Good morning, ladies and gentlemen, and welcome to the Anika Therapeutics’ First Quarter 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 at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I will now turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

Thank you, Ben. Good morning, everyone, and thank you for joining our first 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 first quarter 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 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 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 #2. 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’m pleased to report that we delivered another quarter of profitable growth, while expanding globally and advancing our substantial product pipeline and strengthening our infrastructure to support our expansion. You may recall that while we have consistently maintained tight operating controls and delivered healthy margins and profit, 2017 is a year of investment at Anika. We are making great progress toward the commercial goals that will take our growth and revenues to the next level within the coming years. Please now turn to Slide #3. I’d like to start with a few highlights from the first quarter results. Product revenue increased 5% year-over-year for the first quarter, driven primarily by MONOVISC, which achieved 24% global revenue growth as compared to 2016. During the first quarter of 2017, domestic MONOVISC end-user volume increased 48%. International MONOVISC revenue grew 15% year-over-year. We expect MONOVISC to continue gaining worldwide market share, as we expand into India and Australia in the second-half of this year and as the U.S. and international markets naturally migrate away from the multi-injection options in favor of the more convenient single injection treatments. International orthobiologics revenue increased 12% year-over-year and is expected to continue to grow with the global expansion of MONOVISC, the growth of CINGAL revenue in Canada and Europe, and the availability of ORTHOVISC-T in Germany, the UK, Poland, Hungary and Bulgaria. As a reminder, ORTHOVISC-T is indicated to relieve pain and restore function in tendons affected by chronic lateral epicondylosis or tennis elbow. Treating this condition represents an estimated $700 million global market opportunity. Excuse me, please now turn to Slide #4. We really like the balance of existing and new products as well as the migration to the single injection platform, but the more significant and exciting long-term…

Thank you, Chuck. In the first quarter of 2017, we delivered top line growth and strong operating cash flow, while making larger operating and strategic investments aimed at accelerating growth in the years ahead. Please turn to Slide #8. For the first quarter, product revenue increased 5% year-over-year, driven primarily by the global expansion of MONOVISC. MONOVISC worldwide revenue increased 24% year-over-year for the quarter. And as Chuck mentioned, domestic MONOVISC end user volume growth was very strong for the quarter. We expect MONOVISC to continue to gain share as the market naturally migrates away from multi-injection option in favor of more convenient single injection treatment. Worldwide orthobiologics revenue grew 3% year-over-year and international orthobiologics revenue increased 12% year-over-year, due to our global expansion efforts. Total revenue for the quarter was $23.4 million compared to $22.3 million for the first quarter of 2016. We continue to deliver a healthy gross margin of 74% for the first quarter of 2017. Total operating expenses in the quarter were $15.4 million compared to $11.6 million in the first quarter of 2016. The year-over-year increase was due primarily to higher research and development spending targeted to advance our product pipeline, expanded operational efforts and increased professional service fees. As a result, income from operations was $8 million in the quarter compared to $10.7 million for the first quarter of last year. Net income for the quarter was $5.5 million compared to $6.9 million in the first quarter of 2016. Diluted earnings per share were $0.37 in the quarter compared to $0.45 for the first quarter of last year. The decline was due primarily to the planned increases in operating expenses that I previously mentioned. We generated strong cash from operations in the first quarter, and we ended the quarter with approximately $139 million in…

[Operator Instructions] And our first question today comes from the line of Joe Munda of First Analysis. Your line is open. Please go ahead.

Thank you, Chuck and Sylvia, can you hear me okay?

Yes, we can. Good morning, Joe.

Good morning. Real quick, I just wanted to touch on CINGAL trial first off. You guys had guided first quarter that it was expected to commence, now, it’s second quarter. I was wondering if you could give us some insights on what’s going on there?

Yes. We have been doing a lot of work, a ton of work to get sites qualified. And as you know, it’s – there’s a lot of momentum that you need to build up before you can inject the first patient in terms of setting contracts, getting IRB approvals and so on and so forth. So I think we’re – we started that a month ago, I mean, in the first quarter and we are ready to inject in the second quarter. I think at the same time, we have asked some of our sites to start backlogging patients, so that we can get up to speed quickly in terms of injections. So it may seem like we have a delay. But I think that once we get start injecting, I think, we’ll accumulate patients into the trial rather rapidly.

And Chuck, you had said 83% of the sites are approved, right? Is that correct?

Correct.

Okay.

83% of the sites have been qualified and they...

Okay, qualified.

A lot of these sites – yes, a lot of these sites were – sites in the first Phase III study, which we were very successful in enrolling patients in a fast rate. So we are going back to the same site with a strong pool of patients. And I think, being able to achieve an 83% qualification in a couple of months was also a good progress for the first quarter of this year.

You will also remember, the first time we run through this trial, we got things done very, very quickly comparatively to a lot of trials that get run. And we are certainly expecting to really hit the ground running in the second quarter and get everybody enrolled by fourth quarter – end of fourth quarter so…

Chuck, can you give us some color actually on the trial design? What...

I can, Joe, but – I don’t want to spend the whole call talking about a lot the details. But it’s a three-arm trial, MONOVISC, CINGAL and a steroid. And we are using essentially the same inclusion, exclusion criteria. We’ve added a few more patients from before, so I think we’ll be over 500 patients. We are trying to increase the power. Many of the endpoints are identical to what we did before, and we really talk about this trial as a verification trial. The only difference really is, we have a few more patients and the [semi more] [ph] arm is – been substituted by a steroid arm, right?

Okay.

Still going six months versus superiority and we are still looking at – to verify once again the benefits of CINGAL over MONOVISC in the short-term.

And it’s an international trial, which speak to the speed aspect of being able to enroll and complete faster.

Sure. So we should look at it like MONOVISC, how you guys ran it there, correct?

Well, the first CINGAL trial, yes.

Yes. I’m sorry, the first CINGAL trial.

We do have more patients in this one, like I said, to increase the power, to just enhance our chances of success. But we still think we can hit that aggressive enrollment target that I set for you.

Okay. All right. Can I – one more follow-up as far as pricing goes and gross margin. Sylvia, can you give us some sense of what the pricing dynamics looked like in the quarter? Anyone one-time issues to gross margin and any comments there?

Sure. So growth...

That would be, Joe, that would be like three questions.

I’m trying.

From a – Joe, from a gross margin standpoint, we achieved 74%, as I mentioned on the prepared remarks. Within the quarter, we did have a one-time transaction or activity, if you will, which was related to a component part redesign for one of our products, and a component change was made to improve the handling of the product in the field and our customers reacted positively to the change. And the financial impact of that one-time inventory component change was about 1% of product gross margin. So it’s a one-time item. And we had to write some on-hand inventory off in order to complete the component change. In terms of pricing dynamics, I presume you are referring to in the United States the…

Yes, yes.

…ORTHOVISC pricing situation? What we saw in Q1 was that ORTHOVISC pricing continues to happen in the U.S. market. However, on the MONOVISC side...

Decreased.

Decreased, yes. But on the MONOVISC side, we saw some stabilization. The pricing actually picked up slightly from the second-half or from the year-end of last year, which was positive, given that as we have been talking and then as you probably see in market research reports that the market is migrating from multi-injection products to single injection products that are more convenient And from a profitability profile standpoint, MONOVISC also represents a higher-margin product for us. So that’s what we saw in the first quarter. It’s a little too early, I think, to extrapolate that for the rest of the year. But we are certainly closely monitoring it and we’ll be updating you as the year progresses.

Okay.

I would make two comments just quick. One, internationally, as I have talked about and we’ve talked about many times, we – the most – an innovative products that we have internationally are MONOVISC and CINGAL. So ORTHOVISC really gets into a lot of price competitive issues, and so we are really pushing MONOVISC and CINGAL internationally for sure. Domestically, it also behooves us, and also Mitek to give that transition from multi-injection to single injection a little push. Financially, it’s better. We think we can get more share that way, et cetera, et cetera.

Wait, so let me – let’s back up here. You’ve said revenue growth for MONOVISC was up 24%. Price stable – it has stabilized, but it’s up 48% domestically. How is that? What’s the discrepancy there?

So domestically, maybe I should take a step back. So MONOVISC in the U.S. was launched in the second quarter of 2014, right? So…

It’s early stage of a product life cycle, if you will. So it’s been rapidly taking share. When you look at our product mix – now, we looked at ORTHOVISC and MONOVISC as one franchise, both for fiscal supplementation. One is multi-injection, the other one is single injection. When you look at the breakdown of the products historically ORTHOVISC is the largest share. I mean, it was combined – the two combined, it’s about 85% of our total revenue and 72% or so is in the U.S. and the remainder is outside of the U.S. And within the U.S., the revenue share was higher for ORTHOVISC and lower for MONOVISC. And it was roughly – last year, it was roughly about 2:1, but we are seeing that gap narrowing as a result of MONOVISC taking share as a result of the market shifting from multi-injection to single injection. So when you look at growth numbers versus percentages, you’d see that the percentages increase is very impressive. But it’s also off a relatively smaller base between the two products. When you look at the growth amounts, the gap is narrowing because of the shifting from multi-injection to single injection.

Okay, okay, got it.

Let me give you something qualitative to think about. So you will remember – I think you will remember two, three years ago, when we were talking about – when MONOVISC was just starting, we said will it cannibalize ORTHOVISC? And what I said at that time is, I don’t think it’s going to necessarily cannibalize ORTHOVISC, but it may cannibalize ORTHOVISC’s growth. We are seeing exactly that now.

Okay. Okay, thanks, Chuck. I can say, we appreciate it. I’ll hop back in the queue.

Okay. Thank you, Joe.

Thank you. And I’m showing no further questions in the queue at this time. And I’d like to turn the conference back over to Charles Sherwood for any closing remarks.

Okay, then thank you. Normally, I don’t do this, but if Joe Munden has another question, we’ll take another question from him.

And our next question comes from the line of Joe Munda. Your line is open. Please go ahead.

Thanks for taking the follow-up. [Multiple Speakers] I appreciate it. So, Chuck, I guess, can you talk a little bit more about the Padova facility and what it really brings to the table for you guys as far as expansion of services and ability to cater to the market with the products?

Yes. So first of all, it’s a build to suit for us facility, and the long. And the short of it is that net-net, I think, it’s about equal to or slightly less rent than we were paying where we were before. Two, we have about 3 times as much space, at least, as we have before. Three, we – inside that facility is some R&D and QC labs, which we did not have before. And finally, inside that facility is the training center, which we – with simulators that we have purchased, which we intend to use to train surgeons on cartilage repair surgery. So we have expanded our space essentially at the same cost for rent. We’ve got a lot of new capabilities there. We’ve also hired a new R&D Director into that facility, which we never had before. And so we anticipate that we will be able to do some product development there, either on our own in conjunction with some doctors and universities in Italy. And we certainly have now a legitimate training center, which we did not have before.

Yes, and operationally, we also have a fully functioning warehouse, which will act as our logistics center for our international customers. So it really is our international hub of R&D surgical product training as well as logistics.

And it just – all of these things, which is the warehouse, the independent site just makes our lives a whole lot easier and not – which has to ultimately end up in more efficiency and a little bit of cost reduction.

Okay, thanks. I’ve got a couple more here. Sylvia, can you give us some sense of what CINGAL’s contribution was in the quarter?

CINGAL contribution for the quarter, let’s see. So Q1 of last year, we had a couple of small initial orders. From a percentage growth standpoint, it’s about 300% this quarter versus last quarter. From a growth dollar standpoint, it’s close to $0.5 million or so in the first quarter.

Okay, so up $0.5 million?

So we’re talking about that, yes, in international, Canada and some European countries.

Sure.

So we are still trying to pick up the launch and do some things in Europe. I think Canada is going pretty strongly. So we expect some continued impressive percentage growth as we move through the year.

Okay. Any idea what the OUS biologics, how much of that was MONOVISC, as a percent, if you can?

MONOVISC international is around 6%, 7% or so of total revenue.

Of total orthobiologics revenue, or just total revenue in general?

Total revenue.

Okay.

Total company consolidated revenue.

Okay, okay. That’s – thank you. I appreciate that. And then, Chuck, we get a lot – I get a lot of questions from clients talking about the uptick in SG&A. I guess, that – I mean, that occurred probably last quarter more than this quarter. But I mean, can you give us some sense of what’s going on? You talked about adding to the headcount and getting things ready for the trial. I think,. last quarter, you talked about some temporary people on site. I guess, if you can give some more color, that’d be great?

Yes, I have to turn that call over to my distinguished colleague, Sylvia.

Oh, I’m sorry. Sylvia, yes.

I will take a stab at it. Yes, and at a high-level, headcount, we – if you recall last year – throughout the year, we had added some senior as well as professional level staff to our workforce. So headcount increase is one of the key drivers. We also have some increased external professional fees that are – including accounting, auditing support expenses, as well as legal expenses related to ongoing business and some one-off employee-related matters. From a marketing standpoint, if you recall, within the last six to nine months, we launched two new products: CINGAL and our tennis elbow OVT products, both international approvals and launches. And in support of that, we have some increased marketing product collateral and other support activities that we have to invest in to help our international distributors. So those are some of the key drivers related to the SG&A increase.

Okay. Okay, thank you. And then, I guess, Chuck, any comments on, I guess, Sanofi-Flexion sort of stuff that’s been floating around, any thoughts there?

I’m going to give you just a few comments. I’ll turn it over to Sylvia, she might have some comments too. I don’t have a lot of additional things to say about the product. I will let Sylvia talk about what she thinks about the whole Sanofi and the recent financing activities that Flexion did. We’re spending a lot of time trying to understand what strategy they might use to bring that Zilretta product into the marketplace. Given its performance and maybe some of the limitations as demonstrated by some of their clinical trials, all we can really come up with now is it seems like it gives the Sanofi sales force, should that acquisition go through, another product to talk about in their bag. I really do not see that product making significant headway into replacing HA viscosupplementation products whether it be Synvisc-One or any others. So that’s really the status of what we – we are looking at this a lot, and we are talking to a lot of people, but that’s where we sit right now. I don’t know if you have any comments, Sylvia.

Yes. I think, it’s interesting, but I think it’s a little early to talk about what exactly we think will happen. I think the acquisition news has been out there, but we also see additional debt converts that were raised, which seem to be targeted towards building out the manufacturing and commercial capabilities. So they seem to be, one as an acquisition path, the other one is internal build. And so we’ll see what exactly happens there. But at the end of the day, what we have is a safe and proven product, because we have clinical trial and also commercial experience of a HA and steroid combination products. The profile of Zilretta is very different. It’s a steroid and fewer months of efficacy from a clinical data standpoint. So – and as it relates to how – if the acquisition go through, how it will be marketed with SYNVISC product, that will be interesting to look at. But certainly, it won’t – it can’t be marketed together, because they’re not approved as a combination product. So we will have to see. I think there is a new development. We are closely, as Chuck said, closely looking at it. But at this point, I think it’s a bit early to make any speculation.

There is one final point I would make. And I – by no means am I an expert and have spent a huge amount of time looking at the Zilretta data myself, others have, but not me. But there seems to be one study where they treated some patients versus just a standard steroid. And the results looked to be very equivalent and then they did a data cut and parsed out some patients and saw differentiation between the two. But I guess, the point that I have significant interest in and I just can’t see it is, if that is true and their steroid is marginally improved over a normal steroid injection, I’m not sure how the business model works, how they would get reimbursement at any kind of reasonable level. Certainly, I don’t see how they can positively get reimbursement at an HA injection level. So that’s one curious thing. The other thing you have to remember taking a look at the data is that, the steroid bearers or any others sort of peaks at six or eight weeks and then the patients head back to baseline. I think it’s not been well appreciated by a lot of people that the data for CINGAL doesn’t peak and at six months, the level of pain relief is the same as it was at four to six weeks. So that is a market differentiation between the two products.

Yes, I mean, I think you just said that you can’t market the products together, right? But a lot of these docs tend to do a steroid injection and an HA injection, right? I mean, do you think that’s possibly what they’re looking to sell both?

Yes. if you’re going to do that….

In response to...

If you’re going to do that, then why are you going to use the Zilretta product? Why not use a regular steroid? Why would you pay any extra for a time-release steroid if you – if that was your strategy?

I don’t have an answer for you. I’m just – I was just – I was just posing the question. So I mean, I don’t know.

Well, we are confused too.

So I think, and then, I guess, my last question and I’ll end it here is J&J. I think, you’ve made some comments about second quarter and going out essentially, the visibility isn’t there yet for the full-year and you called in – you took the guidance down a little bit. I guess, how should we look at those comments in terms of J&J? And what is, I guess, what is their take on there and what are they seeing?

They are – the crux of what they are seeing, we have communicated in the prepared remarks in terms of the fact that MONOVISC is strong and we shared data on unit growth, and we’re seeing some stabilization of price. But it’s, as I said earlier, it’s something should be monitored. If it maintains for the rest of the year, it will be very positive and will benefit us as well as them. From a market dynamic standpoint, they are seeing the same things in terms of the transition and the migration from multi-injection to single injection products. And I also read recently a market research report that somebody is projecting by 2018 or early 2019 that the single injection segment of the space will be caught up with the multi-injection, because right now the multi-injection has slightly higher share. So, based on the market reports that we are seeing, based on what Mitek guys are seeing in the market and based on just understanding the end user revenue, this transition is very real and it’s happening. From a – okay, go ahead.

No, no, keep going.

From a pricing standpoint, ORTHOVISC price continues to erode. And I don’t know, Joe, if you remember this or not, ORTHOVISC was launched internationally in 1996 and domestically in 2004. The product has done really, really well. I mean, it took a leading position in the U.S. market. But we are talking about over 20 years internationally and a little over 10 years domestically. So from a growth standpoint, we do see that it is a product that is maturing, and we’re trying to maintain share. A lot of the growth that we are seeing currently and as well as in the near short-term will be coming from MONOVISC, both here in the U.S. as well as in other markets in the world.

I would just throw in a couple of comments. One, there is some strategies that are being developed in Mitek, and I don’t – I’m not going to go into a lot of detail. But they’ve got some access, I guess, through the VA to service that account. They’re still pursuing some managed – some new managed care organizations and have some sense of optimism about that. Once again, they are trying to get, as they did very, very early on, some of the reconstruction guys to also promote the product. So there really is a lot going on in Mitek. I guess, we are – you don’t have total visibility into what’s going on. So we’re kind of taking a little bit more of a show us. We’re from Missouri, show-me-type of attitude. And then we think it’s prudent to take the guidance down a little bit. If we – if you think we are sandbagging on that, then we will, at the end of the year, we’ll own up to that. But we think this is, to tell it like it is, and we’re not sure how successful some of these programs will be, so we thought a conservative approach will be better.

Okay. And then, on – is the direct sales force initiatives still in play?

Now we are still moving along on that and we are starting to – the next step is to finalize some statements of work. And we’ll be doing that over the next couple of quarters since we have a pretty good visibility into when we think ORTHOVISC is going to hit the market now. Oh, I’m sorry, CINGAL will hit the market now.

Okay. All right. Thank you for the rare opportunity to all the questions, I appreciate it.

You’re very welcome.

You’re welcome. Okay.

Have a great day. Thank you.

Yes. Since there’s no more questions, I want to thank everybody on the call today for your time. We hope that you will share optimism for what the near and long-term future holds for Anika. I would say that, we’ve established a strong track record of growth and profitability over the years and we strive to maintain that momentum while dedicating the necessary resources to develop the next-generation of products that we think will deliver the sustained growth and value for shareholders in years to come. So we look forward to updating you again on our next earnings call, and everyone have a great day.

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