Good morning, ladies and gentlemen, and welcome to the Anika Therapeutics' second quarter 2017 earnings conference call [Operator Instructions] I would now like to introduce your host for today's call, Sylvia Cheung, Chief Financial Officer. Please proceed.

Thank you, Christy. Good morning, everyone, and thank you for joining our second quarter earnings call. With me on the call today is Anika's Chief Executive Officer, Dr. Charles Sherwood. During today's call, Chuck and I will review our second 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 Investors 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 two. Before we begin, please remember that certain statements made during this conference call constitute forward-looking statements as defined in the Securities and Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results, performance or achievements. Please also see our SEC filings for more information about factors that could affect our results. I'll now pass the call over to our CEO, Dr. Charles Sherwood. Chuck?

Thank you, Sylvia, and good morning, everyone. We are pleased to report that end-user demand for orthobiologics products was very strong in the second quarter. Total Anika revenue increased 26% year-over-year for the quarter, driven primarily by MONOVISC, and this performance exceeded our expectations for the quarter. Please now turn to slide three. During the second quarter, domestic MONOVISC end-user sales increased 56% year-over-year. As we recently announced, MONOVISC achieved $100 million in U.S. end-user sales within a 12-month consecutive period at the end of June. This resulted in $5 million of milestone revenue to Anika from our U.S. commercialization partner, DePuy Synthes Mitek Sports Medicine. We are very proud of this achievement. And more importantly, for bringing highly effective and safe [drugs] to physicians and patients. We previously talked about our increased emphasis on global expansion, and I am pleased to report that international MONOVISC revenue grew 53% year-over-year for the quarter. In July, we announced the regulatory approval of MONOVISC in India. We're excited about our progress in India, and we plan to expand it to Australia and New Zealand over the next 6 to 9 months. CINGAL revenue growth was very strong in Canada and Europe, and also exceeded our expectations for the quarter. Our global expansion initiatives have resulted in international orthobiologics revenue growth of 50% year-over-year for the quarter. Our growing viscosupplementation franchise performed very well in the second quarter, and positions us to drive long-term growth. During the quarter, ORTHOVISC maintained its position as a market-leading multi-injection treatment for knee OA in the U.S., And we expect MONOVISC to continue gaining market share. As we predicted, the U.S. market is migrating away from multi injection options in favor of a more convenient single-injection treatment. Internationally, ORTHOVISC is facing competition from home-grown generic-type competitors. The…

Thank you, Chuck. In the second quarter of 2017, we delivered very strong top and bottom line growth, driven primarily by the worldwide demand for MONOVISC. Now please turn to slide 10. Total revenue for the quarter increased 26% year-over-year to $33.5 million compared to $26.6 million for the second quarter of 2016. Total revenue included a $15 million of licensing, milestone and contract revenue related to MONOVISC achieving $100 million in the U.S. end-user sales within a 12-month consecutive period. Product revenue increased 7% year-over-year, driven primarily by MONOVISC worldwide growth of 22%. And worldwide orthobiologics revenue grew 5% year-over-year. And international orthobiologics revenue increased about 50% during the same period due to our global expansion efforts and strong demand for MONOVISC and CINGAL products. As we expected, MONOVISC continued to gain worldwide market share in this quarter as the market is migrating away from multi-injection option in favor of a more convenient single-injection treatment. The relative portion of revenue for ORTHOVISC and MONOVISC, which were around 1.5:1 ratio for the first half of 2017 compares to a 3:1 ratio at the beginning of 2016. And we expect this migration of share towards MONOVISC to continue. We delivered a strong product gross margin of 78% for the second quarter, up about 50 basis points from Q2 of 2016. And this increase is primarily due to a more favorable product revenue mix fueled by significant growth of MONOVISC. The total operating expenses in the quarter were $15.7 million compared to $13.1 million in the second quarter of 2016. The year-over-year increase was primarily due to higher research and development spending required to advance our product pipeline, our expanded operational efforts and increased professional service fees. Income from operations increased $4.2 million to $17.7 million in the quarter compared to $13.5…

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

Two quick questions here. Could you quantify, I guess, the OUS growth of MONOVISC and ORTHOVISC as well as CINGAL's contribution overall in the quarter?

Sure. CINGAL's contribution for the quarter is close to $1 million for Q2. And it represents over 300% from a growth standpoint versus the same period last year, meaning Q2 of 2016. The growth for international viscosupplementation products was strong as well, and it was 55% for the quarter.

And the split between MONOVISC and ORTHOVISC, any -- could you give us...

Yes. So for -- I talked about ORTHOVISC and MONOVISC split in my earlier remarks. That was focused on the U.S. market. From an OUS market as of the end of the second quarter, MONOVISC international revenue is about -- MONOVISC to ORTHOVISC is about 3:1. So internationally, a majority of our revenue is coming from MONOVISC. Obviously, now CINGAL is in the market, the single-injection revenue is about 4:1 ratio. And this is really speaking to the migration of multi to single. And we certainly see the strength of MONOVISC and CINGAL in our international markets, and in the U.S., we're seeing that migration taking place as well.

And qualitatively, we've always had different levels of competition outside the United States than inside United States. So particularly, Europe and other places as well there are some very cheap, what we call, homegrown generic-type products, but things that are made and offered at very low prices, and they don't necessarily come with a strong clinical portfolio, but they are low cost. But we do believe, and we're seeing it, that in many of these markets there is a definite need, and that need is growing for, what I might call, higher-cost, higher-efficacy products. This is particularly the case, and we expect in India, for instance, that this will be a big market for us.

Chuck, on India, any thoughts on what -- 12 months -- at the end of 12 months, what potentially revenue could look like -- a rollout, any thoughts there, any color?

Yes, Sylvia will take it. That one.

We're very pleased about the approval, which we achieved just recently. In terms of revenue contribution for 2017, it will not be a significant amount because it will be a partial-year launch as we look out to tweak the period between now and the end of the year. Having that said, I think it will support and sustain the robust international revenue growth that we're seeing because there will be additional incremental revenue for 2017. From a potential standpoint, I think India is a -- as we all know, a large market, a large population. I think the single-injection market is (inaudible) it's an interesting one. We will be one of the two products in the market. I think the partner that we have is strong and we have high expectations and we believe that they can do well in the market. But we have to take a look at how the initial launch goes and come back and report back to you what we see as we move forward. But we're certainly very pleased with achieving this milestone regulatory approval for an important market.

Our next question is from Tim Call of Capital Management.

When we look at your line MONOVISC, U.S. end-user revenue increased 56% year-over-year. Was a lot of that reflected in the quarter's revenue? Or will that be reflected in future quarters' revenue?

Those 56% is reflected in our current quarter revenue as royalty revenue for Anika. So just at a high level, we received on an ongoing basis two types of revenue. One for product that we shipped to Mitek, which are compensated on a transfer price per unit basis. The other one is royalty revenue from Mitek as they achieved end-user sales. So we see directly what the end-user revenue for the quarter was and we get a percentage of that as our royalty income. So to answer your question, yes, it has been reflected in our total revenue.

And is there anything lingering, and a part of it gets reflected now, and part of it gets reflected going forward?

On the royalty revenue, no, there isn't any additional lingering component. I think what's important to understand is, overall MONOVISC growth has been very strong, evident by, one, the end-user demand increased over 50%. And two, the achievement of $100 million milestone of end-user sale came sooner than expected. So those both are pointing to the robustness of demand for MONOVISC in the U.S.

When looking at the product lines, what products are in the other category?

We have two other franchises that are, what we would consider, noncore franchises. One is veterinary. So we use HA injectable products for animals in this particular case, the product is called HYVISC and it's used for equine, where it's mostly race horses. And the second category within the other line is ophthalmic product, which is a legacy product line. So it's a viscoelastic used as a part of cataract surgery.

And the growth in that category in the quarters that are just lumpy quarters? Or is that something that's growing long term?

Mostly lumpiness as we sell to distributors. And based on their timing of when they take orders, there are some of that. I think for veterinary we do see that the full year there will be some positive increase from last year based on some of the marketing initiatives that our partner has taken. But overall, as I said, both ophthalmic and veterinary products are noncore. They help to spread our overhead from our cost to production standpoint. But we do not invest directly into those franchises from an R&D standpoint.

When you look at the investments you're making in your company as well as the Phase III studies, will cash flow from operations cover all that expense?

Historically, it happened. And we continue to expect that our operating cash will be more than adequate to cover up for the ramped-up research and development spending. Which are, as you probably have noticed, has increased significantly over the past few years. And if you take a look at percentage of total revenue, is around mid-teens. It's a sizable investment, more comparable to pharmaceutical-type company. But the goal that Anika is looking to achieve is really to invest in the right program and accelerate the growth trajectory both in terms of revenue growth as well as profitability. So these are strategic investments that we have made. And we are advancing on the development side very nicely as Chuck had reported earlier on the call.

And your cash on the balance sheet is around $7.85 a share, and you basically have no debt. So if your cash flow from operations covers all your expenses, is that an appropriate amount of cash just to be sitting there?

We have some plans in terms of utilization of cash. I think putting aside the capital investment as it relates to the move of our previously outsourced manufacturing in Italy to the United States as well as the ERP program. There are other capital projects that we can work on but none of which will rise to a significant amount of utilizing a good portion of what's on the balance sheet. Ultimately, there are a number of ways it can be deployed to create value for our shareholders. One of which we have talked about is on the M&A front. It is an area that we have interest. And we continue to evaluate opportunities in this area. As we have said previously, we will maintain a very disciplined approach in terms of looking at opportunities.

Our next question is from Michael Petusky of Barrington Research.

I wanted to talk a little bit about the trials and just kind of where you guys are in terms of enrolling all the rest. So you're 30 patients on CINGAL, you want to be at roughly 500 patients by year-end. I guess, Chuck, is there any way for us to kind of think about how that progresses? I mean, you get halfway by the end of the September quarter, or how should that progress if it works out the way you hope?

There's a lot of patients in this trial, I don't know, everybody appreciates this, well over 500 patients, so bigger than the first one. It takes a while to get going. So you have to qualify all the sites, work through the IRBs, get everybody approve the protocol, understand the protocol, train the sites and then get moving. So it's actually quite [pressed] for that. We've got all that done, and we have 30 patients in the trial right now. A lot of our sites are people that we've worked with before. And to some degree, I think they've been stopped filing patients. So I think over the next -- I don't think we're going to have any trouble completing enrollment by the end of the year. It's hard to say though how rapidly it's going to increase. And that's particularly true since we have European sites and we do have the month of August, when not a lot of work always gets done. So Mike, it's hard for me to say, "Okay, by the end of Q3 we will have X patients, that will be July, August, September." What I can pretty much say with 99-plus-percent certainty is that we'll be fully enrolled by the end of the year. And we're really trying to push that as rapidly as we can to make up whatever time we can in that goal.

I just want to make sure, you said -- did you say 99% certainty that you'll be fully enrolled by the end of the year?

Yes, you want 100%? No. Yes. We feel very, very, very confident that we'll be able to achieve that goal.

So I guess, on the HYALOFAST then, could you remind me what's the patient population you're trying to enroll there? And obviously, you're trying to going to get 50% of that number by the end of the year?

The total number of patients is going to be 200. So 50% is going to be 100. A part of the issue with enrolling these trials, which all of the other people trying to look at therapies for cartilage repair is patient selection. The FDA is very strict about inclusion-exclusion criteria for everyone, not just us. And the control is usually microfracture, which most people believe is not durable. And then it comes back to some other particulars related to the size of the lesions and all these other things. So the bottom line is, there's not a lot of patients out there that fit the criteria, which is why the enrollment ends up being slow. Our trial is U.S. and in international. So we're making some strides in both places. But the bureaucracy in the United States is turning out to be a little more severe than it is internationally. Again, now we're -- we're confident, maybe not at the 99% level for HYALOFAST, but I can tell you that, every single week we have reviews on patient enrollment and talk about things that can be done. And this is a very, very important program for us. And so it gets our full intention -- our attention. Maybe didn't answer your question fully. But there's a lot of moving parts in this HYALOFAST trial. And the other thing as compared to CINGAL, it should be pointed out, we've done the CINGAL trial already with many of the safe sites that we're working with. So I won't say that's easier, but in some respects, the patients are there, the clinicians are already trained, the recruitment process was easier because we know all these people already. So as compared to HYALOFAST, which is in the U.S. any way charting new ground for us, I think it's a much more difficult thing to do.

And just two quick ones. I guess, in terms of -- I know you're not in -- the sponsor of the hip trial, but -- and I know that's probably been while we're going then maybe you'd hope, but is there anything to talk about there in terms of enrollment momentum or not really?

I think all the sites are up and running, which is a good thing because that's an advancement. I think now it's a matter of getting the patients into those sites. I can -- you're right, we haven't been pleased with the speed with which Johnson & Johnson is conducting that trial. We've -- let's just say that we've offered some not-so-subtle pressure to move a little faster. We're having -- they've opened up a little bit to talk about ways that we might suggest that help them enroll faster. So the dialogue has increased as well. So we're moving a little faster than we were before. And we're hoping to speed up that enrollment process and go forward. But over the last quarter we've made a little bit of progress in that area.

Last one, Chuck. I guess, the subject that we hear most about in terms of concerns is MONOVISC pricing. Is there anything you'd like to kind of say about the trends or what you see, or how you're thinking about that subject here moving forward?

I want to thank you for asking that question, Mike. And now Sylvia is going to take that one, and if necessary, I'll add some color at the end. Go ahead.

I'll give you the quantitative figures and Chuck can add the colors. From a pricing standpoint, as we reported in our previous quarters, we saw some price deterioration both for ORTHOVISC and MONOVISC, and you asked about MONOVISC. So 2016 versus '15, we saw price decline in a high single, maybe around 10%-or-so. Q1, we had reported that we saw some stabilization of pricing. But it was a little too early to tell what the rest of the year will look like. We were pleasantly surprised to see that in the second quarter price actually came up a bit in addition to the very nice volume increase. So for the first half of the year, we're seeing some good price increase for MONOVISC as it is taking share, expanding share in the marketplace and is a major contributor to our top line. So that's the quantitative color. Chuck, any?

I just -- Mike, I think we -- quarter-to-quarter is tough to look at price. But if you look at it for a 6-month period or even better year-over-year, it's exactly what Sylvia said. From 2015 to 2016, we saw decline. But '16 to what we see in '17, is a stabilization, if not, maybe a little bit of uptick. So we'll see how that progresses throughout the year. But to say that the -- to make the conclusion year-over-year that the price is continuing to decline, I think is an incorrect conclusion.

Actually, can I sneak one more quick one in? I just want to ask, in terms of priorities for your new President, I mean, are there certain things that has kind of been assigned to him in the portfolio, in particular in terms of kind of front burner items?

I think I mentioned something in my prepared remark. He is -- among other things, he's got a lot of real great experience. But among other things, he is a commercial [prof]. So we really added to our bench strength. I think he is going to spearhead the direct commercialization effort. He is very strong in marketing. So he is going to build out marketing team for us here. I think internationally, we're also building up our team. So we'll have some -- he will provide some assistance, some guidance there. And that's where he'll start. And then as we move, he has also got excellent operational experience. So I'm sure that at some point, he will have some responsibility there as well.

Our next question is from Joe Munda of First Analysis.

A couple of more questions here. Chuck and Sylvia, were there any stocking orders in the quarter either in the U.S. or OUS? As well as, how should we look at OpEx, particularly SG&A, R&D for the third quarter and fourth quarter, the progression there?

Going back to the first question, when you said stocking of order, which particular product and territory were you referring to?

So let's say, CINGAL, Europe, and MONOVISC in Europe?

There were no particular stocking orders that I can think of during the quarter. I think it's pretty -- from a European standpoint, pretty normal quarter for us for MONOVISC and CINGAL.

In Canada, same thing, or were there stocking orders in Canada?

All countries had product purchase orders that we ship to.

They were normal operations.

There's no particular stocking order. Yes. So the second question was really -- operating. Yes. So we had -- we're keeping our operating expenses guidance at the high $60 million to low $70 million for the year. We typically don't give quarterly operating expenses guidance. But I think from a qualitative standpoint, on R&D side, we do expect R&D expense to continue to ramp up now that we are in full gear for the CINGAL study. Earlier in the year, I think Q1 was light for CINGAL. Q2 picked up a fair amount because we qualified 100% of the site and started to enroll a good portion of the patients in the study, and that continues to grow, and targeting full enrollment by the end of the year, a lot of the clinical studies cost will hit in the second half of the year. And similarly, on the HYALOFAST front, as we increase the patient and site enrollment, the expenses will correlate. They will proportionately increase as well. For SG&A, we do expect an increase in SG&A cost. Previously we have talked about on the ERP front. Obviously, a majority of that multimillion dollar project will be capitalized. But on an operating side, we do need a good amount of external support to help backfill some of the routine activities. And those expenses would come through on the P&L in the SG&A line. So in short, we expect the second half of the year to be higher from an operating expense standpoint. And we keep to the guidance of high $60 million to low $70 million for the year.

And then as far as gross margin is concerned, can we expect, I mean, this was -- obviously the quarter was skewed with the milestone payment, but it's -- taking a look at product gross margin by itself, it came in pretty high a couple of -- 500-basis point improvement. Is this a level right here at mid-70s that should play out for the rest of the year?

So when we did the product gross margin calculation, we excluded the milestones. So if you take out the milestone, $5 million milestone is at 78% for the quarter, up about 50 basis points from last quarter. So it's still within the range of what we have previously guided, which was between mid to high 70% -- 78% range. So we expect that is still a good range to be in, and don't believe that at this point we would revise that expectation.

Yes, I misspoke I meant 50 basis points, not 500. And then Chuck, I guess, taking a look at the guidance and the product growth expectations, looking on, and I know you're probably hesitant. But I mean, is this a new normal as far as growth is concerned? Orthobiologics grew 5%, or data is telling us that it was flat essentially in the U.S. Any comments as far as what orthobiologics looks like domestically as well as, as a contribution to product growth going forward, because you're talking about essentially growth slowing year-over-year. You put out 17% in '16, 16% in '15, and now, you're talking anywhere product growth to meet the midpoint of your range call it 10%. You're talking about 6% product growth. So any thoughts there would be great?

I will take the question, and then Chuck...

Yes, weigh in...

So from a growth standpoint, obviously, we took a number of factors into consideration. The U.S. market, the mix of ORTHOVISC and MONOVISC, international market expansion and growth of CINGAL pricing trends. And at the end of the day, as we look at all those components and still believe that the high single to low double-digit percentage is a solid and achievable number for us for the year on a total revenue standpoint. In terms of contribution and where the growth is going to come from, I think MONOVISC U.S. continue -- will be a strong component because of its efficacy as well as its product differentiation features. We do believe and we've been making a lot of progress on the international front in certain markets and generated very strong results from an international viscosupplementation revenue standpoint. Looking out a little longer term, I think CINGAL will prove to be a game changer for us. We are seeing extremely positive feedback from our distributors, including Pendopharm in Canada talking about what we previously envisioned, but they are actually seeing in the market in terms of how this innovative product is not only expanding with the visco market but taking shares away from steroid. So that is positive. And we continue to learn how the products are in commercialization and the feedback is. And I think there is a lot of points and lessons that we can leverage and utilize for the ultimate U.S. commercial launch. So those would be at high level, where I believe the revenue contributors are coming from.

The only other comment I would say is that, some of the contributions out of our S.r.l. business, our Italian business have been not where we wanted them to be. And so wound care, some of the other orthobiologics offerings, even surgical. So if we can improve those even by a couple of million dollars, that's going to get you some decent improvement on our revenue growth. And we fully intend to try to do that for sure as we move forward. So that business is a little bit underperforming, and we -- it's our intention to get that back on a higher growth rate. So that may add a few percentage growth points on revenue as well. I hope that gives you some color that's useful.

Chuck, actually, I'd love to hear your commentary. Can you explain to -- I guess, the dynamic that's going on in Canada? And why all of the sudden you're taking share away from, call it, corticosteroids? What's going on there? It's been in Canada for some time now. What is going on is from a positive aspect that is driving this?

Well, I think, and I don't have direct contact with the people in Canada. But I think what's happening is, people are really excited about what CINGAL does, and that physicians are getting and physicians themselves are seeing commentary about the relief their patients are getting. And I think they're willing then to say, "Okay, maybe I will start using this and discontinuing steroid applications because I see great benefits here." And in fact, the HA that has a long-term action also has a steroid in it. So yes, maybe a little bit more costly, but it seems to be that the benefits are there. So I think that's what's driving it. Whether we can reproduce that everywhere around the world, we'll have to see. But in principle, it makes sense.

And my last question, Sylvia, the market growth, if it's still growing for orthobiologics low single digit, is that what you're seeing as far as market growth is concerned?

I haven't seen any new data suggesting otherwise, and I think typically market growth information comes out annually. And that was the last data point that we have. And our growth certainly at end-user level has been multiples of the market growth rate. So we're pleased about that.

To that point, I mean, is the MONOVISC end-user growth, is it a direct reflection of just product switching? Or are you gaining actual share? Because that's a key question I feel like, if it's just a result of product switching then it's -- I can't explain the growth. So is it key -- is it product switching that's occurring here mostly?

I would say that it's more gaining shares from other single injection, and in some cases five injection, multi-injection products. There is some switching conversion, multi to single, but primarily it's...

It's not necessarily all ORTHOVISC.

Correct.

Yes.

But you said the ratio went from 3:1 to 1.5:1, correct? So 3 ORTHOVISC, 1 MONOVISC, now it's 1.5 ORTHOVISC, 1 MONOVISC right?

But that's part of the -- but it doesn't correlate to 1 for 1 switch. As we said, there's -- the growth for MONOVISC is growing driven by fact that it's taking shares away from others.

You're not operating out of a single pool where the ratio is changing in that pool. MONOVISC is growing. It's growing a lot faster than the overall market. So therefore, the contribution of MONOVISC is greater in our pool.

I mean, it's just tough for us to see that with the migration going on from ortho to mono and then getting a real market growth number. So it's a little bit noisy to us to actually see that. But I'll continue to dig into it.

We do have a follow-up from Mike Petusky of Barrington Research.

Sylvia, I was just wondering, would you be willing to share the D&A for the quarter, back half, and CapEx for the quarter?

Depreciation and amortization for the quarter is roughly about $1 million, similar to Q1. And stock comp, I believe is around $1.2 million, if I remember correctly. But can you just give me one… Yes, $1 million for depreciation and amortization and $1.2 million, $1.3 million for stock comp.

And CapEx?

CapEx is roughly around $4 million for 6 months.

Those other two figures were for the quarter though, right?

Correct.

And that concludes our Q&A session for today. I'd like to turn the call back over to management for any further remarks.

Thank you, Kristy. And thanks to all of you on the call today for your time. We are very pleased with our financial and operating results for the second quarter, obviously. And we remain committed to developing the next generation of products that will deliver sustained growth and value for all shareholders. And finally, I'll conclude by saying, we very much look forward to updating you again on our next earnings call. Have a great day.

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