Sylvia Cheung - CFO Charles Sherwood - CEO.

Joe Munda - First Analysis Jim Sidoti - Sidoti & Company Mike Petusky - Barrington Research.

Good day, ladies and gentlemen, and welcome to the Anika Therapeutics' Fourth Quarter and Full-Year 2017 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 call over to Sylvia Cheung, Chief Financial Officer. Please go ahead, ma'am..

Thank you, Christi. Good morning, everyone, and thank you for joining our fourth quarter and full-year 2017 earnings call. With me on the call today is Anika's Chief Executive Officer, Dr. Charles Sherwood.

During today's call, Chuck and I will review our fourth quarter and full-year 2017 financial results and key business highlights, which were summarized in our earnings release issued yesterday. A copy of the earnings release is available in the Investors Relations section of our website at anikatherapeutics.com.

In addition, a slide presentation is posted on our website in the Investor Relations section, under the Events & Presentations tab. We invite you to take a moment to open the file and follow the presentation along with us. Please turn to Slide number 1.

Before we begin, please remember that certain statements made during this conference call constitute forward-looking statements as defined in the Securities and 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. Please also see our SEC filings for more information about factors that could affect our results. I'll now turn the call over to our CEO, Dr. Charles Sherwood.

Chuck?.

one, expanding the international presence of CINGAL and MONOVISC, with MONOVISC approvals and related commercial launches in India, Australia, and Taiwan; two, advancing our product pipeline with completion of patient enrolment in the CINGAL Phase III clinical study, and continued progress on enrolling patients in the FastTRACK Phase III HYALOFAST study for cartilage repair; three, completing all planned activities related to the transfer of our solid HA manufacturing operations to our Bedford headquarter in the fourth quarter as designed; four, implementing a global ERP system which will allow us to optimize processes and which will provide the needed system capability for direct commercialization and future growth; and finally, strengthening our leadership team through the appointments of Joseph Darling, as President, Steven Chartier, as Vice President of Regulatory and Clinical Affairs, and Thomas Finnerty, as Chief Human Resources Officer.

These seasoned and talented professionals bring decades of experience from commercial stage companies across various healthcare sectors, and with other additions to come are critical to the success of our expansion. Please turn now to Slide number 7. As you can see we are at a strong inflection point in Anika's evolution and growth.

Our entire leadership team is focused on four strategic areas in 2018 to drive sustained growth and create shareholder value. Focus area number one is aggressively executing all activities leading to the FDA approval of CINGAL, a game changing fast and long-acting first of its kind combination VISCO supplementation treatment for osteoarthritis.

Second, is expanding our global commercial footprint to drive increasing international growth of MONOVISC and CINGAL. Third, is building the infrastructure to directly commercialize CINGAL in the U.S. under leadership of our newly appointed President, Joseph Darling.

To this end, we have formulated the direct commercialization framework, and during 2018, we will complete the design of a national based sales organization oriented to maximize and optimize our penetration into the market. This effort is to ensure that we are deploying our sales resources in a manner that is efficient and effective.

The sales organization will be deployed immediately upon approval of CINGAL in 2019.

As discussed previously, our plan is to partner with a contract sales organization, publicists, and several other best-in-class service providers that we will use to complete perpetuity work on the pricing, reimbursement, and market access fronts, as well as defining an optimal structure of third-party logistics.

This framework will allow us to rapidly drive market uptake and adoption by the end user. And the fourth is driving new product innovation advancing our orthobiologics and regenerative medicine product candidates through clinical development. Our goal is to ensure a steady cascade of new product development and launches over the next several years.

As we reflect on 2017, and look forward to the multiple commercial, clinical, and regulatory milestones on the horizon, I hope that you will share a sense of renewed enthusiasm in anticipation for the next phase of Anika's growth. Historically, we have reliably delivered on our expectations with limited control over our commercial operations.

Now, as we are placed to oversee the full commercial process and as we close in on the launch of CINGAL in the United States, we are confident that we can maintain our legacy of trust, execution, and strong financial performance, and couple this with the exciting dimension of more rapid revenue expansion.

I will now turn the call back over to Sylvia to review our financial results.

Sylvia?.

Thank you, Chuck. We made substantial progress executing on our growth strategy in 2017, as evidenced by our 10% total revenue growth, 22% international orthobiologics revenue growth, continued strong demand for MONOVISC, and rapid advancement in our CINGAL Phase III study. Please turn to Slide number 8.

Total revenue for the quarter increased to $29.4 million compared to $28.7 million for the fourth quarter of 2016. Revenue growth for the quarter was driven primarily by MONOVISC which delivered worldwide growth of 21% year-over-year.

As we had expected, MONOVISC continued to gain worldwide market share in the quarter as the market is migrating towards a more convenient single injection treatment. CINGAL also performed very well in 2017 delivering revenue growth of 86% year-over-year for the quarter and 129% for the year.

For the full-year of 2017, product revenue increased by 5% excuse me to $108 million and the total revenue was up 10% year-over-year. This total revenue result is right in line with the guidance we've previously given.

Our current revenue level would translate to well over $300 million in product revenue, if we commercialize our product ourselves directly in the market. In 2017, for the full-year, the revenue growth was driven primarily by global expansion of MONOVISC, and growth of CINGAL in Europe and Canada.

MONOVISC worldwide increased 29% for the full-year of 2017 and international orthobiologics grew 22% for the year due to global expansion efforts and the demand for our products.

Domestically, MONOVISC and ORTHOVISC continued to maintain a market leading position and we expect that MONOVISC will continue to gain share, as the growth of the single injection treatment continued to outpace the multi-injection options. We delivered a strong gross margin of 75% for the full-year of 2017.

Total operating expenses in the quarter were $19.7 million compared to $16 million in the fourth quarter of 2016. The year-over-year increase was due primarily to the planned increase in research and development spending to advance our product pipeline as well as our expanded operational initiatives.

Both are focused on developing the next-generation of products that will deliver sustained growth and value for shareholders. Income from operations was $9.7 million in the quarter compared to $12.7 million in the fourth quarter of last year.

Income from operations for the full-year was $45.7 million compared to $50.6 million for the full-year of 2016. The year-over-year decline for both periods was primarily due to the increase in research and development spending.

Net income for the quarter was $8.1 million which was approximately the same level we achieved for the fourth quarter of 2016. Net income for the quarter included a one-time tax benefit of $2.3 million resulting from the recently enacted U.S. Tax Reform legislation. We view tax reform as a favorable development for our business overall.

Net income for the full-year of 2017 was $31.8 million, a decrease of $0.7 million for the full-year of 2016, primarily due to increased R&D investments, increases in personnel costs, inventory, and accounts receivable related charges.

Diluted earnings per share were $0.53 for the quarter compared to $0.54 per share for the fourth quarter of last year. Diluted earnings per share for the year were $2.11, down $0.04 from the full-year of 2016. We ended 2017 with approximately $157 million in cash and investments on our balance sheet, up $32 million since the end of 2016.

Our cash deployment strategy remains focused on sustained innovation to accelerate our revenue and earnings growth in the years ahead. First, we intend to continue R&D investment to execute on our CINGAL, HYALOFAST Phase III, and other preclinical activities, and to prepare for and commence our tennis elbow post-market clinical study.

Second, we will continue to make investments to build our direct commercialization capability in the United States. Third, we will continue to evaluate strategic M&A to augment our organic growth. Turning to guidance for 2018, we expect total revenue growth for the full-year of 2018 to be around the mid-single-digit percentage range.

Licensing milestone and contract revenue is expected to be $5 million for the year.

We expect stronger product revenue growth for the second half of the year and total operating expenses for the full-year of 2018 are expected to be in the high $80 million range which includes an $8 million to $10 million of costs associated with pre-launch activities to support the successful U.S. commercial launch for CINGAL.

We expect approximately one-third of that pre-launch expenses to be incurred during the first half of the year and the fourth quarter will have the highest proportion of that spending. Our effective tax rate for the full-year of 2018 is expected to be in the high 20 percentage range. This reflects a favorable impact from the tax reform.

While the tax reform does not fundamentally change our capital allocation priorities, it does enhance our ability to deploy capital and support our growth strategy. We plan to reinvest the tax savings through innovation and advanced technologies in order to accelerate revenue and earnings growth in the years ahead.

Capital expenditure are expected to be approximately $10 million for the full-year of 2018. In summary, 2017, was a year of significant commercial, operational, and financial achievement.

We delivered double-digit revenue growth, expanded MONOVISC and CINGAL into new high growth regions, we completed enrolment in our CINGAL Phase III study, and we strengthened our leadership team and infrastructure to support our future growth.

We have entered 2018 with clear indicators for growth and we are well-positioned to create near and long-term value for our shareholders. Thank you and we're now happy to take your questions..

Thank you. [Operator Instructions]. Our first question is from Joe Munda of First Analysis. Your line is open..

Good morning, Chuck and Sylvia, can you hear me, okay?.

Yes, we can. Good morning, Joe..

Yes, we can. Good morning, Joe..

Real quick. I will ask maybe two and then hop back in the queue here.

Sylvia first off on gross margin in the fourth quarter, can you give us some color on the decline there, down to where it is, sequentially you are off of -- while year-over-year and sequentially and perhaps maybe if you could give us some color on the pricing regarding MONOVISC and ORTHOVISC? And then Chuck might follow-up different topic, can you give us some color on the rotator cuff application here, totally new area, we had talked in the past possibly about HA injections in the arm or in the shoulder, if you will, and just a little bit more color, how this all came about and your thoughts and size of the market or opportunity there? Thank you..

Sure. With regards to product gross margin, I would like to state that 75% for the year is a strong figure from a product gross margin standpoint. It does represent a 2% decline from the year before on a full-year basis. There are really two main factors earlier in the year we have some inventory charges related to changes in component parts.

So we took some period costs or expenses in the first half of this year which we commented on in prior earnings call. In the fourth quarter, we incurred initial start-up activities as well as validation runs for our new solid HA production which we recently moved from Italy, from a contract manufacturer to our plant.

So as part of that initial start-up activities, we incurred some costs which resulted in the Q4 and a full-year margin levels that I discussed earlier. So I think that answers the first part of your question. The second part related to pricing, I presume you're referring to ORTHOVISC and MONOVISC in the United States.

Based on the data that we have seen, it appears that for the full-year 2017 ORTHOVISC pricing is basically flat year-over-year and MONOVISC remains stable, and as you know, MONOVISC is still priced at a premium comparing to other single injection products and achieving good growth rates at that pricing for us is encouraging.

So I hope those answers your questions and I'll turn it over to Chuck to address the remaining part..

Yes, Chuck has a little comment on ORTHOVISC and MONOVISC, Joe, you have been around long enough with Anika that you remember several years ago, I was talking about before MONOVISC came along that I thought that MONOVISC would eat into the growth of the ORTHOVISC and it didn't happen, it didn’t happen, and then finally it did happen.

So what I think now going forward is I believe that although the numbers don't see a magnificent trend yet I do believe that the trend will show itself in the next year or two where the single injection treatment becomes much more favored over the multi-injection treatment.

So I'm prognosticating a little bit but I'm usually right just not right with the timing, but I do see that going forward and generally for us that's not a bad thing because of the profitability and the pricing on MONOVISC and to come CINGAL. So that's a little commentary on ORTHOVISC and MONOVISC.

Now, you had a question for me on rotator cuff, I believe..

Yes..

So the shoulder is a complicated joint. There's a lot going on there. And at one point, we, in conjunction with Mitek, we looked at a clinical trial where we have injected ORTHOVISC into the shoulder joint. We didn't talk about that very much because actually in all honesty maybe the trial could have been run a little better.

I'm not hanging them out to try but the trial was run by Johnson & Johnson not us. And so while we had some promise and it looked like maybe there was an indication there, there certainly wasn’t enough data to support making a PMA application. That was an injection.

Rotator cuff product that we're working on now is to repair a tear and it's an implant and it's using our HYAFF technology. So it's really a totally different thing. We're just starting to take a look at what the market potential is, but seems like there's probably maybe in the U.S.

250,000 rotator cuff surgeries and I think it's hard to say what the pricing would really be, but it's probably a market right now of a couple hundred million dollars. I think the key though is as we're starting to see with some of the cartilage repair products is when products work, the market grows.

The market maybe a little bit less because if there's not a real viable successful product. So we're pretty, pretty high on that product, I think it fits right into our regenerative medicine portfolio, uses of HYAFF technology and we can do some pretty unique things with that technology..

Okay.

Chuck just one real quick follow-up I mean any idea if MONOVISC or how much of it, any percentage if you can, beside for its off-label usage, is it being injected into the shoulder, I've heard anecdotal stories from orthopedics who have been doing the injections off-label, I'm just wondering if you're hearing some of the same stuff?.

Honestly, Joe, we're not hearing a lot. I guess if you were going to inject something into the shoulder, the first trial we did, I think vial injections pretty hack, it was like almost eight millimeters. I don't think you need to inject that much but maybe the quantity of HA is important.

So probably if it is being used off-label, it probably is the MONOVISC product not the ORTHOVISC product..

Okay, thanks. I will hop back in queue..

Thank you. [Operator Instructions]. Our next question is from Jim Sidoti of Sidoti & Company. Your line is open..

Good morning.

Can you hear me?.

Yes, sir..

Yes, we can..

Great.

You indicated there will be about $5 million of milestone payments in 2018; can you give us any sense on the timing of that and will that all be in one quarter?.

It will all be in one quarter. This is the next sales threshold milestone as part of the MONOVISC agreement with Mitek and we expect that will be achieved towards the end of the year based on the current sales projection and run rate..

Okay. And then, you indicated that operating expenses to be in the high $80 million range up from 2017.

Can you give us a little more detail on how that breaks out; is that primarily an increase in R&D or sales and marketing or is it across the board?.

Right. About $8 million to $10 million is related to the pre-launch activities for U.S. CINGAL which Chuck has provided some helpful information on our goal and the types of activities that we are looking to engage in. So I think that is a significant chunk of increase to the SG&A lines.

The remaining piece will be primarily in R&D as we continue to accelerate the enrollment on HYALOFAST.

We talked about the post market or post approval study for the ORTHOVISC-T the tennis elbow study which will commence in the second half of the year, and we also have the CINGAL three-month extension study which is a cost that we will be incurring this primarily this year based on the timing of the enrollment of patients.

In addition to that, we had talked about other development programs like the rotator cuff as well as some research activities including the newest collaboration activities with University of Massachusetts and Liverpool University. Cost of goods sold is expected to increase and that's primarily driven by the fact that our revenue will be increasing.

So the combination of all those factors are leading to the high $80 million range that I shared earlier..

Okay. Then the last question --.

I was going to add a little color to the R&D spend, if you're interested..

Sure, sure..

Okay. In 2017, we really bumped up our R&D spend, so I don't remember the exact figure but it was around 16% or 17% of revenue. We see 2018 as operating at that level as well as we make -- Sylvia tells me it's a little less so..

No, no, 17%. 17%..

But and so -- we are operating this call, I'm in Italy, she is in the U.S., so seems little disorganization here, but anyway take my explanation as semi-quantitative.

So basically that we're -- we are making investments in our company in R&D at a pretty substantial level because one, we have a lot of internal opportunities; two, a lot of those opportunities are really getting into the developmental phase where we're going to do some animal work or into the clinical phase where we're going to have to do trials.

So that's a pretty big investment that we're making. We made last year, we're continuing at this year. The other big investment we're making in the company here qualitatively is in obviously the commercial development area.

So we're going to spend a lot of money but we believe that this is a great investment to support the future growth of the company..

Okay.

And last question CapEx Sylvia, can you just repeat what you said CapEx is expected to be in 2018 and let us know what it was in 2017?.

CapEx is expected to be around $10 million and for 2017 is roughly the same similar level..

Thank you. Our next question is from Mike Petusky of Barrington Research. Your line is open..

Hi, good morning guys. A few questions.

Sylvia, I didn’t catch it if you gave it but gross margin guidance I mean are we looking kind of low 70s or 70 or might it be a little bit below 70 in this year?.

We expect that gross margin to be around mid-70% range while we focus on process efficiency gains and there are as we've talked about before, we have multi-year cost reduction initiatives and we always look for ways to improve upon our margins.

In 2018, keep in mind that the recent manufacturing transfer in the ERP project will introduced incremental depreciation and that's roughly about $2 million. So that's one of the reasons why we're maintaining at the mid-75 -- around mid-70% range and obviously working towards improving that.

Longer-term we expect that in 2019 and going forward, product gross margin will increase as a result of realizing the cost reduction initiatives, but more importantly the direct CINGAL commercial efforts will certainly provide an uplift on our product gross margin..

Okay, all right.

And then that kind of transition me into the next question, are there additional international approvals that you expect for CINGAL in 2018?.

We do expect adding additional distributors in Europe where we already have approval.

In terms of key countries, there are certainly areas that we're working on but no particular geographies that I can give you an expected timeframe, but we are looking at from a CINGAL standpoint well over 30% from a growth, from that particular franchise which as I mentioned earlier growth was very strong in 2017 comparing to the year before..

Okay.

So you expect to be selling in additional countries through distributors?.

Correct..

Okay, all right. Perfect..

I think one country of note is we've been talking to our partner Australia and we're ready to go with the submission. So I think it's pretty likely will be able to add that as a territory where we can sell CINGAL in 2018..

All right, terrific.

And then just a last question on HYALOFAST, can you remind me what your goal is there for total enrollment and where -- roughly where you guys stand at this point patient enrollment?.

Our goal is 200 patients by the end of that year. We are currently over I think between a quarter to a third of our way there. It took us a little bit long, longer time than planned to initiate and get the U.S. site started but they're now underway, I believe we've got close to 10 sites up and running in the United States.

And once the site and site initiation starts, the enrollment will start to accelerate. And we’re also looking for ways to help our investigators and site to speed up the enrollment and there are some creative measures that we can take. So I think that the spending and the enrolments will accelerate as we move along 2018..

Yes, I would just add a little bit, it looks like kind of a hockey stick performance that we're expecting. But it takes a long time to get the sites up and running go to RRBs, do the training, do all of that, and the sites that we picked seemed to have access to patients.

So we still believe that even though we're only a third of the way there, we're going to make the target by the end of the year. We've had a few part of the difficulty is the comparison is microfracture and there were a lot of sites where they thought it was unethical to look at anything but the smallest of lesions for the use of microfracture.

So we really have to select the sites carefully and it was arduous process believe me, but we're pretty much fully bearing like I said we strongly believe that we're going to hit that target by year-end..

Thank you. Our next question is from Joe Munda of First Analysis. Your line is open..

Hey Chuck, just real quick follow-up on the CINGAL trial. I think last we spoke there were some questions around the primary endpoint or co-primaries steroid at six months, co-primary steroid at six versus MONOVISC at couple of weeks.

If I recall I think at the time you were still negotiating with the FDA, any update there you could provide us as far as the trial is concerned?.

We're still negotiating. But the end points are CINGAL versus steroid at six months, CINGAL versus MONOVISC at three week. So we have to show the short-term benefit and then we have to show the long-term benefit. At this point, we hit both of those and while we didn't have the steroid in the first trial but the data looked pretty good.

So I think we're pretty confident, we always try to negotiate away from co-primaries because we just don't like co-primaries and the FDA loves co-primaries. So whether we end up in a co-primary or we end up in a primary and number one secondary it doesn't really matter that much. Hopefully the FDA is not listening to this call..

Okay. Thanks, Chuck..

Thank you. Our next question is from Mike Petusky of Barrington Research. Your line is open..

Sorry, I had one more.

Sylvia this maybe just kind of semantic but you characterized ORTHOVISC pricing as flat and MONOVISC as stable and I guess I'm just wondering what -- I think I understand what flat means but stable means what a small decline sort of single-digit decline or can you just talk about that?.

Stable actually means it's based on the numbers; it looks like up a little, so I'm characterizing it as stable..

Okay, all right. Well, very good. Thank you..

You're welcome..

Thank you. And that does conclude our Q&A session for today. I'd like to turn the call back over to Dr. Charles Sherwood for any further remarks..

Thank you, Christi, and thanks all of you for your time today. We're pretty proud of our achievements and progress in 2017 aimed at acceleration our revenue and earnings growth in the years ahead.

The next 12 to 18 months promise to be transformational for Anika as we usher in the new wave both product innovation under our new and seasoned leadership team. Indeed, there are costs that come along with our strategic evolution.

Those near-term costs will ultimately be seen as a modest price for a company that can gain far greater control and visibility out of these commercial operations and a product line up that we anticipate will drive a doubling of revenues within three years or less.

A fundamental change is well underway at Anika and we're all encouraged of the progress to-date and we're also very anxious to deliver on the promise of this new wave of innovation and commercial strength.

So we look forward to updating you and providing additional detail and color on these products and our commercial plans we take them to market at our Analyst and Investor Day which will take place on April 3 at NASDAQ headquarters in New York City.

And we certainly hope that many of you can attend and we look forward to reporting our next quarterly results sometime in April after the Investor Day. So thanks for your support in Anika and have a great day..

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