Good day, ladies and gentlemen and welcome to Anika Therapeutics Fourth Quarter and Year-End Earnings Conference Call. At that 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, this conference call maybe recorded. I would now like to introduce your host for today’s conference Sylvia Cheung, Chief Financial Officer of Anika. Please go ahead.

Thanks Charlotte. Good morning, everyone and thank you for joining our fourth 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 fourth quarter and full year 2016 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 Investor Relations section of our website at anikatherapeutics.com. In addition, a slide presentation is posted on our website in the Investor Relations section under Events 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 two. Before we begin, please remember that certain of 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. I am pleased to report that 2016 was yet another year of very strong growth for Anika, fueled by a solid fourth quarter and commercial regulatory and business achievements throughout the year. Let's start with the topline performance. Product revenue increased 17% for the year, surpassing the $100 million mark. Worldwide orthobiologics revenue increased 22% for the year and international orthobiologics revenue increased 24%. Product revenue growth for the year was driven primarily by a 54% year-over-year increase in worldwide MONOVISC revenue. We hope and fully expect that MONOVISC will continue to gain share as the market naturally migrate from our multi-injection platform ORTHOVISC to our single injection MONOVISC offering and as demand for our viscosupplementation products remains strong overall. This migration of share and revenues is a hallmark of the company's culture of innovation as we are well positioned to drive and benefit from technology advances, instead of falling victim to those events. In the same vein, we anticipate that the approval and introduction of CINGAL will usher in another migration except in that case, we anticipate the concurrent and substantial expansion in the overall market for our viscosupplementation products. This is a good segue to our pipeline. Please turn now to Slide number 3. Last quarter we gained clarity on the U.S. regulatory path for CINGAL. In December, we submitted an IND application to the FDA to initiate an additional Phase III clinical trial to verify and supplement our existing set of very strong pivotal data on CINGAL. We have verbally heard from the FDA that they have no objections to our clinical protocol design and we expect to commence this trial in the first quarter of 2017 and to treat the first patient in the second quarter of 2017, which…

Thank you, Chuck. Strong top-line growth and record full year product revenue made 2016 a banner year for Anika. Our growing product portfolio coupled with our financial strength positioned us for continued growth in year ahead. Please now turn to slide number eight. For the fourth quarter product revenue increased 10% year-over-year and worldwide biologics revenue grew by 13%. Total revenue for the quarter was $28.7 million compared to $30.9 million for the first quarter of 2015. Total revenue for the fourth quarter of last year included milestone revenue of $5 million from Mitek from MONOVISC end user revenue surpassing $50 million in a U.S. in a 12 months’ consecutive period for the first time. For the full year 2016, product revenue increased 17% to $103 million and total revenue was up 11%. The strong top line growth in 2016 was primarily driven by global expansion of MONOVISC. MONOVISC worldwide revenue increased 54% for the full year. Domestically ORTHOVISC and MONOVISC continue to maintain a market leading position. As Chuck mentioned we expect that MONOVISC will continue to gain share as the market naturally migrate from ORTHOVISC to MONOVISC. We delivered a strong gross margin of 77% for the full year 2016. Total operating expenses in the quarter were $16.1 million compared to $13.8 million in the fourth quarter of 2015. Total operating expenses for the full year of 2016 were $52.8 million. Income from operations was $12.7 million in the quarter compared to $17.1 million for the fourth quarter of last year. The year-over-year decline was due primarily to lower licensing milestone and contract revenue in the quarter. Income from operations for the full year of 2016 increased $2.5 million to $50.6 million. Net income for the quarter was $8.1 million compared to a $11 million in the fourth…

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

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

Yes.

Good morning, Joe.

Good morning. Couple of quick questions here. First off, tell us what percentage of total revenue was deployed Mitek for the year? And if you could give us some sense of CINGAL's contribution for the fourth quarter that would be great?

CINGAL contribution for the fourth quarter were actually for the year, I think that was probably be a better measurement was about $1 million to $2 million and it's primarily from the Canada and Germany and some other Eastern European countries, what's interesting note is within the first six months that we launched about 8,000 to 9,000 units were sold to our distributors. And from that standpoint it's pretty remarkable given the smaller market outside and at the same amount of units were commercialized in the United States, it would have represented roughly about $10 million or so of end user revenues. So, pretty remarkable outcome for CINGAL internationally given the mid-year launch.

Yes, I'd just put one other comment in there, I mean CINGAL is taking off and building up in at least the same way that MONOVISC did and possibly a little. So, we’re pretty pleased with the real early results so far.

And the first question about U.S. ORTHOVISC and MONOVISC product revenue as a percent of total revenue, it’s about 74%, 75% of total revenue for the year.

Okay. Thank you. Couples here, moving forward, as far as the milestone revenue in the fourth quarter, can you gives us a little bit of background there and then I guess the timing on the expected $5 million -- which quarter could we expect that in, if you could give us some sort of timeline that will be great?

The next milestone is $100 million end-user revenue within a 12 consecutive period obviously from MONOVISC in the United States. From a timing standpoint, we think it will likely be toward the end of the year in the fourth quarter.

Okay. And then I guess the $430,000 you took in the fourth quarter, what was that from?

That was from a couple of distributors, some contractual obviously, it’s not a material amount, some contractual payments in the respective commercial agreements and they are primarily for orthobiologics products.

Okay. So, couple more as far as the uptick in SG&A in the quarter, if you could give us a little background on the context there assuming it has to do with the facility in Italy, but if you can give us a little bit of help there as well as what that could look like going forward is fourth quarter rate a good number to work off going forward? Thanks.

Sure. For Q4 the primary driver for the increase in SG&A is related to headcount. We added some personnel and obviously, employee personnel related costs will scale. There is also new product marketing support costs and in general headcount and external professional costs in the period increased this year versus last year. And from a run rate standpoint we do expect 2017 as I mentioned in my prepared remarks the total operating expenses to go up and SG&A will increase as well. And I mentioned the total operating expenses roughly around low to mid $70 million. So, in terms of the split of that R&D is a component but certainly SG&A will be heading higher as we prepare for the growth and we also talked about the infrastructure investment in terms of system ERP, MRP systems and some of which are expense items not all that can be capitalized.

Okay. And then I guess my final question is on the gross margin line, product gross margin you know down 200 basis points year-on-year, can you give us a little bit of color there and you know is this a new normal you would expect going forward I know you're making a big push internationally so would we expect that gross margin to hover in the low to mid-70 range going forward?

Yeah, so similar to revenue I would recommend looking at product gross margin on an annual basis rather than quarterly and our product gross margin for the full-year was 77% up 100 basis points from last year. Some of the quarterly variability are due to volume or production volume throughout the plan during the year. So, I think the improvement was good and 77% certainly is the strong product gross margin by any industry standard and we maintain our expectation that will be in the product gross margin will maintain at the mid-to-high 70%ish range.

I am just going to make a comment here because if you listen calls, Joey has been on a lot of calls for a long time. Chuck is always very cautious about this gross margin subject. We are feeling some price pressure on some of our biggest products and we are doing an excellent job of cutting cost to more than compensate for that. But if we look three or four years out, we're going to have to be driven by new products and those margins will be nice, but there is price pressure and so far we either met that or exceeded that by cutting costs. But there is a limit to all of this eventually.

Okay. Thank you. I’ll hop back in the queue.

Thank you. [Operator Instructions] Our next question comes from the line of Mike Petusky from Barrington Research. Your line is now open.

Good morning. I guess real quick one, on tax rate I have been modeling 37 last couple years closer to 36 -- 36 may be a better tax rate effective tax rate for model going forward?

I think 36 and 37 are good bench mark at this time before any new tax rule changes that will come online. So, I think that those are good numbers to use, good percentages to use.

Okay. And then Chuck can you just kind of remind me and I guess maybe a few other people just in terms of patient enrollment offered for the CINGAL trial and clinical sights you know anything else you want to add there?

Okay. Look we -- this trial is going to be roughly the same size as last one we did. We’re going to use as many of the same size as we use -- as we can -- as we use before and the reason for that is because of the incredibly fast enrollment and high-quality clinical data that we experienced in the first CINGAL trial. This trial will be a little different in that -- before we had MONOVISC, CINGAL and saline and this time we will have MONOVISC, CINGAL and steroid. We think we can the whole key to moving quickly is and really an enrollment and so we are going to really try to get that done rapidly and we know that a lot of the sites that we went before and have a good patient population. So, we are optimistic and we’re moving ahead right now, because there are many, many things we need to do before you enroll first patient so you get IND approvals and we’ve got investigator contract etcetera, etcetera. So, we’re moving ahead right now on and we will start enrolling as I said probably coming second quarter, is that give you enough color?

Yeah. I just really quickly though, how many clinical sites and how many patients?

I don’t know last time we had about 360, 370 and this year will be about the same level. We’re probably looking at about 20 sites if we can find a few more we’ll do that, but that's about the ballpark – go ahead.

No, you keep going.

We are looking in. The last time we ran this trial, we set a record time and enrollment and it was six months really. So, we are hoping to duplicate that, I think we can. You know the costs will be in the mid-single million-dollar range. One thing I would like to throw out here and this is about the trial so we ran a very successful trial first time. I don’t know people actually realize but this will be the fourth time we run an efficacy trial MONOVISC and when you do for the fourth time you have a very, very good idea how is it’s going to turn out. So, I – I am not capable to say I can absolutely do this, but I wish I could come very close to drawing the performance curve from this trial. All right. It truly could be a verification what we did before. So, I'm real positive about the success we're going to experience here and as a consequence you hear me talking about timing more than I talk about what we're going to achieve in the trial. I think everybody pretty much knows that the steroid arm is going to drop off in a three-month timeframe. And the key factor here is efficacy at six-months. So, I'm just very confident of the outcome. We're pushing really hard to get started and then get the -- with that and some of the other things that we've been talking to the FDA about. We're pretty confident that we're going to gain approval. It's just getting all worked on.

I guess let me ask one last question. A competitor released or at least that perceived competitor filed an NDA on a product last couple two, three weeks and then do you have any thoughts just on that either a product or the fact that they may be first to the market?

I have one thought and that thought is please go back and look at the efficacy demonstrated in the trials that they published. That's all I'm going to say.

Fair enough. Thanks, guys. Really appreciate it.

Thank you. Our next question comes from the line of Mike Manifesto from Asymmetry Capital Management. Your line is now open. Mike Manifesto, your line is now open.

Hi, guys. Sorry about that. So, if you back out the impact of milestones in 2017, you're effectively guiding the product revenue growth of about 10%, which is pretty impressive. Are you expecting most of the growth to come from OUS regions and is the growth expected to come mainly from MONOVISC and what do you expect the impact from CINGAL to the year?

The growth is going to come from various different sources. The continued strong growth in the U.S. MONOVISC that we talked about earlier is going to be a driver. We are by stating the $5 million ROTH milestone we are expecting to achieve that $100 million mark in a 12 months consecutive period. So, that's a nice milestone and the market as we talked about earlier is shifting from multi injection to single injection. Just within two years of launch we went from 0% to final data but based on what we currently can see we're roughly at about 8% or 9% of overall share in two years from original launch which is pretty impressive. And we are looking at the product momentum and see that it can generate continued growth for us. Internationally, certainly expecting MONOVISC to continue to grow and it's actually growing at a much higher rate than the domestic growth but because it's a smaller base comparatively from a contribution standpoint is lesser to U.S. degree. And on top of that we have CINGAL which has shown a very strong acceptance in the market and the ORTHOVISC see the double product recent CE mark approval will fill that. And beyond the orthobiologics franchise we're also expecting some good growth from our wound care product. As a result of and this is not our core franchise that we choose not to discuss it on the prepared remarks, but we've received 25 plus paid through reimbursement last year and as a result of that our outlook for next year is that quite positive and we expect that that franchise's growth is going to be well above 25% year-over-year from 2016 to 2017 So, the overall business I think is strong and it's showing good growth as you stated.

And can you give us a little bit more color on the pricing trends in the U.S. So, I think you talked about volume growth being in the 80% range last quarter and the price impact being somewhere 5% to 8%. Are you seeing similar trends continuing or how are these trends evolving?

The trends are more or less continuing in that direction and overall key takeaways is lost volume is much higher than the price decline so net-net, we're seeing overall revenue increase and our share certainly is growing well above the market growth rate.

But should we continue…

For all products.

For all products.

Yes.

So, should we continue to think about price declines somewhere in the 5% to 8% range going forward though?

I think for the near term I think that would be reasonable to expect, but clearly, it's something that we're off monitoring closely to see how it's going to turn out, but in the term short term, I think that would be reasonable.

Okay. Great. Thank you.

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

Just a quick follow-up a couple here, the 8 million to 12 million in CapEx, can you give us a little bit of color there what's that's being used for? Is it weighted more towards the facility in Europe or the Bedford facility. As well as Chuck if you can give us a little bit more color on the trial endpoints for CINGAL that would be great?

$8 million to $12 million for CapEx, so roughly half of that is related to the completion of our manufacturing operations consolidation. So, finishing up with the loop, the validation and everything that's related to it so that we can gain all the necessary approvals before the end of the year, so 100% of our products will be made from the this plant. About a quarter of it is related to our financial operations system I was talking about ERP, MRP systems and then the remaining quarter of that spend is related to just ongoing equipment and maintenance and other general business support. So, that's roughly how that money is being earmarked for.

Yes, talking about the trial endpoints I alluded to that, the main thing is to demonstrate efficacy at six months. And then we're going to also take a look at the value that the steroid adds in the short term just like we did before. And then there will be a multitude of secondary endpoints. So, we're still trying to work out exactly what the secondary will be. But it will much the same as what we did in the other trial. And we're looking particularly at the contribution of the steroid over whatever it is three month period or two months period, where it might have some contribution. But the big bullet is six-month efficacy, right. That's the primary, primary.

Okay. Thank you.

It's all on -- I'm sorry. Sylvia has thrown the protocol at me right now. So, it's all about, it's primarily about pain and WOMAC scale. But they are all leads other things as [Almarac] and industry standards which will also measure and there are some functional things that may wind up in there too. So, there is going to be quite a few end points but that all of them are going to be secondary except for the you all except for the will change from baseline at 26 weeks which is the primary.

Okay. And Sylvia what was operating cash flow for the year?

Operating cash flow for the year.

This year.

Operating cash flow for the year is here yet here is roughly around mid-$20 million.

And I am sorry, and depreciation and amortization?

Hold on one second. Depreciation and amortization is roughly about $3.5 million $4 million each.

Okay. Thank you.

I can be very specific, hold on one second. Depreciation, amortization is roughly about $3.5 million, $4 million each.

Okay. Thank you.

You're welcome.

You're welcome.

Thank you. I am not showing any further questions at this time. I would now like to turn the call back over to Dr. Sherwood for closing remarks.

Thank you, Charlotte and everybody thank you for your time today. Before we sign off, I would like to remind you of some things that we're most proud of as we look forward into 2017. First, despite the fact that we still primarily operate under a distribution model, we continue to deliver gross margins in the high 70% range and we did that in 2016 and before. Secondly, as a measure of productivity, we delivered revenue per employee in excess of $850,000 for the year, a remarkable achievement and above any industry standard. We view both of these metrics as measures of our strong operational execution and financial discipline. So, in closing, we were pleased to deliver another year of growth and we remain focused on bringing new innovative products to the market to accelerate our growth moving forward and we very much look forward to updating you again on our next earnings call and everyone have a wonderful day.

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