Good day, ladies and gentlemen and welcome to the second quarter 2010 Anika Therapeutics earnings conference call. My name is Josh and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) I would now like to turn the presentation over to our host for today's call, the Chief Financial Officer, Kevin Quinlan. You may proceed, sir.

Thank you, Josh and good morning, everyone. If you have not received a copy of the Anika news release, which was issued yesterday after the market closed, or would like to be added to our contact list, please contact Sharon Merrill Associates at 617-542-5300. The news release is also posted in the Investor Relations section of Anika Therapeutics' website at anikatherapeutics.com. Also, I want to mention that we have slides posted on the Anika website that illustrates some of the financial information we will be discussing during today's call. These slides can be found on the Investor Relations section of the website under the 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 statements as defined in the Securities Exchange Act of 1934. Words such as will, believe, appear, plan, expect, anticipate, forward, seek, continue, target, goals, objectives, on track, intend, pursue, outlook, as well as other expressions which are predictions or indications of future events or trends and which do not constitute historical matters, identify forward-looking statements. 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 described in the forward-looking statements as a result of a number of factors, which include those set forth in last evening's press release and the company's SEC filings. Please move to Slide 3 as I turn the call over to Anika's President and Chief Executive Officer, Dr. Charles Sherwood.

Thank you, Kevin. Good morning, everyone and thanks for joining us today. This was a solid quarter for Anika. We made good progress executing on our key goals and driving revenue growth. Total revenue increased 52% year-over-year, while product revenue was up 56%. On an organic basis, that is, excluding FAB, our product revenue increased 24% from the second quarter last year, extending our record to 12 consecutive quarters of product revenue growth compared with the same quarter of the previous year. Our net income for Q2 2010 increased 12% from the second quarter last year, reflecting the dilutive effect of the FAB acquisition. One of our six goals for the year is to cut FAB operating loss in half and we made progress toward that goal in Q2. Compared with the first quarter of 2010, FAB's revenue grew 70%, that's 70%, and operating loss declined 39%. I'll have more to say about the FAB integration and the advances we made on our other goals in the second quarter after Kevin's financial review. And then we will both be happy to take your questions at the end of this presentation. Kevin?

Thanks, Chuck. Please turn to Slide 4 in the presentation. Total revenue in the second quarter of 2010, including FAB, grew 52% from the second quarter last year to $14.5 million. Consolidated product revenue grew by 56% and as Chuck said, organic product revenue growth for Anika, excluding FAB, was 24%. This revenue growth was driven primarily by the continued strong performance of our joint health franchise. As you can see on the slide, FAB is also contributing to our total revenue in additional therapeutic areas including advanced wound care and surgical products. As you can see on Slide 5, revenue in our Orthobiologics franchise, which includes our joint health products, increased 38% to $7.7 million from the second quarter of 2009, reflecting strong domestic sales of ORTHOVISC. Domestic Orthobiologics sales were up 31% and international Orthobiologics sales, including FAB, were up 58% and they were up 26% excluding FAB. Slide 6 illustrates the impact of this revenue growth on the other lines in our income statement. Our second quarter consolidated product gross margin was 57% compared with 62% in the second quarter last year. The decline in this quarter largely reflected the addition of FAB products into the overall mix. On an organic basis, Anika's gross margin was down slightly from the second quarter last year at 60%, due largely to added inventory reserves. As I have mentioned on previous calls, the transition of manufacturing operations to our Bedford facility will result in a slight decline in margins for 2010 compared to 2009. This is because we will be manufacturing in both our Woburn and Bedford facilities for a significant portion of the year, and as a result, experiencing some inefficiencies during the transition. Net income for the second quarter of 2010 grew 12% to $1.1 million or $0.08…

Thank you, Kevin. Slide number 10 outlines our six key goals for 2010. The first of these goals is to increase domestic and international sales of ORTHOVISC, and ORTHOVISC continued to perform well in the second quarter. Anika's revenues in United States remain particularly strong, up 31% from the second quarter of 2009. Sales in Europe remain somewhat depressed due to the slow economy in Europe and the competitive environment for this class of products there. And while international sales of ORTHOVISC were up 18% for the quarter, year-to-date, they are still off 7% from last year. We clearly saw the impact of the expansion of our EU distribution over the past year in sales of MONOVISC, which increased 55% from Q2 of 2009. We are continuing to pursue additional rest-of-world distribution opportunities for both ORTHOVISC and MONOVISC and we anticipate further growth in international sales of these products in the second half of 2010. Moving to the second bullet on Slide number 10, we continue to make progress towards our goal related to our U.S. launch of MONOVISC. A meeting with the FDA took place in May and focused on a discussion of our pivotal clinical study results. They raised several questions and asked us to perform some additional analyses. We expect to submit our responses to the FDA's questions in early September. Our goal remains to directly commercialize MONOVISC in the United States and we have made good progress on our infrastructure development plans. As we announced last month, Anika has been served with the complaint alleging patent infringement with respect to MONOVISC by Genzyme Corporation. Although the patents at issue have a very short remaining life, we intend to vigorously defend the lawsuit in our MONOVISC product franchise and we believe MONOVISC does not infringe any existing…

(Operator Instructions). And our first question comes from the line of Yan Wang [ph] of Greencoast Capital. Yan, you may proceed. (Operator Instructions). And we will take a moment to compile questions. And our next question comes from the line of Ali Motamed of Boston Partners. Ali, you may proceed. Ali Motamed – Boston Partners: Hi, nice quarter. I was wondering if you could talk a little bit about Bausch & Lomb. That's something that's of some concern to me and I know the contract comes up here.

Sure. The – as we stated, we are still actually in negotiations with this, but it's apparent that the contract will be ending sometime in 2011. We do expect a – an extension, but at this point, I can't tell you the exact financial impact, because we are – we expect that we will have revenue in 2011, but we don't know how much yet. But I guess the major point is that in the long term, it is going away as a contract for the company. Ali Motamed – Boston Partners: So can we start talking about it and kind of straightening it out sooner rather than later, because as we start – as we start progressing into the future, there is a lot of good things in the company going on and it will be nice to be able to identify the progress that you are making against sort of the good assets of the company and not have that and for example, HYDRELLE and these things be distracting us so much? So maybe as we go forward, you guys could take a bit of a – maybe a more – I know perhaps it hurts results now, but identifying sort of what that contributes or what it maybe, just a thought there?

Yes. I think when – after we have come to some – to a conclusion with Bausch & Lomb in a future call, we can certainly update the situation and paint a more exact expectation as to what we think it's going to mean.

Yes, let me make – Ali, let me make one additional point. This is Chuck Sherwood. We do have two additional ophthalmic partners and we will continue to distribute ophthalmic viscoelastics through those partners. They are very small compared to Bausch & Lomb, but the Bausch & Lomb arrangement was somewhat restrictive on us in terms of adding additional partners, in terms of potentially developing any new products. So there are some other opportunities that will become available to us once this relationship is terminated. To a point that you made, however, our focus will continue to be in the orthopedic/joint health space and we look at some of this ophthalmic business as opportunity, but we have been in this business manufacturing and developing these products for over 20 years and this is essentially where Anika started. So we do know a lot about the space. So we will take your comments to heart and we will look forward to trying to be clear about where our focus and real opportunities are in subsequent conference calls and communications with investors. Ali Motamed – Boston Partners: Perfect. And then one other thing. There is some amortization expense certainly on the acquisition that impacts us. What – excluding that, what kind of loss do you think that the quarter had because of the acquisition, so whether contribution loss – true contribution loss?

Ali, are you asking me what was the impact of amortization? Ali Motamed – Boston Partners: No, I know what the impact of amortization was. I – my understanding was we would probably be losing a couple of million bucks even – excluding amortization related on the first couple of years. But then you also talked about the progress you are making. So I am wondering sort of where we sit with regards to that.

Yes. Well, I think the – in terms of the impact on FAB, they were close to breakeven, if you exclude the amortization cost on them. So we are making substantial progress on making that business more efficient, as well as looking at expanded commercial opportunities, because we need to do both; we need to increase revenue, as well as be more efficient in our spending. Ali Motamed – Boston Partners: Thank you very much.

And our next question comes from the line of Larry Anderson of Raymond James. Larry, you may proceed. Larry Anderson – Raymond James: Nice quarter, men. Better than I thought it would be at this point.

Thank you. Larry Anderson – Raymond James: Thank you for the additional comments on the patent infringement issue. I know you are limited in what you can say there, but in addition to that, could you briefly summarize what patent protection MONOVISC has been granted?

Primarily, the MONOVISC patent or the MONOVISC product is covered under some of the other patents that we have that cover some of the basic chemistry used to make that product. So it's not specifically covered by a use patent, but more of a basic chemistry and composition of matter patent. So I – the Genzyme – not to go too far, but the Genzyme patent goes back to really the old Biomatrix company that they acquired and it's one of the original patents that Biomatrix had, which is – as I pointed out, has very little life remaining on it. And we do not believe that it at all relates to our MONOVISC product. Larry Anderson – Raymond James: Very good.

And our next question comes from the line of Yan Wang [ph] of Greencoast Capital. Yan, you may proceed. Yan Wang – Greencoast Capital: Good morning, everyone. Congrats on the successful quarter.

Thank you. Yan Wang – Greencoast Capital: My first question, Chuck mentioned that Anika is going to move the facility – the FAB facility to U.S. I am just wondering whether this move will be to existing facility or there will be more capital expenditure.

Okay, let me be a little clear on that. We are not going to move the FAB facility to the United States. And the FAB facility consists of R&D people, finance people, the – all the people necessary to run the operation, but it also consists of a very sophisticated laboratory and manufacturing function to make the tissue engineered products that are cell-based. We cannot move that; that will stay in Abano Terme. Many of the other FAB products are contract-manufactured by FAB's former parent Fidia Farmaceutici and it is these products that we plan to move to the United States. So then in essence, Anika will be the contract manufacturer for FAB. Yan Wang – Greencoast Capital: Okay. I would like the – I would like to hear some estimate on the profit margin for this and next year, given the changes of R&D and SG&A expenses.

Yes. The – specifically, you are saying on the SG&A and the R&D expenses? Yan Wang – Greencoast Capital: Sure.

Yes. So I think we – as you know, the R&D expenses are significantly down this year versus last, mainly because of the completion of the MONOVISC clinical trial. And we believe that as we are moving forward on approvals for additional products, we will have some modest increases in the R&D area relative to the levels that we are at right now. On the SG&A front, we do have some costs that are in there related to the integration. And so as we complete the integration process, a little bit of that will go away, and I would model the SG&A only to have modest increases from the current levels and not the significant increase that you saw this year versus 2009. Yan Wang – Greencoast Capital: Thank you. My last question is related to the product. So is it fair to say that with the FAB integration, the regenerative products likely to be the next growth driver for Anika? If so, I would like to hear some management's expectations of the timing and the magnitude of the revenue impact. And also, I would like to hear some updates on the development of CINGAL. Thank you.

Okay. I think that the – some of the regenerative products, namely the cell-based products that I spoke about in the presentation – I'm sorry – okay, they have some real long-term potential for revenue generation. It's a challenging regulatory environment, both in Europe, in the rest of the world, and also in the United States. And one of the things that we are trying to understand and get our heads around as we integrate our R&D product portfolio is exactly what are the hurdles to try to think about bringing some of these products into the United States through the approval process. And quite frankly, with all the things that we have going now, we have not made a huge amount of progress in that area. So our focus primarily for these cell-based products now is in Europe, where they are operating under approval status, which may change in the future, but is fine right now. Some of the other FAB products though that we think can add some real value and that we can get approved in United States are some of the orthopedic products and also the wound care products, which – advanced wound care products, which – many of which are already approved here, but aren’t being sold here at the current time because we do not have any mechanism to sell them. We don't have any direct sales force and really don't have an intention to generate one. And we are looking for a commercial partner here in the States and possibly in some other territories for these products as well. So that could be more of a short-term driver for revenue here in the company. But long term, we feel very positive about some of the regenerative products. Yan Wang – Greencoast Capital: Thank you. And also – thank you, I'll jump back to the queue. Thank you.

And at this time, we are showing no further questions available. Dr. Sherwood, you may proceed.

Is there one additional question from the –?

From Yan?

Yan.

And pardon me, I am showing that we have Yan that has dialed in again. Would you like to take that question?

Of course. Yes.

And Yan, you may proceed. Yan Wang – Greencoast Capital: Thank you. And this question is – I think – so, I would like to hear some update on development of CINGAL.

Okay. We strongly took a look at CINGAL in terms of our R&D portfolio rationalization and we are still going ahead to try to complete the final steps in the formulation and we are trying to develop our regulatory strategy as we speak. And it is our plan to move ahead with that product. I think things got somewhat delayed for various reasons, not the least of which was the acquisition and integration of FAB. But it is our plan to move ahead with that product. Yan Wang – Greencoast Capital: Thank you. It's very helpful. I have one last question regarding the MONOVISC. I – do we have a time expectation on when we can hear the decision of the litigation – the complaint? Thank you.

I don't know, it's frequently quite difficult to predict what's going to happen in any of these kinds of legal matters. I think that it's probably going to play out over time. I don't think it's going to reach a quick decision. Beyond saying that, I really can't give you any real useful time table. Yan Wang – Greencoast Capital: Sure. Okay. Thank you.

And our next question comes from the line of Gary Siperstein of Eliot Rose Asset Management. Gary, you may proceed. Gary Siperstein – Eliot Rose Asset Management: Hi, guys. Good morning and congratulations on a solid quarter.

Thank you, Gary.

Thank you, Gary. Gary Siperstein – Eliot Rose Asset Management: Chuck, starting out with the Orthobiologics franchise, what do you think accounted for the 31% increase in Q2 for our product? Did our distributor add salespeople or is it just getting more market share as time passes? I mean, could you – can you point to anything?

Gary, this is Kevin. I think they have just – they are continuing to just progress very well with the franchise and it's – they – it's not that they have added a lot of salespeople, but I think they are just getting the word out and penetrating the market further.

I think also they are making investments, they have done some campaigns. And if you look at a lot of – this is my personal opinion, not necessarily based on fact. But if you look at Johnson & Johnson in general, they sort of are a company that continues to gain momentum as they go. So they aren’t a company that goes out there very, very strong initially, sometimes they are cautious, but they do – if they believe in a product and a franchise, they work at it and they keep going and their goal is always to be number one or number two in the market space. So they are still very, very keen on ORTHOVISC and so far, they are doing a great job with it. Gary Siperstein – Eliot Rose Asset Management: Okay. Moving on to MONOVISC, can you give us a little bit more color on the questions from the FDA? This additional statistical analysis – what are they looking for? Why wasn't it anticipated? Was our package not complete? And you said you would get the (inaudible) them in early September. Do you think it is of such a level of significance, this added data, that it tilts the scale one way or the other?

No. In my experience, Gary, over however many years here, when you make a submission, typically 90-plus-percent of the time you get questions back. Almost never does it go through without questions. And they usually come depending on what kind of submission it is in the form of a deficiency letter – here's our questions. So we got a bunch of questions. Sometimes, the questions are trivial and as a matter of fact, some percentage of them are trivial. Sometimes, the questions are already in the submission that you provided to them and you just have to point that out. So this is really a mix and we got the questions very short time frame before the meeting. So the meeting that we had was primarily trying to clarify what their questions really were rather than answering any of these questions. We went back, took a look, and we understand what they are looking for now. And so, we want to make sure that the answers are – pretty much meet all of the needs so we don't get another round of questions. So we are not at all discouraged. Some of this is very normal and part of the process. Gary Siperstein – Eliot Rose Asset Management: Okay. But why is the – what is the reason then for the extending of the timeline if it's part of the normal process?

I don't quite understand your question. Gary Siperstein – Eliot Rose Asset Management: Well, I guess, because we made a June/July filing, we thought we would have an answer from the FDA in December and it seems like the –

No, no. We made – we sent in the clinical section, which is always the most controversial, at the very end of last year. So, they needed to get back to us within six months and we are hoping that we would have a meeting relatively early in the process; it when a little later because of scheduling concerns at their end. And now, we are addressing the issues. So maybe it's a little later than people had assumed, but it's kind of part of the process. So I – it took them a while to get through all the clinical material that we had and then get questions back to us. Gary Siperstein – Eliot Rose Asset Management: So do you expect an answer from them by March, for example, or can you put a month on it, the further south it could go?

It's – well, we certainly expect that we are going to get by year-end a much more definitive assessment of where we are. There is still the potential that we are going to end up being in front of the Advisory Panel. And I know there are a few meetings of the Advisory Panel, or at least one, sometime in the fall. And so we may wind up there. And then depending on how that goes, it should be that – assuming that's a very positive meeting and the – and first of all, that we end up there and two, that it's a very positive meeting, the – and the approval should follow fairly shortly thereafter. So we are looking at probably end of year, first quarter of 2011 to mobilize. Gary Siperstein – Eliot Rose Asset Management: Okay, good. Great, that's what I was looking for. Okay. And in terms of the FAB integration, so you are satisfied where you are now, and Kevin just mentioned that close to breakeven before amortization. Do you think you will knock into that in the second quarter or have we made a lot progress and now it's going to be slower progress to reduce the losses from here forward?

Yes. We think the – third quarter is typically a little bit more challenging in Europe because of the holiday situation there. So we think the fourth quarter should shape up to be a stronger quarter for them. And we are hopeful that it will be stronger than the second quarter was. Gary Siperstein – Eliot Rose Asset Management: Oh, super. Okay. So if that's the case, then you would be sort of beyond breakeven; just part of the amortization would be the result and that would be the loss. And then as you go into the new calendar year, that would flip to a positive cash flow before breakeven?

Not necessarily. The pattern historically for the last three years in their business has been fourth quarter is much stronger than the first quarters. So it's a – at this point, I'm not sure I would be willing to say that they are going flip to be positive right away in the first quarter. But we are still hopeful that we are going to have an accretive company for calendar 2011. Gary Siperstein – Eliot Rose Asset Management: And is it that seasonality, Kevin, that accounted for the 70% increase in revenue from Q1 to Q2 for FAB?

Certainly not all of it. But there is certainly a portion of it. I can't quantify it. Gary Siperstein – Eliot Rose Asset Management: Why was there such a large increase quarter-to-quarter? Was it due to the uncertainty over the acquisition or were things held back? I mean, sequential plus 70% is pretty huge.

It is. They just had a – they had a very low first quarter. It – some of it was business that happened in the fourth quarter of 2009 perhaps. But in any event, they had a significant increase in Q2 over Q1 and I think that would be typical of what we would expect in their business.

Also, Gary, we are getting a handle on this business, how we are going to put this business in sync with Anika. But one of the things that may not be obvious to you is a lot of companies in Europe and certainly Fidia was one of them – they don't run their business on a quarterly basis. They ran it on a yearly basis. So this whole "close the books, get the quarter results" is a new phenomenon that we are introducing over there. Gary Siperstein – Eliot Rose Asset Management: Got you.

So some of the – first quarter was not that great a quarter; second quarter was decent. So we are starting to try to build momentum, put some structure around the way that we do things over there, operate on a quarter-by-quarter basis and do a lot of these infrastructure development as well as we go. So it's been hard work, but – and honestly, a little harder than we thought. But fortunately, we have been able to stay on our plan despite the additional, and sometimes, unanticipated issues. So I am really pretty enthused about that. Gary Siperstein – Eliot Rose Asset Management: Chuck, in terms of valuation for the stock – I mean, we are – for a biomedical device company, we are trading under two times sales, we are trading under book, and if earnings this year turn out to be flat with last year, 17 or so P-E. Both in the news release and in your comments earlier, you talked about earnings growth next year. You guys obviously were well aware of the Bausch & Lomb situation coming to an end. So – I'm just curious, so if we add another $0.15 to $0.20 in the back half of the year on to a $6.05 book value and then if the company can come back and do $0.50 plus next year, we are going to have a $7 book, maybe just be one time sales, one-and-a-half time sales and 11, 12 times earnings. Is that all reasonable? And then my second part of that question is where do we stand on IR analysts picking us up, conferences that you guys are going to be going to?

You can address the first one. I will do the second one.

Okay. Well, I think the – Gary, as far as expectorations for next year, I am not sure what you meant by – we – the comments relative to Bausch & Lomb. It will have an impact on next year, but we think that MONOVISC can have a bigger impact on next year and we do think that we can increase our earnings in 2011 versus 2010. Gary Siperstein – Eliot Rose Asset Management: Okay. Yes, that's what I'm looking for, because if we look at this most recent quarter, I mean, you guys had a stunning 50% increase in operating earnings, but obviously because of the larger denominator, it didn't reflect in EPS. So if we can get – I think that's the only thing missing from the equation. You got sales going, you got operating income going, you got a bunch of new stuff coming out, you are trading under book value and at reasonable multiple of sales for a biotech-type company. So if that EPS starts to going the right way, seems to me there is a tremendous value here. So that goes to the second part of question, why we haven’t been able to get any visibility on the street?

Well, there is – this is Chuck. Part of the reason that despite some of the unanticipated things that were still on our plan with regard to the integration of FAB has been some intense effort by the management team and for some of us, myself primarily, a huge amount of travel over to Italy and other places. So that's pretty much consumed us and quite frankly, we felt that that was the most important thing to keep the business progressing. And that left little time unfortunately since we are so thinly staffed to deal with the street. So it looks like we are on a pretty good track and certainly from myself, I hope that the second half of this year is not going to be such a heavy travel burden that the first half was. We have some plans to present at Rodman & Renshaw's down in New York in – I think the middle of September. And we are looking to put – invest some more of our time in IR. But I – okay? Gary Siperstein – Eliot Rose Asset Management: Yes, that's great. Thanks, Chuck. I appreciate it. Great job.

Thank you.

Thank you.

And at this time, we are showing no further questions available. Dr. Sherwood, you may proceed.

Thanks, Josh. And thanks to everyone for joining us today. I appreciate the questions and we will look forward to speaking with you again on our third quarter conference call.