Dr. Charles Sherwood - Chief Executive Officer Sylvia Cheung - Chief Financial Officer.

Joe Munda - Sidoti & Company William Plovanic - Canaccord Genuity Mark Landy - Summer Street John Curti - Singular Research Isaac Shapiro - Private Investor.

Good day, ladies and gentlemen and welcome to the Quarter One 2014 Anika Therapeutics Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) I would now like to turn the conference over to your host for today, Ms. Sylvia Cheung, Chief Financial Officer. Ma’am, you may begin..

Thank you, Ben. Good morning, everyone and thank you for joining us. If you have not received a copy of the Anika news release, which was issued yesterday after the market closed or you would like to be added to our contact list, please call Sharon Merrill Associates at 617-542-5300.

The news release is also posted in the Investor Relations section of our website at anikatherapeutics.com. In addition, a slide presentation is posted on the Anika website. It illustrates many of the key points we will be covering during today’s call.

The slides can be found on the Investor Relations section, under the Events, Webcasts & Presentations tab. We invite you to take a moment to open the file and follow the presentation along with us. Please turn to Slide #2.

Before we begin, please remember that the statements made in this call, which are not statements of historical facts, are forward-looking statements as defined in the Securities and Exchange Act of 1934. These statements are based on current beliefs and expectations of management and are subject to significant risks and uncertainties.

The company’s actual results could differ materially from any anticipated future results, performance, or achievements. Please see our SEC filings for more information about factors that could affect our results. Please turn to Slide #3 and I will begin our first quarter financial and franchise review.

Anika’s total revenue for the first quarter of 2014 was $34 million, up 123% from the first quarter last year. Revenue for the quarter included a total of $19.7 million in milestone and contract revenue associated with our U.S. license agreement from Monovisc.

This consisted of a $17.5 million milestone payment resulting from the product approval and the resolution of patent litigation with Sanofi Genzyme. It also included the recognition of the remainder of the unamortized upfront payment under the U.S. license agreement, which was previously received in December 2011.

The immediate recognition of the milestone payment related to the patent litigation resolution as well as the full recognition of the deferred revenue from the upfront payment were the result of FDA product approval in the quarter and full delivery of development obligations under the Monovisc license agreement.

This accounting treatment is in accordance with current generally accepted accounting principles on revenue recognition. It represents a change from the Orthovisc contract due to recent changes in revenue recognition rules. In addition to milestone and contract revenue, our revenue for the first quarter also included an initial U.S.

stocking order for Monovisc. This order was in preparation for the U.S. commercial launch which took place on April 15 with the first in-market Monovisc unit. Revenue for the first quarter from our largest franchise, Orthobiologics increased 3% from the first quarter last year.

The modest growth was in line with the comments we made on our Q4 conference call in March. This growth rates reflects the several non-recurring events and is not indicative of what we are anticipating for the rest of the year.

For example, one of our top international distributors decided to reach all their packaging during the quarter, which shifted the timing of their Orthovisc shipment to later this year. Another key international distributor in the Middle East delayed certain orders due to short-term foreign exchange concerns.

These issues should not impact our full year results. And as a consequence we expect to report stronger Orthobiologics revenue growth in the second half of the year. Looking briefly at the other Anika franchises, advanced wound care product revenue in our dermal franchise was down 22% from the first quarter last year.

Veterinary revenue was down 40%, while our surgical franchise revenue was up 77%. The dermal and veterinary product revenue comparisons year-over-year primarily reflected order timing. For the ophthalmic franchise revenue in the first quarter of 2014 was 78% lower than in the first quarter of last year.

Our major ophthalmic partner Bausch & Lomb has delayed its 2014 orders until the fourth quarter. Our remaining shipment to the other ophthalmic partners remained steady and should result in single-digit revenue growth this year for those distributors. More commentary on our full year revenue outlook will be provided towards the end of this call.

Please now turn to Slide #4 for the income statement highlights. We continued to successfully manage our product gross margin, which was at 70% for the quarter and was up 3 percentage points from the first quarter of last year. The increase was primarily due to a more favorable product mix as well as continued efficiency gain.

Total operating expenses for the first quarter decreased 1% from the same period last year. Research and development expense was higher year-over-year. This primarily reflected our early completion of patient enrollment in our Cingal clinical trial during the quarter versus a lower level of trial initiation expense we experienced a year earlier.

The increase in research and development expense was offset by a decline in the selling, general and administrative expenses from last year’s first quarter, which included certain non-recurring external professional and personnel related expenses.

Operating income for the first quarter of 2014 was $23.9 million, up 376% and the $5 million we have recorded in first quarter of 2013. Net income was $15 million or $0.97 per diluted share compared with $3.1 million or $0.21 per diluted share a year ago.

Note that our year-over-year diluted shares outstanding increased by approximately 1 million shares. Our growth in both operating income and net income was primarily driven by $19.7 million of milestone and contract revenue related to Monovisc in the U.S. as well as operating leverage on our sales volume.

Turning to Slide #5, Anika held $82 million of cash at March 31, 2014, up approximately $19 million from the $63 million held at last year end. Our operating cash flow for the first quarter was primarily driven by a $17.5 million Monovisc milestone payment, collections on accounts receivable and proceeds from stock option exercises during the period.

This concludes our financial and franchise review. Please now turn to Slide #6, because I will turn the call over to Dr. Charles Sherwood for the business highlights..

Thank you, Sylvia. I will begin the business discussion this morning with the Orthobiologics franchise which continues to be Anika’s primary growth driver for the near-term. Speaking first about our single injection product Monovisc, the anticipated U.S. commercial launch is underway. We began our launch activity with our partners U.S.

Monovisc sales team in late February immediately following the FDA product approval announcement. Monovisc was introduced in mid-March at the annual meeting of the American Academy of Orthopedic Surgeons in New Orleans with the first in market commercial sale achieved on April 15. In the U.S.

the single injection market has grown to nearly half of the total market or at approximate $430 million. While the single injection market segment is currently slightly behind the multi-injection market segment and remains an excellent revenue opportunity for us.

Overall, the launch of Monovisc is proceeding well, and delivering encouraging early results to Anika. We are seeing Monovisc product pricing consistent with our plans and at the same time making progress on the reimbursement front.

The overall domestic viscosupplementation market growth rate is projected to be in the high-single to low-double digit percentage range for the next several years. Although there has been some pressure on policy changes for the category recently, we believe the positive market fundamentals remain intact.

In industry group which includes our distribution partner has been active with private payers over the last few months reviewing data and pressing the case for expanded access to viscosupplementation therapies. (indiscernible) work is paying off and is expected to continue throughout 2014.

Under the viscosupplementation growth scenario mentioned earlier our target is for Monovisc to achieve 2% to 3% U.S. market share by the end of 2014 with the potential to reach 5% share in the initial 12 months.

Outside of the U.S., our Monovisc international revenue increased by nearly $2.5 million or 380% from the launch year in 2008 to 2013 and we expect it to grow between 25% to 30% in 2014 as we gain additional momentum. The brand recognition associated with the U.S.

approval and commercialization of Monovisc should enable us to gain market share and enhance this growth rate further in 2015 and future years especially in the Middle East and Asia.

Please now turn to Slide #7, with Orthovisc and Monovisc in our portfolio, we are the only company that offers both high performance multi-injection product and a novel single injection product. This flexibility positions us well to accelerate our domestic as well as international growth.

Worldwide the viscosupplementation market is currently estimated at roughly $2 billion. At present, we participate in just over half of this market. The major gap in our footprint is Japan, which represents about $800 million in annual viscosupplementation demand. We are taking active steps to close that gap.

Our global viscosupplementation revenue goal is to reach a 15% global market share by the end of 2018. To get there we are in the process of negotiating new distribution agreements around the world. We significantly increased our presence by signing distribution agreements in a number of smaller type countries over the past year.

Looking ahead longer term, we are actively pursuing partners in Asia and South America. Now to dig even deeper, we are executing on a three parts strategy. First, we are working to leverage our leadership in the United States as the only branded offering with both single and multi-injection options.

The second part of this strategy is to expand our Monovisc and Orthovisc distribution network into growth markets in the Middle East, Asia and Latin America where we will lead with Monovisc and follow with Orthovisc.

We are in a deliberate growth mode in all of these regions with more than 15 new distribution agreements and related regulatory filings underway. Our third strategic initiative is focused on bringing two new viscosupplementation products to the market in late 2015 or early 2016. The first of these products is Cingal.

The second is a value based product for select international markets where we can effectively capture larger shares with an enhanced value proposition. I will have more to say about our clinical progress on Cingal in a moment.

In terms of commercialization, we will start with Cingal in markets outside the United States with particular focus in Europe, South America, and Asia where market growth is expected to remain in the double-digit range for the next 3 to 4 years at least.

The opportunity to introduce a new value product has been in our plans for sometime and now that the Monovisc U.S. launch and Cingal development are well underway, it is receiving a renewed focus.

What we found in certain international markets is a high level of physician and payer interest in us providing quality viscosupplementation products at very competitive price points. With our cost reduction work and the market opportunity coming together, we believe we can create a significant revenue opportunity with this new product by 2018.

Beyond Orthobiologics our advanced wound care franchise continues to demonstrate solid high-double digit annual growth. At these growth rates, we see this business well on the road to approaching a $10 million franchise by 2018. Advanced wound care revenue growth is driven by two factors; Existing market penetration and new geography expansion.

In key countries in Europe, the Middle East and Latin America we expect to finish the year with a solid presence. We are now seeing this small experience base of distributors drive good year-over-year growth consistently. Our new geography expansion effort continues to be focused primarily on the United States market.

We are now evaluating a couple of promising distribution partnerships for Hyalomatrix, our novel scalpel products for the treatment of burns and ulcers. Hyalomatrix reduces the wound inspection work of the wound management nurse.

It reduces the number of wound inspections required and it also reduces the number of painful clinical visits for the patient. We expect to decide on a new U.S. partner early this summer. I will turn now to the pipeline discussion on Slide #8, focusing on our two major near-term products Cingal and Hyalofast.

Cingal as you know is our patented HA+ steroid single injection offering designed to provide the convenience relief of Monovisc with the added early symptom relief benefits of a commonly used steroid. Our goal is to complete the ongoing multinational Cingal clinical trial and submit our CE mark application by the end of 2014 or shortly thereafter.

In terms of the domestic market, we are close to arranging preliminary discussions with the FDA. We hope to have these discussions followed by formal FDA meeting with the Cingal European clinical data in hand by the end of the year.

To give you a sense of the size of the opportunity we are targeting with Cingal it’s helpful to look at the market for steroid therapy for osteoarthritis in the United States. The latest market estimate is approximately 4 million injections for early pain annually with an average injection cost of about $70.

More than half of these injections are for knee pain, roughly 20% for shoulder pain and 30% for pain in other joints. Cingal gives us a great first to market technology opportunity to relive pain and ease symptoms for the millions of people in this country diagnosed with difficult and chronic osteoarthritis.

We are also continuing to make progress on our mission to make Hyalofast available as a one step cartilage repair solution in the United States. Hyalofast delivers value because it’s easy to use and economical to deliver. And it’s been demonstrated as safe and effective in 100s of orthopedic clinics internationally.

As we have discussed our advisory panel of international clinical experts could be in place in 2013 to help build our clinical understanding and sharpen our thinking about the state of regenerative medicine for the knee especially in sports medicine aesthetics.

These meetings focused on a possible protocol design for randomized placebo controlled human clinical trial protocol to be submitted later this year to the FDA. We formed a focused internal team during the quarter to advance this effort and their work is moving forward on schedule.

Turning to Slide #9, we continue to be positive in our outlook for 2014. We are on track business to meet our goals highlighted by the commercial launch of Monovisc in the United States, the clinical study in European regulatory advancement for Cingal as well as the clinical progress on the Hyalofast and our longer term product pipeline opportunity.

In addition, we are adding the organizational operational capabilities we need to expand beyond viscosupplementation and deliver on Anika’s scope potential in the years ahead.

As an example within past several weeks, we have been joined by two new members of our leadership team, a Vice President of Human Resources and a general manager for our Italian operation. Both of these additions are steps along the way to enhance Anika’s talent pool and strengthen our organization in order to successfully execute on our plans.

In terms of our financial outlook for 2014, we expect to achieve product revenue growth for the year in the low 20% range with at least equivalent net income and EPS growth for the year. This expectation is excluding milestone revenue and weighted to the third and fourth quarter.

Again as we said last quarter, we expect product revenue in the second half of second half of 2014 to be more robust due to seasonality as well as order timing.

As always we will continue to focus on effectively deploying the cash currently on our balance sheet with the bias for the remaining conservative while generating the highest possible returns. And currently our Board will continue to consider and explore the full range of options for maximizing value and total return for Anika shareholders.

We continue to be very encouraged by our business prospects and we look forward to reporting our progress to you next quarter. And with that I will turn the call back over to Ben to take any questions that you may have, Ben..

(Operator Instructions) Our first question comes from Joe Munda of Sidoti & Company. Your line is open. Please go ahead..

Good morning Chuck and Sylvia. Thank you for taking the question..

Good morning Joe..

Sylvia, I was wondering if you guys could breakout at least on a percentage basis what Orthobiologics segment consisted of Orthovisc versus Monovisc in the quarter?.

Sure. Including the international Monovisc for the quarter Monovisc was about 15% of the total Orthobiologics revenue for the first quarter..

Okay and then….

The major of primarily Orthovisc U.S., international and some Orthobiologics from our Italian subsidiary, primarily Hyalofast..

Okay.

And then if I may ask one quick follow-up, in the prepared remarks you talked about timing of orders and you are projecting out robust second half, Chuck I was wondering if you could give us some sense of why and what’s going on as far as the ordering pattern that you are expecting that – I know you have some visibility into (indiscernible) distribution, I am just wondering what’s going on that these orders are being kind of pushed out or being built up into the second half of this year?.

We have a couple comments on that, one, a lot of the timing of orders really doesn’t have anything to do with the (indiscernible) it’s some of our other – well it’s Bausch & Lomb as we said in the prepared remarks and it’s some of our other international customers.

With regard to (indiscernible) on the stocking order fundamentally at least partially filled their inventory channel. So as they start to take orders, we of course expect additional orders going out throughout the remainder of year as I am sure that they are going to want to keep some level of inventory in their warehouse at all times.

So what sold in so far wasn’t that significant, it was just to get them started and as they start to have some success I am sure their orders will roll-in in much great magnitude throughout the year..

Okay. I will hop back in the queue. Okay..

Thank you. Our next question comes from the line of William Plovanic of Canaccord Genuity. Your line is open. Please go ahead..

Hi, great, thanks. Good morning. Can you hear me, okay..

Yes, good morning, Bill..

Hi, good morning.

So just I know it’s early to ask this question and it’s the one we gave asked before, but we are month in, are you giving any feedback from the end market in terms of whether the thought on Monovisc will be that it’s cannibalistic or complementary to Orthovisc?.

Sure. I will take the question. We are one month in, so early days, what we are seeing that we currently are not seeing the cannibalization between Orthovisc and Monovisc.

We believe that and we are seeing Mitek implementing some sales and marketing strategy to maintain Orthovisc in a market and at the same time capture the single market share with Monovisc. So at this stage, we are not seeing any cannibalization, but obviously we are closely monitoring the reaction.

And the pricing strategies and marketing strategies that Mitek is implying is with the goal to maintain Orthovisc and then rapidly grow the single injection Monovisc share..

Great, thank you. That’s all I had. .

Thank you, Bill. .

Thank you. (Operator Instructions) Our next question comes from the line of Mark Landy of Summer Street. Your line is open, please go ahead..

Good morning folks. Could you hear me, okay..

Yes. How are you Mark? A little and with something back..

Yes, I think that should be better..

Yes, much better. Thank you, Mark..

Okay, sure. Good morning.

Chuck I guess the question for you with respects to the cash flow that you brought up at $82 million I think previously you have – you didn’t really spent on R&D relating to chemical productivity and bringing new products to the United States, should we view the cash position has been sufficient to fully fund the pipeline that you have and you have a tremendous pipeline in bringing more of those products to the U.S.

And where are you looking to go for ultimate end point such as cartilage regeneration, repair with HyaloFast rather than just coming under adjunctive surgical kind of products?.

I think Mark, that the cash that we have some of that will be reinvested in capital. We – a lot of our margin improvements that come from things we have done on the manufacturing floor in terms of the equipment and process development and so on and so forth.

And we have some plans to go forward and do so more of that, that’s not a huge amount of money, but that’s where we will put some of that cash investment.

Our plan now in terms of moving forward to take advantage of some of our product pipeline is for the most part to fund that out of our operation and not to have a major, major investment out of cash to go through that.

In other words, our R&D spend as a function of our total revenue will go up percentage wise, but I don’t see us taking that to an extraordinary high level of revenue in the near-term.

We also are trying to prudently build our organization so in order to run a multitude of products you need a fairly good organization of complement inside even if you are going to try to run it as a virtual organization doing a lot of contracting outside.

So I think we need to focus, we will work hard to bring Cingal and Hyalofast forward and actually the investment in some of the other pipeline products in the early and mid-developmental stage prior to clinic it’s not that we can accomplish a lot was not a huge investment..

I guess just a quick follow-up if you may, so what are you projecting for R&D this year in terms of the dollar amount?.

In terms of the dollar amount, we expect R&D to increase in the low-single digit million dollars versus last year, reason being the Cingal trial is ramping up this year, we had previously stated that the total trial cost is between $5 million to $6 million.

In 2013, we spent a little less than $2 million, so the remainder of it comes through this year so that contributed to the increment. And as Chuck had said earlier that we are gearing up on our Hyalofast development as well as other pipeline development activities and that would contribute to the remainder of the increase..

I’ll jump back - sorry, Chuck..

Yes, I just want to lay one more comment on here mark, I don’t want to totally confuse you, but for certain product initiatives and particularly if we are going to sign agreements with larger companies built into that it’s off times commitment on their part to fund additional clinical efforts.

So we do get out of our agreements a lot of funding for additional efforts in the clinic paid for by our partners that you need to keep that in mind as well..

Okay, fair enough, I will jump back in queue. Thanks guys..

Thank you, Mark..

Thank you. Our next question comes from the line of John Curti of Singular Research. Your line is open. Please go ahead..

Hello, john..

Mr. Curti. Please check to ensure your line is not on un-mute..

Hello, can you hear me now..

Very weak..

Couple of points of clarification on the Bausch & Lomb business for this year is it all going to be in the fourth quarter?.

Correct, we expect all of our 2014 orders to be in the fourth quarter of this year..

Okay.

And then with respect to contract milestone payments for the remaining quarters, where if anywhere will you be receiving payments from or will there some additional Monovisc or Orthovisc payments this year?.

There is one additional milestone payment which we recently announced as far as received cash and it’s $5 million related to the first commercial sale which we announced in mid this month. So that would be a Q2 revenue item and that will be recognized in Q2 similar to the first quarter milestone related to the patent resolution and approval..

Okay and then the very last one on the – with respect to potential gross margin expansion based on the expected delivery ramp-up in revenues in the back half of the year, do you expect further gross margin expansion from the 70% enjoyed in the first quarter based on this volume and efficiency gain?.

We expect to continue the efficiency gains, but also keep in mind that product gross margin is also impacted by product mix and the Bausch & Lomb revenue represents lower margins for us. And since all of that is coming through in the first quarter it’s going to have an offsetting impact to the higher revenue in the later part of the year.

We do however believe that product gross margin will at least maintain at the high-50 percentage range that we achieved in 2013 and we hope to improve on that. But we have to cognizant of the product mix impact as well..

Alright, that’s everything for me. Thank you..

Thank you, John..

Thank you. Our next question comes from the line of Isaac Shapiro, Private Investor. Your line is open, please go ahead..

Yes. Hi. Thank you. I am just trying to understand the interaction of some of these future projections as hopefully the viscosupplementation market hypothetically let’s say where it’s growing to $3 billion in – by 2018.

And you say your strategy is to achieve 15% of the market this happening you would the strategy consistent with the $3 billion market would be to have $415 million worth of revenue to Anika by 2018 in viscosupplementation revenue?.

No, the – since we do not have our own sales force our products are commercialized through distribution or other types of partnerships. As a consequence the most logical way for us to talk about market share and revenue is to talk about the total end user market which is the $2 billion figure or in your hypothetical is the $3 billion figure.

So when we say 15% of global sales, we mean end user sales and our portion of that would be some percentage..

Can you give rough approximation in that percentage?.

Well, we said before, we gave a range, we said somewhere between 25% and 40% depending on our partner what part of the world so on and so forth..

Okay, thank you..

You’re welcome..

Thank you. (Operator Instructions) Our next question is a follow-up from the line of Joe Munda of Sidoti. Your line is open. Please go ahead..

Yes. Hi, Chuck, just a quick follow-up on the market potential for Cingal and Hyalofast, I think I missed the breakout you talked about 4 million injections in the U.S.

or Cingal annually, can you give us that breakout again of knee pain and other categories?.

Yes. I got to find my notes again, I think other was 30. So that’s all other joints and I will go back. Unfortunately I am not in office, conducting this call remotely, so..

Okay. I could catch up with you offline for that..

Okay, that would be a little simple or actually if you don’t mind doing that because we get a lot of things in front of me here and it might be a little – here you go. Alright, so half the injections are for knee, 20% shoulder roughly and then the rest for all other joints ankle, hips so on and so forth..

Okay.

And then as far as Hyalofast I mean you spoke about the trial and the discussions that – about possibly putting together an FDA application later this year just two questions size of the trial and what’s the market potential there?.

I think we talked about the market potential in the past and this kind of difficult to take that number exactly because it’s not a market that’s been fully serve right now (indiscernible) not being served highly at all. But I think the market potential we can really look at that in terms of the $200 million-$250 million range in U.S.

As we estimated now, obviously if products were successful and market you can grow. In terms of the trial size that’s yet to be determined, but it seems these days that trials for almost anything are getting up into the range of 300 to 400 patients. So we can probably count on something like that.

And you didn’t ask this, but I will say that the indication that we would be going after of course would be beneath..

And I know I asked this multiple times, but any possibility you expand the platform of indication outside the knee for some of maybe Orthovisc, if there is possible cannibalization that is going on with Monovisc, is that a possibility are you willing to take a look at that?.

Yes, we are having some discussions with Mitek for the U.S. now to take a look at whether it makes sense to make the investment would be pretty much on their investment to look at running trials for other joints.

The use of the product is pretty substantially weighted towards the knee but – and it’s used off label in hip and shoulder and to some degree in ankle. The real question is could you really maximize the use in another joint with and improved claims or not. So that’s still under discussion.

Unfortunately, I do not believe the situation in the United States is going to change whereby you can run one more study and get multiples joints included like it was possible to do in Europe, I just think the FDA goes tissue-by-tissue, joint-by-joint and that’s going to be what we stuck with for adding here..

Okay.

And I guess my last question, I mean judging by the lengths of time you had to go through with Monovisc and the FDA approval, do you envision a similar situation with Hyalofast or Cingal taking X amount of years to get it there?.

Well, I am very happy that we finally got through with Monovisc and as you know the review process went on for a couple of years.

I am certainly hopeful that we will be able to and the FDA is trying to work with companies in this regard too to be little more clear upfront as to what exactly the goals of any study would be, to be clear how certain data are going to be analyzed and if we’re able to do that and reach an agreement upfront and the product is actually effective in the clinic then I think the review time at least by design should be able to be cut down.

So I don’t anticipate that will be in at least I hope we won’t have ever be in another situation where we finished the trial and it takes three years to negotiate with the FDA to get an approval. I just hope that those days are behind us..

Okay. Alright, thank you..

Thank you. And I am showing no further questions in queue. I would like to turn the conference back over to management for any closing remarks..

Thank you, Ben and thanks to everyone who was on the call. We certainly believe that we appreciate your support and we believe that 2014 will be a very good year for us and we look forward to reporting back to you with results in the upcoming quarters. Thank you..

Ladies and gentlemen, thank you for your participation in today’s conference. This does conclude the program and you may all disconnect. Have a great rest of your day..