ANIK - NASDAQ

Good morning, ladies and gentlemen, and welcome to Anika's Fourth Quarter and Year End Earnings Conference Call. At this time, all lines are in listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator Instructions] Also note that this call is being recorded on Wednesday, March 12, 2025. I will now turn the call over to Matt Hall, Director, Corporate Development and Investor Relations. Please go ahead, sir.

Thank you, Sylvie. Good evening, and thank you for joining us for Anika's fourth quarter and year end 2024 conference call and webcast. I'm Matt Hall, Anika's Director of Corporate Development and Investor Relations. Our earnings press release was issued earlier this afternoon and is available on our Investor Relations website located at www.anika.com as are the supplementary PowerPoint slides that will be used for the discussion today. With me on the call today are Dr. Cheryl Blanchard, President and Chief Executive Officer; and Steve Griffin, Executive Vice President, Chief Financial Officer and Treasurer, who will present our fourth quarter and year-end 2024 financial results and business highlights. Please take a moment and open the slide presentation and refer to slide number two. Before we begin, please understand that certain statements made during the call today constitute forward-looking statements as defined in the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results, performance or achievements. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. Please also see our most recent SEC filings for more information about risk factors that could affect our performance. In addition, during the call, we may refer to several adjusted or non-GAAP financial measures, which may include adjusted gross margin, adjusted EBITDA, adjusted net income for continuing operations and adjusted earnings per share from continuing operations, which are used in addition to the results presented in accordance with GAAP financial measures. We believe that non-GAAP measures provide an additional way of viewing aspects of our operations and performance. But when considered with GAAP financial measures and the reconciliation of GAAP measures, they provide an even more complete understanding of our business. A reconciliation of these adjusted non-GAAP financial results to the most comparable GAAP measurements are available at the end of the presentation slide deck and our fourth quarter and full year 2024 press release. And now I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Thanks, Matt. Good afternoon, everyone, and thank you for joining us. Please turn to slide 3. I'm pleased to report since our last call that we've made meaningful progress advancing our strategic initiatives and refocusing our strategy. As we've communicated, a key objective has been to focus our human and financial capital on our most promising opportunities to create shareholder value. As a result, we divested Arthrosurface in Q4 of 2024, and last week announced that we have completed the sale of Parcus Medical. These divestitures align with our focus to capitalize on our core HA products that provide us with the best value building opportunities, including the integrity implant system and the US approvals of Hyalofast and Cingal. I'll start today by sharing our financial results for the quarter and full year. Overall revenue in the fourth quarter was $30.6 million, up 1% compared to the same period in 2023. For the year, revenue was $119.9 million, a slight decrease of 1% compared to 2023. Commercial channel revenue was up 25% in the quarter and 17% for the full year, while OEM channel revenue decreased by 8% for the quarter and the full year, consistent with our expectations. During the fourth quarter, we delivered 22% international OA pain management growth and 16% growth for the full year. This success was driven by continued geographic expansion and market share gains, highlighting our robust international presence. Our efforts to penetrate new markets and strengthen our distribution networks have paid off, and we are committed to further expanding our global footprint. In 2024, we made significant progress across the refocused company. We executed on key objectives that drove strong growth in our commercial channel, fueled by continued gains in our international OA pain management business and further acceleration of integrity. We sharpened our strategic focus on HA-based products and achieved important milestones in our commercial, regulatory and clinical trial goals. During the quarter, Integrity realized more than 40% sequential growth with more than 300 surgeries performed in the quarter and now over 1,000 globally since its launch. This marks the third sequential quarter that we've achieved greater than 40% quarter-over-quarter growth. This impressive growth is attributed to the superior regenerative properties and mechanical strength of Integrity compared to collagen scaffolds. These key attributes of Integrity have resulted in a strong pull from surgeons. In February, we released a white paper summarizing the early clinical results from our first post-market study of 29 patients with partial and full thickness rotator cuff repairs. The results showed significant and clinically meaningful improvements in pain and strength at 3 months and further improvements in pain, range of motion and strength at 6 months, with no evidence of any retails at 6 months or device-related complications. This data has been well received, leading to increased adoption, and we continue to hear positive feedback from both surgeons and their patients. As a result of our successful commercial launch, we captured more than 1% of the 2024 US soft tissue augmentation procedures in our first 6 months of full market release. We believe Integrity will continue to drive significant commercial channel revenue, contributing to our long-term revenue targets and market expansion plans. To further accelerate growth in our commercial channel, we continue to advance our Integrity technology platform to add additional near-term regenerative solutions products to our pipeline. As mentioned on our Q3 call, we've partnered with a team of leading surgeons to develop new shapes, sizes and configurations of Integrity. We are on track to begin the introduction of those new product line extensions to the US market later this year. Additionally, we've enrolled our first patient in the prospective clinical study for Integrity. This study will provide valuable real-world evidence that will enhance Integrity's position in the market, support expanding sales efforts and marketing efforts and drive further commercial growth. We anticipate that the data from this study will reinforce the clinical benefits and safety profile of Integrity, further solidifying its market position. Data from this study will also be used for submission to the EU for MDR approval. We also made significant regulatory and clinical progress with our key pipeline programs. In January 2025, we filed the second PMA module for Hyalofast, our single-stage off-the-shelf proprietary hyaluronic acid scaffold for cartilage repair, which is already sold in over 35 countries outside the US. We expect to file the third and final clinical module in the second half of this year with a US launch planned by 2026. We also reached another key regulatory milestone for Hyalofast, receiving MDR approval in February. Hyalofast has shown continued market-leading positions in geographies where it's sold and we're excited about its potential to address significant unmet needs for cartilage repair patients in the US. Finally, Cingal, our fast-acting long-lasting non-opioid OA pain product also saw important advancements. We held a productive Type C meeting with the FDA in February to help finalize the bioequivalence bridging study design. We are awaiting formal feedback from the meeting and plan to share further updates to investors as we move forward. We also started the final non-clinical toxicology testing in Q1 of this year. The feedback from international markets has been overwhelmingly positive, and we believe Cingal will be a market driving force in the next-generation OA pain management segment. And with that, I'll now turn the call over to Steve for a detailed review of our financial results.

Thank you, Cheryl. Before I review the quarter, I'll start by providing some further details regarding the recently announced sale of the Parcus business. In line with our announcement in October of last year, we completed the simultaneous signing and closing of the Parcus Sports Medicine business on Friday, March 7 to Medacta, a well-respected and growing global orthopedic company. This deal positions the Parcus business to continue to serve patients, while enabling Anika to prioritize our investments on our highest growth, higher-margin hyaluronic acid technologies. The transaction closed with cash received at closing subject to customary post-closing networking capital conditions. We expect to support the Parcus and Medacta teams through a transition services agreement in 2025 to ensure continuity of business services. We have now successfully closed on the sales of Arthrosurface and Parcus. Both businesses will be included in the discontinued operations income statement. And the associated assets and liabilities have been re-classed to held-for-sale in their respective balance sheet periods. This strategic move, including an all-cash transaction at closing for the second sale, allows us to streamline our operations and focus on our core strengths, while providing these businesses with new opportunities under their new leadership. Going forward, our continuing operations will reflect the core products serve Anika's hyaluronic acid future, and key reconciliations to quarter results are provided in the appendix materials of today's presentation. I'll now provide updates on the fourth quarter of 2024. Please refer to Slide 4 of the presentation. In the fourth quarter, Anika generated $30.6 million in total revenue, up 1% versus the same period in 2023. Revenue in the commercial channel, which includes our highly differentiated products sold globally through commercial leaders, direct sales representatives and independent distributors, was up 25% year-over-year to $10.9 million, slightly ahead of our previously provided guidance. We continue to execute well on our international OA pain growth strategy, with sales up 22% year-over-year, led by Monovisc and Cingal. Also in our commercial channel, regenerative solutions grew 32% year-over-year and continues to form a solid foundation for future growth as we exceed our initial launch expectations for Integrity. Integrity sales grew by more than 40% sequentially for the third straight quarter. And since commercial launch, we have completed more than 1,000 cases. Integrity captured more than 1% of the domestic rotator cuff augmentation market in 2024 and is poised to continue to grow as a result of our differentiated technology. Revenue in the OEM channel, which includes our domestic OA pain and non-orthopedic products sold under long-term agreements, decreased 8% in the fourth quarter to $19.7 million, in line with guidance. The decline was primarily due to lower US sales from J&J, which faced lower volumes and competitive pricing pressures. Despite reduced market access and lower pricing, Monovisc and Orthovisc remain market leaders in the US. In this market, multi-injection continues to seed market share to single injection, while both products pricing are more reflective of the competitive environment. Non-orthopedic revenue declined in the quarter, driven by lower sales of mature products. Fourth quarter gross margin was 56%, down 13 points from last year. Adjusted gross margin, excluding legacy product rationalization charges, was 58%, down 11 points versus last year. One-time legacy program expenses and the product mix sold during the quarter equally contributed to the decrease. Operating expenses in the fourth quarter totaled $17.8 million, down $1 million or 7% as compared to 2023. Selling, general and administrative expenses were lower by 16% as compared to 2023 driven by cost actions taken earlier in the year and headcount reductions. Research and development expenses of $6.5 million were higher by 18% compared to 2023, primarily as a result of the one-time FDA filing fee for Hyalofast in October. Continuing operations generated $3.6 million of adjusted EBITDA and down 44% as compared to 2023, primarily as a result of the one-time legacy program expenses, product mix and higher research and development. Discontinued operations in the fourth quarter included a one-time non-cash impairment charge associated with the sale of Parcus Medical. For the quarter, discontinued operations generated $100,000 in adjusted EBITDA. As a note, in accordance with GAAP, certain corporate expenses for accounting, human resources, IT and legal, remaining continuing operations and have not been allocated to the discontinued operations P&L for any of our recasted financials. Total adjusted EBITDA for Anika was $3.6 million, in line with our previous guidance. In the first quarter of 2025, we will continue to include the results from Parcus Medical and discontinued operations in addition to any transition services related to support for the buyer. We expect that by year-end 2025, there will be no further discontinued operations activities. Now turning to cash and liquidity. We generated $1.6 million in operating cash flow this quarter, down from $3.6 million last year, primarily due to lower profitability. In the second half of 2024, we generated $6.6 million in operating cash flow as a result of stronger working capital management. Capital expenditures in the quarter were $1.3 million, down $500,000 from the prior year. We're investing in our Massachusetts Manufacturing Facility to support higher expected output of OA pain and regenerative solutions products, offset by lower expenditures for Arthrosurface and Parcus in the prior year. As previously communicated, we initiated a 10b5-1 stock repurchase plan in May 2024. In the fourth quarter, we purchased $5.6 million in common stock. As of last week, we completed the $15 million initial share repurchase earlier than our expected June 2025 deadline. We remain committed to completing our total share repurchase plan by 2026. And we'll share more information when we're in a position to do so. We ended the fourth quarter with $56 million in cash and no debt. Now to Slide 5. For the full year, Anika generated revenue of $119.9 million, a decline of 1% compared to prior year and in line with our full year guidance. Our commercial channel grew 17% to $42.1 million. International OA Pain grew 16% in the year, slightly ahead of our expectations. This growth highlights the outstanding work of our international sales team and distributors and gaining market share with Monovisc, Orthovisc and Cingal, all three of which grew year-over-year, led by Monovisc and Cingal. The launch of Integrity was the other primary driver of year-over-year revenue growth. Our commercial channel has grown at an average compounded annual growth rate of 17% for the last three years organically, and now represents 35% of total company continuing operations revenue, up from 24% in 2021. OEM channel revenue was $77.8 million in 2025, down 8% year-over-year, in line with prior guidance. Competitive market pressures for Monovisc and Orthovisc in the U.S. drove the majority of this reduction. GAAP gross margin for the year was 63%, down from 68% last year. Adjusted gross margin, excluding product rationalization was 64%, down from 69% last year, mainly driven by certain legacy program expenses and the impact of product mix. Total operating expenses were $81 million, down $1 million year-over-year. R&D spend was higher by $4 million, driven by the Hyalofast submission and Integrity product launch and line extensions, partially offset by $4 million of cost reductions from general and administrative expenses. Adjusted EBITDA from continuing operations was $15.5 million, and adjusted EBITDA from discontinued operations was $2.3 million. Combined for the full year, total company adjusted EBITDA was in line with our previously provided range of $16 million to $18 million. As a reminder, certain corporate expenses for accounting, HR, IT and legal, remaining continuing operations and have not been allocated to the prior periods for the discontinued operations P&L. Since the third quarter, Anika has generated $6.6 million in operating cash flow. For the full year, we generated $5.4 million, significantly improving from the $1.7 million operating cash usage in 2023. Stronger working capital management of our core HA products and reduced investments into our two divested businesses have driven this positive change. Now on Slide 6. I'll review our full year financial outlook for 2025. For the year, we anticipate our commercial channel to deliver between $47 million and $49.5 million of revenue, an increase of 12% to 18% in 2025. This growth is driven by expanding market share for Integrity and increasing international sales of our OA Pain management products. In our OEM channel, we now anticipate revenue to be at the lower end of the range of $64 million to $68.5 million, a range of 12% to 18% decline versus 2024. This update is based on the initial 2025 pricing insights from J&J for Orthovisc and Monovisc. As a reminder, J&J has full control of sales, marketing and pricing activities for these products in the United States; and Anika receives royalties based on J&J's end user pricing. We expect in the coming quarters to further tighten this revenue range. As expected, 2025 is a challenging reset year for these two products in the US. However, looking ahead to 2026 and 2027, we expect revenue in the OEM channel to remain stable or slightly lower as pricing for Monovisc and Orthovisc stabilized more in line with the market and historic trends. Now, turning to profitability. Based on J&J's new pricing, we expect adjusted EBITDA for 2025 to be between 8% and 10%. Lower pricing for Monovisc and Orthovisc has directly impacted our royalties and we continue to seek ways to reduce our operating expenses to drive efficiency, our 2025 adjusted EBITDA accounts for investments in our regenerative solutions portfolio and the necessary toxicity studies for the Cingal FDA filing. We are awaiting formal feedback from the FDA on bioequivalence testing for Cingal. Once we receive feedback from our Type C meeting with them, we will update you on our next quarterly call on any potential R&D expenses required in 2025. In summary, 2024 was a year of significant progress for Anika. We are confident that the steps we have taken will serve to increase our growth profile for years to come. We believe the company is now in a substantially better position to drive long-term sustainable growth as we continue to execute on our commercial and product development goals and objectives. With that, I'll turn it back over to Cheryl.

Thanks, Steve. So as you've heard today, we're making excellent progress; driving our refocused strategy and have line of sight to significant shareholder value creation in the not-so-distant future as we continue to execute. What do we need to do for that to happen? We need to continue to grow international OA pain products and integrity domestically, and we need to get Hyalofast approved and move Cingal to an NDA filing. I'm more confident than ever that we can accomplish these critical objectives. As we achieve these goals, the impact and importance of the long-standing J&J and Anika contracts will be substantially lessened as Anika will be a drastically different company. Moreover, our financial structure is on solid footing, and we have the means to deliver on these goals without the need to raise capital. We look forward to sharing our progress in the coming quarters. Finally, I'd like to sincerely thank all the team members who left the company as part of the Arthrosurface and Parcus divestitures. I wish them all the best as they continue to serve patients. I would also like to thank those at Anika, who contributed to our financial performance this quarter and furthered our programs. Finally, I would also like to thank the distributors and surgeons who have remained committed to Anika, and we look forward to continuing to work together. And with that, we'll open up the line for questions.

Thank you. [Operator Instructions] First, we will hear from Jim Sidoti at Sidoti & Co. Please go ahead, Jim.

Hi, good afternoon. Thanks for taking the questions. I'm sorry if I missed this, but what were the one-time legacy program expenses you referred to?

Some program expenses related to legacy product lines that were no longer going to be carrying, so kind of onetime in nature, Jim, in relation to the quarter, not something we expect to continue going forward.

And what was the magnitude of that?

It's a couple of million dollars, but it's not material. So I'd say between $1 million and $2 million.

And then G&A, down quite a bit from prior quarters because of divestitures that SG&A of around $11 million, $12 million. Is that a good proxy for 2025 in the one times in that?

I think that's a good approximation going forward. The numbers that you see here on a continuing operations basis, so they reflect sort of the go forward of what Anika is with our focus around hyaluronic acid. Obviously, Jim, we're trying to remain very focused around being lean. But in the same respect, this is the right representation of where the business is today.

All right. And it sounds like there were some charges in R&D for Hyalofast, non-recurring charges. Can you tell me about how big those were?

Yes. The Hyalofast filing fee was about $600,000. That was for the first module that was submitted back in October of last year. That's a one-time filing fee.

All right. So if you take that out $6 million in R&D, is that a good proxy for that one?

Yes. I think that's a fair way to look at it. I mean R&D is trending towards the higher end when we enter into 2025. And that's primarily due to the fact that we have the continued work on the completion of Hyalofast from a submission standpoint in the US, as well as the post-market clinical trial for Integrity. And the work associated with toxicity for Cingal. So R&D is ticking a little higher when we had during to 2025 versus 2024, but if you wanted to back that number out of your fourth quarter number on R&D, you could.

Okay. And then lastly, on Cingal, do you expect any major R&D expense in 2025 for Cingal?

We have included -- I think I included this in my remarks just a couple of minutes ago, but we've already built in the costs associated with the toxicity study. So as you know, there's sort of two filing items associated with Cingal. One of them was the toxicity for Monovisc. That work was kicked off and that's assumed. The other one is around bioequivalence for the TH. We'll give an update, I think, when we get to the first quarter earnings call, that's what I referenced in terms of if there are any expenses from an R&D perspective, exactly how much those will be.

Okay. But it sounds like the bulk of that work -- the bulk of the expenses are done at this point. It's just, I guess, responding to questions from the FDA

Certainly, yes. I mean in comparison to what this total program has cost over time, definitely, that's the right way to conclude.

Okay. All right. Thank you.

Thank you. Next question will be from Mike Petusky of Barrington Research. Please go ahead, Mike.

Hi. So Cheryl, I guess in terms of the Integrity progress, do you have anything you can share in terms of sort of uptake from surgeons, meaning like is a handful of guys sort of doing the vast majority of these? Or are you starting to sort of build a base of surgeons and any -- obviously, any quantification of any progress there I would be interested. Thanks.

Yes. Great question, Mike. Thanks. What I would tell you is that our uptake of Integrity is being driven by a broad set of surgeons using it. We obviously have a core group of surgeons who were the kind of initial release surgeons who have continued to adopt Integrity in their practices. But we have built out a very strong group of surgeons, brought a lot of new users, new relationships into Anika. I'll tell you, I met the American Academy of Orthopedic Surgeons meeting this week. We are as a company and we had a presentation at the Academy on Integrity today that was standing room only and have been very busy at the booth with a lot of interest. This product is really a technology that is addressing a lot of unmet needs that are getting surgeons excited. So, it's much broader than like a handful of key surgeons that are using it at this point

All right. Great. And then just turning to Cingal, and forgive me if I missed this in the prepared remarks. But in terms of the go forward, do you have any timetable as far as when the current nonclinical testing when that might be completed?

Yes. We haven't given an updated timetable because we just have this Type C meeting with FDA to get questions answered and make progress on finalizing the bioequivalent study design. Once I get formal feedback from FDA and I have information that I can then further communicate that will give me kind of the last bit that I need around the 2 filing issues that we know we have that we're addressing with the toxicology studies, bioequivalent studies. And that's going to put me in a position to give a timing update as soon as we have that information back from FDA.

And then, I guess, in terms of the longer term -- the longer-term guidance for revenue. The commercial channel you have sort of picking up from sort of 17% the last few years on average to 20% to 30% in the out years. And I'm just curious, is that an acceleration of Integrity? Like what sort of goes into that pick up?

Yes, it's a great question. This year, I'd say the largest piece of the growth is going to come from Integrity. And then, we'll also have some continued growth from the international OA pain. I mean international OA pain for us has been a real bright spot. That's the lion's share of the growth of that 17% CAGR in the last couple of years. We'll see it moderate to some extent this year. But when we get to '26, what we'd expect to see is sort of that, again, slower growth on international OA pain, continued growth on Integrity and then the introduction of Hyalofast in the fourth quarter. And then by 27%, that 20% to 30% range is really going to be mostly driven by the introduction of Hyalofast. That will be the first full year after the FDA approval.

Okay. So that actually includes, okay, we're going to model or at least forecast revenue from Hyalofast in late '26?

Yes, that's correct. I mean it's not a material amount of revenue, but it does contribute. And then we'd expect to see it kind of kick in '27. So I think in total, what you're looking at is Integrity, on the market today, really doing an excellent job. Our teams and the surgeons have really, I think, found a great product here. We expect to continue to take market share as we go through '25 and then into '26 and '27. And then in '27, you really start to see more contribution from Hyalofast.

Okay. All right. All right. Sounds good. Thank you, guys.

Thanks Mike.