a patent right owned by it is infringed by the use or sale of Licensed Product, OBI will be solely responsible for defending against any such assertions at its cost and expense. OBI shall have the right to defend and settle against such charge of infringement. ANIKA shall have the same responsibility and rights in such Third Party actions if the alleged infringement relates to the manufacture of Licensed Product. If an action has not been brought but an assertion has been made that a patent right owned by a Third Party is infringed by the use or sale of Licensed Product, then the parties shall first exercise their rights and/or perform their obligations set forth in Section 5.4. If an action for patent infringement is brought against OBI for the use or sale of Licensed Product by a Third Party, OBI shall promptly notify ANIKA. ANIKA shall have the right, but not the obligation, to settle the litigation at its sole cost and expense. In no event, however, shall any such settlement by ANIKA modify the rights and licenses granted hereunder to OBI. If OBI is defending such charge of infringement, OBI shall have the right to apply up to 50% of the royalties due ANIKA on sales of the allegedly infringing Licensed Product against its litigation expenses during the pendency of any litigation, but only in the event that the infringement action is not based on or not related to a Modified Licensed Product. "Modified Licensed Product" means Licensed Product not in the Currently Filed PMA (except that Modified Licensed Product shall not include Licensed Products which result solely from changes initiated by ANIKA). If, as a result of judgment in the litigation or settlement with the Third Party not in connection with or not related to a Modified Licensed Product, OBI is required to pay royalties or other monies to such Third Party, OBI may thereafter deduct from the royalties due ANIKA on net sales of the Licensed Product charge to infringe, an amount of which is the lesser of 50% of all sums actually paid by OBI to such Third Party or 50% of all royalty payments otherwise payable to ANIKA on the net sales of such Licensed Product. In the case of a litigation involving a Modified Licensed Product, OBI shall be fully responsible for all costs and expenses of such litigation or settlement thereof. ARTICLE IX - REPRESENTATIONS AND WARRANTIES. 9.1. REPRESENTATIONS AND WARRANTIES OF ANIKA. ANIKA hereby represents and warrants to OBI as follows: (a) ANIKA is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has all requisite corporate power and lawful authority to own, lease and operate its assets and to carry on its business as heretofore conducted. ANIKA has the full legal right, corporate power and authority to execute and deliver this Agreement and the other agreements contemplated hereby and to consummate the 32 transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by ANIKA and constitutes the valid and binding obligation of ANIKA, enforceable against ANIKA in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally or by general equitable principles. (b) ANIKA owns all rights, title and interest in the Licensed Product necessary to grant the rights contained in this Agreement to OBI for Licensed Product in the Territory. The Licensed Product does not infringe upon any proprietary right, other than patents of any Person in the Territory; provided, however, that ANIKA makes no such representation and warranty with respect to any trademarks or trade dress not licensed to OBI hereunder which may be used by OBI in the marketing, distribution and sale of the Licensed Product. ANIKA does not have actual knowledge of any infringement by the Licensed Product of any issued United States or Mexican patent; however, ANIKA makes no representations or warranties regarding patents in any foreign jurisdictions other than Mexico. ANIKA makes no representation or warranty with respect to any marketing, distribution sale or use of the Licensed Product not in accordance with any applicable PMA or any other Regulatory Approval. Nothing contained in this Agreement is in conflict with any other agreement to which ANIKA is a Party or is otherwise bound. ANIKA has not granted the right to market, sell or distribute the Licensed Product in the Field in the Territory to any other Person. (c) ANIKA represents and warrants to OBI that at the time of delivery to a common carrier at ANIKA's Shipping Point, all Licensed Product supplied in connection with this Agreement shall be of merchantable quality, fit for the purpose intended by this Agreement and free from defects in material and workmanship and shall be manufactured and provided in accordance and conformity with the Specifications and in compliance with this Agreement. ANIKA represents and warrants that it shall materially comply with all pertinent present and future statutes, laws, ordinances and regulations relating to the manufacture and supply of the Licensed Product in the Territory and in the Field being provided hereunder, including, without limitation, those enforced by the United States Food and Drug Administration (including compliance with GMP) and International Standards Organization Rules 9000 et seq. (d) ANIKA'S WARRANTIES SET FORTH IN THIS AGREEMENT ARE IN LIEU OF ANY OTHER WARRANTY, WHETHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, AND, ANIKA HEREBY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, NON-INFRINGEMENT, TITLE OR FITNESS FOR A PARTICULAR PURPOSE. (e) EXCEPT AS OTHERWISE EXPRESSLY PROVIDED FOR IN THIS AGREEMENT, NEITHER PARTY SHALL IN ANY EVENT BE LIABLE TO THE OTHER FOR PUNITIVE, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES ARISING OUT OF THIS AGREEMENT, INCLUDING BUT NOT LIMITED TO LOSS OF PROFITS. 33 9.2. REPRESENTATIONS AND WARRANTEES OF OBI. OBI hereby represents and warrants to ANIKA as follows: (a) OBI is a limited partnership duly organized, validly existing and in good standing under the laws of the State of New Jersey and has all requisite power and lawful authority to own, lease and operate its assets and to carry on its business as heretofore conducted. OBI is a wholly-owned indirect subsidiary of Johnson & Johnson. OBI has the full legal right, power and authority to execute and deliver this Agreement and the other agreements contemplated hereby and to consummate the transactions contemplated hereby and thereby. This Agreement has been duly executed and delivered by OBI and constitutes the valid and binding obligation of OBI, enforceable against OBI in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally or by general equitable principles. (b) Nothing contained in this Agreement is in conflict with any other agreement to which OBI or its Affiliates or sub-distributors is or may become a party or is otherwise bound. (c) OBI and its Affiliates and sub-distributors shall store, distribute, market and sell Licensed Product in accordance with directions for storage and use as indicated in this Agreement and any amendments hereto. (d) OBI and its Affiliates and sub-distributors shall distribute, market and sell Product in accordance with all applicable international, national and local laws of each country within the Territory, including without limitation, applicable drug and medical device laws. ARTICLE X - ANIKA'S GENERAL OBLIGATIONS AND COVENANTS (a) During the Term of this Agreement, ANIKA shall, in accordance with any marketing plan, strategy and direction approved by the Steering Committee: (i) Provide to OBI reasonable technical, scientific, sales and marketing support with respect to the Licensed Product, to the extent OBI makes available opportunities to provide such support; (ii) Use commercially reasonable efforts to ensure that products manufactured by the ANIKA for the purposes other than the treatment of osteoarthritis (other than the Licensed Product) are not marketed or used in the Field in the Territory (the "Gray Market Product"). If OBI reasonably believes that Gray Market Product is being marketed or used in any country in the Territory, and has caused financial loss to OBI of at least [****], OBI shall promptly notify ANIKA of such belief, and provide ANIKA with a written description of the basis for OBI's belief. Within five (5) Business Days of ANIKA's receipt of such notice, the matter shall be submitted to the Steering Committee for resolution of the following issues: (A) whether or not the goods believed by OBI to be Gray Market Product are actually goods manufactured by ANIKA; (B) whether or not 34 the goods believed by OBI to be Gray Market Product are actually being marketed or used in the Field in the Territory; (C) upon determination that the goods are in fact Gray Market Product, whether or not the financial loss to OBI is at least [******], and if so, the approximate amount; and (D) upon determination that Gray Market Product has caused financial loss to OBI of at least [*****], what commercially reasonable course of action ANIKA shall be required to take, including without limitation taking such action, including legal and/or equitable action as required to prevent the Gray Market Product from entering the Territory and to prevent it from being marketed or used therein. In the event the Steering Committee does not reach a resolution concerning the Gray Market Product within thirty (30) days after such issues are presented to it, either Party may submit the matter to arbitration as provided in Article XVI herein, for resolution of the same issues as outlined in clauses (A) through (C) in the immediately preceding sentence; (iii) Use commercially reasonable efforts to ensure that products manufactured by ANIKA for the purposes of treatment of osteoarthritis outside of the Territory (including the Licensed Product) are not marketed or used in the United States of America (the "Diverted Product"). If OBI reasonably believes that Diverted Product is being marketed or used in the United States of America, and has caused financial loss to OBI of at least [*****], OBI shall promptly notify ANIKA of such belief, and provide ANIKA with a written description of the basis for OBI's belief. Within five (5) Business Days of ANIKA's receipt of such notice, the matter shall be submitted to the Steering Committee for resolution of the following issues: (A) whether or not the goods believed by OBI to be Diverted Product are actually goods manufactured by ANIKA (B) whether or not the goods believed by OBI to be Diverted Product are actually being marketed or used in the Field in the United States of America; (C) upon determination that the goods are in fact Diverted Product, whether or not the financial loss to OBI is at least [******], and if so, the approximate amount; and (D) upon determination that Diverted Product has caused financial loss to OBI of at least [*****], what commercially reasonable course of action ANIKA shall be required to take, including without limitation, taking such action, including legal and/or equitable action as required to prevent the Diverted Product from entering the United States of America and to prevent it from being marketed or used therein (including, without limitation, terminating the supply agreement(s), if permitted thereunder, with the parties to whom ANIKA had originally sold such Diverted Product). In the event the Steering Committee does not reach a resolution concerning the Diverted Product within thirty (30) days after such issues are presented to it, either Party may submit the matter to arbitration as provided in Article XVI herein, for resolution of the same issues as outlined in clauses (A) through (C) in the immediately preceding sentence; (iv) Except as otherwise explicitly provided for herein, maintain ownership of all Licensed Product Regulatory Approvals and be responsible for making all regulatory filings for the Licensed Product within the Territory; (v) No earlier than thirty (30) days after the execution and delivery of this Agreement, upon OBI's request, ANIKA shall deliver to OBI copies of all Information in ANIKA's possession related to ANIKA's Know-How and ANIKA's Patents available as 35 of such date which ANIKA and OBI reasonably determine is relevant to the safety, efficacy, regulatory status, sale, marketing or distribution of a Licensed Product in the Territory; provided, however, that all such transferred Information shall be subject to the confidentiality provisions of Article VII of this Agreement; and (vi) ANIKA agrees that it will not use or grant rights to a Third Party to use the Trademark in connection with any product intended for use in animals other than humans. ARTICLE XI - OBI's GENERAL OBLIGATIONS During the Term of this Agreement, OBI shall: (a) Store and distribute Licensed Product in accordance with direction for storage and use as indicated in the applicable PMA and Regulatory Approvals which are in effect at the time of such storage and use; (b) Market and sell Licensed Product in accordance with approved labeling for Licensed Product at the time of such distribution, marketing or sales; (c) Use its commercially reasonable efforts to commercialize Licensed Product in the Territory in a manner consistent with the efforts that OBI uses in commercializing its own pharmaceutical products; (d) Subject to Article IV, notify ANIKA prior to engaging any distributor(s) to market, sell or distribute Licensed Product in the Territory and cause any such distributor(s) to agree in writing to be bound by the terms of this Agreement as if OBI hereunder. Notwithstanding the foregoing, OBI shall remain solely and primarily responsible under this Agreement. (e) Be responsible for the entire cost of selling, marketing, advertising, promoting and distributing Licensed Product in the Territory; (f) Supply ANIKA with any information as required by the FDA or other governmental agencies for U.S. and international regulatory filings related to the sale of the Licensed Product in the Territory; (g) Timely advise ANIKA in writing of any suit, claim or complaint known to OBI resulting from the distribution or use of any Licensed Product; (h) Refrain from soliciting orders from or selling Licensed Products to any Person located outside the Territory or to any Person inside the Territory for sales which OBI knows are intended to be distributed to users outside the Territory; 36 (i) Neither acquire directly or indirectly through its Affiliates from any Third Party, any products containing HA as the sole active ingredient for use in the Field (a "Competing Product"), nor distribute such Competing Product; (j) Furnish to ANIKA all advertising, marketing and promotional materials related to the Licensed Product, for review and approval as to their conformance with regulatory requirements, not to be unreasonably withheld, at least five (5) days prior to utilizing such materials, including, without limitation, any content to be displayed on the website pursuant to Section 3.3 of this Agreement; provided, however, that if there is an unresolved dispute as to whether ANIKA has unreasonably withheld approval of such materials, such matter shall be submitted to arbitration as provided in Article XVI; provided further, however, that should ANIKA fail to respond to any request for approval within the applicable five (5) day period then such approval will be deemed to have been granted; (k) Invoice Third Parties (and ensure any distributors invoice Third Parties appropriately, consistently and on a timely basis with respect to sales of any and all Licensed Products; and (l) OBI, and its Affiliates, sublicensees and distributors will, to the extent required by applicable law, keep detailed distribution records for each lot number detailing the quantity shipped and the first location where the lot was shipped by OBI, and will provide ANIKA with reasonable access to records for purposes of conducting quality control audits as provided in Section 5.6(d). ANIKA will generate and promptly transfer to OBI the same detailed distribution records for any and all units of the Licensed Product drop-shipped directly from ANIKA to a customer of OBI. ARTICLE XII - TERM AND TERMINATION 12.1. TERM. This Agreement shall commence on the Effective Date and shall remain in effect for ten (10) years subject to the termination provisions set forth herein. OBI shall have the right, but not the obligation, to choose to extend the term of this Agreement for additional periods of (5) five-year intervals subject to the termination provisions set forth herein, so long as notification of any five-year extension of the Term is provided by OBI to ANIKA at least one-year prior to the expiration of the original ten (10) year Term or the then-current five (5) year Term, as the case may be, and at such time of notification extensions are permitted for the next five-year period only. Absent a provision to the contrary, any extension of this Agreement shall be subject to the terms set forth hereunder. 12.2. TERMINATION RIGHTS. (a) Notwithstanding any of the foregoing, this Agreement may be terminated by either Party upon written notice to the other party, upon the occurrence of any of the following: (i) a material breach of any term or condition of this Agreement by the other Party which is amenable 37 to cure, and the breaching party shall have failed to cure such breach within ninety (90) days from the receipt by it of written notice thereof from the other Party; (ii) either Party commits a material breach which is not amenable to cure; (iii) the other Party (or, in the case of OBI, its general partner or ultimate parent Affiliate) shall commence any case, proceeding or other action (A) under any applicable law relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it as bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, wind-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets; (iv) there shall be commenced against the other Party (or, in the case of OBI, its general partner or ultimate parent Affiliate) any such case, proceeding or other action referred to in clause (iii) of this Section 12.2 which results in the entry of an order for relief; (v) the other Party (or, in the case of OBI, its general partner or ultimate parent Affiliate) shall take any action authorizing, or in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth above in clauses (iii) or (iv) of this Section 12.2; or (vi) the other Party (or, in the case of OBI, its general partner or ultimate parent Affiliate) shall admit in writing its inability to pay its debts as they become due; PROVIDED, HOWEVER, that OBI may not terminate under Section 12.2(iii)-(vi) if ANIKA has not materially breached Section 6.1 of this Agreement. 12.3. RESULTS OF TERMINATION. In the event of termination of this Agreement by ANIKA, except as expressly provided in this Article 12, all the rights and obligations, including without limitation, the licenses granted to OBI in Article II and Article V hereof, shall immediately terminate. Upon termination by either Party, OBI shall provide ANIKA at no cost to ANIKA copies of all relevant communications and correspondence with and from regulatory agencies pertaining to Licensed Products and copies of all relevant marketing and promotional materials including customer lists, together with all Information relating to OBI's product development pursuant to Article II hereof. Except as otherwise provided in this Section 12.3, upon the termination of this Agreement, each Party shall promptly: (i) upon request return to the requesting Party all of the requesting Party's relevant records, materials and Confidential Information relating to the Licensed Product in the possession or control of the other Party, or its Affiliates, suppliers or Third Party distributors or sublicensees, and (ii) discontinue all distribution of the Licensed Product and the use of know-how in connection therewith. Notwithstanding anything herein to the contrary, upon termination of this Agreement for any reason, OBI shall have the right for one (1) year to dispose of all Licensed Product then in OBI's, OBI's Affiliate's, or Third Party distributor's possession, and the payments pursuant to Sections 5.2 and 5.3 shall be paid to ANIKA with respect to such Licensed Product as though this Agreement had not terminated. Termination of this Agreement shall not terminate OBI's obligation to pay ANIKA for Licensed Product which has been shipped to OBI under this Agreement or under the supply provisions if it is sold to a Third Party, including, without limitation, any applicable payments under Article V hereof. Subject to the provisions of this Section 12.3 with respect to OBI's right to dispose of Licensed Product post-termination of this Agreement, ANIKA shall have the right upon termination of this Agreement to purchase all of OBI' s unsold inventory in merchantable condition or having a remaining shelf 38 life acceptable to ANIKA, at the price of [****] per Unit. 12.4. TERMINATION BY OBI. OBI shall have the right to terminate this Agreement as follows: (i) at any time after March 31, 2004, upon 30 days prior written notice, if the Currently Filed PMA is not approved; (ii) upon thirty (30) days written notice to ANIKA at any time during the Term if material data regarding the safety of the Licensed Product arise after the Effective Date that indicate a materially and adversely different safety profile as compared to the profile as of the Effective Date; (iii) during the period from the Effective Date to the second anniversary of the Effective Date, OBI may not terminate other than pursuant to Section 12.4(i)-(iii); (iv) upon two hundred and seventy (270) days written notice to ANIKA if such notice to terminate is given after two (2) years from the Effective Date; and (v) upon one hundred and eighty (180) days written notice to ANIKA if such notice to terminate is given after three (3) years from the Effective Date. In the event of a termination under this Section 12.4, ANIKA shall retain all payments made by OBI under this Agreement and all payments made by OBI to purchase Licensed Product prior to the termination date, and OBI shall also make any such payments to which ANIKA is then entitled under this Agreement but payment of which have not previously been made by OBI. In addition, ANIKA shall have no right to use OBI owned trademarks even if such were used by OBI in connection with the Licensed Product. Article VII and any relevant definitions in Article I shall survive the expiration and any termination of this Agreement for any reason. 12.5. ACCRUED RIGHTS, SURVIVING OBLIGATIONS. Termination of the Agreement for any reason shall be without prejudice to any Party's obligations which shall have accrued prior to such termination, including, without limitation, the payment obligations under Article V hereof or to the remedy, in accordance with the terms herein, of either Party hereto in respect of any previous breach on any covenant contained herein. Such termination shall not relieve either Party from obligations that are expressly indicated to survive termination or expiration of the Agreement. 12.6. TERMINATION NOT SOLE REMEDY. Termination is not the sole remedy under this Agreement and, whether or not termination is effected, all other remedies will remain available except as agreed to otherwise herein. 39 ARTICLE XIII - INDEMNIFICATION 13.1. ANIKA shall indemnify, defend and hold harmless OBI, and any Affiliates of OBI, together with their respective officers and directors, from and against any and all losses (except consequential losses, such as, for example, loss of business profits) including compensatory losses for personal injury, damages, liabilities, costs and expenses, including without limitation reasonable attorney's fees, arising out of or in connection with: (a) the breach of any of ANIKA's representations and warranties made in Section 9.1; (b) the breach by ANIKA of any of its obligations, covenants or undertakings hereunder; (c) any Licensed Product recall for which ANIKA is required to bear all costs and expenses pursuant to Section 6.9(d); and (d) any act or omission of ANIKA in connection with the design, development, manufacture, packaging, testing, warehousing or handling of the Licensed Product; (e) any infringement or alleged infringement of a Third Party's patent rights resulting solely from the manufacture of any Licensed Product other than Modified Licensed Products. 13.2. OBI shall indemnify, defend and hold harmless ANIKA and any Affiliates of ANIKA, together with their respective officers and directors, from and against any and all losses (except consequential losses, such as, for example, loss of business or of profits) including compensatory losses for personal injury, damages, liabilities, costs and expenses, including without limitation reasonable attorney's fees, arising out of or in connection with: (a) the breach of any of OBI's representations and warranties made hereunder; (b) the breach by OBI of any of its obligations, covenants or undertakings hereunder; (c) any claim made by OBI, its distributors, sublicensees or Affiliates, as to the safety or effectiveness of the Licensed Product or the use to be made of the Licensed Product by any purchaser of Licensed Product, contained in any advertising or other promotional material created and disseminated by OBI, its distributors, sublicensees or Affiliates, to the extent that such claim (A) is not supported by the Licensed Product label and package insert as approved by the FDA (or, in Mexico, the appropriate governmental body having authority to approve the Licensed Product, label, and package insert for marketing in Mexico) and (B) was not approved in advance by ANIKA; (d) any other act or omission of the OBI, its distributors, sublicensees or Affiliates, in connection with the marketing, promotion, and sale of Licensed Product, including the storage, handling and distribution by OBI, its distributors, sublicensees or Affiliates of the Product, other than as contemplated by this Agreement or the provisions of the PMA; 40 (e) any product recall for which OBI is required to bear all costs and expenses pursuant to Section 6.9(d); and (f) OBI's, its Affiliates', distributors' or sublicensees' use, sale or disposition of Licensed Products where such Licensed Products incorporate changes made by OBI, its Affiliates, distributors, or sublicensees, to the Specifications or packaging which ANIKA has not approved, or changes made by OBI, its Affiliates, distributors or sublicensees to any Regulatory Application with respect to Licensed Product which ANIKA has not approved. 13.3. The Parties agree that in the event of a loss for which it is determined under this Article XIII that both Parties bear a measure of responsibility, it is the intent of both Parties that the liability for the loss (including without limitation all damages, hard costs and expenses, together with reasonable attorney's fees) be apportioned among the Parties according to their respective measures of responsibility, as that responsibility is determined according to this Section 13.3. The Parties further agree that any portion of the loss not attributable to either party under this Section 13.3 (and not otherwise recoverable from a third party or its insurer) shall be borne equally among the Parties. For example, the Party determined to be 10% responsible under Article XIII pays 10% of the loss, the Party determined to be 60% responsible pays 60% of the loss, and each Party pays one-half of the remaining 30%. Within ten (10) business days after either Party so requests, the Steering Committee shall convene to develop an equitable apportionment of liability for the loss according to this Article XIII. If the Steering Committee fails to agree on an apportionment within twenty (20) days after meeting, either Party may submit the matter to arbitration under this Article XIV. 13.4. Notwithstanding anything contained in this Agreement to the contrary, the Parties expressly agree that ANIKA shall have no liability to OBI under this Article XIII for claims, losses, or liability of any kind based upon or related to: (a) OBI's, its Affiliates', distributors', sublicensees' use, sale or disposition of Licensed Products where such Licensed Products incorporates changes made by OBI, its Affiliates, distributors or sublicensees to the Specifications or packaging which ANIKA has not approved, or changes made by OBI, its Affiliates, distributors or sublicensees, to any Regulatory Application with respect to Licensed Product which ANIKA has not approved; (b) sale or disposition of Licensed Products by OBI, its Affiliates, distributors or sublicensees for any use other than the uses specified by the accompanying package inserts; (c) use, sale of disposition of Licensed Products by OBI, its Affiliates, distributors or sublicensees in combination with devices or Licensed Products not purchased hereunder, where such combined sale or disposition is the sole cause of an infringement claim and whereas such Licensed Products would not themselves be infringing; (d) sale or disposition of Licensed Products by OBI, its Affiliates, distributors or sublicensees in or for an application or environment for which such Licensed Products were not approved by the FDA or other applicable government or regulatory agency; or 41 (e) modifications of Licensed Products by OBI, its Affiliates, distributors or sublicensees; to the extent such uses, sales, dispositions or modifications give rise to the claim, loss or liability and have not been approved by ANIKA. 13.5. Notwithstanding anything contained in this Agreement to the contrary, the Parties expressly agree that OBI shall have no liability to ANIKA under this Section for claims, losses or liability of any kind based upon or related to: (a) the design, manufacturing, packaging, sterilization, testing, warehousing and handling of the Product by ANIKA through delivery to the common carrier for shipment to the Shipping Point; (b) ANIKA's use, sale or disposition of Licensed Products where such Licensed Products incorporate changes made by ANIKA to the Specifications which OBI has not approved; (c) sale or disposition of Licensed Products by ANIKA for any use other than the uses specified by the accompanying package inserts; (d) sale or disposition of Licensed Products by ANIKA in or for an application or environment for which such Licensed Products were not approved by the FDA or other applicable government or regulatory agency; or (e) modification of Licensed Products by ANIKA which OBI has not approved and as to which OBI has the right to approve under this Agreement; to the extent such activities, uses, sales, dispositions or modifications give rise to the claim, loss or liability and have not been reviewed or approved by ANIKA. 42 13.6. If OBI or ANIKA intends to claim indemnification under this Section, such Party (the "Claiming Party") shall (i) promptly notify the other Party in writing of any claim or loss for which it intends to claim such indemnification, (ii) cooperate fully with the other Party and its legal representatives in the investigation of any claim or loss covered by this Section, and (iii) allow the other Party to control the defense and/or disposition of such suit or claim; provided that the Claiming Party shall have the right to participate at its own expense through counsel of its own choosing. Neither Party shall have any indemnification obligations hereunder to the extent that such Party's ability to defend such suit or redress such loss is prejudiced by the Claiming Party's failure to perform the obligations set forth in the preceding sentence. No claim shall be settled for which any Indemnifying Party shall be liable without the advance written consent of both the indemnifying Party and the Claiming Party, which consent shall not be unreasonably withheld. ARTICLE XIV - ADDITIONAL APPLICATIONS AND INDICATIONS 14.1. OBI FIRST RIGHT OF REFUSAL. (a) ANIKA hereby grants to OBI a right of first refusal, as described in this Section 14.1, to obtain rights to any new HA-based products derived from ANIKA's R&D Pipeline, which are solely owned by ANIKA, acquired by or licensed to ANIKA (provided ANIKA has rights to sublicense to others thereunder) and developed for human use in the treatment of osteoarthritis, (collectively referred to as the "ANIKA Potential Products"). (b) If at any time during the development of ANIKA Potential Products, ANIKA determines in its sole discretion to seek a license, distribution and/or development partner, ANIKA shall promptly notify OBI and shall supply to OBI all available relevant information and data related thereto as is reasonably necessary for OBI to make an informed decision of its interest in obtaining license or distribution rights to the ANIKA Potential Product and to develop a proposal for the commercial terms for such rights. The date of such notification is hereinafter referred to as the "ANIKA Disclosure Date." OBI shall have sixty (60) days from the ANIKA Disclosure Date to review the ANIKA Potential Product and to determine if it wishes to negotiate distribution or licensing arrangements with respect to such ANIKA Potential Product. During such period, OBI may request that ANIKA provide OBI with additional information and data which OBI reasonably considers relevant to OBI's consideration of the ANIKA Potential Product, and ANIKA shall provide such additional information at OBI's expense, but only to the extent such information is in existence and easily accessed. If OBI does not wish to pursue negotiations for the distribution or license of such ANIKA Potential Product and OBI so notifies ANIKA, or if such sixty (60) day period expires without OBI notifying ANIKA as to its interest, then ANIKA shall be free to enter into an agreement with a Third Party as to that ANIKA Potential Product, as ANIKA shall determine at its sole discretion, without any further restriction or obligation to OBI. (c) If prior to the expiration of the sixty (60) day period referred to in Section 14.1(b) OBI expresses in writing its interest in obtaining the right to distribute or license the ANIKA 43 Potential Product, the Parties shall enter into good faith negotiations regarding the right to distribute or license such ANIKA Potential Product within the one hundred eighty (180) day period immediately following the ANIKA Disclosure Date. If at the end of such one hundred eighty (180) day period the parties are unable to reach a definitive agreement, and ANIKA does not wish to continue the negotiations, as ANIKA shall determine at its sole discretion, ANIKA shall be free to enter into an agreement with any Third Party without any further restriction or obligation to OBI, except that it may not enter into an agreement with a Third Party on terms less favorable to ANIKA then those terms offered to ANIKA by OBI. 14.2. ANIKA FIRST RIGHT OF REFUSAL. (a) OBI (and its Affiliates) hereby grants to ANIKA a right of first refusal, as described in this Section 14.2, to manufacture any new HA-based products solely owned by OBI and/or its Affiliates or licensed to OBI and/or its Affiliates, provided, so long as, in the case of and such licensed products, OBI and/or its Affiliates has no obligations to use another manufacturer as part of its license obligations (collectively referred to as the "OBI Potential Products"). (b) If at any time during the development of OBI Potential Products, OBI or an Affiliate determines in its sole discretion to seek a supplier or manufactures for OBI Potential Products, OBI shall promptly notify ANIKA and shall supply to OBI all available relevant information and data related thereto as is reasonably necessary for ANIKA to make an informed decision of its interest in supplying and/or manufacturing the OBI Potential Product and to develop a proposal for the commercial terms for such supply rights. The date of such notification is hereinafter referred to as the "OBI Disclosure Date." ANIKA shall have sixty (60) days from the OBI Disclosure Date to review the OBI Potential Product and to determine if it wishes to negotiate supply and/or manufacturing arrangements with respect to such OBI Potential Product. During such period, ANIKA may request that OBI provide ANIKA with additional information and data which ANIKA reasonably considers relevant to ANIKA's consideration of the OBI Potential Product, and OBI and its Affiliates shall provide such additional information at ANIKA's expense, but only to the extent such information is in existence and easily accessed. If ANIKA does not wish to pursue negotiations for supply of such OBI Potential Product and ANIKA so notifies OBI, or if such sixty (60) day period expires without ANIKA notifying OBI as to its interest, then OBI or an Affiliate shall be free to enter into an agreement with a Third Party as to that OBI Potential Product, as OBI shall determine at its sole discretion, without any further restriction or obligation to ANIKA. (c) If prior to the expiration of the sixty (60) day period referred to in Section 14.2(b) ANIKA expresses in writing its interest in obtaining the right to supply the OBI Potential Product, the Parties shall enter into good faith negotiations regarding the supply and/or manufacturing of such OBI Potential Product within the one hundred eighty (180) day period immediately following the OBI Disclosure Date. If at the end of such one hundred eighty (180) day period, the Parties are unable to reach a definitive agreement, and OBI does not wish to continue the negotiations, as OBI shall determine at its sole discretion, OBI or an Affiliate shall be free to enter into an agreement with any Third Party without any further restriction or 44 obligation to ANIKA, except that it may not enter into an agreement with a Third Party on terms less favorable to OBI and its Affiliates than those terms offered to OBI and its Affiliates by ANIKA. ARTICLE XV - STEERING COMMITTEE (a) OBI and ANIKA shall establish a Steering Committee (the "Steering Committee") consisting of four (4) members. Each of OBI and ANIKA shall appoint two (2) individuals to serve on the Steering Committee. (b) Within thirty (30) days after the execution and delivery of this Agreement by both Parties, ANIKA and OBI shall each appoint its initial representatives to serve on the Steering Committee. Each Party may change its representatives upon notice to the other Party. (c) The Steering Committee shall be chaired by one representative of either ANIKA or OBI for each successive twelve (12) month period during the Term of this Agreement, and the chair shall alternate between the Parties. During the first twelve (12) month period, the Steering Committee shall be chaired by a representative of OBI. (d) The Steering Committee shall meet at least two (2) times each year during the Term of this Agreement, at such dates and times as agreed to by the Parties, with the intention that the meetings should occur at least once during each Calendar Quarter. Meetings in person shall alternate between the offices of the Parties or such other place as may be mutually agreed upon by the Parties. The Steering Committee may also convene or be polled or consulted from time to time by means of telecommunications or correspondence, and members will be deemed "present" at "meetings" for purposes of this Article 15 if participating by such means. All decisions made or actions taken by the Steering Committee shall require the affirmative vote of a majority of its entire membership. A quorum for a meeting shall require at least one ANIKA member and at least one OBI member. (e) The duties and responsibilities of the Steering Committee shall include: (i) reviewing and commenting on any Development being conducted by OBI; (ii) reviewing and commenting on development relating to Orthovisc(R) being conducted by ANIKA outside the Territory; (iii) review and comment on marketing and sales activities being carried out by OBI in the Territory including trademark and website issues, including review of an annual marketing plan; (iv) review and comment on marketing and sales activities being conducted by ANIKA outside the Territory; (v) discussing issues concerning whether to file for Regulatory Approval and/or launch the Licensed Product in Mexico; and (vi) review and discuss any manufacture and supply issues that may arise. In connection with any meeting of the Steering Committee, the Parties will endeavor to provide to the other Party all materials in connection with this Article XV(e) at least five (5) Business Days in advance of such meeting. 45 ARTICLE XVI - DISPUTE RESOLUTION. 16.1. DISPUTE RESOLUTION AND ARBITRATION. In the case of any Disputes (as defined below) between the Parties arising from this Agreement, and in case this Agreement does not provide a solution for how to resolve such disputes, the Parties shall endeavor to discuss and negotiate in good faith towards a solution acceptable to both Parties and in the spirit of this Agreement. If the Parties fail to reach agreement within sixty (60) days, then the President of ANIKA and the President of OBI shall discuss in good faith an appropriate resolution to the dispute. If these executives fail to reach an amicable agreement within sixty (60) days, then either Party may upon written notice to the other submit the dispute to binding arbitration pursuant to Section 16.2. 16.2. ARBITRATION. Any claim, dispute or controversy arising out of or in connection with or relating to this Agreement, (including, without limitation, disputes with respect to the rights and obligations of the Parties following termination) (a "Dispute") not settled by the procedures set forth in Section 16.1 above shall be adjudicated by arbitration in accordance with the Arbitration Proceedings as set forth in Exhibit B attached hereto. ARTICLE XVII - HSR FILING 17.1. To the extent, that a Party concludes in good faith that it is required to file or register this Agreement or a notification thereof in accordance with applicable Laws with any Governmental Authority with regulatory jurisdiction over enforcement of any applicable Competition Laws ("Governmental Antitrust Authority"), including without limitation the U.S. Federal Trade Commission Bureau of Competition ("FTC") and the U.S. Department of Justice Antitrust Division ("DOJ"), such Party may do so. Without limiting the foregoing, the Parties agree to make all necessary HSR Filings, if any, within seven (7) business days after the Effective Date. Each Party shall be responsible for its own costs, expenses, and filing fees associated with any filing with any Governmental Antitrust Authority, including any HSR Filing. 17.2. Subject to appropriate confidentiality protections, the Parties shall work cooperatively in connection with obtaining the requisite approvals, consents or orders of each applicable Governmental Antitrust Authority necessary for the consummation of the transactions contemplated by this Agreement, and shall keep each other apprised of the status of matters relating to the obtainment of such approvals, consents or orders, including: (i) cooperating with each other in connection with HSR Filings and filings under any foreign investments laws or any other Competition Laws; (ii) furnishing to the other Party all information within its possession that is required for any HSR Filing or any application or other filing to be made by the other party pursuant to any foreign investment laws or any other Competition Laws in connection with the transactions contemplated by this Agreement; 46 (iii) promptly notifying each other of any communications from or with any Governmental Antitrust Authority with respect to the transactions contemplated by this Agreement; (iv) promptly providing to the other Party copies of all communications with any Governmental Antitrust Authority relating to the transactions contemplated by this Agreement, or relating to any of the matters described in this Article XVII; (v) not participating in any meeting or discussion with any Governmental Antitrust Authority in connection with proceedings under or relating to the HSR Act, any foreign investment laws or any other antitrust laws unless it consults with the other Party in advance, and, to the extent permitted by such Governmental Antitrust Authority, gives the other Party the opportunity to attend and participate thereat; and (vi) consulting and cooperating with one another in connection with all analyses, appearances, presentations, memoranda, briefs, arguments, opinions and proposals made or submitted by or on behalf of any Party hereto in connection with proceedings under or relating to the HSR Act, any foreign investment laws or any other competition laws. 17.3. The Parties agree to request early termination of the applicable waiting period under the HSR Act in any HSR Filing. Each Party shall use its commercially reasonable best efforts to secure termination of any waiting periods under the HSR Act or other applicable law, to certify as soon as practicable its substantial compliance with any requests for additional information or documentary material that may be made under the HSR Act, and/or to obtain the approval of any Governmental Antitrust Authority of the transactions contemplated by this Agreement, including without limitation promptly providing information and documents requested by any Governmental Antitrust Authority and entering into good faith negotiations with any Governmental Antitrust Authority to enter into a consent decree or other arrangement to secure termination of such waiting periods or to obtain such approval (provided, however, that nothing in this Article XVII shall prevent, or be construed to prevent, either Party from agreeing to extend the waiting period under the HSR Act in connection with good faith settlement negotiations with the DOJ or FTC). 17.4. As used in this Article, the following terms have the following meanings: (a) "HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rule and regulations promulgated thereunder. (b) "HSR Filing" means filings by ANIKA and OBI with the FTC and the DOJ of a Notification and Report Form for Certain Mergers and Acquisitions (as that term is defined in the HSR Act) with respect to the matters set forth in this Agreement, together with all required documentary attachments thereto. (c) "HSR Clearance Date" means the earlier of 47 (i) the date on which the FTC shall notify OBI and ANIKA of early termination of the applicable waiting period under the HSR Act, or (ii) the day after the date on which the applicable waiting period under the HSR Act expires; or (iii) the day after the date on which the seven (7) Business Day period referred to in Section 17.1 expires if no HSR Filings have been filed by that date. 17.5. The licenses granted pursuant to Articles III, IV and VIII shall not be effective until the HSR Clearance Date. In the event that an HSR Filing is required and either: (a) the FTC and/or the DOJ shall seek a preliminary injunction under the HSR Act against ANIKA and OBI to enjoin the transactions contemplated by this Agreement; or (b) the HSR Clearance Date shall not have occurred on or prior to June 1, 2004; this Agreement may be terminated by either Party upon one (1) week written notice (such termination to be deemed a termination pursuant to Section 12.2). ARTICLE XVIII - MISCELLANEOUS 18.1. RELATIONSHIP OF PARTIES. For the purposes of this Agreement, each Party is an independent contractor and not an agent or employee of the other Party. Neither Party shall have authority to make any statements, representations, or commitments of any kind, or to take any action which shall be binding on the other Party, except as may be explicitly provided for herein or authorized in writing. 18.2. COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, and all of which together shall be deemed to be one and the same instrument. 18.3. HEADINGS. All headings in this Agreement are for convenience only and shall not affect the meaning of any provision hereof. 18.4. BINDING EFFECT. This Agreement shall inure to the benefit of and be binding upon the Parties and their respective lawful successors and assigns. 48 18.5. ASSIGNMENT. Neither Party may assign or transfer this Agreement or its rights and obligations under this Agreement without the prior written consent of the other Party, except to its Affiliates, which consent may be given or withheld in its sole discretion, and any such assignment or transfer shall be null and void and entitle the non-assigning party to terminate this Agreement forthwith. Notwithstanding the foregoing, either Party must assign this Agreement (and shall be permitted to do so without the consent of the other Party) in connection with the sale of all or substantially all of its assets (whether by merger, consolidation or otherwise); provided, however, that in no event shall any such assignment release either Party from its responsibilities under this agreement unless the assignee has agreed in writing to assume all of the obligations of assignor hereunder. 18.6. AMENDMENT AND WAIVER. This Agreement may be amended, supplemented, or otherwise modified at any time, but only by means of a written instrument signed by both Parties. Any waiver of any rights or failure to act in a specific instance shall relate only to such instance and shall not be construed as an agreement to waive any rights or fail to act in any other instance, whether or not similar. 18.7. GOVERNING LAW. This Agreement and the legal relations among the parties shall be governed by and construed in accordance with the laws of the State of New York, USA, irrespective of any choice of laws or conflict-of-law principles. 18.8. SEVERABILITY. In the event that any provision of this Agreement shall, for any reason, be held to be invalid or unenforceable in any respect, such invalidity or unenforceability shall not affect any other provision hereof, and this Agreement shall be construed as if such invalid or unenforceable provision had not been included herein. 18.9. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes any and all prior or contemporaneous oral and prior written agreements and understandings. 18.10. ADVICE OF COUNSEL. OBI and ANIKA have each consulted counsel of their choice regarding this Agreement, and each acknowledges and agrees that this Agreement shall not be deemed to have been drafted by one party or another and will be construed accordingly. 49 18.11. FORCE MAJEURE. Neither Party shall lose any rights hereunder or be liable to the other Party for damages or losses on account of failure or delay of performance by the defaulting Party if the failure or delay is occasioned by (i) any fire, explosion, unusually severe weather, natural disaster or Act of God (except for any fire or explosion that could reasonably have been prevented by ANIKA); (ii) epidemic; any nuclear, biological, chemical, or similar attack; any other public health or safety emergency; any act of terrorism; and any action reasonably taken in response to any of the foregoing; (iii) any act of declared or undeclared war or of a public enemy, or any riot or insurrection; (iv) any disruption in transportation, communications, electric power or other utilities, or other vital infrastructure; or any means of disrupting or damaging internet or other computer networks or facilities; (v) any strike, lockout or other labor dispute or action; (vi) any action taken in response to any of the foregoing events by any civil or military authority; or (vii) any other event beyond such Party's control, provided that the Party claiming force majeure has exerted all reasonable efforts to avoid or remedy such force majeure; provided, however, that in no event shall a Party be required to settle any labor dispute or disturbance. Notwithstanding the foregoing, this Section 18.11 shall not operate to relieve either Party from performance of any obligation for more than ninety (90) days. 18.12. FURTHER ACTIONS. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of this Agreement. 18.13. NO TRADEMARK RIGHTS. Except as otherwise explicitly provided herein, no right, express or implied, is granted by the Agreement to use in any manner the name "ANIKA" or "OBI", or any other trade name or trademark of the other Party or its Affiliates in connection with the performance of the Agreement. 18.14. NOTICES. All notices hereunder shall be in writing and shall be deemed given if delivered personally or by facsimile transmission (receipt verified), email (receipt acknowledged), mailed by registered or certified mail (return receipt requested), postage prepaid, or sent by express courier service, to the Parties at the following address (or at such other address for a Party as shall be specified by like notice; provided, that notices of a change of address shall be effective only upon receipt thereof). 50 If to ANIKA, addressed to: ANIKA THERAPEUTICS INC. 160 New Boston Street Woburn, MA 01801 Attention: Chief Executive Officer Facsimile: (781) 932-3360 Email: csherwood@anikatherapeutics.com With a copy to: Goodwin Procter LLP Exchange Place Boston, MA 02109 Attention: H. David Henken, P.C. Facsimile: (617) 523-1231 Email: dhenken@goodwinprocter.com If to OBI: addressed to: Ortho Biotech Products, L.P. 430 Route 22 East P.O. Box 6914 Bridgewater, NJ 08807-0914 Attention: President Facsimile: 908-529-4365 Email: jhjohns@obius.jnj.com With a copy to: Office of General Counsel Johnson & Johnson One Johnson & Johnson Plaza New Brunswick, NJ 08933 Facsimile: 732-524-2788 Email: pjohnson@corus.jnj.com Each of the Parties consent to the personal jurisdiction of the U.S. Federal Courts and agree to accept any legal process served upon such Party at the addresses specified above for such Party. 51 18.15. WAIVER. Except as specifically provided for herein, the waiver from time to time by either of the Parties of any of their rights or their failure to exercise any remedy shall not operate or be construed as a continuing waiver of same or of any other of such Party's rights or remedies provided in this Agreement. 18.16. BANKRUPTCY. All rights and licenses granted under or pursuant to this Agreement by each Party are, and shall otherwise be deemed to be, for purposes of Section 365(n) of Title 11, U.S. code (the "Bankruptcy Code"), licenses of rights to "intellectual property" as defined under Section 101(60) of the Bankruptcy Code. The parties agree that OBI shall retain and may fully exercise all of its rights and elections under the Bankruptcy Code. The licensor agrees, during the term of this Agreement, to create and maintain current copies or, if not amenable to copying, detailed descriptions or other appropriate embodiments, of all such intellectual property. The Parties further agrees that in the event of the commencement of a bankruptcy proceeding by or against it under the Bankruptcy Code, the licensee shall be entitled to a complete duplicate of (or complete access to, as appropriate) any such intellectual property, and all embodiments of such intellectual property, and same, if not already in its possession, shall promptly be delivered to licensee (a) upon such commencement of a bankruptcy proceeding upon written request therefore by licensee, unless licensor elects to continue to perform all of its obligations under this Agreement, or (b) if not delivered under (a) above, upon the rejection of this Agreement by or on behalf of licensor upon written request therefore by licensee. 18.17. COMPLIANCE WITH ENVIRONMENT, SAFETY AND INDUSTRIAL HYGIENE. With respect to all environmental, safety and industrial hygiene matters related to ANIKA's activities under this Agreement, ANIKA shall (i) comply with all applicable laws and regulations issued by national, state and local authorities, (ii) allow OBI to inspect ANIKA's facilities, such inspections to be at reasonable times and upon reasonable notice, and (iii) implement corrective action which may be reasonably requested by OBI to correct an violations of laws or regulations regarding environmental, safety and industrial hygiene 18.18. CHILD LABOR EMPLOYMENT PRACTICES. ANIKA agrees to comply with the following PPC Corporate Policy relating to the Employment of Child Labor: (a) No person under the age of 16 shall be employed, and no other young person (under age of 18) shall be employed unless such employment is in compliance with the International Labor Organizations Convention 138 Concerning Minimum Age; (b) No young person (under age 18) shall be required to work more than 48 regular hours and 12 hours overtime per week nor more than six (6) days per week; and 52 (c) No young person (under age 18) shall be employed unless such employment is in compliance with all applicable laws and regulations concerning, age, hours, compensation, health and safety. 53 IN WITNESS WHEREOF, the undersigned have duly executed and delivered this Agreement as a sealed instrument effective as of the date first above written. ORTHO BIOTECH PRODUCTS, L.P. BY: Ortho Biotech Inc., its general partner BY: /s/ John Johnson -------------------------------------------- John Johnson, President DATE: December 20, 2003 ----------------------------------------------- ANIKA THERAPEUTICS, INC. By: /s/ Charles h. Sherwood ------------------------------------------------- Charles H. Sherwood, Ph.D., President and CEO DATE: December 20, 2003 ----------------------------------------------- EXHIBIT A PRODUCT SPECIFICATIONS [****************************************************************************** ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* *******************************************************************************] A-1 EXHIBIT B ARBITRATION Any controversy or claim arising out of or relating to this Agreement shall be resolved by arbitration before a single arbitrator in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("AAA") then pertaining (available at www.adr.org), except where those rules conflict with this provision, in which case this provision controls. Any court with jurisdiction shall enforce this clause and enter judgment on any award. The arbitrator shall be selected within twenty business days from commencement of the arbitration from the AAA's National Roster of Arbitrators pursuant to agreement or through selection procedures administered by the AAA. Within 45 days of initiation of arbitration, the parties shall reach agreement upon and thereafter follow procedures, including limits on discovery, assuring that the arbitration will be concluded and the award rendered within no more than six months from selection of the arbitrator or, failing agreement, procedures meeting such time limits will be designed by the AAA and adhered to by the parties. In connection with the arbitration proceeding, the arbitrator shall order the prompt exchange of relevant documents by each party; each party may take up to two depositions as of right, and the arbitrator may in his or her discretion allow additional depositions upon good cause shown by the moving party; however, the arbitrator shall not have the power to order the answering of interrogatories or the response to requests for admission. In connection with any arbitration, each party shall provide to the other, no later than fourteen (14) days before the date of the arbitration, the identity of all persons that may testify at the arbitration and a copy of all documents that may be introduced at the arbitration or considered or used by a party's witness or expert. The arbitration shall be held in Boston, MA and the arbitrator shall apply the substantive law of New York, except that the interpretation and enforcement of this arbitration provision shall be governed by the Federal Arbitration Act. From the date of initiation of arbitration and until such time as any matter has been finally settled by arbitration, the running of the time periods contained in Article VII as to which Party must cure a breach of this Agreement shall be suspended as to the subject matter of the dispute. Prior to commencement of arbitration, emergency relief is available from any court to avoid irreparable harm. THE ARBITRATOR SHALL NOT AWARD EITHER PARTY PUNITIVE, EXEMPLARY, MULTIPLIED OR CONSEQUENTIAL DAMAGES, OR ATTORNEYS FEES OR COSTS. Prior to commencement of arbitration, the parties must attempt to mediate their dispute using a professional mediator from AAA, the CPR Institute for Dispute Resolution, or like organization selected by agreement or, absent agreement, through selection procedures administered by the AAA. Within a period of 45 days after the request for mediation, the parties agree to convene with the mediator, with business representatives present, for at least one session to attempt to resolve the matter. In no event will mediation delay commencement of the arbitration for more than 45 days absent agreement of the parties or interfere with the availability of emergency relief. B-1 EXHIBIT C FORM OF PRESS RELEASE DRAFT 12/18/03 FOR IMMEDIATE RELEASE Contacts: ANIKA THERAPEUTICS, INC. PONDEL/WILKINSON KLEIN Charles Sherwood, Ph.D., CEO Susan Klein (508) 358-4315 William Knight, CFO Rob Whetstone (323) 866-6050 (781) 932-6616 ANIKA THERAPEUTICS ANNOUNCES U.S. ORTHOVISC(R)LICENSE AND SUPPLY AGREEMENT WITH ORTHO BIOTECH PRODUCTS, L.P. WOBURN, MA - December 22, 2003 - Anika Therapeutics, Inc. (NASDAQ:ANIK) today announced the signing of an exclusive, multi-year U.S. licensing and supply agreement with Ortho Biotech Products, L.P. for Anika's ORTHOVISC(R), a highly purified, high molecular weight form of hyaluronic acid for treating pain in patients suffering from osteoarthritis of the knee. Under the agreement, Anika will receive an initial payment of $2 million and payments upon receipt of final marketing approval for ORTHOVISC from the U.S. Food and Drug Administration (FDA), and other milestones. Earlier this month, Anika announced that it had received a letter from the FDA stating that an approval order will be issued for ORTHOVISC subject to a successful inspection of Anika's manufacturing facility. In addition, Ortho Biotech will fund post-marketing clinical trials for ORTHOVISC and development of future products based on Anika's proprietary viscosupplementation technology. The agreement covers the U.S. and Mexico. The effectiveness of certain of the license provisions under the agreement may be subject to customary regulatory approvals, including clearance under the Hart-Scott-Rodino Antitrust Improvements Act. Anika Chief Executive Officer Charles H. Sherwood, Ph.D., said Anika selected Ortho Biotech as its U.S. marketing partner for ORTHOVISC due to its outstanding reputation for high quality products and customer service. "Ortho Biotech is known for its strategy aimed at becoming a leader in the markets it chooses to address. We C-1 believe the company is an excellent partner for driving ORTHOVISC sales and penetrating the U.S. market for viscosupplementation." Designed to relieve pain and stiffness and improve joint mobility, ORTHOVISC has been marketed outside of the United States since 1996. It is currently sold in Canada and various European and Middle Eastern nations. The U.S. market for viscosupplementation products is growing, with more than 10 million Americans suffering from osteoarthritis of the knee. ABOUT ORTHO BIOTECH PRODUCTS, L.P. (www.orthobiotech.com) In 1990, Ortho Biotech Products, L.P. was established in Raritan, N.J., as the first biotechnology subsidiary of Johnson & Johnson. Since that time, Ortho Biotech and its worldwide affiliates have earned a global reputation for researching, manufacturing and marketing innovative health care products that extend and enhance the quality of patients' lives. Ortho Biotech, the established market leader in Epoetin alfa therapy for anemia management across multiple indications, focuses its research and marketing efforts in four clinical areas: oncology, nephrology, immunology and critical care/surgery. ABOUT ANIKA THERAPEUTICS, INC. (www.anikatherapeutics.com) Headquartered in Woburn, Mass., Anika Therapeutics, Inc. 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. In addition to ORTHOVISC(R), a treatment for osteoarthritis of the knee (not approved for sale in the U.S.), Anika markets HYVISC(R) in the U.S. for the treatment of equine osteoarthritis through Boehringer Ingelheim Vetmedica, Inc. and manufactures AMVISC(R) and AMVISC(R) Plus, HA viscoelastic products for ophthalmic surgery, for Bausch & Lomb. It also produces CoEaseTM, which is marketed by Advanced Medical Optics, Inc., STAARVISCTM-II distributed by STAAR Surgical Company and ShellgelTM for Cytosol Ophthalmics, Inc. THE STATEMENTS MADE IN THIS PRESS RELEASE WHICH ARE NOT STATEMENTS OF HISTORICAL FACT ARE 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, INCLUDING, WITHOUT LIMITATION, STATEMENTS THAT MAY BE IDENTIFIED BY WORDS SUCH AS "EXPECTATIONS," "REMAINS," "FOCUS," "EXPECTED," "PROSPECTIVE," "EXPANDING," "BUILDING," "CONTINUE," "PROGRESS," "EFFORTS," "HOPE," "BELIEVE," "OBJECTIVES," OPPORTUNITIES," "WILL," "SEEK," AND OTHER EXPRESSIONS WHICH ARE PREDICTIONS OF OR INDICATE FUTURE EVENTS AND TRENDS AND WHICH DO NOT CONSTITUTE HISTORICAL MATTERS IDENTIFY FORWARD-LOOKING STATEMENTS. THE STATEMENTS ARE BASED UPON THE CURRENT BELIEFS AND EXPECTATIONS OF MANAGEMENT AND ARE SUBJECT TO SIGNIFICANT RISKS AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM ANY ANTICIPATED FUTURE RESULTS, C-2 PERFORMANCE OR ACHIEVEMENTS DESCRIBED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING: THE RESULTS OF ITS RESEARCH AND DEVELOPMENT EFFORTS AND TIMING OF REGULATORY APPROVALS; APPROVAL AND COMMERCIALIZATION OF THE COMPANY'S PRODUCTS, AND, WITH RESPECT TO ORTHOVISC, RISKS RELATING TO THE ABILITY OF THE COMPANY TO SUCCESSFULLY ADDRESS THE REQUESTS OF THE FDA IN THE APPROVABLE LETTER AND THE TIMING OF THE COMPANY'S EFFORTS TO DO SO, AS WELL AS THE TIMING OF ANY APPROVED ORDER; AND THAT THE COMPANY'S NEW LICENSING AND SUPPLY ARRANGEMENTS WILL NOT RESULT IN MEANINGFUL SALES OR WILL BE TERMINATED AT AN EARLIER DATE IN ACCORDANCE WITH ITS TERMS OR THAT ANY OF THE MILESTONES CONTAINED IN THE COMPANY'S NEW LICENSING AND SUPPLY AGREEMENTS WILL BE ACHIEVED. THERE CAN BE NO ASSURANCES THAT THE COMPANY'S INCREASED UNIT SALES WILL MATERIALLY INCREASE PRODUCT REVENUE OR IMPROVE GROSS MARGINS. CERTAIN OTHER FACTORS THAT MIGHT CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE FORWARD-LOOKING STATEMENTS INCLUDE THOSE SET FORTH UNDER THE HEADINGS "BUSINESS," "RISK FACTORS AND CERTAIN FACTORS AFFECTING FUTURE OPERATING RESULTS" AND "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" IN EACH OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002, ITS QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2003 AND CURRENT REPORTS ON FORM 8-K, AS WELL AS THOSE DESCRIBED IN THE COMPANY'S OTHER PRESS RELEASES AND SEC FILINGS. # # # C-3 EXHIBIT D ANIKA'S INSURANCE REQUIREMENTS 1.0 DEFINITIONS "ANIKA" 2.0 INSURANCE REQUIREMENTS ANIKA shall procure and maintain, at all times, and at its own expense, until final completion of the work covered by the contract, and during the time period following the final completion if ANIKA is required to return and perform additional work, for any reason whatsoever, the types of insurance(s) specified below. A. COMMERCIAL GENERAL LIABILITY ANIKA shall provide coverage on a Commercial General Liability Occurrence Coverage Form (or equivalent) with limits of not less than $1,000,000 each occurrence, $1,000,000 products/completed operations aggregate, $1,000,000 personal injury/advertising injury aggregate and $2,000,000 general aggregate. ANIKA will endeavor to inform OBI of any exclusions or amendments to the policy form which would result in direct impact to OBI. ANIKA's policy shall be specifically endorsed with Chubb Form to include OBI, its subsidiaries, and its directors, officers and employees, as an Additional Insured, as respects negligence caused by ANIKA as a result of this Agreement. ANIKA shall supply OBI with the above proof of insurance and forms as required upon the signing of this Agreement, but OBI's failure to demand such proof or forms shall not waive OBI's rights to such coverage as specified herein. B. AUTOMOBILE LIABILITY ANIKA shall provide coverage on a Business Auto Policy Form (or equivalent) for hired and non-owned automobiles with a limit of liability in an amount no less than $1,000,000 each accident. C. WORKERS' COMPENSATION ANIKA shall provide Workers' Compensation Form (or equivalent) in accordance with the laws of the State of MA, and any other applicable jurisdiction, covering all employees who are to provide service under this Agreement. Employers' Liability coverage is required with limits of not less than the following: Bodily Injury by Accident.................................$500,000 Each Accident Bodily Injury by Disease..................................$500,000 Each Employee Bodily Injury by Disease..................................$500,000 Policy Limit
D-1 D. EXCESS LIABILITY ANIKA shall provide Umbrella Liability coverage with a limit of liability no less than $5,000,000 each occurrence, $5,000,000 aggregate. E. MISCELLANEOUS All insurance companies must be authorized to do business in the States where business is being transacted covering all operations under this Agreement. All insurance companies must be rated A or better with a financial rating of VII or better in the most recent A. M. BEST'S RATING GUIDE. All insurers will endeavor to provide for thirty (30) days' prior written notice to OBI of cancellation. Certificates of insurance for all required coverages shall be provided to OBI prior to commencement of any work on the project. D-2 EXHIBIT E QUALITY AGREEMENT QUALITY AGREEMENT BETWEEN PHARMACEUTICAL SOURCING GROUP AMERICAS (PSGA), A JOHNSON & JOHNSON COMPANY, AND ANIKA THERAPEUTICS EFFECTIVE DATE: MM/YY / REPLACES: NEW E-1 QUALITY AGREEMENT 21 CFR Sec. 820.50 (Purchasing controls) of the Quality System Regulation states "Each manufacturer shall establish and maintain procedures to ensure that all purchased or otherwise received product and services conform to specified requirements." Toward this end, the PURPOSE of this Agreement is to ensure a mutual understanding of key responsibilities to assure that those Pharmaceutical Sourcing Group Americas (PSGA) products manufactured by Anika Therapeutics, Inc., are produced according to specifications and comply with all governing regulations and corporate policies. IT IS ACKNOWLEDGED THAT THIS WILL BE A CONTINUOUSLY EVOLVING PROCESS. E-2 TABLE OF CONTENTS
SECTION TITLE PAGE - ------------- ---- 1. MAIN CONTACTS 4 2. OBJECTIVES 5 3. SCOPE 5 4. DEFINITIONS 5 5. REGULATORY/GMP 6 6. MATERIALS 7 7. MANUFACTURING/PACKAGING 7 8. STABILITY 7 9. PRODUCT COMPLAINTS 8 10. EXPIRATION DATING / LOT NUMBERING 8 11. SPECIFICATIONS 8 12. NON-CONFORMANCES 9 13. PRODUCT RELEASE/REJECTION 9 14. VALIDATION 9 15. SUPPLIERS 10 16. CHANGE CONTROL 10 17. ADVERSE DRUG EXPERIENCES 10 18. RECALLS 10 19. TECHNICAL SUPPORT 11 20. AGREEMENT MAINTENANCE 11 21. RESPONSIBILITIES 12 22. APPROVALS 17
E-3 1. MAIN CONTACTS: PSGA: [****************************************************************************** ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* ******************************************************************************* *******************************************************************************] ANIKA THERAPEUTICS: Name: Frank Luppino Title: Vice President - Operations Telephone: 781-932-6616 x136 FAX: 781-932-3360 e-mail: fluppino@anikatherapeutics.com E-4 2. OBJECTIVES: 2.1 To document the responsibilities of Anika Therapeutics and Pharmaceutical Sourcing Group Americas (PSGA) associated with the manufacture, packaging, testing, storage, and release of product. 2.2 To ensure a mutual understanding of key responsibilities, to ensure PSGA products are produced according to agreed upon specifications, and to ensure compliance with all applicable governing regulations and corporate policies. 2.3 It is acknowledged that this will be a continuously evolving process and that this Quality Agreement may be amended with concurrence from both parties as necessary. 3. SCOPE: 3.1 This agreement applies to the product(s) and locations listed below: PRODUCT(S): ORTHOVISC(R) LOCATION(S): 236 West Cummings Park, Woburn, MA 01801 3.2 Any external manufacturing or packaging services provided for PSGA by an outside facility must conform at a minimum to the Quality Agreement terms and conditions. Anika Therapeutics is currently being contracted to provide these services. This Quality Agreement is being implemented to delineate the PSGA/Anika Therapeutics quality objectives and responsibilities. 3.3 This document constitutes a Quality Agreement only and is not intended to represent a purchase contract. The Quality Agreement does not represent or replace the Manufacturing and Supply Agreement or any other agreement and/or amendment(s) thereto between Anika Therapeutics and PSGA. 4. DEFINITIONS: 4.1 FDA: United States Food and Drug Administration or any successor entity (CBER-CDER). 4.2 PMA: Pre-market approval E-5 4.3 QSR'S: Quality System Regulation, covering medical device good manufacturing practices as defined in the regulations promulgated under the Food, Drug, & Cosmetic Act (FDCA) 21 CFR Part 820. 4.4 PRODUCTS: Those products in Section 3. 4.5 RESPONSIBILITY: These abbreviations will be used to identify the responsibilities outlined in Section 21. 4.5.1 A = Audit 4.5.2 R = Primary Responsibility 4.5.3 D = Ultimate Decision Maker 4.5.4 S = Shared Responsibility 4.6 SPECIFICATIONS: 4.6.1 Master Formula 4.6.2 Test Methods 4.6.3 Product (WIP (Work in-process)/Finished) Requirements 4.6.4 Standard Operating Procedures (SOPs) 4.6.5 Labels & labelling 4.7 PRODUCT TERMS: 4.7.1 Bulk: Product stored in containers (drums, vessels, portable kettles etc.) 4.7.2 Work in Process (WIP): Product processed into its primary container needing further processing and/or packaging. 4.7.3 Finished Product: Product completely packaged and in its final stage. No further processing and/or packaging is required. 4.8 NON-CONFORMANCE: Any deviation from a specification as defined in Section 4.6. 5. REGULATORY / QSR: 5.1 Unless other wise specified, all information and documentation from Anika Therapeutics shall be provided to the PSGA QA contacts designated in Section 1 or their designee. 5.2 Anika Therapeutics shall manufacture, test, label, package, and store ORTHOVISC(R) in compliance with the QSR. 5.3 PMA: E-6 5.3.1 Anika Therapeutics shall provide PSGA with copy of the annual report to the FDA not later than thirty (30) days from established dates. 5.4 GMP AUDITS: 5.4.1 For auditing purposes, PSGA will be granted full access to the Anika Therapeutics facility (except restricted areas) used for manufacturing, filing, packaging, testing, and storage of ORTHOVISC(R). 5.4.2 PSGA will provide Anika Therapeutics at least two weeks notification prior to scheduling an audit of the Anika Therapeutics facility. 5.4.3 The Anika Therapeutics response to any audit report findings must be received by PSGA within 30 days of receipt of an audit report unless otherwise agreed upon by the two companies. 5.5 VISITS BY THE FDA: 5.5.1 Within 2 business days Anika Therapeutics shall notify PSGA of any FDA inspection, or notice of inspection, relating to the ORTHOVISC(R) product. 5.5.2 Anika Therapeutics will notify PSGA by the end of the audit, or more frequently if appropriate, of any issues found during the FDA inspection that may impact ORTHOVISC(R) operations. 5.5.3 Anika Therapeutics will provide PSGA with copies of FDA 483 reports or similar reports relating to ORTHOVISC(R) or the facility. 5.5.4 PSGA will participate in the development and approval of action plans which involve actions to be taken by PSGA. 6. MATERIALS: 6.1 RAW MATERIALS: Anika Therapeutics will be responsible for inspection/testing and acceptance of all raw materials. 6.2 COMPONENTS: Anika Therapeutics will be responsible for all inspection/testing of components. 7. MANUFACTURING / PACKAGING: 7.1 Anika Therapeutics shall manufacture, package, test, and store the, bulk, WIP, and finished product in accordance with its approved specifications and current Good Manufacturing Practices. 7.2 The manufacture of any penicillin or steroid product will not be allowed in the same facility used for the manufacture of (PSGA product(s)). E-7 7.3 Anika Therapeutics is responsible for releasing the finished product for PSGA review and the overall quality/compliance of the product (see Responsbilities - Section 21). 8. STABILITY / RETAIN SAMPLES: 8.1 Anika Therapeutics will be responsible for withdrawing the required number of samples and performing annual product stability analysis in accordance with approved test methods and at test intervals identified in the stability specifications. 8.2 Anika Therapeutics will maintain the required amount of retain samples of finished goods to perform full testing from every commercial lot manufactured at Anika Therapeutics. 8.3 All stability results will be available to PSGA upon request. 8.4 Anika Therapeutics will provide a copy of their stability protocol to PSGA. 9. PRODUCT COMPLAINTS: 9.1 OBI shall promptly communicate to ANIKA by facsimile, telephone or email (and confirm any such telephone communication as instructed at the time) any complaint received from users of the Licensed Product, in the configuration supplied by ANIKA. 9.2 Each notification of a complaint shall contain, but not be limited to, the lot number, dosage size, expiration date, indication for actual use and description of circumstances involved in the failure of the Unit(s) in question. 9.3 Each complaint notification will contain all the information available to OBI at that time, including all information then available which is required in the ANIKA Complaint Form, and a summary of the proposed action to be taken by OBI to comply with its legal obligations. OBI will provide additional information promptly as it becomes available. 9.4 OBI acknowledges that complaint investigation is the responsibility of ANIKA, but OBI reserves the right to directly contact its customers. 9.5 Anika Therapeutics will make reasonable efforts to complete their investigation, in writing, to all complaints within 30 business days of receipt, although some complaint investigations, due to their nature, may take longer to complete. 9.6 Anika Therapeutics will provide PSGA with summary complaint data on a semi-annual basis. E-8 10. EXPIRATION DATING / LOT NUMBERING: 10.1 Anika Therapeutics will be responsible for providing PSGA QA the formats, layouts and abbreviations for expiration dating and lot numbers. The assignment of expiration dates will be identified in the specifications. 10.2 The format, layout, and abbreviation for expiration date and lot number will be approved in writing by PSGA QA and be documented in the specification. All labels must comply with the PMA-approved labelling. 11. NON-CONFORMANCES: 11.1 Anika Therapeutics will be responsible for investigating and documenting any non-conformance to any process, material or product. (Reference Sections 4.6 and 4.8). 11.2 Anika Therapeutics will provide PSGA with non-conformance summary data on a quarterly basis. 12. PRODUCT RELEASE: 12.1 Upon determination by Anika Therapeutics that the ORTHOVISC(R) meets the required specifications it is approved for shipment to PSGA. PSGA will disposition the shipment after review and receipt of Anika Therapeutics QA documentation: 12.1.1 Anika Therapeutics is responsible for the storage of product prior to its receipt by PSGA 12.1.2 Shipment will be made to the designated PSGA facility 12.1.3 PSGA will specify approved carrier(s). 12.1.4 Carriers not specified by PSGA must be initially approved by PSGA prior to use by Anika Therapeutics. 12.2 Anika Therapeutics will forward the required documentation to PSGA QA for release. 12.2.1 Certificate of Analysis (COA) 12.2.2 Certificate of Compliance (COC) 12.2.3 Copies of the completed manufacturing record 12.2.4 12.3 PSGA is responsible for its acceptance decisions on finished ORTHOVISC(R) lots based on manufacturing site compliance with QSR's, including completed and approved batch record documentation and conformance to specifications. E-9 12.4 Anika Therapeutics will maintain retain samples for each lot of raw materials for one (1) year past the expiration date. 12.5 Anika Therapeutics will not supply to PSGA product that has been reworked unless such rework is validated and approved within the PMA for the product. 13. VALIDATION: 13.1 Anika Therapeutics will perform process, packaging, and cleaning validations as required by its procedures and in accordance with standard industry practice. 13.2 Anika Therapeutics will perform laboratory test method validations as required by its procedures and in accordance with standard industry practice. 13.3 Anika Therapeutics will develop protocols for required validations in accordance with standard industry practice. 14. SUPPLIERS: 14.1 Anika Therapeutics will be responsible for conducting periodic audits of suppliers. 14.2 Anika Therapeutics will be responsible for qualification of new suppliers. 14.3 Anika Therapeutics will notify PSGA of any supplier-related quality issues impacting PSGA product(s). 15. CHANGE CONTROL: 15.1 Anika Therapeutics will notify PSGA QA in advance of any changes in processes, testing, and materials prior to implementation if such changes are significant enough to affect finished product specifications or require FDA pre-approval submission. 15.2 Anika Therapeutics will provide PSGA with a summary of Change Control activities on a semi annual basis. This depends upon the type of change. 16. MEDICAL DEVICE REPORTS: 16.1 ANIKA shall be responsible for notifying all applicable regulatory authorities of reportable events (including without limitation complaints) involving the Licensed Product for which ANIKA receives written notification, as required by applicable laws. E-10 16.2 OBI shall notify ANIKA of potentially reportable events promptly but in no event later than twenty-four (24) hours after the event. In addition, all such notices by OBI shall be consistent with the requirements of law in the applicable jurisdictions. 16.3 Anika Therapeutics will provide PSGA with a summary of Medical Device Reports on a semi annual basis. 16.4 Anika Therapeutics and PSGA will work together to investigate reportable events and complaints, including gathering information from customers and end users. 17. RECALLS: 17.1 Anika Therapeutics shall be responsible for coordinatingany recall of product from PSGA 17.2 PSGA shall be responsible for recalling product from end users and notifying end users of any field alert activities. 17.3 Anika Therapeutics shall forward all required recall-related information to PSGA on request, within two (2) calendar days of the request. 18. TECHNICAL SUPPORT: 18.1 Technical support will be mutually agreed upon as situations arise. 19. AGREEMENT MAINTENANCE: 19.1 This agreement shall be reviewed and amended annually or as needed. 19.2 Modifications/addenda can be made as required; any such modifications or addenda must be in writing and approved by the Anika Therapeutics and PSGA. 19.3 RECORD RETENTION: Original signed copies of this Agreement must be maintained for ten (10) years from the date of approval. E-11 20. RESPONSIBILITIES:
DUTIES ANIKA PSGA N/A COMMENTS - ------------------------------------------------------------------------------------------------------------- 1. RAW MATERIAL AND COMPONENTS -Specifications Development & Maintenance R, D A -Specifications Control in Plant/SOPs R, D A -Ordered from Approved Suppliers R, D A -Receipt/Warehousing/Segregation of Materials R, D A -Incoming inspection, sampling & testing R, D A -Retest as necessary for release R, D A -Retest for expiration R, D A -Inventory Management & Accountability - FIFO R, D A -Destruction of Waste Materials R, D A -Retain Samples (Active RM) R, D A -Labelling Control & Accountability R, D A -Disposition of Materials (Release/Reject) R, D A - -Use of Materials out of Specifications - Deviations R, D A -Suppliers Audits R, D A -Supplier Audit (API) X
E-12 2. BULK AND WORK-IN-PROGRESS -Specifications Development and Maintenance R, D A -Manufacturing Directions Development & Maint. R, D A -Specifications Control in Plant R, D A -Area/Equipment Set Up & Inspection R, D A -Sanitization - Manufacturing Areas R, D A -Filling Machinery & Equipment Sanitization R, D A -Line Clearance Procedure R, D A -Batch Records issuance & maintenance R, D A -Equipment -maintenance, integrity & calibration R, D A -Environmental & Personnel monitoring R, D A -Primary batch record review R, D A -Cleaning Records & Logs R, D A -Dispensing records & logs R, D A -In-Process Sampling analysis & testing R, D A -Deviations from Bulk Finished Parameters Specifications S S - -Development of Bulk and WIP Parameters/Annual Rev. R A -Documentation System and SOPs/Int'l R, D A -Changes to Process Parameters* S S -Final Product Sampling and testing R, D A -Disposition of Product (release/reject) R A -Destruction of Waste Materials R, D A
*To the extent changes meet the threshold in the "Change Control" section of this agreement. E-13
DUTIES ANIKA PSGA N/A COMMENTS - ------------------------------------------------------------------------------------------------------------- 3. PACKAGING -Specifications Development & Maintenance R, D A -Specifications Control in Plant R, D A -Line Clearance Procedure R, D A -Environmental & Personnel monitoring R, D A - -Labelling controls & reconciliation (bottle, PI, carton) R, D A -Lot number, control R, D A -Expiration Date Control R, D A -Expiration Dating Development S A -Cartoning & Bundling R, D A -Palletizing and Storage R, D A -Quarantine and Storage SOPs R, D A -Deviations from Packaging Specifications S S -Product Sampling, Inspection and testing R, D A 4. PRODUCT RELEASE -Specifications Development and Maintenance R, D A -Quarantine Release SOPs R, D A -Product Release SOPs R, D A -Standard Analytical & Microbiological Tests R, D A -Batch record review R, D A - -Environmental monitoring review (air, water, steam, pressure) R, D A -Tests Problem Resolution procedures R, D A - -Deviation(s) reporting, investigations & documentation S S - -Finished Goods Re-testing R D -Disposition of Product (release/rejection) R D - -Evaluation of Finished Product with deviations from specs R D
E-14 -Destruction of Waste Materials R, D A - -Quarantine & Quarantine Release procedures/Execute based on SOP R, D A
E-15
DUTIES ANIKA PSGA N/A COMMENTS - ------------------------------------------------------------------------------------------------------------- 5. STABILITY PROGRAM -Stability Protocols/Documentation System R, D A -Documentation Systems/SOPs in Plant R, D A -Retain Sampling R, D A -Stability Testing R, D A - -New test Methods Development (validation, transfer, documentation) R, D A -Test Methods Implementation R, D A -Equipment Records, calibrations, validations R, D A -Result Handling -Result Reporting to PSGA R A -Stability alert - OOS Results R A -Reporting (Internal, External) R, D A -FDA Field Alert S S 6. CUSTOMER COMPLAINTS -Standard Operating Procedure-in plant R, D A -Logging/Receipt R, D A -Retain Sampling, handling & testing R, D A -Analysis -in plant laboratory R, D A -outside laboratory R D -Synchrony on records with PSGA X -Reporting (Internal & External) R, D A -FDA Field Alert S S
E-16
DUTIES ANIKA PSGA N/A COMMENTS - ------------------------------------------------------------------------------------------------------------- 7. GENERAL & FACILITY -SOPs, Guidelines, Practices and Policies R, D A -Monitoring, Maintenance, Calibration of -Water Systems (DI, WFI) R, D A -Clean Air System R, D A -HVAC System R, D A -Steam System R, D A -Pressure System R, D A -Annual Product Review -Data Collection R, D A - -Written Report (Process, Analytical & Complaint Data) R, D A -General Records Systems R, D A -Documentation System in Plant R, D A -Records Retention (Batch Records) R, D A -Change Control in Plant R, D A -Retain Samples Management R, D A -Training and Education R, D A -Process and Product Validation -Facility and Systems R, D A -Equipment R, D A -Product R, D A -Revalidation R, D A -New Products X -Quality Alert System R, D A 8. COMPLIANCE & PMA-RELATED - - Adverse Drug Experience Reporting R,D A - - PMA compliance & Annual Report to FDA R,D A - - Recall coordination S S
E-17 A = Audits R = Primary Responsible D = Ultimate Decision Maker S = Shared Responsibility/Agree E-18 22. APPROVAL SIGNATURES THIS AGREEMENT HAS BEEN REVIEWED AND APPROVED BY:
APPROVED BY: DATE: -------------------------------------------------- Anika Therapeutics (Site QA Manager, PSGA) (QA Director Ext. Mfg., PSGA) (VPQA Pharmaceuticals, PSGA)
E-19 EXHIBIT F ANIKA COMPLAINT FORM COMPLAINT FORM COMPLAINT FILE NUMBER: COMPLAINANT: DATE COMPLAINT RECEIVED: Address METHOD OF COMMUNICATION OF COMPLAINT: Address Phone number PRODUCT NAME: PRODUCT LOT NUMBER: COMPLAINT: ATTACH APPROPRIATE DOCUMENTATION TO THIS FORM. 1. Date Complaint Receipt Acknowledged: 2. Was there a death, serious injury or serious illness? 3. Any relationship of the device/drug to the reported incident? 4. Is the event described in product labeling? 5. Description of specific medical intervention action taken or withheld: 6. Physician name: 7. Description of patient condition: 8. ADE or MDR Reportable Event? YES: ________ NO: ________ ( If yes, proceed to #4.) IF NO STATE RATIONALE: Vigilance Reporting? YES: ________ NO: ________ Date Reported: _____________ 9. DATE FAILURE INVESTIGATION INITIATED: If investigation was not initiated, state reason: 10. CAPA #: If corrective action is not required, state rationale: 11. DATE FAILURE INVESTIGATION CLOSED: F-1 REQUIRED DOCUMENTATION OBTAINED AND COMPLAINT CLOSED: DATE OF CLOSE-OUT TO COMPLAINANT: ____________________ QS/RA SIGNATURE: __________________________________ DATE: ________________ F-2

EXHIBIT 10.39 January 19, 2004 Roger C. Stikeleather 6166 Stover's Mill Road Doylestown, PA 18901 Dear Roger: As previously discussed with you in connection with your separation from employment with Anika Therapeutics, Inc. (the "COMPANY"), this letter presents two options from which you may choose with respect to your separation benefits. The first option, "Option A," will be governed by the first paragraph of the severance terms contained in the agreement between you and the Company dated February 21, 2003 (the "Offer Letter"). If you choose Option A, your employment will terminate on February 17, 2004. Under Option A, you do not need to execute this document. Alternatively, you may choose "Option B." Under the Terms of Option B, the Offer Letter will become void and the Company will continue to employ you through March 31, 2004 to permit you to vest in certain stock options. Under Option B, the Company will also pay you one month's severance pay and contribute toward your health benefits for one month following your termination. If you elect Option B, you must enter into an Agreement, which includes a release of all claims you may have against the Company and related persons. I set forth in detail below the terms of the two options. OPTION A - GOVERNED BY TERMS OF THE OFFER LETTER: o Your employment with the Company shall terminate effective February 17, 2004 (the "Option A Termination Date"), provided that you continue to perform your duties loyally and in good faith between now and the Option A Termination Date. o As required by law, on the Option A Termination Date, the Company shall pay you for all accrued but unused vacation time through that date. o In accordance with the terms of the Offer Letter, the Company also shall continue paying your salary ("Severance Pay") at your final base salary rate of $15,416.67 per month, subject to regular deductions and withholdings, for the period February 18, 2004 through and including August 18, 2004 (the "Severance Pay Period"). The Company shall pay you Severance Pay on its regular payroll dates applicable to your position.

Roger C. Stikeleather January 19, 2004 Page 2 o The Company shall also provide you with the right to continue group medical and dental insurance coverage after the termination of your employment under the law known as "COBRA." If you elect COBRA continuation coverage and PROVIDED that you and your beneficiaries remain eligible for COBRA continuation coverage, the Company shall continue to pay for medical and dental insurance premiums for coverage of you and your beneficiaries to the same extent as if you had remained employed to the end of the Severance Pay Period. You will be responsible for the remaining portion of such coverage as if you remained employed. The Company will deduct the portion for which you are responsible from your Severance Pay. If you elect COBRA continuation coverage, you may continue coverage for yourself and any beneficiaries after the end of the Severance Pay period at your own expense for the remainder of the COBRA period, to the extent you and they remain eligible. The terms for that opportunity will be set forth in a separate written notice. o The termination of other benefits will be addressed in separate correspondence. Basically, your eligibility to participate in any other employee benefit plans and programs of the Company ceases on or after the termination of your employment in accordance with applicable benefit plan or program terms and practices. o The Company shall also reimburse you for any outstanding, reasonable business-related expenses that you have incurred or will incur on the Company's behalf as part of the execution of your duties through the termination of your employment, PROVIDED THAT you submit appropriate documentation pursuant to the Company's business expense reimbursement policy no later than five (5) business days after the Option A Termination Date. o In accordance with the terms of the Offer Letter, during the Severance Pay Period, you will provide transitional services to Anika at any reasonable time requested by the Company. o You understand that the payment of your Severance Pay is contingent upon your continuing to abide by the terms of the Anika Non-Disclosure and Non-Competition Agreement (the "Anika Non-Disclosure and Non-Competition Agreement") between you and the Company which you acknowledge you executed in or around March 2003 at the commencement of your employment with Anika. Because the Company is unable to locate its copy of the Anika Non-Disclosure and Non-Competition Agreement that you previously executed, you hereby agree to execute the Anika Non-Disclosure and Non-Competition Agreement that is attached as Exhibit A to this document, which is identical to the Anika Non-Disclosure and Non-Competition Agreement that you previously signed. OPTION B - IN LIEU OF TERMS OF OFFER LETTER In lieu of the above, the Company proposes entering into the following Agreement (the "OPTION B AGREEMENT") between you and the Company. The purpose of the Option B Agreement is to

Roger C. Stikeleather January 19, 2004 Page 3 establish an amicable arrangement for ending your employment relationship, including releasing the Company and related persons or entities from any claims. If you agree to the terms of this Option B Agreement, you acknowledge that you are entering into this Option B Agreement voluntarily. It is customary in employment separation agreements for the departing employee to release the employer from any possible claims, even if the employer believes, as is the case here, that no such claims exist. Neither the Company nor you want your employment relationship to end with a legal dispute. By entering into this Option B Agreement, you understand that the Company is not admitting in any way that it violated any legal obligation that it owed to you. With those understandings, you and the Company agree as follows: 1. TERMINATION OF EMPLOYMENT Your employment with the Company as its Vice President of Sales and Marketing will terminate on March 31, 2004 (the "OPTION B TERMINATION DATE"). You agree that you will resign from any and all other positions that you hold with the Company as an officer, director or otherwise effective on the Option B Termination Date. 2. TERMINATION OF EXISTING OFFER LETTER You acknowledge and agree that the Offer Letter is null and void and of no continuing effect. 3. SEVERANCE BENEFITS (a) SEVERANCE PAY. Promptly after the Option B Termination Date, the Company shall pay you (the "Option B Agreement Severance Payment") the amount of $15,416.67, constituting one-month's pay at your regular base salary. (b) HEALTH BENEFITS. Your rights and obligations under COBRA will be explained in a separate letter to you describing your medical and dental insurance continuation rights under COBRA. To continue your medical and dental insurance coverage, you must elect COBRA continuation coverage. If you elect COBRA continuation coverage and PROVIDED that you and your beneficiaries remain eligible for COBRA continuation coverage, the Company shall continue to pay for medical and dental insurance premiums for coverage of you and your beneficiaries to the same extent as if you had remained employed to April 30, 2004. You will be responsible for the remaining portion of such coverage as if you remained employed. You hereby authorize the deduction of the portion for which you are responsible after March 31, 2004 from the Option B Agreement Severance Payment. If you elect COBRA continuation coverage, you may continue coverage for yourself and any beneficiaries after April 30, 2004 at your own expense for the remainder of the COBRA period, to the extent you and they remain eligible. (c) STOCK OPTIONS. Pursuant to the Anika Therapeutics Incentive Stock Option Agreement dated June 12, 2003 between you and the Company (the "Stock Option Agreement"),

Roger C. Stikeleather January 19, 2004 Page 4 the Company granted you the option to purchase 75,000 shares of common stock in the Company at an exercise price of $1.50 to vest in four equal annual installments beginning March 17, 2004. If you enter into this Option B Agreement, the Company will continue to employ you through March 31, 2004 and, consequently, you will be permitted to vest in the first such annual installment of 18,750 shares. You understand that the exercise of any such share options is subject to the terms of the Stock Option Agreement and the Company's 2003 Stock Option and Incentive Plan (the "Plan"). In accordance with Section 3(d) of the Stock Option Agreement, to the extent that any shares are exercisable upon the Option B Termination Date, you must exercise them within three months of the Option B Termination Date. To the extent you exercise such options, you agree to notify the Company in the event that you sell any shares so acquired. Any sale of such shares must be in accordance with applicable securities laws. (d) OTHER BENEFITS. The termination of other benefits will be addressed in separate correspondence. Basically, your eligibility to participate in any other employee benefit plans and programs of the Company ceases on or after the Option B Termination Date in accordance with applicable benefit plan or program terms and practices. (e) REIMBURSEMENT OF EXPENSES. The Company shall also reimburse you for any outstanding, reasonable business-related expenses that you have incurred or will incur on the Company's behalf as part of the execution of your duties through the termination of your employment, PROVIDED THAT you submit appropriate documentation pursuant to the Company's business expense reimbursement policy no later than five (5) business days after the Option B Termination Date. (f) VACATION PAY. As required by law, on the Option B Termination Date, the Company shall pay you for all accrued but unused vacation time through that date. 4. TAX TREATMENT The Company shall undertake to make deductions, withholdings and tax reports with respect to payments and benefits under this Option B Agreement to the extent that it reasonably and in good faith determines that it is required to make such deductions, withholdings and tax reports. Payments under this Option B Agreement shall be in amounts net of any such deductions or withholdings. Nothing in this Option B Agreement shall be construed to require the Company to make any payments to compensate you for any adverse tax effect associated with any payments or benefits or for any deduction or withholding from any payment or benefit. 5. RETURN OF PROPERTY You confirm that, upon the Option B Termination Date, you will return to the Company all Company property, including, without limitation, computer equipment, software, keys and access cards, credit cards, files and any other documents (including computerized data and any copies made of any computerized data or software) containing information concerning the Company, its business or its business relationships (in the latter two cases, actual or prospective).

Roger C. Stikeleather January 19, 2004 Page 5 In the event that you discover that you continue to retain any such property, you shall return it to the Company immediately. 6. CONFIDENTIAL INFORMATION AND NONCOMPETITION AGREEMENT You acknowledge and agree that you and the Company entered into the Anika Non-Disclosure and Non-Competition Agreement (the "Anika Non-Disclosure and Non-Competition Agreement") in or around March 2003, at the commencement of your employment with Anika. Because the Company is unable to locate its copy of the Anika Non-Disclosure and Non-Competition Agreement that you previously executed, you hereby agree to execute the Anika Non-Disclosure and Non-Competition Agreement that is attached as Exhibit A to this document, which is identical to the Anika Non-Disclosure and Non-Competition Agreement that you previously signed. You acknowledge that you are bound by the terms and conditions of the Anika Non-Disclosure and Non-Competition Agreement and that nothing in this Option B Agreement shall be construed to supersede its terms and conditions.] 7. RELEASE OF YOUR CLAIMS In consideration for, among other terms, the terms, payments and benefits described in Section 3, which are substantially more advantageous to you than any benefits to which you otherwise may be entitled, you voluntarily release and forever discharge the Company, its affiliated and related entities, its and their respective predecessors, successors and assigns, its and their respective employee benefit plans and fiduciaries of such plans, and the current and former officers, directors, shareholders, employees, attorneys, accountants and agents of each of the foregoing in their official and personal capacities (collectively referred to as the "RELEASEES") generally from all claims, demands, debts, damages and liabilities of every name and nature, known or unknown ("CLAIMS") that, as of the date when you sign this Option B Agreement, you have, ever had, now claim to have or ever claimed to have had against any or all of the Releasees. This release includes, without limitation, all Claims: o relating to your employment by and termination of employment with the Company; o of wrongful discharge; o of breach of contract; o of retaliation or discrimination under federal, state or local law (including, without limitation, Claims of age discrimination or retaliation under the Age Discrimination in Employment Act, Claims of disability discrimination or retaliation under the Americans with Disabilities Act, and Claims of discrimination or retaliation under Title VII of the Civil Rights Act of 1964); o under any other federal or state statute (including, without limitation, Claims under the Family Medical Leave Act); o of defamation or other torts; o of violation of public policy;

Roger C. Stikeleather January 19, 2004 Page 6 o for wages, bonuses, incentive compensation, stock options, vacation pay or any other compensation or benefits, including any such Claims that may be brought pursuant to the Offer Letter; and o for damages or other remedies of any sort, including, without limitation, compensatory damages, punitive damages, injunctive relief and attorney's fees; PROVIDED, however, that this release shall not affect your vested rights under the Company's Section 401(k) Plan, the Stock Option Agreement, the Plan or your rights under this Option B Agreement. You agree that you shall not seek or accept damages of any nature, other equitable or legal remedies for your own benefit, attorney's fees, or costs from any of the Releasees with respect to any Claim. As a material inducement to the Company to enter into this Option B Agreement, you represent that you have not assigned to any third party and you have not filed with any agency or court any Claim released by this Option B Agreement. 8. CONFIDENTIALITY You agree to keep the existence and terms of this Option B Agreement ("AGREEMENT-RELATED INFORMATION") in the strictest confidence and not reveal, unless legally compelled to do so, any Agreement-Related Information to any persons except your spouse, your attorney and your financial advisors, and to them only provided that they first agree for the benefit of the Company to keep Agreement-Related Information confidential. Any violation of this provision will be deemed a material breach of this Option B Agreement. Nothing in this Section 8 shall be construed to prevent you from disclosing Agreement-Related Information to the extent required by a lawfully issued subpoena or duly issued court order; PROVIDED that you provide the Company with advance written notice and a reasonable opportunity to contest such subpoena or court order. 9. NONDISPARAGEMENT You agree not to make any disparaging statements concerning the Company or any of its affiliates or current or former officers, directors, shareholders, employees or agents. You further agree not to take any actions or conduct yourself in any way that would reasonably be expected to affect adversely the reputation or goodwill of the Company or any of its affiliates or any of its current or former officers, directors, shareholders, employees or agents. These nondisparagement obligations shall not in any way affect your obligation to testify truthfully in any legal proceeding. 10. INFORMATION CONCERNING ACTUAL, POTENTIAL OR ALLEGED FINANCIAL IRREGULARITIES OR WRONGDOING You represent that you are not aware of any actual, potential or alleged financial irregularities concerning the Company or any other wrongdoing by the Company.

Roger C. Stikeleather January 19, 2004 Page 7 11. TRANSITIONAL SERVICES Between January 19, 2004 and the Option B Termination Date, you agree to remain a full-time employee of the Company and to devote your attention and diligence to the good faith execution of your duties in your position as Vice President of Sales and Marketing. You further agree to provide transitional services to the Company to assist the Company in an orderly and effective transition from your position. 12. FUTURE COOPERATION You agree to cooperate reasonably with the Company and all of its affiliates (including its and their outside counsel) in connection with the contemplation, prosecution and defense of all phases of existing, past and future litigation about which the Company believes you may have knowledge or information. You further agree to make yourself available at mutually convenient times during and outside of regular business hours as reasonably deemed necessary by the Company's counsel. The Company shall not utilize this Section 12 to require you to make yourself available to an extent that would unreasonably interfere with full-time employment responsibilities that you may have. You agree to appear without the necessity of a subpoena to testify truthfully in any legal proceedings in which the Company calls you as a witness. The Company shall also reimburse you for any pre-approved reasonable business travel expenses that you incur on the Company's behalf as a result of your litigation cooperation services, after receipt of appropriate documentation consistent with the Company's business expense reimbursement policy. In addition, for all time that you reasonably expend in cooperating with the Company or any of its affiliates pursuant to this Section 12 after the end of the Severance Pay Period, the Company shall compensate you at the rate of $150 per hour; PROVIDED that your right to such compensation shall not apply to time spent in activities that could have been compelled pursuant to a subpoena, including testimony and related attendance at depositions, hearings or trials. You further agree that you shall not voluntarily provide information to or otherwise cooperate with any individual or entity that is contemplating or pursuing litigation against any of the Releasees or that is undertaking any investigation or review of any of the Releasees' activities or practices; PROVIDED, however, that you may participate in or otherwise assist in any investigation or inquiry conducted by the EEOC or the Massachusetts Commission Against Discrimination. Notwithstanding the foregoing, this provision shall not apply to the extent that your breach of this Option B Agreement consists of initiating a legal action in which you contend that the release set forth in Section 7 is invalid, in whole or in part, due to the provisions of 29 U.S.C. Section 626(f). 13. SUSPENSION OR TERMINATION OF PAYMENTS In the event that you fail to comply with any of your obligations under this Option B Agreement, in addition to any other legal or equitable remedies it may have for such breach the Company shall have the right to terminate or suspend its payments to you under this Option B Agreement. The termination or suspension of such payments in the event of such breach by you will not affect your continuing obligations under this Option B Agreement. Notwithstanding the

Roger C. Stikeleather January 19, 2004 Page 8 foregoing, this provision shall not apply to the extent that your breach of this Option B Agreement consists of initiating a legal action in which you contend that the release set forth in Section 7 is invalid, in whole or in part, due to the provisions of 29 U.S.C. Section 626(f). 14. LEGAL REPRESENTATION This Option B Agreement is a legally binding document and your signature will commit you to its terms. You acknowledge that you have been advised to discuss all aspects of this Option B Agreement with your attorney, that you have carefully read and fully understand all of the provisions of this Option B Agreement and that you are voluntarily entering into this Option B Agreement. 15. ABSENCE OF RELIANCE In signing this Option B Agreement, you are not relying upon any promises or representations made by anyone at or on behalf of the Company. 16. ENFORCEMENT (a) JURISDICTION. You and the Company hereby agree that the Superior Court of the Commonwealth of Massachusetts and the United States District Court for the District of Massachusetts shall have the exclusive jurisdiction to consider any matters related to this Option B Agreement, including without limitation any claim for violation of this Option B Agreement. With respect to any such court action, you (i) submit to the jurisdiction of such courts, (ii) consent to service of process, and (iii) waive any other requirement (whether imposed by statute, rule of court or otherwise) with respect to personal jurisdiction or venue. (b) RELIEF. You agree that it would be difficult to measure any harm caused to the Company that might result from any breach by you of your promises set forth in Sections 6, 7, 8, 9, 10, 11 or 12, and that in any event money damages would be an inadequate remedy for any such breach. Accordingly, you agree that if you breach, or propose to breach, any portion of your obligations under Sections 6, 7, 8, 9, 10, 11 or 12, the Company shall be entitled, in addition to all other remedies it may have, to an injunction or other appropriate equitable relief to restrain any such breach, without showing or proving any actual damage to the Company and without the necessity of posting a bond. In the event that the Company prevails in any action to enforce Sections 6, 7, 8, 9, 10, 11 or 12, then you also shall be liable to the Company for attorney's fees and costs incurred by the Company in enforcing such provision(s). 17. GOVERNING LAW; INTERPRETATION This Option B Agreement shall be interpreted and enforced under the laws of the Commonwealth of Massachusetts, without regard to conflict of law principles. In the event of any dispute, this Option B Agreement is intended by the parties to be construed as a whole, to be

Roger C. Stikeleather January 19, 2004 Page 9 interpreted in accordance with its fair meaning, and not to be construed strictly for or against either you or the Company or the "drafter" of all or any portion of this Option B Agreement. 18. ENTIRE AGREEMENT This Option B Agreement constitutes the entire agreement between you and the Company. This Option B Agreement supersedes any previous agreements or understandings between you and the Company, including without limitation, the Offer Letter, PROVIDED that, this Agreement does not supercede the Anika Non-Disclosure and Non-Competition Agreement attached as Exhibit A to this Option B Agreement. 19. TIME FOR CONSIDERATION; EFFECTIVE DATE You have the opportunity to consider this Option B Agreement for twenty-one (21) days before signing it. To accept this Option B Agreement, you must return a signed original of this Option B Agreement so that it is received by the undersigned at or before the expiration of this twenty-one (21) day period. If you sign this Option B Agreement within less than twenty-one (21) days of the date of its delivery to you, you acknowledge by signing this Option B Agreement that such decision was entirely voluntary and that you had the opportunity to consider this Option B Agreement for the entire twenty-one (21) day period. For the period of seven (7) days from the date when this Option B Agreement becomes fully executed, you have the right to revoke this Option B Agreement by written notice to the undersigned. For such a revocation to be effective, it must be delivered so that it is received by the undersigned at or before the expiration of the seven (7) day revocation period. This Option B Agreement shall not become effective or enforceable during the revocation period. This Option B Agreement shall become effective on the first business day following the expiration of the revocation period (the "EFFECTIVE DATE"). Please indicate your agreement to the terms of this Option B Agreement by signing and returning to me the original of this letter within the time period set forth above. Very truly yours, ANIKA THERAPEUTICS, INC. By: /s/ Charles H. Sherwood January 19, 2004 ------------------------------ ----------------------------------- CHARLES H. SHERWOOD, PH.D. Date PRESIDENT AND CHIEF EXECUTIVE OFFICER

Roger C. Stikeleather January 19, 2004 Page 10 You are advised to consult with an attorney before signing this Option B Agreement. The foregoing is agreed to and accepted by: /s/ Roger C. Stikeleather February 9, 2004 - ------------------------------------ ---------------------------------- ROGER C. STIKELEATHER Date

EXHIBIT 21.1 SUBSIDIARIES OF ANIKA THERAPEUTICS, INC. Anika Securities Corp.


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EXHIBIT 23.1


CONSENT OF INDEPENDENT ACCOUNTANTS

        We hereby consent to the incorporation by reference in the Registration Statements on Forms S-8 (File Nos. 333-06275, 333-66831, 333-79047, 333-58264 and 333-110326) of Anika Therapeutics, Inc., of our report dated February 20,2003 relating to the financial statements, which appears in this Form 10-K. s

    /s/ PRICEWATERHOUSECOOPERS LLP

Boston, Massachusetts
March 29, 2004

 

 



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CONSENT OF INDEPENDENT ACCOUNTANTS

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Exhibit 31.1


CERTIFICATION

I, Charles H. Sherwood, certify that:

1.
I have reviewed this report on Form 10-K for the year ended December 31, 2003 of Anika Therapeutics, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 29, 2004   /s/  CHARLES H. SHERWOOD      
Charles H. Sherwood, Ph.D.
Chief Executive Officer



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CERTIFICATION

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Exhibit 31.2


CERTIFICATION

I, William J. Knight, certify that:

1.
I have reviewed this report on Form 10-K for the year ended December 31, 2003 of Anika Therapeutics, Inc.;

2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4.
The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

(a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(c)
Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5.
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: March 29, 2004   /s/  WILLIAM J. KNIGHT      
William J. Knight
Chief Financial Officer



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CERTIFICATION

EXHIBIT 32.1 SECTION 906 CERTIFICATION The undersigned officers of Anika Therapeutics, Inc. (the "Company") hereby certify in their respective capacities that the Company's annual report on Form 10-K to which this certification is attached (the "Report"), as filed with the Securities and Exchange Commission on the date hereof, fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 29, 2004 /s/ Charles H. Sherwood ----------------------------------- Charles H. Sherwood, Ph.D. Chief Executive Officer /s/ William J. Knight ----------------------------------- William J. Knight Chief Financial Officer This certification shall not be deemed "filed" for any purpose, nor shall it be deemed to be incorporated by reference into any filing, under the Securities Act of 1933 or the Exchange Act.