Charles Sherwood - President and CEO Sylvia Cheung - CFO.

Jeremy Hellman - Singular Research Tim McCandless - Asymmetry Global Healthcare.

Good day, ladies and gentlemen and welcome to the Anika Therapeutics’ Q1 2015 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 follow at that time [Operator Instructions]. As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Sylvia Cheung; CFO of Anika Therapeutics. Ma'am, please go ahead..

Thank you, Candice. 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 distribution list, please contact 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’ll be covering during today’s call. The slides can be found in the Investor Relations section, under Events, Webcasts and 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 fact, are forward-looking statement as defined in the Securities and Exchange Act of 1934.

These statements are based on the current beliefs and expectations of management and are subject to significant risks and uncertainties. The Company’s actual results could differ materially from any anticipated future results, 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'll begin our financial and franchise review. Anika's total revenue for the first quarter of 2015 was $15.5 million. In the year-ago quarter, we reported $19.7 million, a milestone and contract revenue associated with our U.S. license agreement or Monovisc, resulting in total Q1 2014 revenue of $34 million.

When you exclude milestone and contract revenue from the first quarter of 2014, product revenue was up 8% in 2015. Revenue for the first quarter for our largest franchise Orthobiologics increased 3% from the first quarter of last year. We continued to be challenged by the inventory reset by our U.S.

commercial partner DePuy Synthes Mitek's Sports Medicine, which was partially offset by stronger international Orthobiologic sales. End user demand in the U.S. remains strong for our Orthobiologics products and is aiding in the inventory reduction process.

In fact we saw a nice uptick in Monovisc sales in the fourth quarter of 2014 to the first quarter of '15. Demonstrating that the unique J-Code is having the effect that we expected.

We believe that the inventory reset will be completed in the third quarter, but while we're pleased with Mitek's efforts in driving end user demand, we're not pleased with the inventory purchase interruption due to their planning and business practice changes, but as mentioned earlier, the effects of the inventory adjustment are coming to an end.

Focusing on the market demand during the first quarter of '15, Orthovisc and Monovisc exited the quarter with a combined share of 23% up 2% from the prior year end. Orthovisc and Monovisc each gained 1% market share during the past quarter.

Orthovisc continues to maintain the number one position in the multi-injection segment and the end user sales increased 6% from prior year Q1. Now some of you already know Orthovisc is indicated for both three and four injection regimens.

The four injection treatment is the most efficacious, commercially available treatment that has been studied to date. Superior to other three are five injection competitors and has been marketed by Mitek as such and in growing clinical use particularly for patients with OA.

Orthovisc efficacy affluent safety profile and treatment regimen flexibility are key factors in maintaining its leadership position in the multi injection segment of the U.S. market. Monovisc was launched in the second quarter of 2014.

End user sales in the first quarter of 2015 increased 41% sequentially from the fourth quarter of 2014 and reached close to 3% market share exiting the first quarter.

Having the unique CMS J-Code beginning January 2015 has supported Monovisc adoption and competitive conversion as customers are now able to treat patients with a safe non-avian single injection, while having a simple and precise path to gain reimbursement.

The high quality and strong adoption of Monovisc allows Mitek to offer an unparallel HA portfolio with the highest HA concentration, multiple dosing options and a strong safety profile supported by clinicians and physicians. Now in the dermal franchise, product revenues for the first quarter of 2015 increased 121% year-over-year, driven by U.S.

Hyalomatrix sales as a result of our distribution agreement with Medline Industries. In April, we announced that Hyalomatrix is now eligible for reimbursement as a skin substitute through the centers for Medicare and Medicaid services in 11 states and DC. This marks an important milestone in the commercialization of Hyalomatrix.

In the surgical franchise, first quarter product revenue decreased 21%, primarily due to the timing of product shipments for Hyalobarrier and our ear, nose and throat surgical products. For the full year 2015, we expect revenue from our surgical products to remain at similar level compared to 2014.

In the veterinary franchise, product revenue was up 96% year-over-year for the first quarter, reflecting market share gains and timing of orders. In summary, total product revenue increased 8% year-over-year to $15.5 million from $14.4 million in the year ago quarter. Now please to Slide 4 for the income statement highlights.

Anika's Q1 product gross margin of 72% was up two percentage points from the first quarter of last year. The increase was primarily due to a more favorable revenue mix. Total operating expenses were essentially flat with last year.

Research and development expense was down year-over-year, reflecting lower cost from the Cingal retreatment study compared with the higher cost in Q1 of last year for the Cingal pivotal study, which was completed in Q3 of 2014.

We expect significant increases in the level of R&D activities as we continue the Cingal retreatment study begin the Hyalofast Phase III study later this year and accelerate pre-clinical efforts and grow staffing levels over the next few quarters.

Selling, general and administrative expense for the first quarter increased 3% from last year due to higher external professional fees and stock-based compensation expenses.

We expect general and administrative expenses to increase in 2015 as compared to 2014 primarily as a result of increases in headcount and external professional spending in the commercial and corporate development areas. Operating income for the first quarter was $5.5 million down 77% year-over-year.

Q1 net income was $3.5 million or $0.23 per diluted share compared with $15 million or $0.97 per diluted share a year ago. The Q1 2014 net income included milestone and contract revenue of $19.7 million or $0.78 current diluted share.

Excluding the Monovisc milestone revenue impact from the 2014 net income, in Q1 2015, diluted EPS was up 21% year-over-year. Turning to Slide 5, Anika held $112 million of cash at March 31, 2015 up approximately $5 million from the $107 million held at the end of last year.

This $5 million increase was driven primarily by solid operating income performance and cash proceeds from exercises of stock options during the period. Turning to our guidance, we continue to expect product revenue growth in the low double digit range. This is excluding the 2014 U.S. Monovisc milestone revenue impact.

I would like to note that the linearity of our revenue for the remainder of the year will be quite different than in 2014. Last year, Mitek built its inventory levels in the first three quarters of the year. This year as discussed they're working down that inventory which we expect will complete during the third quarter.

As a result, a strong component of our expected growth in product revenue will come in the fourth quarter of the year. We expect that Q2 and Q3 2015 revenue will revenue at similar levels to 2014. This concludes our financial review. I will now turn the call over to Dr. Charles Sherwood for the business review..

Thank you, Sylvia and good morning everyone. On our last call, we discussed the momentum that we saw building at Anika and excited we have about our future. This momentum continues to accelerate as we made excellent clinical, regulatory and commercial progress during the past three months across our product franchises.

Please now turn to Slide Number 6, we have a focused strategy to achieve a 15% share of the global viscosupplementation market by the end of 2018. This includes growing sales of Monovisc, expanding our international presence and bringing new products to market. Our growth target for Monovisc in the U.S.

is to more than double our share of the single injection market reaching a minimum of 5% share by yearend 2015. With CMS reimbursement codes and the choice of products, the Mitek offering will be of increased attractiveness to private payers and should facilitate entry into new formularies and competitive accounts.

Our unique J-Code for Monovisc became effective January 1 of this year and that contributed to the 41% sequential increase in end user sales of Q1. We’re pleased about the domestic Orthovisc and Monovisc growth and it's our target to reach overall viscosupplementation market share leadership in the U.S.

2017 from our combined viscosupplementation product portfolio. Internationally, we continue to work on expanding our distribution network into new markets where we believe our viscosupplementation product portfolio can thrive.

Currently some of our distributors are being pressured as a result of currency fluctuations that are limiting their investments. We are working on additional marketing and clinical efforts internally to provide support for our distributors. Let’s take a look now at Slide Number 7. We made excellent progress with Cingal during the past quarter.

After submitting our CE Mark application in Europe in the fourth quarter, we filed a PMA submission with the FDA in Q1 ahead of schedule. This PMA was filed on the strength of our pivotal Cingal study in which 368 patients were enrolled in a multicentre randomized double-blind, saline-controlled study with an active comparator arm Monovisc.

In mid-April we announced highly positive topline results. Cingal met all primary endpoints and all secondary endpoints. The pivotal study results unequivocally demonstrates a strong clinical benefit of Cingal.

Patients receiving Cingal, experienced significant symptom relief in the first week after treatment and that symptom release then strengthened somewhat and continues throughout six months. We also recently completed the enrolment of an open label follow-up study at Cingal.

The total of 242 subjects were enrolled and treated with the Cingal injection at 10 sites in Poland, Hungary and the Czech Republic. All of these subjects had participated in the pivotal Cingal study. We expect to complete patient follow-up and lock the database around the end of the second quarter.

We then expect to report retreatment safety data in the third quarter of this year. We are continuing our dialog with the FDA regarding our PMA submission. While we do not have a definite decision to report yet, we're encouraged by the straightforward interactions and positive approach by the agency.

We expect decisions on this matter by the end of the second quarter. Now let’s backtrack a little bit. On April 17, we issued a press release summarizing the results from our clinical study for Cingal and for those of you not well versed in interpreting clinical study data or statistics let me expand on that release a bit.

In our study, the primary effect of this endpoint compared the benefit of the Cingal injection with an injection of saline. The patient response was then observed across several measures of effectiveness including pain reduction, physical function and stiffness.

Several aspects of the results prove noteworthy particularly in the context of osteoarthritis studies. First the level of pain reduction experienced by Cingal treated patients was quite impressive and average pain reduction of 72% at 26 weeks post treatment.

To put this number in context, the average of the viscosupplementation now approved by the FDA is approximately 42% improve in pain as 42% versus 72% for Cingal.

Second the results across all measures and timeframes were strongly statistically significant, the P value is a measure of the likelihood that the study results occurred by chance and the lower this number, the stronger the results. A P-value of less than 0.05 is the industry standard for showing significance.

In our results mostly 0.01 or lower are considered strongly statistically significant. Third, in addition to showing a statistically significant improvement, it's also important to show that the level of improvement obtained in clinically significant, meaning that the amount of pain reduction is meaningful in the context of patient's daily life.

The magnitude of the difference in pain reduction seen with Cingal combined with saline is 50% larger than demonstrated by any other viscosupplement approved by the FDA now. Lastly a little background on our primary investigator of the Cingal pivotal study, Dr. Laszlo Hangody. Dr.

Hangody’s world renowned orthopedic surgeon pioneered the use of mosaicplasty in 1992. Dr. Hangody is member of the ICRS Executive Board that’s the International Cartilage Repair Society and he has been so since 1997 and the former President of Hungarian Orthopedist Society.

He is authored over a 190 publications, is on the Editorial Board of six journals including Arthroscopy and Joint Surgery and we're very pleased to have been able to work with Dr. Hangody as our PI for the Cingal efforts. Okay.

Now please turn to Slide Number 8 and I'll discuss our regenerative medicine product portfolio starting with Hyalomatrix, our lead wound care product in the dermal area.

In April we achieved an important milestone when Hyalomatrix became eligible for reimbursement as a skin substitute by the Centers for Medicaid and Medicare services in 11 states and the District of Columbia.

Our distribution partner Medline Industries is working closely with leading reimbursement experts to expand Hyalomatrix reimbursement coverage throughout the United States. We see tremendous potential for Hyalomatrix in the $550 million addressable portion of the $1.1 billion wound care biologics market.

This market is expected to grow at a 9% compounded annual growth rate over the next three years. We also made excellent progress with Hyalofast our biodegradable 3D scaffold that enables patients to naturally regenerate cartilage with minimally invasive and cost effective procedure.

Hyalofast has already CE mark for the entrapment mesenchymal stem cells. In April we sought an Investigation of Device Exemption or IDE with the FDA to conduct a pivotal Phase III clinical trial of Hyalofast.

The trial which we're calling FastTRACK will compare Hyalofast in the treatment of articular knee cartilage defect lesions to a control microfracture treatment. FastTRACK will be a perspective, randomized active treatment controlled evaluator blinded study.

We plan to enroll approximately 200 patients at up to 30 sites in the United States and Europe beginning in the fourth quarter of 2015. We're working with some of the world's leading experts in cartilage repair and these key opinion leaders will be helping to recruit patients for the trial.

We took this same approach with our very successful Cingal trial, which as you all know was completed well ahead of schedule. Hyalofast is another innovative product where its unique characteristics will enable us to take share in a growing market. The cartilage repair market is estimated to be $1.9 billion in 2015 growing to $2.8 billion by 2030.

Hyalofast can be implanted in a single step arthroscopic procedure that only requires a small incision. It saves time and is less costly in current procedures and other treatments being developed. Because of Hyalofast HAB scalpel and other unique properties it regenerates cartilage similar to what was there prior to the trauma event.

In fact Hyalofast performs as well if not better than many multistep autologous treatments in terms of effectiveness. This is a highly compelling argument for the use of Hyalofast.

The product has been implanted in over 6,000 patients and has multiyear clinical data on the knee and ankle and extensive preclinical and clinical publication supporting the safety and effectiveness of the procedure. This bodes well for the product as we advance Hyalofast into the clinic domestically. Interest in Hyalofast in the U.S.

and worldwide is high -- very high. We're excited about this and look forward to presenting seven papers in the upcoming 12th Annual World Congress of the International Cartilage Repair Society in Chicago in early May.

The scientific data being presented on Hyalofast highlights deposit clinical outcomes in patients being treated in multiple areas including knees and ankles. This data validates the distinct advantage that Haylofast has over other products as the only HA based scalpel for regeneration as well as the safety and effectiveness of the surgical procedure.

Several of the offers of these patients are influential in the ICRS, world renowned leaders in cartilage regeneration field and among the experts on our Haylofast Advisory Board.

In addition to the product concepts already discussed, external global collaborations continue to be established with academic institutions and compositions to develop programs that can produce additional candidates for our regeneration pipeline.

We see these opportunities to develop products in soft and hard tissue repair as well as in certain areas of disease treatment and prevention. Now let's turn to Slide Number 9. This is undoubtedly the most positively exciting time in the history of Anika.

We have great growth opportunities with our commercialized products and we're making progress with additional innovative pipeline products with potential in large commercial markets. We're well positioned to achieve our goal of 15% market share of the global viscosupplementation market by the end of 2018.

Monovisc is doing well domestically with the new J-Code having taken effect in January and our distribution partner Mitek has a distinct advantage in being able to sell both single injection and multi-injection products. Cingal and Hyalofast continue to advance toward commercialization.

We filed the ID for Hyalofast and we expect to begin a pivotal Phase III trial later this year. We expect to continue patient follow-up for the retreatment study of Cingal around the end of the second quarter and report safety data in Q3.

We continue to see potential for international revenue from Cingal beginning in 2016 with domestic revenue to file. We also see strong potential for Hyalomatrix, a leading wound care product in dermal area.

Our distribution partner is making excellent progress with reimbursement and we expect Hyalomatrix's advantages will enable us to take a meaningful share of this market. You can see that we have a strong development pipeline and a number of important milestones during the remainder of 2015.

Our track record provides a solid foundation for success and we plan to continue to execute well on our strategy and we also look forward to reporting our progress in the next earnings conference call. So with that, I’ll turn the call back over the Candice to take any questions that you may have.

Candice?.

[Operator Instructions] And our first question comes from the line of Jeremy Hellman of Singular Research. Your line is now open..

Hi good morning, everybody..

Good morning, Jeremy..

Hey certainly I wanted to be excited about here. I just wanted to reconcile something though as it relate to Monovisc and Orthovisc where Monovisc sales were up nice sequentially there, but overall orthobiologics were down sequentially.

Is that to imply that Orthovisc sales are coming down?.

Orthovisc sale is not coming down. Orthobiologics franchise year-over-year is up 3% sequentially down and as previously discussed because of our distributor modeled business there is lumpiness in terms of quarterly revenue. Part of that is also related to the inventory reset that we discussed earlier.

So in short summary, the Orthovisc end user revenue is increasing and the Monovisc share is increasing in the market space as well to close to 3%..

Let me -- I think you understand, but let me make that even simpler. Our total revenue with these products we essentially get paid twice. We get paid when they take the product equivalent to roughly a transfer price and then we get paid when the sell the product. So the end user sales we talk about we're doing extremely well.

Orthovisc continues to grow and Monovisc is picking up nicely.

It’s the transfer of the product that’s related to their inventory situation that is having an impact on our growth rate and when we finally clear through that in the third quarter, then we're going to see a nice pick up in that area and there has never been a problem in end user sales area..

Okay. Thanks for that clarification. That's helpful and then one follow-up for me, just on single, FDA usually gives a PMA update within 45 days, it looks like they've gone past that deadline and when you talk about the timeline being end of Q2, is that kind of refer that you might to go down the drug pathway with those..

No, I wouldn't reside to it at all. Fundamentally, we're in discussions with the FDA as to what direction they should take. We still -- they've read part of our submission and I would characterize those discussions as very productive. They haven't refused to do anything nor have they accepted to do anything.

So they're not really -- that 45-day thing is almost a little bit irrelevant given this particular situation. We firmly believe and we continue to believe based on consults we have ex-FDA and our own perspective that this is ultimately going to be reviewed as a medical device, not as a drug. It's a difficult supplementation product.

So we're going to -- we're standing by that position and at this point we have no reason to suspect that we won't prevail..

Okay. Thanks for that clarification and color. Good luck, guys..

Thank you..

Thanks..

[Operator Instructions] And our next question comes from the line of Tim McCandless of Asymmetry Global. Your line is now open..

Good morning, Chuck and Sylvia. I just wanted to come back to the Monovisc end user sales. As you mentioned end user sales were up 41% sequentially, you mentioned the share gains on the Orthovisc. So could you just come back in trying to understand the inventory reductions, those have spanned over three quarters now.

I am just trying to true up the positive end user sales with the continual declines on the inventory side..

Right, let me maybe take a minute to explain some of the fundamentals that Chuck already mentioned, but I'll add a little bit more color hopefully it will provide better perspective.

The transfer price that we receive from Mitek on product shipment and the royalty that we receive based on their end user sales, on a normal basis, is about 50-50 split roughly. So on an annual basis, in 2014 revenue from Mitek was approximately 70% of total revenue.

So you know that the Mitek revenue in total is about $53 million, $54 million and on normal basis, half of it is product, half of it is royalty.

The inventory reset that they decided to implement is roughly about a 50% reduction of their targeted on-hand inventory level and basically the impact is for 2015 the overall for the full year, the overall inventory purchase from us to them is roughly flat and from a royalty standpoint, which is based on the end user sales and based on the increase in share, we expect to see a 20% plus royalty revenue increase and that explains the reason why we're not having a better overall product revenue increase.

Now the decline that you're referring to comes in with timing. As I mentioned earlier, in Q1, Q2 and Q3 of last year, Mitek was building up inventory versus in 2015 Q1, Q2 and Q3 they are adjusting their inventory down.

So from a year-over-year standpoint, the inventory purchase from us is declining and it's offset by the royalty based on the end user sales. So there is the overall inventory adjustment and there is also quarter-by-quarter impact based on the timing of when they build up inventory last year and when they're offloading inventory this year.

So hopefully that helps to clarify the situation better for you..

That does and jus to true-up with your guidance, so I think if we look at product sales in Q1 were up about 8%, I think if I heard correctly you said that Q2 and Q3 product sales should be about flattish. So then to get to your greater than 10% product sales for 2015 for the year would imply Q4 growth of greater than 36%.

I just want to make sure I am at least thinking about that correctly?.

Taking the Q1 actual and assuming roughly similar levels of product revenue for Q2 and Q3, I think Q4 if you do the math correctly will be in the 30% range and that is primarily the results of the timing of when the inventory upload and offload happen between Q1, Q2, Q3 of last year versus Q1, Q2, Q3 and they're going in a complete opposite direction even though the underlying royalty is improving..

Got it. And then just one last question on -- just want to make sure I understand the commentary around Cingal, so following up to Jeremy's question, so we're past the 45 days, it's still a discussion, which you believe will ultimately will be successful on.

Is that mean right now that you are filing an FDA request for designation, just to confirm that you will be able to file [CD] [ph] or can you just give us a little bit more color. I am quite sure -- I don't quite understand the delay in the acceptance. Thank you..

We're -- probably the next step is going to have a discussion with the office of combination products and whether or not an RF you need to file we'll see. Please keep in mind though that what I said. We strongly believe this is viscosupplementation product.

I want to make -- I want to also talk about the Cingal results and say something and this is important to consider. I talked about the level of clinical benefit and pain relief. The FDA has been known to -- after the approve products set the bar of the last approved product.

So if that practice continues, the power of that Cingal trial will set a pretty high bar for any other product that hopes to get approved as a viscosupplementation. I know you can't fully realize that because you don't work in the field, but that is a big deal and that has ramifications for other people that C2 have products to treat osteoarthritis..

Thank you. And I am showing no further questions at this time. And now I turn the conference back over to Dr. Charles Sherwood for any further remarks..

Thank you, Candice. And thanks to all of you for participating on the call. I reiterate that at least we're here very excited about what's going on and we very much look forward to reporting to you in the next conference call. Thanks for your interest in Anika..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Have a great day everyone..