Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2004

Commission File Number 000-21326

Anika Therapeutics, Inc.

(Exact Name of Registrant as Specified in Its Charter)

(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 ý    No o

        The aggregate market value of voting and non-voting stock held by non-affiliates of the Registrant as of June 30, 2004, the last day of the Registrant's most recently completed second fiscal quarter, was $172,235,000 based on the average bid and ask price per share of Common Stock of $17.34 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 4, 2005, there were issued and outstanding 10,296,222 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 1, 2005. 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, 2004

        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:

•

our future sales and product revenues, including possible retroactive price adjustments and expectations of unit volumes or other offsets to price reductions;



•

our efforts to increase sales of ophthalmic viscoelastic products and support of the distribution of ORTHOVISC® in the U.S and internationally.;



•

our manufacturing capacity and efficiency gains and work-in-process manufacturing operations;



•

the timing of, scope of and rate of patient enrollment for clinical trials;



•

development of possible new products, including plans to advance cosmetic tissue augmentation and post-surgical adhesion therapies through human clinical trials;



•

FDA or other regulatory approvals and/or reimbursement approvals of new or potential products;



•

negotiations with potential and existing customers, including our performance under any of our distribution or supply agreements or our expectations with respect to sales and milestones pursuant to such agreements;



•

the level of our revenue or sales in particular geographic areas and/or for particular products;



•

the market share for any of our products;



•

our profitability and margin improvements resulting from a higher margin product mix;



•

our expectations of the size of the U.S. and European markets for osteoarthritis of the knee;



•

our intention to increase market share for ORTHOVISC in international and domestic markets or otherwise penetrate growing markets for osteoarthritis of the knee;



•

our current strategy, including our corporate objectives and research and development and collaboration opportunities, including, without limitation, commencement and completion of cosmetic tissue augmentation product and INCERT® clinical trials;



•

our and OrthoNeutrogena's performance under the license agreement for our cosmetic tissue augmentation product;



•

our and Bausch & Lomb's performance under the newly-entered supply agreement for certain of our ophthalmic viscoelastic products;



•

our ability to achieve performance and sales threshold milestones in our existing and future distribution and supply agreements;



•

our expected tax rate and taxable revenues;



•

our ability and timing with respect to filling vacancies in senior management positions;



•

the rate at which we use cash, the amounts used, and the utilization of such cash; and



•

possible negotiations or re-negotiations with existing or new distribution or collaboration partners.

        Furthermore, additional statements identified by words such as "will," "likely," "may," "believe," "expect," "anticipate," "intend," "seek," "designed," "develop," "would," "future," "can," "could" and other

2

expressions that are predictions of or indicate future events and trends and which do not relate to historical matters, also 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 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, CoEase™, STAARVISC™-II, and ShellGel™, each an injectable ophthalmic viscoelastic HA product, 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 became available for sale in the U.S. on March 1, 2004 and 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. In December 2004, we entered into a multi-year supply agreement with Bausch & Lomb covering viscoelastic products used in ophthalmic surgery, including the AMVISC and AMVISC Plus family of products.

        Our current strategy is to:

•

support U.S. ORTHOVISC sales growth and to expand ORTHOVISC sales internationally;



•

complete the pivotal human clinical trial in the U.S. for our potential cosmetic tissue augmentation (CTA) product and file a Pre-Market Approval (PMA) application with the FDA;



•

complete the pilot human clinical trial in Europe for INCERT®-S, our potential product to prevent post-surgical adhesion and develop and implement a commercialization plan;



•

initiate additional human clinical trials for our ORTHOVISC formulation;



•

focus research and development resources on evaluating potential product applications, including possible collaborations with other parties

3

•

continue to increase gross margins by further upgrading manufacturing processes and efficiencies;



•

complete management team staffing; and



•

establish a 5-year strategic plan to maximize our many assets (including our strong cash position).

        In 2004, revenue from the sale of our products contributed 84% of our total revenue. Licensing, milestone and contract revenue contributed 16% of our total revenue in 2004. Revenue from the sale of ophthalmic viscoelastic products was 43% of total revenue in 2004 or 52% of product revenue. ORTHOVISC contributed 33% of our total revenue in 2004 or 39% of product revenue and HYVISC contributed 8% of our total revenue or 9% of product revenue in 2004.

        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. The objective of the studies was to assess the effectiveness of ORTHOVISC for the treatment of joint pain. 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 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, a milestone payment of $20.0 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC and a $5.0 million milestone payment in December 2004 for planned upgrades to our manufacturing operations. Under the OBI Agreement, we are the exclusive supplier of ORTHOVISC to Ortho Biotech. The OBI Agreement provides for additional sales-based milestone payments to us

4

contingent upon 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, 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. In December 2004, we entered into a multi-year supply agreement (the 2004 B&L Agreement) with Bausch & Lomb for viscoelastic products used in ophthalmic surgery. Under the 2004 B&L Agreement, which extends through December 31, 2010, and superseded the existing supply contract that was set to expire December 31, 2007, we will continue to be the exclusive global supplier (other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb. The 2004 B&L Agreement also provides us with a right to negotiate to manufacture future surgical ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb has been granted rights to commercialize certain future surgical ophthalmic viscoelastic products developed by us. The 2004 B&L Agreement applies to all products sold by us to Bausch & Lomb from the beginning of 2004, with a price increase starting in 2005. Under the 2004 B&L Agreement, we are entitled to continue providing surgical viscoelastic products to our existing customers (e.g. Advanced Medical Optics, STAAR Surgical Company, Cytosol Ophthalmics, Inc.) who currently receive such products from us. 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.

Cosmetic Tissue Augmentation

        Our products for cosmetic tissue augmentation (CTA) 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

5

the market. In May 2004, we commenced a pivotal U.S. clinical trial to evaluate CTA's effectiveness for correcting nasolabial folds. The trial is being conducted by dermatologists and plastic surgeons at 10 centers throughout the U.S. Patient enrollment was completed during the third quarter of 2004 and patients will be monitored for 6 to 12 months following initial treatment.

        In July 2004 we entered into an exclusive worldwide development and commercialization partnership (the OrthoNeutrogena Agreement) for our CTA products with the OrthoNeutrogena division of Ortho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. Under the terms of the OrthoNeutrogena Agreement, we received an initial payment of $1.0 million. In addition, OrthoNeutrogena is required, subject to certain limitations, to fund our ongoing pivotal clinical trial of our CTA product initiated in May 2004 and to support the development of the CTA product, as well as future line extensions. The OrthoNeutrogena Agreement also provides for sales- and development-based milestone payments to be made upon receipt of final marketing approval from the U.S. Food and Drug Administration (FDA), receipt of a European CE Mark, and upon achievement of other sales and development targets in addition to royalty payments and transfer payments for the supply of CTA products.

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 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. We received CE marking for INCERT in the third quarter of 2004.

        INCERT-S is our product designed to reduce post-surgical fibrosis following spinal surgery. We initiated a pilot human clinical trial in Europe in April 2004 involving patients undergoing spinal surgery. The clinical trial is being conducted at two centers in the U.K. and will involve approximately 45 patients. As of December 31, 2004, patient enrollment was approximately two-thirds complete.

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

        We cannot assure you that: (1) we will successfully complete clinical trials of our CTA products or INCERT-S; (2) if completed, regulatory approval for sales in the U.S. or internationally, in the case of our CTA products, will be obtained; or (3) if regulatory approvals are obtained, meaningful sales of our CTA products or INCERT-S 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, which we have expanded to include all of our current 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

6

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."

        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, non-exclusive license to our manufacturing inventions which relate to the AMVISC products, effective upon the earlier of (1) the termination date of the 2004 B&L Agreement or (2) the loss of our rights of exclusivity thereunder.

        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.

        We have granted Ortho Neutrogena a worldwide, exclusive, non-transferable license to use, sell and offer our CTA product currently in development (and other products developed pursuant to the OrthoNeutrogena Agreement), as well as a non-transferable license to manufacture and have manufactured such products in the event (and during such times) that we are unable to supply OrthoNeutrogena with CTA products in accordance with the terms of the OrthoNeutrogena 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

7

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.

        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.

8

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 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 parts of the Middle East. 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. In August 2004, we received an EC Design Examination Certificate which entitled us to affix a CE mark to INCERT-S as a barrier to adhesion formation following surgery. 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

9

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:

•

the quality and breadth of our technology and technological advances;



•

our ability to complete successful clinical studies and obtain FDA marketing and foreign regulatory approvals prior to our competitors;



•

our ability to recruit and retain skilled employees; and



•

the availability of substantial capital resources to fund discovery, development and commercialization activities or the ability to defray such costs through securing relationships with collaborators for our research and development and commercialization programs.

        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, 2004, we had nine employees engaged primarily in research and development and engineering and two employees engaged in regulatory matters. For the years ended December 31, 2004, 2003, and 2002, research and development expenses were $4.1 million, $2.6 million, and $3.9 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 April of 2004 we initiated a pilot human clinical trial in Europe for INCERT-S, our product designed to reduce post-surgical fibrosis following spinal surgery. In May we commenced a pivotal clinical trial in the U.S. for our product for CTA. We cannot assure you that: (1) we will successfully complete clinical trials of our INCERT-S or CTA products; (2) if completed, regulatory approval for sales in the U.S.

10

or internationally, in the case of our CTA product, will be obtained; or (3) if regulatory approvals are obtained, meaningful sales of our products will be achieved

        Under the OrthoNeutrogena Agreement, OrthoNeutrogena is required, subject to certain limitations, to fund the May 2004 pivotal Phase III CTA clinical trial and to support us in our development of this CTA product, as well as possible future line extensions.

        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, 2004, we had approximately 61 full-time employees. We consider our relations with our employees to be good. None of our employees are represented by labor unions.

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 December 20, 2004, we announced the signing of a multi-year supply agreement, effective December 15, 2004, with Bausch & Lomb for viscoelastic products used in ophthalmic surgery.

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.

11

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 2004 for a term ending in December 2006. 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, 2004, we had aggregate lease costs of approximately $700,000.

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), 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.

12

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 sales 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.

        At December 31, 2004, the closing price per share of our common stock was $9.15 as reported on the Nasdaq National Market and there were approximately 275 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.

EQUITY COMPENSATION PLAN INFORMATION

        The following table sets forth information concerning the Company's equity compensation plan as of December 31, 2004.

13

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, 2004 and 2003 and the Statement of Operations Data for each of the three years ended December 31, 2004 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, 2002, 2001 and 2000, and the Statement of Operations Data for each of the two years in the period ended December 31, 2001 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 2000 and 2001 were audited by Arthur Andersen LLP (Andersen) who has ceased operations.

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

Balance Sheet Data
(In thousands)

        In the first quarter of 2004, based on our expectations regarding future profitability, we released the previously established valuation allowance against our deferred tax assets and recorded a one-time income tax benefit of $7.0 million.

        We received an initial payment of $2.0 million in December 2003 upon entering into the OBI Agreement. In February 2004 we received a milestone payment of $20.0 million as a result of obtaining FDA approval for ORTHOVISC and in December 2004 we received a milestone payment of $5.0 million upon completion of certain manufacturing upgrades. We are recognizing these non-refundable payments ratably over the expected term of the OBI Agreement, which is currently 10 years, and as of December 31, 2004, we had recorded deferred revenue of $24.3 million.

14

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

        Our currently marketed products include ORTHOVISC®, an HA product used in the treatment of some forms of osteoarthritis in humans, and HYVISC®, an HA product used in the treatment of equine osteoarthritis. In the U.S., ORTHOVISC became available for sale on March 1, 2004 and is marketed by Ortho Biotech Products, L.P., under an exclusive license and supply agreement. Internationally, ORTHOVISC has been approved for sale and marketed since 1996 under various distribution and marketing agreements. HYVISC is marketed in the U.S. through an exclusive agreement with Boehringer Ingelheim Vetmedica, Inc. Our ophthalmic products include CoEase™, STAARVISC™-II, and ShellGel™, each an injectable ophthalmic viscoelastic HA product, distributed by Advanced Medical Optics, Inc., STAAR Surgical Company, and Cytosol Ophthalmics, Inc., respectively. We also manufacture AMVISC® and AMVISC® Plus, HA viscoelastic supplement products used in ophthalmic surgery, for Bausch & Lomb Incorporated.

        In December 2004, we entered into a multi-year supply agreement (the 2004 B&L Agreement) with Bausch & Lomb for viscoelastic products used in ophthalmic surgery, including the AMVISC and AMVISC Plus family of products. Under the new agreement, which extends through December 31, 2010, and superseded the existing supply contract that was set to expire December 31, 2007, we will continue to be the exclusive global supplier (other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb. The 2004 B&L Agreement also provides us with a right to negotiate to manufacture future surgical ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb has been granted rights to commercialize certain future surgical ophthalmic viscoelastic products developed by us. The 2004 B&L Agreement applies to all products sold by us to Bausch & Lomb from the beginning of 2004, with a price increase starting in 2005. Under the 2004 B&L Agreement, we are entitled to continue providing surgical viscoelastic products to our existing customers (e.g. Advanced Medical Optics, STAAR Surgical Company, Cytosol Ophthalmics, Inc.) who currently receive such products from us.

15

        On July 26, 2004, we announced the signing of an exclusive worldwide development and commercialization partnership for our CTA products with the OrthoNeutrogena division of Ortho- McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. Under the terms of the OrthoNeutrogena Agreement, we received an initial payment of $1.0 million. In addition, OrthoNeutrogena is required, subject to certain limitations, to fund our ongoing pivotal clinical trial of our CTA product initiated in May 2004 and to support the development of the CTA product, as well as future line extensions. The OrthoNeutrogena Agreement also provides for sales- and development-based milestone payments in addition to royalty payments and transfer payments for the supply of CTA products.

Osteoarthritis Business

        We have marketed ORTHOVISC, our product for the treatment of osteoarthritis of the knee, internationally since 1996 through various distribution agreements. International sales of ORTHOVISC contributed 18% of product revenue for the year ended December 31, 2004 and increased 31% compared to 2003. The increase was primarily due to increased market penetration in Canada and Greece, as well as significant sales increase in Turkey. We expect international sales to grow in 2005 compared to 2004 reflecting further increased market penetration in certain of our existing markets as well as anticipated expansion into new international markets. For these new opportunities we have assessed the world market and we are actively pursuing commercial partners.

        In December 2003 we entered into the OBI Agreement with Ortho Biotech for the sales, marketing and distribution of ORTHOVISC in the U.S. and we received marketing approval from the U.S. FDA in February 2004 for ORTHOVISC. Sales of ORTHOVISC were initiated in March 2004 by Ortho Biotech with the U.S. launch of ORTHOVISC at the annual meeting of the American Academy of Orthopedic Surgeons. Sales of ORTHOVISC in the U.S. contributed 21% of our product revenue for the year ended December 31, 2004.

        Our sales of ORTHOVISC in the U.S. during 2004 represented primarily product for the initial product launch and inventory building. Sales of ORTHOVISC to end-users grew slower than anticipated in 2004 as a result of a number of factors. We believe that a primary contributing factor to this slower growth has been reimbursement and lack of receiving assignment of a specific reimbursement code. The Healthcare Common Procedure Coding System (HCPCS) is a comprehensive and standardized coding system that describes classifications of like products that are medical in nature by category for the purpose of efficient claims processing. HCPCS codes are assigned by the Centers for Medicare and Medicaid Services (CMS). As is typical for a newly-introduced medical device, initial sales of ORTHOVISC were made without a unique reimbursement code and reimbursement submissions were made using a miscellaneous code with no specified reimbursement dollar value. We believe that using the miscellaneous reimbursement code without a specified reimbursement dollar value negatively impacted end-user sales of ORTHOVISC in 2004. Ortho Biotech, with our help, submitted an application to secure a unique reimbursement code for ORTHOVISC in March 2004. In November 2004, Ortho Biotech received a decision on the application which assigned a unique reimbursement code to be used by hospitals in an outpatient setting (the C code) which specifies a reimbursement dollar value. Use of the C code was effective January 2005. The CMS decision, however, did not assign a unique reimbursement code to be used in the physician office setting (the J code) because the application filed in March 2004 did not reflect the required six months of sales history. Instead of a unique J code, submission for reimbursement of ORTHOVISC is to continue using a miscellaneous J code. However, under the decision, the dollar value to be reimbursed under the miscellaneous J code is defined. An application for a unique J code was re-submitted in January 2005 which, if assigned, will be effective in January 2006. There can be no assurance that ORTHOVISC will receive a unique J code.

        As a result of the CMS decision which did not assign a unique J code for ORTHOSVISC to be effective January 2005 we are not entitled to a contractual milestone under the OBI Agreement that would have been triggered had a unique J code been assigned by a specific date. The decision by the CMS to not

16

assign a unique J code for ORTHOVISC may further adversely impact our ORTHOVISC revenues. The required use of a miscellaneous J code may result in physician reluctance to utilize ORTHOVISC as compared to if a unique J code had been assigned. These negative trends are further effected by changes in the categories of revenues we are entitled to under the OBI agreement. In addition to milestone payments, the OBI Agreement provides for Ortho Biotech to pay us transfer fees, which are related to sales to Ortho Biotech, and royalty fees, which are tied to end-user sales. As a result of Ortho Biotech's inventory buildup during 2004, we presently expect to experience a reduction in transfer fees, which may be offset by royalties as, and if, ORTHOVISC achieves desired market penetration. As a result of these factors, we did not ship any ORTHOVISC to Ortho Biotech in the fourth quarter of 2004. We expect unit sales of ORTHOVISC to Ortho Biotech in 2005 will be below 2004 levels. We expect the negative impact on our revenues will be partially offset by expected increased royalties we receive on end-user sales.

        Sales of HYVISC, our product for the treatment of equine osteoarthritis, contributed 9% to product revenue for the year ended December 31, 2004 and increased 18% compared to 2003. We expect sales of HYVISC to decrease modestly in 2005 compared to 2004 primarily due to distributor inventory replenishment patterns. We continue to look at other veterinary applications and opportunities to expand geographic territories.

Ophthalmic Business

        Our ophthalmic business includes HA viscoelastic products used in ophthalmic surgery. For the year ended December 31, 2004, sales of ophthalmic products contributed 52% of our product revenue reflecting an increase in sales of ophthalmic products of 10% compared to 2003. Sales to Bausch & Lomb accounted for 74% of ophthalmic sales for 2004 and contributed 38% of product revenue for the period.

        In December 2004, we entered into a multi-year supply agreement (the 2004 B&L Agreement) with Bausch & Lomb for viscoelastic products used in ophthalmic surgery. Under the new agreement, which extends through December 31, 2010, and superseded the existing supply contract that was set to expire December 31, 2007, we will continue to be the exclusive global supplier (other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb. The 2004 B&L Agreement also provides us with a right to negotiate to manufacture future surgical ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb has been granted rights to commercialize certain future surgical ophthalmic viscoelastic products developed by us. The 2004 B&L Agreement applies to all products sold by us to Bausch & Lomb from the beginning of 2004, with a price increase starting in 2005. Under the 2004 B&L Agreement, we are entitled to continue providing surgical viscoelastic products to our existing customers (e.g. Advanced Medical Optics, STAAR Surgical Company, Cytosol Ophthalmics, Inc.) who currently receive such products from us.

        Prior to entering into the 2004 B&L Agreement sales to Bausch & Lomb were made under the 2000 B&L Agreement. Under the terms of the 2000 B&L Agreement the price applicable for all units sold to Bausch & Lomb in a calendar year was dependent on the total unit volume of sales of certain ophthalmic products during the year. 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 are recorded as deferred revenue. During the fourth quarter the actual annual unit volume became known and we recorded revenue equal to the amounts earned or we provided a rebate to our customer. In each of the previous three fiscal years (i.e. 2003, 2002, 2001), the annual unit volume was below levels fixed under our agreement with Bausch & Lomb and, accordingly, in the fourth quarter of each of these years we recognized as revenue the amounts deferred during the first three quarters. For the nine months ended September 30, 2004, we deferred $1.0 million related to sales to Bausch & Lomb which was subject to possible retroactive price adjustments. As a result of entering into the 2004 B&L Agreement, which retroactively applies to sales from the beginning of 2004, we applied the unit pricing terms under the 2004 B&L Agreement to our 2004 Bausch & Lomb sales activity. These terms essentially provide for fixed unit pricing with reduced unit pricing applicable for units purchased in excess of a specified amount during the

17

fiscal year. As a result of applying this new pricing to 2004 transactions, we earned $761,000 of revenue which was previously deferred during the first nine months of 2004 and rebated $252,000 to Bausch & Lomb.

        Our distributor for CoEase, Advanced Medical Optics, completed the acquisition of the surgical ophthalmology business of Pfizer, Inc., in June 2004, which includes a competing line of viscoelastic products for use in ocular surgery. As a result, our agreement with Advanced Medical Optics has not been renewed and we expect will terminate in July 2005 upon its expiration. We expect sales to Advanced Medical Optics will decline to minimum required levels in accordance with the agreement and to discontinue during the first quarter of 2005. As a result, in the future we may not be able to sustain current product revenue levels in our ophthalmic business. Sales to Advanced Medical Optics contributed 19% of ophthalmic product revenue and 10% of total product revenue for the year ended December 31, 2004.

Research and Development

        Our current research and development efforts are focused on our chemically modified formulations of HA designed for longer residence time in the body. We initiated a U.S. pivotal clinical trial for our product for cosmetic tissue augmentation (CTA), a therapy for correcting dermal defects, including facial wrinkles, scar remediation and lip augmentation, in May 2004. The trial is designed to evaluate the effectiveness of CTA for correcting nasolabial folds and is being conducted by dermatologists and plastic surgeons at 10 centers throughout the U.S. Patient enrollment was completed during the third quarter of 2004 and patients will be monitored for 6 to 12 months following initial treatment. As discussed above, we are being reimbursed for the clinical trial expenses, subject to certain limitations, in connection with the OrthoNeutrogena Agreement which is included in contract revenue.

        In April 2004 we initiated a pilot human clinical trial for INCERT®-S, a chemically modified form of HA designed to act as a barrier to prevent internal tissue adhesion and scarring following spinal surgery. The clinical trial is being conducted at two centers in the U.K. and will involve approximately 45 patients. As of December 31, 2004, patient enrollment was approximately two-thirds complete.

Financial Overview

        For the year ended December 31, 2004 net income increased to $11,190,000 or $.98 per diluted share from $827,000, or $.08 per diluted share for the same period last year. Net income from operations for 2004 was $6,388,000 compared to $595,000 for 2003.

        Revenue    We increased sales in each of our product groups for the year ended December 31, 2004 compared to the same period last year. Sales of our ophthalmic products increased 10%, HYVISC sales increased 18% and ORTHOVISC sales increased 183% in 2004 compared to 2003. The increases in product sales were primarily due to increased sales volume with existing customers and also included the launch of ORTHOVISC in the U.S. License, milestone and contract revenue comprised 16% of total revenue in 2004 and consists of the ratable recognition of the upfront and milestone payments received under the OBI Agreement and contract revenue received under the Ortho Neutrogena Agreement.

        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. Gross margin on product revenue for the year ended December 31, 2004 increased to 55% compared to 48% for the year ended December 31, 2003. We expect gross margin on product sales to be relatively consistent in 2005 compared to 2004 reflecting product mix and comparable manufacturing volume.

18

        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 increased 57% for the year ended December 31, 2004 compared to the same period last year primarily due to costs associated with the clinical trials for CTA and INCERT. We expect to incur additional costs associated with the human clinical trials for our product candidates and to increase personnel-related expenses as we expand our research and development efforts. As a result, we expect research and development costs will increase in 2005 compared to 2004.

        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. Selling, general and administrative expenses for the year ended December 31, 2004 increased 44% compared to the prior year. The increase in selling, general and administrative expenses during 2004 is primarily due to an increase in professional and outside services fees, including costs for implementation and compliance of Section 404 of the Sarbanes-Oxley Act of 2002, combined with an increase in personnel related costs. We expect selling, general and administrative expenses to increase in 2005 compared to 2004 as a result of increased personnel related costs as well as expanded marketing efforts for ORTHOVISC and partially offset by lower audit and tax fees and consulting fees for ongoing Sarbanes-Oxley compliance.

        Income taxes.    We recorded a provision for income taxes for the year ended December 31, 2004 reflecting an effective tax rate of approximately 39%. As a result of the receipt of the upfront and milestone payments from Ortho Biotech, we have determined that we will utilize all of our net operating loss and credit carry-forwards. In addition, based on our current expectations regarding future profitability, we released the previously established valuation allowance against our deferred tax assets and recorded a one-time income tax benefit of $7.0 million in the first quarter of 2004.

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, 2004.

Revenue Recognition.

        Our revenue recognition policies are in accordance with the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC

19

Staff Accounting Bulletin No. 104, Revenue Recognition, and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

        We recognize revenue from the sales of products we manufacture 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. 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.

        Under the 2000 B&L Agreement, the price for units sold in a calendar year was dependent on total unit volume of sales to Bausch & Lomb and other customers of certain ophthalmic products during the year. Prices fluctuated based on sales levels, and interim quarters were subject to possible retroactive price adjustments when the actual annual unit volume for the year became known. Given the pricing in this arrangement was not fixed and was determined based on qualifying sales to multiple customers, we determined that we could not reliably estimate the rebate, and accordingly, we deferred the maximum rebate that could be due until the annual sales volume was known in the fourth quarter. Under the 2004 B&L Agreement, the pricing is based solely on ophthalmic products sold to Bausch & Lomb. While the unit prices will be discounted for those units in excess of cumulative minimum sales levels, no amounts will be rebated. The applicable discount will be measured quarterly, subject to adjustment based on cumulative annual thresholds. Since quarterly revenue may be adjusted higher or lower depending on the relationship of our quarterly activity relative to our annual goals, we will need to estimate annual unit volume to determine the amount of revenue recognition in each quarter, thereby spreading the discount, if any, across all units purchased in a given annual period. Factors we will consider in developing our estimate include: (1) the discount will be based solely on sales activity with Bausch &Lomb who has been a long standing customer of our ophthalmic products; (2) the homogeneous nature of the products purchased under this arrangement; (3) our expected future activity with Bausch & Lomb based on historical experience and product forecasts provided by them; and (4) overall market demand for our ophthalmic products. In 2004, retroactive application of the 2004 Bausch & Lomb agreement resulted in recognition of $761,000 of revenue which was previously deferred during the first nine months of 2004 and we rebated $252,000 to Bausch & Lomb.

        In July 2004 the Company entered into an exclusive worldwide development and commercialization agreement (the OrthoNeutrogena Agreement) for our CTA products with the OrthoNeutrogena, a division of Ortho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. This arrangement included up front payments, funding of ongoing development activities, milestones upon achievement of predefined goals, in addition, we will receive payments for supply of CTA products and royalties on sales. We believe this is a multiple element arrangement that falls under the scope of EITF 00-21. Under the EITF 00-21 framework, in order to account for an element as a separate unit of accounting, the element must have stand-alone value and there must be objective and reliable evidence of fair value of the undelivered elements. While this arrangement includes several elements, we believe that two separate units of accounting exist (a combined license and development unit and a manufacturing unit) under the EITF 00-21 model.

        We are accounting for the combined license and development unit using the performance based model, which recognizes revenue as the efforts are expended limited to the amount of non-refundable cash received. Under this arrangement, we received non-refundable upfront fees of $1 million and reimbursement for approximately $1.3 million of costs which were incurred prior to our entering into this arrangement. We have treated both these amounts as upfront fees that will be recognized over the

20

expected term of the license and development unit. In addition to the upfront fees, we are receiving reimbursement of pre-approved development costs incurred. For the year ended December 31, 2004 we recognized $1,392,000 as contract revenue for this arrangement under the performance-based method.

        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 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, a milestone payment of $20.0 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC and a milestone payment of $5.0 million in December 2004 for planned upgrades to our manufacturing operations. We evaluated the terms of the OBI Agreement and determined that the upfront fee and milestone payments did not meet the conditions to be recognized separately from the supply agreement, therefore, we have deferred non refundable payments received of $27.0 million which we are recognizing ratably over the expected term of the OBI Agreement, which is currently 10 years.

        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.

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

        In 2004, we achieved milestones under the OBI Agreement and received payments totaling $25.0 million which we recognized as taxable income in 2004. As a result, we have determined that we will be able to utilize all of our net operating loss and credit carry-forwards in 2004 to offset part of our taxable income. In accordance with our revenue recognition policy, for financial statement purposes, the milestone payments totaling $25.0 million were deferred and are being recognized ratably over the expected ten-year term of the OBI Agreement. We recorded a deferred tax asset of $9.1 million representing the approximate income tax effect of the timing difference of revenue recognition for financial statement purposes and for tax purposes related to these milestone payments as of December 31, 2004. Based on management's current expectations regarding future profitability, we released the valuation allowance previously established against our deferred tax assets and recorded a one-time income tax benefit of $7.0 million.

21

Results of Operations

Year ended December 31, 2004 compared to year ended December 31, 2003

Statement of Operations Detail

        Product revenue.    Product revenue for the year ended December 31, 2004 was $22,286,000, an increase of $6,956,000, or 45%, compared with $15,330,000 for the year ended December 31, 2003.

        Ophthalmic products sales increased $1,021,000, or 10%, to $11,533,000 compared with sales of $10,512,000 in 2003. The increase is primarily attributable to increased sales to Bausch & Lomb and, to a lesser extent, to increased sales to each of our other ophthalmic customers. In December 2004, the company entered into the 2004 B&L Agreement which, among other things, established reduced unit pricing to Bausch & Lomb for units purchased in 2004 in excess of a specified volume. Under the terms of the 2000 B&L Agreement, which was replaced by the 2004 B&L Agreement in December 2004, the price for all units sold for a calendar year was 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, 2004 and 2003 were subject to possible retroactive price adjustments when the actual annual unit volume became known. In accordance with our revenue recognition policy, the amount of revenue reasonably subject to the price adjustment was recorded as deferred revenue until the annual unit volume became known and the sales price becomes fixed. In the fourth quarter 2004, as a result of entering into the 2004 B&L Agreement, we applied the terms of the 2004 B&L Agreement retroactively to the beginning of 2004 and included in product revenue $761,000 of revenue related to sales of AMVISC to Bausch & Lomb which had been previously deferred during the first three quarters of 2004 and rebated $252,000 to Bausch & Lomb. Under the 2000 B&L Agreement, during the fourth quarter of 2003 the

22

actual annual unit volume, and therefore the final sales price, became known and determinable and product revenue included the recognition of $846,000 of revenue related to sales of AMVISC to Bausch & Lomb previously deferred during the first three quarters of 2003. Our agreement with Advanced Medical Optics has not been renewed as a result of their acquisition of a competing line of viscoelastic products for ophthalmic surgery and is expected terminate in July 2005 upon its expiration. We expect sales to Advanced Medical Optics to decline to minimum required levels in accordance with the agreement and to discontinue during the first quarter of 2005. Sales to Advanced Medical Optics contributed 19% of ophthalmic product revenue and 10% of total product revenue for the year ended December 31, 2004. As a result, we expect ophthalmic sales will decrease in 2005 compared to 2004.

        Our sales of ORTHOVISC increased $5,626,000, or 183%, to $8,699,000 in 2004 as compared with $3,073,000 in 2003. The increase was primarily due to sales to our U.S. distributor, Ortho Biotech, and royalty fees tied to end-user sales. U. S. sales of ORTHOVISC were 21% of product sales for 2004. We expect sales of ORTHOVISC to our U.S. distributor for 2005 to be below 2004 levels primarily because of inventory buildup by Ortho Biotech in 2004, partially offset by increased royalty fees tied to end-user sales. International sales of ORTHOVISC increased 31% for 2004 to $4,030,000 from $3,073,000 for 2003. The increase is primarily due to increased sales to our Turkey distributor combined with increased sales in Canada and Greece. We expect international sales to increase in 2005 compared to 2004 reflecting increased market penetration in certain of our existing markets as well as expansion into new international markets.

        Sales of HYVISC increased $309,000, or 18%, to $2,054,000 for 2004 as compared with $1,745,000 for 2003. Sales of HYVISC are made to a single customer under an exclusive agreement which expires in May 2006. Sales of HYVISC in 2003 included distributor inventory replenishment for certain units shipped without regulatory approval in the third quarter of 2002.

        Licensing, milestone and contract revenue.    Licensing, milestone and contract revenue for the year ended December 31, 2004 was $4,180,000, compared to $74,000 for 2003. Licensing and milestone revenue includes the ratable recognition of the $2.0 million up-front payment and $25.0 million in milestone payments from Ortho Biotech. These amounts are being recognized in income ratably over the ten-year expected life of the agreement, or $675,000 per quarter. Contract revenue was $1,392,000 for the year ended December 31, 2004. Contract revenue consists of reimbursement of clinical and development costs from OrthoNeutrogena as well as development-related fees and milestones under the OrthoNeutrogena agreement recorded utilizing a performance-based method for revenue recognition.

        Gross profit.    Gross profit for the year ended December 31, 2004 was $16,517,000, or 62% of revenue, compared with $7,399,000, or 48% of revenue, for the year ended December 31, 2003. Gross margin on product revenue was 55% for 2004 compared to 48% for 2003. The increase in gross margin on product revenue is mainly due to a higher margin product mix combined with efficiency gains in our manufacturing process. We introduced outsourced intermediates in our manufacturing process for certain of our products in 2004 which we expect to expand to all product lines in 2005. We expect gross margin on product sales to be relatively consistent in 2005 compared to 2004 reflecting product mix and comparable manufacturing volume.

        Research and development.    Research and development expenses for the year ended December 31, 2004 increased by $1,492,000, or 57%, to $4,087,000 from $2,595,000 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 increase in research and development expenses during 2004 is primarily attributable to expenditures associated with the pilot study for INCERT-S initiated in April 2004 and the pivotal clinical trial for our product for cosmetic tissue augmentation initiated in May 2004, including costs associated with the start-up of the clinical trials incurred in the first quarter of 2004. The comparative

23

increase in 2004 was partially offset by the elimination of costs primarily incurred in the first half of 2003 associated with the completion of our pivotal clinical trial for ORTHOVISC.

        Our current in-house research and development efforts primarily relate to INCERT, a product designed to prevent surgical adhesions and our products for the CTA market. Our research and development efforts will include seeking new applications for the HA molecule as well as our proprietary chemically modified HA and other therapeutics applications of our ORTHOVISC formulation that target osteoarthritis-related ailments. As a result of these ongoing efforts, as well as the ongoing clinical trials, we expect research and development expenses will increase in 2005 compared to 2004.

        Selling, general and administrative.    Selling, general and administrative expenses for the year ended December 31, 2004 increased by $1,833,000 or 44%, to $6,042,000 from $4,209,000 in the prior year. The increase in selling, general and administrative expenses during 2004 is primarily due to an increase in professional and outside services fees of $1,393,000 combined with an increase in personnel related costs of $403,000 compared with 2003. The increase in professional and outside services fees included an increase in audit and tax fees and consulting fees of $773,000 primarily relating to costs for the implementation and compliance with Section 404 of the Sarbanes-Oxley Act of 2002. We expect selling, general and administrative expenses to increase in 2005 compared to 2004 as a result of increased personnel related costs as well as expanded marketing efforts for ORTHOVISC partially offset by lower audit and tax fees and consulting fees for ongoing Sarbanes-Oxley compliance.

        Interest income.    Interest income increased $245,000, or 170%, to $389,000 for the year ended December 31, 2004, from $144,000 in 2003. The increase is primarily attributable to a higher average cash and investment balances during 2004. Interest income in 2005 is expected to increase as a result of higher average cash and investment balances.

        Income taxes. A net tax benefit of $4,413,000 was recorded for the year ended December 31, 2004, comprising a provision for income taxes of $2,626,000 offset by a $7,039,000 benefit resulting from the release of the valuation allowance. As a result of the receipt of the $20.0 million milestone payment in February 2004 and the $5.0 million milestone payment received in December 2004 from Ortho Biotech, our recent operating results and forecasted future income support an assertion that ultimate realization of our deferred tax assets is more likely than not at December 31, 2004. Accordingly, the Company fully released the valuation allowance during 2004 and correspondingly recorded a one-time tax benefit of $7,039,000.

        We recorded a provision for income taxes of $66,000 and an income tax benefit of $154,000 for year ended December 31, 2003. 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.

24

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

Statement of Operations Detail

        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.

        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 2000 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. 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

25

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. 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.

        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.

        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 legal expenses partially offset by an increase in accounting fees.

        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.

        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

26

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.

Liquidity And Capital Resources

        We require cash to fund our operating expenses and to make capital expenditures. We expect that our requirements 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, 2004, cash and cash equivalents totaled $39.3 million compared to cash, cash equivalents and marketable securities of $14.6 million at December 31, 2003 and $13.5 million at December 31, 2002.

        We received an initial payment of $2.0 million in December 2003 upon entering into the OBI Agreement. In February 2004, we received a milestone payment of $20.0 million as a result of obtaining FDA approval for ORTHOVISC and in December 2004 we received a milestone payment of $5.0 million upon completion of certain manufacturing upgrades. On an on-going and long-term basis, the OBI Agreement also provides for us to receive royalty and transfer fees.

        In July 2004 we received an initial payment of $1.0 million upon entering into the OrthoNeutrogena Agreement. The OrthoNeutrogena Agreement provides for additional performance- and sales-based milestone payments to the Company contingent upon final marketing approval from the FDA, receipt of a European CE Mark, and upon achievement of other sales and development targets, in addition to royalty and transfer fees. In addition, OrthoNeutrogena is required, subject to certain limitations, to fund the ongoing pivotal clinical trial of our CTA product initiated in May 2004 and to support the development of the CTA product, as well as future line extensions. Reimbursable development and clinical expenses incurred through the December 31, 2004 totaled approximately $2.2 million of which payment for approximately $1.4 million had been received.

        Cash provided by operating activities was $23,825,000 for the year ended December 31, 2004 compared with cash provided by operating activities of $2,012,000 and $332,000 for the years ended December 31, 2003 and 2002, respectively. Cash provided by operating activities in 2004 resulted primarily from net income of $11,190,000 which includes a one-time non-cash income tax benefit of $7,039,000 from the release of the previously established valuation allowance against our deferred tax assets and an increase in deferred revenue of $24,166,000. The increase in cash provided by operating activities was partially offset by an increase in the deferred tax asset of $11,181,000 and a net increase in other current assets and liabilities of $1,663,000. The increase in other current assets and liabilities includes an increase on accounts receivable of $927,000, an increase in inventory of $600,000 and an increase in prepaid expenses of $1,257,000 partially offset by an increase in current liabilities of $1,186,000. The increase in deferred revenue was primarily due to the $20.0 million milestone payment received in February 2004 and the $5.0 million milestone payment received in December 2004 from Ortho Biotech. The increase in prepaid expenses includes $933,000 of prepaid income taxes as a result of our estimated federal and state income tax payments totaling approximately $7.2 million for the year.

        Cash provided by investing activities was $344,000, $1,485,000, and $1,605,000 for 2004, 2003 and 2002, respectively. Net cash flows from investing activities for 2004 includes the release of restricted cash of $818,000 which was partially offset by capital expenditures of $474,000, primarily for manufacturing and computer equipment. 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 at December 31, 2003. These funds were restricted from our use during the

27

term of the letter of credit which expired in April 2004. We expect to increase our capital expenditures in 2005 primarily for upgrading and expanding our manufacturing and packaging equipment.

        Cash provided by financing activities of $578,000 and $93,000 for 2004 and 2003, respectively, 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.

Recent Accounting Pronouncements

        In November 2004, the FASB issued SFAS 151, "Inventory Costs" which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 is effective for the first annual reporting period beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the our Consolidated Financial Statements.

        In December 2004, the FASB, issued a revision to SFAS 123 Share-Based Payment, also known as SFAS 123R, that amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R's effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after June 15, 2005. SFAS 123R includes three transition methods: one that provides for prospective application and two that provide for retrospective application. We intend to adopt SFAS 123R prospectively commencing in the third quarter of the fiscal year ending December 31, 2005; it is expected that the adoption of SFAS 123R will cause us to record, as expense each quarter, a non-cash accounting charge approximating the fair value of such share based compensation meeting the criteria outlined in the provisions of SFAS 123R; as of December 31, 2004, we had approximately 692,000 stock options outstanding which had not yet become vested.

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 2005 compared to 2004 in addition to greater capital expenditures in 2005 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.

28

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

•

market acceptance of our existing and future products;



•

the success and sales of ORTHOVISC under the OBI Agreement;



•

the successful commercialization of products in development;



•

progress in our product development efforts;



•

the magnitude and scope of such efforts;



•

progress with pre-clinical studies, clinical trials and product clearances by the FDA and other agencies;



•

the cost of maintaining adequate manufacturing capabilities;



•

the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;



•

competing technological and market developments;



•

the development of strategic alliances for the marketing of certain of our products; and



•

the cost of maintaining adequate inventory levels to meet current and future product demands.

        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 beyond 2005. 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 at December 31, 2004:

29

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 (CTA), and INCERT®, a product designed to prevent surgical adhesions, have not obtained U.S. regulatory approval for commercial marketing and sale. We received Conformité Européenne marking (CE marking), a foreign regulatory approval for commercial marketing and sale, for INCERT in the third quarter of 2004. CTA has not received foreign regulatory approval for 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 will begin or successfully complete clinical trials for these products;



•

the clinical data will support the efficacy of these products;



•

we will be able to successfully complete the FDA or foreign regulatory approval process, where required; or



•

additional clinical trials will support a PMA application and/or FDA approval or foreign regulatory approval, where required, in a timely manner or at all.

        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:

•

the approval may include significant limitations on the indications and other claims sought for use for which the products may be marketed;



•

the approval may include other significant conditions of approval such as post-market testing, tracking, or surveillance requirements; and



•

meaningful sales may never be achieved.

        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

30

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. 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 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 years ended December 31, 2004 and 2003, we recorded net income of $11.2 million and $827,000, respectively, and as of December 31, 2004, we had an accumulated deficit of approximately $2.4 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

31

distribution capabilities and arrangements will be established in order to permit us to maintain profitability.

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, 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 before us 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 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.

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 began a pilot human clinical trial in Europe for INCERT-S in April 2004 and initiated a pivotal clinical trial for our product for CTA in May 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 regulatory 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 2004 B&L Agreement, effective December 15, 2004, we will continue to be Bausch & Lomb's exclusive global supplier (other than with respect to Japan) of AMVISC and AMVISC Plus ophthalmic viscoelastic products. The B&L Agreement expires December 31, 2010, and superseded an existing supply contract with Bausch & Lomb that was set to expire December 31, 2007. The new contract also provides us with a right to negotiate to manufacture future surgical ophthalmic viscoelastic products developed by Bausch & Lomb, while Bausch & Lomb has

32

been granted rights to commercialize certain future surgical ophthalmic viscoelastic products developed by us. 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, 2004 and 2003, sales of AMVISC products to Bausch & Lomb accounted for 32% and 51% of total 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.

        Our distributor for CoEase, Advanced Medical Optics, completed its previously announced acquisition of the surgical ophthalmology business of Pfizer, Inc. in June 2004, which includes a competing line of viscoelastic products for use in ocular surgery. As a result, our agreement with Advanced Medical Optics has not been renewed and we expect will terminate in July 2005 upon its expiration. We expect that sales to Advanced Medical Optics will decline to minimum required levels in accordance with the agreement and to discontinue during the first quarter of 2005. As a result, in the future we may not be able to sustain current product revenue levels in our ophthalmic business.

        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 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 Anika 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. For the year ended December 31, 2004, sales of ORTHOVISC to Ortho Biotech and royalties tied to end-user sales accounted for 18% of total revenue. Furthermore, we cannot predict whether the license granted to Ortho Biotech in the OBI Agreement to further develop and commercialize ORTHOVISC products for the treatment of pain associated with osteoarthritis based on our viscosupplementation technology will result in any new products or indications for use.

        On July 26, 2004, we announced the signing of an exclusive worldwide development and commercialization partnership with OrthoNeutrogena a division of Ortho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson, for our CTA therapy products. Under the terms of the agreement, OrthoNeutrogena will, subject to certain limitations, reimburse us for costs incurred for the ongoing pivotal clinical trial with our CTA product initiated in May 2004 and support the development of the CTA product, as well as future line extensions. There can be no assurance that we will successfully complete the clinical trial for our CTA product or that we will be able to successfully complete the FDA approval process. If we are able to successfully complete the FDA approval process for our CTA product, we cannot assure you that OrthoNeutrogena will be able to commercialize our CTA product effectively, or at all, nor can we assure you that we will be able to achieve the sales- and performance-based milestones provided in the agreement.

        We may 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

33

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 may 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.

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

34

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 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 2004 B&L Agreement, we have agreed to transfer to Bausch & Lomb, upon expiration of the term of the 2004 B&L agreement on December 31, 2010, 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 2004 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

35

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. There 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:

•

develop the necessary manufacturing capabilities;



•

obtain the assistance of additional marketing partners;



•

attract, retain and integrate the required key personnel;



•

implement the financial, accounting and management systems needed to manage growing demand for our products.

        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

36

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 any failure or delay in obtaining reimbursement approvals can negatively impact sales or our new products. In addition, 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. Also, 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 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 $39.3 million at December 31, 2004. Our future capital requirements and the adequacy of available funds will depend, however, on numerous factors, including:

•

market acceptance of our existing and future products;



•

the successful commercialization of products in development;



•

progress in our product development efforts;



•

the magnitude and scope of such product development efforts,



•

progress with preclinical studies, clinical trials and product clearances by the FDA and other agencies;



•

the cost and timing of our efforts to manage our manufacturing capabilities and related costs;



•

the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights;



•

competing technological and market developments;



•

the development of strategic alliances for the marketing of certain of our products;



•

the terms of such strategic alliances, including provisions (and our ability to satisfy such provisions) that provide upfront and/or milestone payments to us; and



•

the cost of maintaining adequate inventory levels to meet current and future product demands.

        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.

37

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 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 experienced a number of management changes in 2004. There can be no assurances that such management changes will not adversely affect our business. 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. We have been operating without a Chief Financial Officer since October 2004 and continue to search for a permanent replacement. There can be no assurance that we will be successful in hiring or retaining the personnel we require, including a permanent Chief Financial Officer. 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, 2004 and 2003, approximately, 18% and 20%, 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,

38

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.

        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, 2004, three customers accounted for 73% of product revenue. While it is expected that our ability to market ORTHOVISC in the U.S. will reduce our dependence on revenues from Bausch & Lomb, historically our largest customer, 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

39

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.

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 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 have and continue to expect to incur general and administrative expense as we maintain compliance with Section 404 of the Sarbanes-Oxley Act of 2002, which requires management to report on, and our independent registered public accounting firm to attest to, our internal controls. These 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 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, 2004, 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. Our investment portfolio of cash equivalent is subject to interest rate fluctuations, but we believe this risk is immaterial due to the short-term nature of these investments. We currently do not hedge interest rate exposure.

40

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

41

Management's Report on Internal Control Over Financial Reporting

        Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

        Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

        Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework.

        Based on our assessment and those criteria, our management believes that the company maintained effective internal control over financial reporting as of December 31, 2004.

        Our management's assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

42

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of
Anika Therapeutics, Inc.:

        We have completed an integrated audit of Anika Therapeutics, Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31, 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

Consolidated financial statements

        In our opinion, the accompanying consolidated balance sheets and related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Anika Therapeutics, Inc. and its subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004 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 audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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 of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

        Also, in our opinion, management's assessment, included in Management's Report on Internal Control Over Financial Reporting appearing under this Item 8, that the Company maintained effective internal control over financial reporting as of December 31, 2004 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

        A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance

43

of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

        Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Boston, Massachusetts
March 16, 2005

44

Anika Therapeutics, Inc. and Subsidiaries
Consolidated Balance Sheets

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

45

Anika Therapeutics, Inc. and Subsidiaries
Consolidated Statements of Operations

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

46

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

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

47

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

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

48

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, CoEase™, STAARVISC™-II, and ShellGel™, each an injectable ophthalmic viscoelastic HA product, and HYVISC®, which is an HA product used in the treatment of equine osteoarthritis. In February 2004, the Company received marketing approval from the U.S. Food and Drug Administration (FDA) for ORTHOVISC. ORTHOVISC became available for sale in the U.S. on March 1, 2004 and 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 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 and 2002. 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.

49

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

        The Company's revenue recognition policies are in accordance with the Securities and Exchange Commission's (SEC) Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, as amended by SEC Staff Accounting Bulletin No. 104, Revenue Recognition, and Emerging Issues Task Force Issue No. 00-21, Revenue Arrangements with Multiple Deliverables.

        The Company recognizes revenue from the sales of products it manufactures 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. 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.

        In December 2004, the Company entered into a multi-year supply agreement (the 2004 B&L Agreement) with Bausch & Lomb for viscoelastic products used in ophthalmic surgery. Under the new agreement, which extends through December 31, 2010, and superseded the existing supply contract, the Company will continue to be the exclusive global supplier (other than with respect to Japan) for AMVISC and AMVISC Plus to Bausch & Lomb. Prior to entering into the 2004 B&L Agreement sales to Bausch & Lomb were made under the 2000 B&L Agreement. Under the terms of the 2000 B&L Agreement the price applicable for all units sold to Bausch & Lomb in a calendar year was dependent on the total unit volume of sales of certain ophthalmic products during the year. Since the price was not fixed and determinable, the Company deferred the portion of revenue that is subject to retroactive price adjustment, until the ultimate amount it will earn is known. Under the 2000 B&L Agreement, during the nine months ended September 30, 2004, the Company deferred $1.0 million related to sales to Bausch & Lomb which was subject to possible retroactive price adjustments under the 2000 B&L Agreement when actual unit volume for the year would have become known. As a result of entering into the 2004 B&L Agreement, which retroactively applies to sales from the beginning of 2004, the Company applied the unit pricing terms under the 2004 B&L Agreement to its 2004 Bausch & Lomb sales activity. These terms essentially provide for fixed unit pricing with reduced unit pricing applicable for units purchased in excess of a specified amount during the fiscal year and in the fourth quarter. As a result of applying this new pricing to 2004 transactions, we earned $761,000 of revenue which was previously deferred during the first nine months which relates to those units under the reduced pricing threshold of 2004 and rebated $252,000 to Bausch & Lomb.

        In July 2004 the Company entered into an exclusive worldwide development and commercialization agreement (the OrthoNeutrogena Agreement) for our CTA products with the OrthoNeutrogena, a

50

division of Ortho-McNeil Pharmaceuticals, Inc., an affiliate of Johnson & Johnson. This arrangement included up front payments, funding of ongoing development activities, milestones upon achievement of predefined goals, in addition, the Company will receive payments for supply of CTA products and royalties on sales. The Company believes this is a multiple element arrangement that falls under the scope of EITF 00-21. Under the EITF 00-21 framework, in order to account for an element as a separate unit of accounting, the element must have stand-alone value and there must be objective and reliable evidence of fair value of the undelivered elements. While this arrangement includes several elements, the Company believes that two separate units of accounting exist (a combined license and development unit and a manufacturing unit) under the EITF 00-21 model.

        The Company is accounting for the combined license and development unit using the performance based model, which recognizes revenue as the efforts are expended limited to the amount of non-refundable cash received. Under this arrangement, the Company received non-refundable upfront fees of $1 million and reimbursement for approximately $1.3 million of costs which were incurred prior to our entering into this arrangement. The Company has treated both these amounts as upfront fees that will be recognized over the expected term of the license and development unit. In addition to the upfront fees, the Company is receiving reimbursement of pre-approved development costs incurred. For the year ended December 31, 2004 the Company recognized $1,392,000 as contract revenue for this arrangement under the performance-based method.

        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 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, a milestone payment of $20.0 million in February 2004, as a result of obtaining FDA approval of ORTHOVISC and a milestone payment of $5.0 million in December 2004 for planned upgrades to its manufacturing operations. The Company evaluated the terms of the OBI Agreement and determined that the upfront fee and milestone payments did not meet the conditions to be recognized separately from the supply agreement, therefore, it has deferred non refundable payments received of $27.0 million which it is recognizing ratably over the expected term of the OBI Agreement, which is currently 10 years.

Accounts Receivable and Allowance for Doubtful Accounts:

        Trade accounts receivable are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is the Company's best estimate of the amount of probable credit losses in its existing accounts receivable. The Company determines the allowance based on historical write-off experience by industry and regional economic data. The Company reviews its allowance for doubtful accounts monthly. Past due balances over 90 days and over a specified amount are reviewed individually for collectibility. Account balances are charged off against the allowance when the Company feels it is probable the receivable will not be recovered. The Company does not have any off-balance-sheet credit exposure related to its customers.

51

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:

        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, 2004 and 2003, long-lived assets consisted of property and equipment.

        During the years ended December 31, 2004, 2003, and 2002 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.

Stock-Based Compensation

        Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No. 148, 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, 2004, the Company has stock options outstanding under three stock-based compensation plans, which are

52

described more fully in Note 10. 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:

        The fair value of each stock option granted is estimated on the grant date using the fair value method with the following weighted average assumptions:

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. As of December 31, 2004, Bausch & Lomb, Ortho Biotech, OrthoNeutrogena, and Boehringer Ingelheim Vetmedica, combined, represented 90% of the Company's

53

accounts receivable balance. As of December 31, 2003, Bausch & Lomb and Advanced Medical Optics, combined, represented 85% of the Company's accounts receivable balance.

        The Company maintains an 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 were 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, 2004, 2003, and 2002 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. 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

        In November 2004, the FASB issued SFAS 151, "Inventory Costs" which amends the guidance in Accounting Research Bulletin No. 43, Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The provisions of SFAS 151 is effective for the first annual reporting period beginning after June 15, 2005. The adoption of SFAS 151 is not expected to have a material impact on the Company's Consolidated Financial Statements.

        In December 2004, the FASB, issued a revision to SFAS 123 "Share-Based Payment", also known as SFAS 123R, that amends existing accounting pronouncements for share-based payment transactions in which an enterprise receives employee and certain non-employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123R eliminates the ability to account for share-based compensation transactions using APB 25 and generally requires such transactions be accounted for using a fair-value-based method. SFAS 123R's effective date would be applicable for awards that are granted, modified, become vested, or settled in cash in interim or annual periods beginning after June 15, 2005. SFAS 123R includes three transition methods: one that provides for prospective application and two that provide for retrospective application. The Company intends to adopt

54

SFAS 123R prospectively commencing in the third quarter of the fiscal year ending December 31, 2005; it is expected that the adoption of SFAS 123R will cause the Company to record, as expense each quarter, a non-cash accounting charge approximating the fair value of such share-based compensation meeting the criteria outlined in the provisions of SFAS 123R; as of December 31, 2004, the Company has approximately 692,000 stock options outstanding which had not yet become vested.

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, 2004, 2003 and 2002, are as follows:

        Outstanding stock options to purchase approximately 233,000 shares at December 31, 2002 are excluded from the calculation of diluted weighted average shares outstanding for 2002 because the Company incurred a loss for each of these years and to include them would have been anitdilutive. Options to purchase approximately 14,000, 728,000 and 1,115,000 shares were outstanding at December 31, 2004, 2003, and 2002, 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.

4. 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 were restricted from the Company's use during the term of the letter of credit although the Company was entitled to all interest earned on the funds. The letter of credit was drawn upon by the Company's vendor and in April 2004 the restricted funds were released to the Company. There was no restricted cash at December 31, 2004.

55

5. ALLOWANCE FOR DOUBTFUL ACCOUNTS

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