Good day, ladies and gentlemen, and welcome to the Q2 2016 Anika Therapeutics Earnings Conference Call. At that time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions] I would now like to introduce your host for today's conference, Miss Sylvia Cheung, Chief Financial Officer. Ma'am, please go ahead.

Thank you. Good morning, everyone. And thank you for joining our second quarter earnings call. With me on the call today is Anika's President and Chief Executive Officer, Dr. Charles Sherwood. During today's call, Chuck and I will review our second quarter 2016 financial results and key business highlights, which were summarized in our earnings release issued yesterday and available in the Investor Relations section on our website at anikatherapeutics.com. In addition, a slide presentation is posted on our website in the Investor Relations section under the Events, Webcast 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 number 2. Before we begin, please remember that the 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 see our SEC filings for more information about factors that could affect our results. I'll now pass the call over to our President and CEO, Dr. Charles Sherwood. Chuck.

Thank you, Sylvia, and good morning, everyone. We continued our strong momentum in the second quarter of 2016 with solid revenue and earnings growth year-over-year, driven primarily by ORTHOVISC and MONOVISC, our flagship viscosupplementation products. End user demand for MONOVISC was very strong in the quarter. And orthobiologics revenue increased 21% year-over-year in the period. International orthobiologics revenue increased 35% year-over-year for the quarter, driven primarily by MONOVISC's growth in Eastern Europe, the Middle East and Southeast Asia. Before I turn it over to Sylvia to review our detailed second quarter financial results, I'd like to provide an update on the execution of our growth strategy, and some exciting elements and milestones surrounding that strategy. So please now turn to Slide number 3. To remind everyone, our long-term growth strategy is based on four pillars: global expansion, pipeline advancement, strengthening our infrastructure to support future growth, and strategic M&A to compliment organic growth. Now, please turn to Slide number 4. I'd like to start by providing an update on CINGAL, which touches on both the global expansion and pipeline advancement pillars of our strategy. CINGAL is our next generation viscosupplement that combines MONOVISC with and FDA-approved steroid to relieve pain and inflammation caused by osteoarthritis. In the United States, we remain in active discussions with the FDA to reach a reasonable and mutually acceptable path for the submission of an NDA. While we are very disappointed with the pace of this process, we hold strong to our commitment to bring this important treatment to patients in the United States and to provide additional information on the process and requirements as we gain a clear path forward with the Agency. Our optimism and enthusiasm about CINGAL is significantly reinforced by its rapid advancement outside the United States. This quarter marked two…

Thank you, Chuck. Anika delivered strong financial results in the second quarter, and we remain in an excellent financial position to drive continued growth throughout the year and beyond. Please now turn to Slide number 9. Total revenue increased 16% year-over-year to $26.6 million for the second quarter, with Worldwide Orthobiologics revenue increasing by 21%. ORTHOVISC and MONOVISC, our lead viscosupplementation products in the Orthobiologics franchise, continue to be the main revenue and growth driver. Internationally, our second quarter Orthbiologics revenue grew 35% year-over-year, as a result of our global commercial expansion efforts. Domestically, ORTHOVISC maintained its position as the leading multi-injection product, while MONOVISC continued to hold the number two position in the single-injection segment. While the end user demand increase was healthy, it was impacted by pricing concessions aimed at growing market share. We delivered a strong gross margin of 77% in the second quarter, up slightly from second quarter of 2015. Total operating expenses in the quarter were $13.1 million, compared to $10.5 million in the second quarter of 2015. We expect operating expenses to increase during the remaining quarters of 2016, primarily as a result of our planned product development and marketing initiatives. Income from operations increased approximately $1 million, to $13.5 million in the second quarter, as compared to $12.4 million for the second quarter of last year. Net income in the quarter grew approximately by $800,000 to $8.6 million, compared to $7.8 million in the second quarter of 2015. Diluted earnings per share were $0.57 in the quarter, up $0.06 from the second quarter of last year. The increase was primarily a result of robust revenue generation in the quarter. We ended the quarter with approximately $112 million in cash and investments on our balance sheet. The sequential decrease in cash was primarily due to investments made to strengthen our infrastructure to support future growth, including the buildout of our manufacturing operations at our Bedford headquarters and the new construction of our European headquarters in Italy. Additionally, we continue to expect our $25 million accelerated share repurchase program to be completed in August of this year. Turning to guidance. With the strong revenue growth in the first half of this year, we are increasing our full year 2016 product revenue and total revenue guidance. We expect product revenue growth for the full year 2016 to be in the mid- to high-teens percentage range. We do not expect to recognize any milestone revenue in 2016. Because of milestone revenue in 2015, total revenue growth for the full year 2016 is expected to be in the low-double-digits percentage range. In conclusion, we are very pleased with our financial results for the second quarter, and we are well positioned for continued growth throughout the year. Orthobiologicals end user demand is healthy and we are expanding globally, and we have a deep and advancing product pipeline to drive long-term growth. We're now happy to take your questions. Thank you.

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

Good morning, Chuck and Sylvia, thank you for taking the questions, and congrats on a very solid quarter. First question here, Sylvia -- I mean Chuck -- MONOVISC end user growth…we're looking at the script data. It's really strong here. Sylvia, you had talked a little bit about discounting or pricing concessions in the quarter. Is that something we can expect to continue going forward? Is that more on the ORTHOVISC side or the MONOVISC side? Any clarity there? And is that baked into the guidance?

Okay, a few questions there. I will try to order them all, but probably in reverse order. Yes, the expectation of pricing trend is built into the guidance that I made in this earlier script. With regards to the trend, I believe we will continue to see some competitive pricing and targeting increasing of market share. The important part to remember is the market is growing very healthily. We are seeing some price declines, but it's more than offset by the increase in the unit volume increase. The ORTHOVISC and MONOVISC price continues to be priced at a premium and we're seeing the growth in our ORTHOVISC and MONOVISC product demand, resulting in the robust revenue results that we shared.

Okay. Thank you, I'll hop back in the queue.

[Operator Instructions] Our next comes from Greg Garner from Millennium Asset Management. Your line is now open.

Thank you. Great quarter, Chuck and Sylvia. I'm sorry, again, hard time getting on through the queue here, so I missed some of your prepared remarks, Chuck, so I have a question that you might have mentioned. Just can you provide any more insight into what's going on with the FDA over CINGAL -- just some characterization perhaps of the conversations and any insight on how things are going? It just seems like such a tremendous opportunity there, and the FDA is not really known as progressive, or a fast-moving organization, I should say. So I'm just trying to get a sense for it. Hoping they're progressing there.

Okay, thanks for your comments about the quarter. I probably said in the past most everything I'm going to say right now, but I'll put -- maybe I'll put it together in a slightly different way. So I really have three points. The first one is this product CINGAL is a combination of two already approved products. That's MONOVISC, which was approved as a medical device and the steroid compound, which was approved as a drug. We put them together and we have strong evidence to demonstrate that they do not interact with one another, and it's a simple mixture. When we put this product in front of the FDA, it's a fairly unique situation. It's not a new molecular entity, it's really a mixture of two already approved products and, quite frankly, all along, I'm pretty sure they didn't know how to handle it, because it was so different. In addition to that, we went right into a Phase III trial, we ran it outside the United States and it was wildly successful to demonstrate both safety and efficacy. So we've been in these back-and-forth discussions with them for quite some time now and it's quite distracting to us. And I'll get back to that point in just a second. We believe, although we've believed this before, that we're coming to the end of their deliberation, and we have had a few back-and-forth conversations over the last six months or so. So we're optimistic that we're going to hear from them, which is the first step and then having a meeting with them to try to understand and hopefully negotiate whatever we need to do going forward. And that's just about the best that I can really say. My second point is, I want to say one more thing, though, and it kind of echoes the FDA position and how they're slow, but -- I've got to tell you that -- I said it in the script but, the feedback that we're getting about CINGAL is just tremendous. A lot of -- it's limited, of course, because it's very early, but particularly our commercial partner in Canada is surprised by the enthusiasm of the physicians. They comment a lot and, again, it's early, but they comment a lot about how impressive the patients feel after getting these injections. So we may very well have hit on to the magic here. Also, we have to assume although we don't have the facts, but these same patients, some of them already went through a course of steroid treatment and maybe even took some HA treatment. So if we have hit on some real magic here, it makes it even more distracting that this product is being made available around the world, but not in the United States.

Are you finding that the marketing's easier in Canada versus the EU? Or is that not really a significant factor you look at? I'm just curious to see how it's --

Yes, it's -- oh, I'm sorry, I didn't mean to cut you off.

I'm just curious about the characteristics of this ramping up in Canada versus the EU.

The Canadians are really psyched about this product because they were pretty keen on MONOVISC as well, but they're really enthusiastic based on the feedback they get from the physicians. So they've redoubled their efforts to go more quickly. In Europe, we introduced it a little bit later. There are smaller distributors involved. We're getting some good response, certainly in Hungary, our P.I. from the trial is the key figure in Hungary, so we're doing pretty well there. But I would say that the Canadians really jumped on it and they see a real huge business opportunity for themselves. So that's going a little faster. But I imagine in the next quarter, the conference call, we'll have a lot more to say about some of our success in various European countries.

The Canadian approval and launch was earlier because of --

Right. So they got started earlier.

Okay, thanks. And then just one question about the HYOLOFAST and, again, I'm sorry, I apologize for not hearing your comments on it and maybe I'm just asking for what you said before, but -- I mean this seems just like a tremendous opportunity here, and so I just wanted to get an update on where things are in moving this through the Fast Track of obtaining that categorization. Has that been actually received by the FDA? The Fast Track categorization? Or is that something that you're still looking to get that categorization from the FDA? I'm also curious as to how that's selling internationally, too. I mean, you've done will internationally, is it still a push for the company? Because you have a lot on your plate. I'm just curious where that fits into.

I'm going to answer some of those questions and Sylvia, I'm sure, is going to chime in with some other information. So, let me start with the Fast Track. Fast Track, is the name we gave to the trial. So it doesn't really have anything to do with any fast track designation at the FDA. We announced that we got our IDE supplement approved, which is going to allow us to address a larger patient population in the trial. And we think that that will help us accelerate the enrollment. If you know anything about this category, you know one of the biggest issues in these kinds of products is finding enough patients to keep your trial enrolling at a reasonable rate. So this has been a challenge, and we're hoping that we added a few more sites and we modified to some degree the inclusion/exclusion criteria, and we hope that this will just make more patients eligible and therefore we'll be able to attract more patients, and enroll more quickly. In terms of -- it is a big push for us internationally, actually, and particularly in Europe and we're putting a lot of effort and a lot of money into that. We have a very strong KOL base internationally, and we're relying on them to help us with this effort. And the product works extremely well, we just need to hone our commercial patient efforts to get it the attention and revenue generation that it truly deserves. So it is a big effort for us and I think as we go through the rest of the year, we may have some things -- more things to say about alternative commercialization approaches to get more high out of that sale. It's going well, but we think it can do a lot better.

I agree. I'm here to say how fast growth was above 35%, actually at 40%, but because it's the details, the growth rate is tremendous at 25 -- 35% international growth. Both Chuck and I commented on it earlier and as Chuck said, you'll be hearing more about that in the year. There is an upcoming international conference called ICRS. It's the National Cartilage Repair Society conference that's coming up in the fall [indiscernible] in that conference. So more to come on that front.

Okay, thanks.

Our next question comes from Joe Munda from First Analysis. Your line is now open.

Thank you for allowing me to follow up here. Sylvia, with all these moving trials with HYOLOFAST and the discussions with the FDA, how can we look at R&D spend in the back half of the year? Are we expecting a ramp up as you guys progress with some of the clinical initiatives you're currently undertaking? And one follow-up to that: the prior caller asked about CINGAL. I was just wondering if you could give us a little bit of color on the contribution in the quarter. I know it's early, but just for modeling purposes, kind of get a sense of where CINGAL is at this point.

Sure. On the R&D question, yes, you are correct. The R&D expenditure for the second half of the year will ramp up for the reasons that you named, including the continued and increased enrollment activities for the HYOLOFAST trial, the tendonopathy trial that we just announced on this call will start to incur clinical spending to get the trial up and running, as well as other earlier-stage product development activities: pre-clinical stage product development activities that we have plans for. So all those activities are reasons for the ramp-up of R&D expenses for the second half of this year. In terms of the second part of your question about CINGAL's contribution for the quarter…not significant. It's in the quarter to half a million dollar range for the quarter in initial orders, and we do expect that to grow in the second half of the year as a result of positive response in the market. This year, from a gross dollar standpoint, no, not a major revenue contributor, but we do expect it to take on a lot more significant contribution as we move toward full year revenue impact in next year and years after.

Okay, if I may, one quick follow-up on HYOLOFAST, Chuck, and there's the recent -- I know it's early, the announcement on tendonopathy, but as far as timeline goes, Chuck, if everything were to go to plan and on HYOLOFAST, when do you think we would see a commercial launch on that product in the U.S.?

Well, we're hoping to complete enrollment, I think, by the end of next year and, we have to follow the patients for two years and then probably another -- at least another year to put all the data together, submit the package in, and get it back into the FDA and then some time for approval so, really, we're looking out to the end of 2021, sometime in 2022. So it's pretty far out in the U.S.

Okay, thank you.

Our next question comes from Mike Petusky from Barrington Research. Your line is now open.

Hi, just a few questions. I just want to understand. What is the timetable and what actually has to happen -- is what you guys are trying to do is schedule in terms of the FDA and CINGAL -- are you trying to schedule an in person meeting or is there just a lot of back and forth via phone or whatever…can you just say what's going now and what you expect to go on in the next three to six months, in terms of communication there?

Typically, what happens -- well, nothing's typical on this project. But we were supposed to have a negotiation meeting back in March. We talked about it, we never really said much on the phone. It got canceled back then. So they're deliberating on our situation which, like I said, is unique. What I expect now is that we're going to get some response -- we submitted a few things to them about what we feel should happen, and we're going to get a response back from them, hopefully not too far in the future that will delineate what they think should happen, and then there'll be a meeting. And hopefully there'll be some give and take and out of that meeting will come a plan, hopefully, for how we get this product approved. Drug people seem to behave a little bit differently than the device people, and they seem to be able to function better in meetings and have to some degree -- it's the FDA, you've got to remember -- some degree of discussions about requirements. So what we're hoping in the next couple of months is that we get a letter and we manage to get a meeting. We will be very well prepared for that meeting, and I don't want to go any further than just to say that. We have lots of support from clinicians, technical support, consultants, lawyers, just all kinds of things. So we just need the meeting to occur. And it's slowed down, we're frustrated, you may not hear it my voice, but we are. Things have been slowed down by vacation, which, I guess the FDA likes to take a lot of vacation and all kinds of things. Hopefully, we're looking clearly at the next couple of months to try to bring that about.

Okay, so potentially by the time you guys report third quarter, you very well could have a sense at least of what the path is going to be, going forward. Is that fair?

That's fair and I would be very disappointed if we don't have that, but having said that, I've been disappointed before. But that is definitely the goal. We're pushing about as hard as we possibly can.

Got you. And then, just in terms of M&A, you guys have had all that cash for a while, obviously you're doing some share repurchase. But in terms of M&A, is there anything other than you stated that you're actively looking, but is there anything more that you can say? I mean, are you seeing interesting assets, just not at the right valuation, or are you just not seeing the assets you're really kind of excited by? What's the -- what are you seeing out there?

We are seeing some things, I'll be honest, the population is not large. There are a couple of things that we have looked at that appeared interesting and complementary, but at this point, nothing that is -- and advanced enough that is worth discussing externally. And the things that we're seeing are very much in line with the criteria, parameters that we have shared publicly, in terms of the orthobiologic focus, in terms of ease of integration and the ability to be accreted in a short time frame and focus for the most part on the commercial side. So those are -- we've done in the past and we've also communicated. We take a very disciplined and focused approach and we're continuing with that and at this stage I think that's all we can say, given the activity levels that we've performed.

I would just make one other comment. Some of these things somewhat fall into the category of bolt-ons, but as we have taken on a style of communication, we will most likely communicate when we really have something in hand and that we are serious about and pursuing. And until such time, we really won't have a whole lot to say.

You may have mentioned this earlier, but did you guys make any comment around what you believe the aggregate market share of -- now currently standing at? Do you make any guesstimate there?

We didn't make any estimates earlier on this call. We will analyze and will take into consideration the information that puts out, or will put out later this week. For the first quarter, real-time data that we have, it appears we're in the 26% to 27% share in the U.S.

So $85?

Yes.

Got you. So last question, Sylvia --

Can I just throw something out there, if I may? We always report in dollars. There is no price erosion, and yet the market is still growing in dollars so treatments are growing faster than dollars. So for people who might say that maybe the viscosupplementation market isn't so viable -- that's absolutely wrong because treatments are significantly increasing, which I have to say that the physician community and even the payers believe that this is a viable treatment for osteoarthritis.

Okay, great. That's helpful. And just last one, Sylvia: CapEx for the quarter? Do you have it?

CapEx for the quarter -- I don't have it right in front of me. We sent it -- the cash, as I commented before, decreased as a result of the -- from year end as a result of ASR and capital expenditures, so year-to-date, CapEx is approximately a $10 million of expenditure from year end, so that six-month period, about $10 million.

All right. Great. Thank you very much. Appreciate it.

We have a follow-up question from Joe Munda from First Analysis. Your line is now open.

Thank you. Chuck, just on your comment on the pricing in the marketplace. How should we -- I'm sorry, Sylvia: How should we look at gross margin? Are we going to see it come off a little bit here going forward? Or how should we think about that going forward as far as Orthobiologics are concerned/

Sure. For 2016, I think we're still comfortable with the previous guidance that we discussed earlier in the year, which is around mid to high 70% range, and for the last couple quarters, we were in that range and, given the product mix as well as the anticipated pricing, we should still be able to maintain in that range.

Yes, we -- just another comment. Behind the scenes, we make a fair amount of investment in our manufacturing operations and our cost reduction activities. And so the price -- we've seen pricing pressure outside the United State for a while and maybe a little bit in the U.S. now. Yet our profit margins have stayed the same or even gone up a little bit. And that's a little bit due to mix but a lot due to the fact that we're continuing to lower our manufacturing costs and the reliability of our processes. So I just wanted to throw that other factor in there.

And Chuck, I just wanted to pick your brain, get your thoughts on the Bioventis situation at IPO. Any thoughts there from you? How you guys do that competitively, or is it not even a thought whether they go public or not?

To be honest with you, Joe, we have been pretty busy. We don't have a lot of thoughts in that area. I think, really, their viscosupplementation product has not been a real competitor for us, and so we really haven't paid a lot of attention. We'll take a look. On the next call, maybe you can ask that question and we may have some commentary.

Thank you.

And I am showing no further questions. At this time, I would now like to turn the call back over to Dr. Charles Sherwood for any further remarks.

Thank you very much. And thanks to everyone who participated on the call, for asking some very good questions and listening to us today. I appreciate it. We're very excited about our plans that are currently under way to advance our pipeline and bring new products to market and drive our continued growth and, as a consequence, honestly, we look forward to updating you again on all of these activities on our next earnings call. Have a great day.

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