Good morning ladies and gentlemen and welcome to Anika Therapeutics First Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions]. As a reminder this conference maybe recorded. I will now turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

Thank you, Latif. Good morning everyone and thank you for joining our first quarter 2018 earnings call. With me on the call today is Anika's President and Chief Executive Officer, Joseph Darling. During today's call Joe and I will review our first quarter 2018 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 Investors 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 number one. 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 risks and uncertainties. The company's actual results could differ materially from any anticipated future results, performance and achievements. Please also see our SEC filings for more information about factors that could affect our results. Please turn to slide number two, while I pass the call over our CEO, Joseph Darling. Joe.

Thank you Sylvia and good morning everyone. Welcome to our 2018 first quarter earnings call. This morning I would like to share with you my vision for the future of Anika. I joined Anika in late July 2017 after spending the better part of the last two decades working on and overseeing general management and commercial operations at large publicly held companies, including Abbott Laboratories, Wyeth-Ayerst, Baxter International, Smith & Nephew and CONMED. When the opportunity to join Anika arose, I recognized not only an organization with a tremendously versatile technology platform, but also an organization with an expansive, innovative product portfolio and a pipeline filled with potential game changing opportunities. Even more importantly, I recognized an exciting opportunity to apply my experience and expertise to develop a strategy and build a direct commercial infrastructure from the ground up and to leverage our strategy and infrastructure to drive the next phase of the company’s growth. It is truly an honor and a great opportunity to lead Anika through the next phase of its evolution as we invest in and build our pipeline to deliver a series of innovative new treatments to the global orthopedic community over the next several years. Please now turn to slide number three. Whether you have a history with the Anika story or a new shareholder tuning in today for the first time, I think it is safe to say that this company has a reputation for both stringent, business practices and candor. These attributes of Anika were also factors that attracted me to the company and I intend to uphold them as we move forward. It is important for me to note that some of the discipline that was put to the test recently as new information arose that we knew would have a near…

Thank you, Joe. In the first quarter of 2018 we continued to execute on our strategic initiative aimed at accelerating our revenue and earnings growth in the years ahead. We made significant progress advancing the CINGAL Phase III trial, continued to expand MONOVISC and CINGAL in international markets and advanced our pre-launch activities to support the CINGAL U.S. commercial launch next year. Please turn to slide number nine. Total revenue for the quarter was $21.3 million compared to $23.4 million for the first quarter of 2017. As Joe mentioned, the year-over-year revenue decline which was partially due to $1 million related to the voluntary recall of three HYAFF-based products. Worldwide orthobiologics revenue decreased approximately $700,000 year-over-year for the quarter. This was primarily due to lower ORTHOVISC revenue as the trend of multi-injection to single injection shift continues. Overall, domestic ORTHOVISC revenue was also impacted by pricing, which was primarily offset by the increase in domestic MONOVISC revenue. On the sequential quarter basis, ORTHOVISC experienced a double digit percentage decline in price in the United States during the first quarter, while MONOVISC experienced a high single digit percentage price decline during the same period. Domestically despite the double digit rate overall market decline during the quarter, we are very pleased to report that our ORTHOVISC and MONOVISC products revenue at the end user level achieved the leading position in the overall market in the United States. MONOVISC’s worldwide revenue increased 29% year-over-year due to our global expansion efforts and the industry shift from multi injection options to more convenient single injection options. CINGAL also continued to perform very well, delivering revenue growth of close to 280% year-over-year for the quarter. International Viscosupplementation revenue grew 17% year-over-year due to continued strong demand from MONOVISC and CINGAL. Product gross margin was 63% for…

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

Good morning Joe and Sylvia. Thanks for taking the questions.

Good morning Joe.

Good morning Joe.

First off, can you give us the circumstances, a little bit more of a time line if you will around the recall. When did you learn of the issues and when did you decide to recall these products?

Joe, as we talked about earlier, the recall was a very recent activity. It came about as part of our ongoing quality activities that we have. During the first quarter we came across certain data which indicated that the product’s shelf life maybe impacted over – these products have a five-year shelf life, and we saw some data that over the long term we may have challenges maintaining the shelf life over the course of the five-year period. As a result of precautionary measure, it’s not – there certainly is no indication of safety and efficacy issues. We made the decision in late April. We’re talking about within the last couple of weeks to initiate this voluntary recall and all the communication activities are happening very rapidly as a result of that decision.

Joe, I want to add a couple of comments to you know Sylvia’s answer to you. You know as Sylvia indicated, this is purely a voluntary recall, and as I mentioned early on in my beginning notes that you know it’s very important – we take our quality standards very seriously here at Anika, and you know the legacy of quality and trust has been one of the values in this company. So we felt that was important at that point in time based upon these indicators that Sylvia had mentioned, that it was important that we took the voluntary action.

Okay, and then flipping over to ORTHOVISC and MONOVISC, first on the MONOVISC side, can you talk a little bit about the CE Mark being temporarily suspended and the circumstances there and then as far as the U.S. is concerned, you know you talked about single-digit declines in MONOVISC pricing, double digit in ORTHOVISC. Is that a function of – you know we’ve been reading J&J is looking to rationalize some of its cost from its suppliers, as well as you know you talked about competitive pressure. So if you could give us a little bit more color there that would be great.

Yeah Jon, I am going to take the first part of your question as it relates to the CE mark, and then I’ll turn it over to Sylvia and she can address some of the supplier cost restructuring that we’ve all seen in the press. First of all, you know when you look at the certification process for the CE mark, that allows us to sell MONOVISC into the European markets. That was suspended back at the very end of March of this year. One thing I want to point out, it is not a product quality issue. This is purely an administrative issue between us and our notified body. One of the challenges that we’ve noticed with some of the notified bodies is the increase in the regulations that occurred during 2017 in the EU markets. As a result of that, that’s created a backlog. We were adjusting to the new information they were requesting, so a lot of this is more administrative. I can tell you personally, I’ve been involved in the calls with our notified body and we have a very high degree of confidence that’s going to be resolved in the next few weeks. So from my perspective this is just temporary. It was the result of some change in guidelines and regulations last year, and as you know we’ve been very diligent on what we call the RA/QA front, and during the process with the backlog, with the notified body, this result is being temporarily suspended. Sylvia, I’ll turn it – yeah, if you want to answer Joe’s second question.

Sure Joe, with regards to your question about price decline in the United States, as you know the U.S. pricing last year was more or less stable. What we saw in the first quarter was that both ORTHOVISC and MONOVISC experienced some high degree of price erosion. I talked about the sequential quarter price erosion and comparing this to the previous year’s Q1, both ORTHOVISC and MONOVISC experienced a high single digit price decline. What we learned from our partner Mitek is that it’s a combination of reacting to competitive pricing in the market as well as their strategic move to secure certain large accounts and we’re seeing that on our products’ ASP for this quarter. What’s important to know and I think both Joe and I had highlighted on our scripted section is that during the first quarter the market itself declined in the double-digit rate, at a double-digit rate, and despite that our products’ growth, especially MONOVISC was very robust. Year-over-year volume of MONOVISC went up 30% and that is certainly positive and reinforces the product differentiating features, as well as the shift in the market from multi-injection to the singe-injection segment. Hopefully that answered your question Joe.

Our next question comes from the line of Lisa Springer of Singular Research. Your line is open.

Thank you for taking my questions. My first question concerns ORTHOVISC. Is the expectation that that will gradually be replaced entirely by MONOVISC or is that always going to be a certain inch of the market that that product addresses?

Lisa, good morning. Thank you for the question. We believe that ORTHOVISC and the overall multi-injection market will always have its place based on certain physician practice preferences related to pricing and the lease of multi-injection efficacy. As it stands today, ORTHOVISC still maintains a large portion of the market, but we’re seeing the shift from multi-injection to single injection. So in short to answer the question, we believe ORTHOVISC will be there, but the growth will be from the single injection segment of the market.

Okay, thank you. And my second question concerns the R&D spend for the year. Do you expect it to be fairly even across quarters? Is it going to be more back loaded towards the second half of the year?

Overall for the year R&D spend is increasing comparing to last year. From a quarterly standpoint we believe that first half of the year will be heavier for CINGAL related activities as we complete our six month follow-up and the three month additional study, whereas on the second half of the year we have heavier HYALOFAST spending and in addition to that we will be commencing the tennis elbow post marketing study. So the timing of these studies contribute to the timing of the spend. So first half on CINGAL, second half more so on the HYALOFAST and the ORTHOVISC study.

Thank you. Our next question comes from the line of Jim Sidoti of Sidoti & Company. Your line is open.

Good morning, can you hear me?

We can Jim, thank you.

Great. First on the recall, is there any potential issues that caused you to recall these products could impact any of your other products or MONOVISC or ORTHOVISC or is this strictly related to those products?

The recall is strictly related to those products. As we mentioned before, these are HYAFF based products which were recently transferred to our Bedford facility, so they are completely separated both from a manufacturing space and process standpoint from our gel based products.

Okay, that’s good to hear. And then with CINGAL, has there been any change in the timeline since your last call?

No, we still remain on track with what we’ve indicated in the past Jim. It’s a great question. The team is working diligently and waiting, so we still remain on track for potential filing at midyear this year.

So with $163 million in cash you know are you prepared to go-to-market with just one product or would you anticipate possibly doing an acquisition prior to your launch of CINGAL so you could at least have two or three products in the bag when you go.

I am going to let Sylvia address part of that and then I am going to pick it up from there, so go ahead Sylvia?

Jim, you pointed out that our cash balance sheet is quite strong and we have a strong history of generating good cash flows. M&A will play an important part of our growth strategy and from a capital deployment standpoint we historically have had a pretty disciplined approach and our priorities will be in the order of organic growth, inorganic growth and return of capital and on the inorganic growth part, M&A will certainly be something that we will dedicate resource and effort to it and Joe will speak to the specifics and the progress that was made so far.

Yeah, so we – since I took over the reins about six weeks ago, I’ve been working with some members of the team and building out the, what I call the M&A process and the target profiles of those types of activities we’d want to engage in, so I can tell you Jim and it’s a great question considering your capital allocation here, that part of our short and long term strategy is to look at M&A. Of course we want to be – we want to make sure that whatever we’re looking at is a good fit for the business and the market space we’re in and that it’s not dilutive and that you know it would be a nice tuck-in in creating opportunity both short term and longer term for the company.

Thank you. Our next question comes from the line of Mike Petusky of Barrington Research. Your line is open.

Hi, good morning. I may have missed this. I was temporarily called away from the call here. Have you guys talked about some of the capital allocation, the share repurchase become more on the table with the stock having come in fairly hard last few months?

Mike, we spoke or I spoke briefly about our capital deployment strategy in terms of the priorities. So our top focus is on organic growth followed by inorganic growth and Joe shared on the M&A front our philosophies and some latest activities. And the third item is the return of capital. So although at this time we have made no decision or there is no announcements that we can make, it is the topic that is routinely discussed by management and our board. So what I can tell you is its being looked at and evaluated but no decisions has been made.

And then the revenue guide for the year, that does still include an assumption of roughly a $5 million milestone in ’18, is that right?

It does include it and we’re closely monitoring the progress to make sure that we are advancing towards achievement.

Is that material in question at this point, whether you’ll make that?

It’s not materially in question.

I think that’s all I got, thanks.

Thank you. Our next question comes from the line of Joe Munda of First Analysis. Your line is open.

Yeah, just a couple of follow-ups here. Joe, could you provide us a little bit of a roadmap between now and CINGAL launch, some sort of benchmarks that we can you know kind of look at as we approach the launch here, perhaps the data readout on the trial if you will, some key benchmarks going forward?

Yeah, you know Joe and it’s a great question, thank you for asking that. You know there’s a couple of things that I would point out and I think I’ve shared this in the past and so you know when we came into the first of the year this year we really started to deploy the actual commercialization strategies. The first step in that process and the best opportunity at that point in time was at the AAOS meeting where we started to engage physicians and what I would call in-depth interviews, one-on-ones, quality time lasts 45 minutes to almost an hour and talking about the attributes of products that they like. The types of products they’ve used in the past, reimbursement, so pretty intensive one-on-one meetings with each of these physicians. The second component is you know – so that was at the end user base, which was really the immediate primary focus so that we can start to plan the additional types of activities. That would be the pathway taking us to the launch. So the second component to that was at the recent AMCP meeting which was held here in Boston just a few weeks ago and focusing in on the payer side of the business. And we’ve got a pretty good grasp on that and we are actually developing some advisory panels with some of these large payer groups and some of the directors of the formularities that control this type of a approval process. The next phase that we’ll be moving into is really scoping out and sizing out the market and what I mean that is, as we continue this market research we’ve have done in the past, now we’ll be continuing going forward. So I don’t want to discount that that is not…

Okay and then just one follow-up. I know you talk about competitive pressures. Are you seeing any impact from the recent Zilretta launch in the market place? Is that the core driver of some of the pressure and then as far as product gross margin is concerned, I mean is that a direct result of the pricing itself or is there something else there?

So I’ll address the Zilretta question. So we are not seeing a lot to be honest with you Joe. It still seems to be quite. We even checked with our partners, they are not seeing any impact relative to Zilretta. You are still dealing with a steroid versus a VISCO supplement. So from our perspective we don’t see that as major impact and we haven’t seen much activity. So the information coming in indicates that no impact on our base of business. That could change potentially over time, but I just don’t see it at this point in time and we haven’t received that kind of feedback. In fact what’s interesting when we went out and did the studies the in-depth studies with physicians, part of the feedback coming back is we can see some of those physicians in the treatment algorithm shifting left, meaning using earlier intervention with CINGAL on the steroid side where they tend to use steroids first, so some of that feedback is coming back as part of our reviews. I’m a little off base on your question here, but I thought it’s important to put that in so that you could understand the full gravity of the situation.

With regards to product gross margin, the pricing certainly is a factor in the projection that we stated earlier, which is the mid to high 60% range, but it’s not a main driver. The main drivers are related to higher production costs for our solid HA products, as well as the chargers related to the voluntary recall that we talked about earlier.

Thank you. At this time I would like to turn the call back over to Joe Darling for any closing remarks. Sir.

Well, first of all I would like to thank all of you for your time today. I’d also like to reinforce how this first quarter in my opinion has strengthened our results to rapidly assume greater control and responsibility over our end user relationships through our direct commercialization initiatives and our revenue growth drivers. We have multiple revenue streams from a broad product portfolio, a deep and innovative pipeline with tremendous potential and a seasoned leadership team with proven commercial expertise. We expect the next 12 to 18 months to be transformational and a bridge to our direct commercialization initiatives for Anika. I look forward to leading the company through this inflection point into the next phase of its evolution. I also look forward to meeting with many of you in person on the road at investor events in the coming weeks and months. Thank you for your time this morning and have a great day.

Thank you, sir. Ladies and gentlemen, this concludes today’s conference. Thank you for your participation and have a wonderful day.