Anika Therapeutics, Inc. (ANIK) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to Anika Therapeutics Second Quarter 2018 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 follow at that time. [Operator Instructions]. I will now turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

Thank you. Good morning, everyone, and thank you for joining our second 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 second 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 today's 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 and achievements. Please also see our SEC filings for more information about factors that could affect our results. Please turn to Slide number two, as I now turn the call over our CEO, Joseph Darling. Joe?

Thank you, Sylvia, and good morning, everyone. Welcome to our second quarter 2018 earnings call. While our recent challenges have been well documented and will discuss those further shortly, we are pleased with our financial results in the second quarter and remain confident in our ability to drive growth and shareholder value. Our results were primarily driven by growth in our U.S. viscosupplementation business and improved operational performance which demonstrate the strength of our business and the success of our initiatives to improve our financial and operational performance. Before we dive into the financial and operational updates for the quarter, I want to take a moment to provide my high level perspective on the business and why we are confident that Anika is well positioned to continue its transformation into a fully integrated commercial company. We have had a history of having too little control over our own destiny, as our contracts are structured such that our partners determined end market pricing and other decisions for a large portion of our exceptional product line. However, our capabilities and expertise go far beyond those of just a contract manufacturer. As I will detail shortly, we are actively working to gain greater control of our future as a company under new leadership and with new commercial and strategic initiatives to accelerate growth. When I first joined Anika, I was excited to be a part of such an innovative, high growth, profitable and global orthopedic company. Anika has a diversified portfolio of differentiated market leading therapeutic products and an emerging orthopedic medicine pipeline with tremendous potential. I knew that I was joining the company at a pivotal moment and that we would likely encounter some challenges as we work to position Anika for the future. Importantly, despite our recent initiatives, my excitement and optimism for the future of Anika is stronger than ever. Anika is a growth company and I am confident that we have the opportunities and resources to accelerate our revenue and earnings growth over the next several years and beyond. I was appointed CEO in March of this year, a couple of weeks before the end of our first quarter. Since that time, we have begun a thorough evaluation of our strategy, operations and performance. I wanted to make sure that we were maximizing our current opportunities while also enhancing our near and mid-term growth trajectory. We quickly identified several opportunities where we can further optimize our commercial reach in operational processes and refocus our resources to continue to improve our financial performance. Importantly, we're making significant progress towards realizing these opportunities. The first focus area is improving our distributor engagement outside the U.S. with oversight and performance in the international markets where I believe we are not currently getting our fair share of the market. In the U.S., we still see either a direct correlation model or a hybrid direct with partnership approach has optimal. However internationally, we see a clear opportunity to improve our processes for managing international markets and distributors in order to optimize our OUS performance. In order to jumpstart our international growth, we will be working closely with our distribution partners to increase our collaboration and involvement within country programs and initiatives to generate improved awareness of our product portfolio and company. To that end, I am proud to say we recently hired a seasoned industry veteran with a strong track record of building successful international sales networks to assess our performance and ongoing initiatives in every region and to implement changes where necessary. I am confident that with the new expertise on the ground, we can drive greater international growth from our existing products and expand our commercial network. This new structure will also enable greater oversight of distributor led sales and marketing activities in order to ensure we optimize our returns and support our partners to improve their market penetration and overall performance. The second focus area is driving operational efficiency in the U.S. We recently hired a Vice President of Operation was been tasked with optimizing resource utilization, manufacturing, distribution and inventory management. We're already starting to see the benefits of his efforts. And over the coming months, we will be implementing enhancements to processes, systems and people to drive improved operational performance. As evidenced by these recent hires, we realize that we need to have the right team in place as we execute our initiatives. We are committed to supplementing, augmenting and reinforcing the talents throughout Anika. Based on my prior leadership experiences in larger organizations, I know that while innovation will always play a role in success, internal R&D alone is not enough to sustain the long term topline growth which we strive to deliver to our shareholders. To that end we realize that we also need the right product portfolio. We are actively focused on targeted partnerships and acquisitions to supplement and in some cases organic growth. We have already implemented focused in elevated efforts to define specific targets that will allow us to bridge the gap between MONOVISC our next generation of internally develop products such as CINGAL. We recently refocused the internal efforts of our Chief Technology and Strategy Officer towards business development activities and we are actively screening a number of product and technology company candidates that will enhance our portfolio and drive profitable growth for shareholders. In addition to these ongoing initiatives, we are currently developing a detailed five years strategic plan to deliver and sustain double digit revenue growth in 2019 and beyond. We look forward to outlining our strategic plan in the coming months. I'd like to now turn the call over to our Chief Financial Officer, Sylvia Cheung to review our second quarter financial results, before I provide more details about our ongoing initiatives to mitigate the recent challenges and enhance growth. Sylvia?

Thank you, Joe. Total revenue for the quarter was $30.5 million dollars compared to $33.5 million for the second quarter of last year. The year-over-year deference was due primarily to the achievement of $5 million of milestone revenue in a prior year period as a result of MONOVISC reaching $100 dollars in U.S. end user sales within a consecutive 12 month period. As you can see on Slide number Three, product revenue in this quarter increased 8% year-over-year, primarily due to strong viscosupplementation revenue here in the United States driven by MONOVISC performance. MONOVISC U.S. product and royalty revenue increased 42% year-over-year in the quarter, resulting in U.S. fiscal viscosupplementation revenue growth of 12% for the second quarter. Domestically, ORTHOVISC and MONOVISC maintained the number one position in the combined U.S. multi and single injection segment, which we achieved during the first quarter of this year. On a sequential quarter basis, ORTHOVISC end user sales experienced a double digit percentage increase in volume and price in the second quarter, while MONOVISC end user sales experienced 38% increase in volume and was flat on price. The relative proportion of U.S. revenue for ORTHOVISC and MONOVISC was around one to one for the second quarter for 2018 compared to about two to one at the beginning of last year. And we expect this migration of share toward MONOVISC to continue. International viscosupplementation revenue decreased $700,000 year-over-year for the quarter, due primarily to the timing of orders. We expect double digit growth from our international viscosupplementation business on a full year basis. Product gross margin was 73% for the second quarter compared to 63% for the first quarter of 2018 and 78% for the second quarter of last year. As Joe mentioned, we are actively executing a number of initiatives to increase operating efficiency and we are pleased to see the initial results of our efforts in this past quarter. Total operating expenses in the quarter were $19.3 million compared to $15.7 million in the second quarter of 2017. The increase was primarily due to increased production costs as a result of product revenue growth, increased personnel costs and expanded worldwide commercial initiatives. Our effective tax rate for the quarter was 13% and was positively impacted by tax benefits of approximately $1.3 million related to employees stock option exercises. Net income for the quarter was $10.1 million or $0.68 per diluted share compared to a net income of $11.4 million or $0.76 per diluted share in the second quarter of 2017. The change was due primarily to the decline in milestone revenue and increase in operating expenses which were partially offset by the favorable tax effect from employee stock option exercises previously discussed. We ended the quarter with $139 million in cash in investments on our balance sheet. We completed our $30 million accelerated share repurchase program in July and repurchased a total of approximately 800,000 shares under the program. Returning capital to our shareholders as a part of our balanced capital allocation strategy and the implementation and completion of our share repurchase program reflects our strong financial position and confidence in our future. With that said, we are also focused on both organic investment and strategic M&A and will always take a disciplined approach to capital allocation to ensure we are deploying our capital to the most value creating opportunities. Based on our internal analysis and current available information, we have updated our revenue guidance for the full year of 2018 to exclude the $5 million of milestone revenue previously expected in 2018. We continue to expect product revenue for the full year of 2018 to be around the same level as 2017. We also expect product gross margin to be around high 60 percentage range for the full year of 2018. The impact on 2018 earnings from the reduction in milestone revenue is expected to be offset by lower SG&A associated with CINGAL U.S. pre-launch marketing activities. Total operating expenses for the full year of 2018 are now expected to be in the low $90 ninety million range. Additionally, we expect product revenue in the third quarter to be slightly down from the prior year, mainly as a result of effects from a voluntary recall initiated earlier this year and decreased U.S. viscosupplementation transfer pricing. As a reminder, while our royalty revenue from U.S. ORTHOVISC and MONOVISC sales reflects end market pricing during the quarter, the U.S. ORTHOVISC and MONOVISC product transfer prices are based on end user sale prices two quarters in arrears. This means that we will now experience the impact on our product transfer price of the decreased market pricing that we saw in the first quarter of this year. I'd like to now to turn the call back to Joe to discuss and provide some context about our recent business events and initiative as well as our product development strategy.

Thank you, Sylvia. Please turn to Slide number Four. I will now turn to an update on CINGAL. While we were surprised and obviously disappointed by the result of the 16-02 clinical trial that we had announced in June, I'd like to be very clear regarding our current thinking about CINGAL. CINGAL has now been evaluated in several control clinical studies. We believe that the data gathered from these studies demonstrate the safety and efficacy of this novel combination therapy. The pain reduction experienced by trial subject is rapid as well as durable which we believe validates the design rationale for CINGAL. Despite the results from the 16-02 clinical trial, we believe that data from our existing studies may be sufficient to support U.S. approval. As noted earlier this year, we continue to monitor the results of the 16-02 patients in a closed actively designed extension phase to the study which will gather data through 39 weeks. We intend to discuss all relevant data with the FDA once we have had a chance to analyze the 39 week results. While we believe we have a potential pathway for approval based on the existing CINGAL studies, we also understand there's a chance that we will need to gather additional clinical data to support the U.S. approval. We are preparing multiple strategies, so that we can move forward expeditiously when we receive additional guidance from the FDA. We intend to provide our next update on CINGAL once we have had discussions with the FDA and have determined an appropriate path forward. Please turn to Slide number Five. Beyond CINGAL, I am pleased to say we are actively preparing for the 2019 commercial launch of our bone repair product which received 510-K clearance this past December. This treatment provides an injectable self-setting osteoconductive bone graft substitute that is resorbed by the body and is replaced by the growth of new bone during the healing process. This product represents a 250 million to 300 million market opportunity and we are first regenerative medicine treatment launched in the U.S. Given the growing interest in this product, we are exploring a hybrid commercial model that may include partnering with current or new partners. Moving on to HYALOFAST. The HYALOFAST clinical program as you know, we are currently conducting an international Phase III clinical trial to support FDA approval. U.S. sites have come online over the past 12 months and the reception to the treatment in the U.S. has been overwhelmingly positive. This is the first opportunity for U.S. based surgeons to use this novel treatment and they're finding that the product properties greatly enhance the surgical procedure. While we continue to see a very high level of enthusiasm among physicians and patients for this unique regenerative treatment, we no longer expect to complete enrollment in the Phase III trial by the end of this year. The trial is being conducted within a landscape that is changing with respect to the randomization arm which is microfracture and physicians are reluctant to randomized patients to that arm of the trial. We are pursuing strategies to accelerate enrollment and will provide the revised timeline for the expected completion of the trial as soon as possible. With a conservative U.S. market size of greater than a half a billion annually, we continue to view HYALOFAST as an important product with significant future revenue potential. As you can see on Slide 6, we're also advancing a noval regenerative treatment for rotator cuff repair procedures based on our HYAFF technology which is in its conceptual phase of prototype development and demonstrates the versatility of our hyaluronic acid platform. This product represents a U.S. market opportunity of approximately $150 million to $200 million with over 650,000 procedures in the U.S. alone each year. We also think this product could be a candidate for a potential partnership. We are on track to have a first prototype by the end of the year. Lastly, while it was not a significant percentage of our overall revenue, we target to have our HYAFF based products impacted by the voluntary recall to be back in the market by the end of this year. I am also pleased to report we received an updated CE mark for MONOVISC in May as expected following a temporary administrators’ suspension. In closing, I am certain we had a route right foundation for success, we know what we need to do drive our next phase of growth and are well positioned with world class talent of versatile technology platform in a diverse commercial portfolio as well as a strong balance sheet in a culture of financial discipline and accountability. With focused hands on leadership in the new in reassign talent coupled with our clear strategic vision and forthcoming five year strategic plan, we are confident that we can drive grow and create near and long term value for patients and shareholders. We are now happy to take your questions. Thank you.

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

Good morning, Joe and Sylvia. Can you hear me okay?

We can Joe, good morning.

Good morning, Joe.

Thank you first off for that, pretty extensive and comprehensive update. Really appreciate it from my end at least. So Joe, I just want to start off on one question and I'll do a follow-up and then I'll hop back in the queue. But you know in regards to the outlook, I know you said it's early and you're going to come back to us with the strategic plan you know but given the guidance for product growth being flat this year and the expectation for growth to accelerate into the double digit range, I mean how much of that would be from some of the improvements you've talked about working closer with distributers as well as you know are we to expect probably an M&A or a transaction this year or early next year to help drive that growth, how much of that is going to be organic you think versus possible acquired growth?

Joe, it's a great question and let me break the question down into a couple different components. First on the growth that we anticipate for 2019. We see a variety of components to that including the international growth including new product introduction whether bone repair product. Also we would also expect that as a result of the increased focus and activities outside the U.S. that that will contributed significantly as well. In terms M&A opportunity, as I mentioned earlier in this call, we are continuously screening potential targets. You know it's probably too early at this point to put a stake in the ground and I'd rather not do that. But you know you can rest assured that that is a strategic priority as we look to the future. So does that answer your question, Joe?

Yeah, you know that's helpful. And then a follow-up to that. Essentially you know in what you just said, you talked about you know even though CINGAL you're still trying to you strategize and figure out a go forward strategy, but you still talk about possibly a U.S. direct sales force or hybrid model if you will regardless of CINGAL. So I mean how much of that is factoring into that double digit growth expectation as well as you know is that sales force going to be carrying the bone product possibly, is that I guess can you give us some color on the dynamics there and how that would look?

Yeah, let me explain the hybrid approach first. You know as I had a chance now to settle in to the position here at Anika and look at available options, you know clearly what I see is the need for a very small sales force that can help especially in the pre-launch or soft watch seeding of the products reducing the pressure on our SG&A line by looking at potential partnership opportunities for distribution. So I want to be clear that we're not talking about a magnitude of a large sales force here, but we are talking about having feed on the street that can help the pre-launch activities, building up the pre-market awareness and then working closely with a partner. You know one other things I can tell you is I think it's very important as we look at any partnership what really drives the result is going to be the way the contracts are structured in such a way that are beneficial not only to the partner but also to Anika as well.

Okay. If one more if you can. In regards to the contract you commented, it seems like you're having more dialogue with Mitek, you know was there any sort of a change to structure there this quarter that drove you know the outperformance if you will in orthobiologics, I know you know it's always been a touchy sort of thing relationship between you guys and Mitek, I mean you worked very closely but they've always sort of seemed to dictate a pricing. So I wonder have you seen any shift in the pendulum your way towards being able to dictate a little bit more the end user sort of pricing and any of occur in this quarter and then I'll hope back in the queue.

Yeah, so that's structurally nothing really happened on the contract structure Joe. Here is the way I would like to position this with you and the rest of the audience on the call is I think and I think if you check with our partners the relationship is stronger than ever, the dialogs are more frequent, the depth of the conversations are much deeper than they had been historically. So going back to you know some of your words, I know in the past it may have been touchy, I would say today the relationship is very strong and more collaborative than it is where it's historically. So I really feel that the input from us as part of the dialogue with our partner has been good and has resulted in more information sharing and strategy sharing than it had been ever in the past.

Okay, thank you.

You bet. Thank you, Joe.

And our next question is from the line of Lisa Springer with Singular Research. Your line is open.

Good morning. I have a couple questions about the bone repair agreement. When you talk about the market opportunity of $250 million to $300 million, is that global or just the U.S. market?

It’s U.S.

Okay and what are opportunities for the product overseas?

You know the way we typically look at it because the assessments in the U.S. market given the population densities, we technically Lisa will just double that for a global market assessment.

Okay. And if you were to launch it, but we also look for a launch overseas in 2019 or would that be further out?

No, we're probably looking at a launch beyond 2019 OUS markets. We want to establish the launch here first in the U.S. and then proceed to the international markets from their registrations and CE marks.

Sure, that makes sense. Okay, thank you.

Thank you.

Our next question is from the line of Jim Sidoti with Sidoti & Company. Your line is open.

Good morning. Can you hear me?

Good morning, Jim, how are you?

Good. Good. First on the milestone payment, I'm a little confused it seems like business with my Mitek was very strong in the quarter. Why was the payment delayed and do you expect that to come in the future period?

Jim, that's a great question and I'd like to shed some light on that. So we worked very, very closely with when we think the milestone would hit. And the reality is, it was so close to the end of the year that the risk of saying okay within a few days was too great, we felt that was more important take a conservative approach at this point. So the reality is it will probably bleed into 2019 and not hit in 2018.

As part of our quarter end profits, we update our outlook not just internally also with input from our partner J&J. And the latest expectation is the milestone will be achieved per J&J's analysis towards the end of the year. And as Joe mentioned, because of the timing and the potential risks surrounding that we feel that it's more prudent and conservative to exclude it from this year's expectation.

Okay, that makes sense. And then follow-up question on CINGAL. Can you just give us an indication of how international sales were affected by the news last month, was there any hiccup in international sales after you announced the data from the FDA?

Jim, relative to international sales of CINGAL, we did see an effect of the results of the 16-02 study. In fact I can share with you that I've had conversations with physicians outside the U.S. that have are scratching their heads like us and saying they never see those types of results on the steroids front. So they're still continuing to use CINGAL. We haven't heard of any consequences at this point. So we still feel very strong about our performance with CINGAL outside the U.S.

Alright, thank you.

Thank you, Jim.

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

Hey, good morning, guys.

Good morning, Mike.

Good morning, Mike.

Good morning. Sylvia, I guess first question around modeling. You know growth margin sort of been all over the place in the first half and based on your commentary, I suspect that maybe gross margin in the second half looks more or like something in between the first quarter of 63% and the second quarter of 73%, is that fair, it's probably coming down but maybe not quite to the first quarter level?

Yeah, that's fair. Mike, thank you for the question. The first quarter of this year as you recall, we had a couple of non-routine or one-time items including a voluntary recall of our HYAFF products, HYALOFAST, HYALOGRAFT-C and HYALOMATRIX. As a result of that, we took some cost of goods sold related charges and some inventory write-offs and added to our reserve which led to a 63% of product gross margin significantly down from the historic mid to high-70% range. We are pleased with the second quarter result or achievement of 73% which is showing that we are seeing some of the outcome from the improvement plan that we put in place since the first quarter of this year. Looking at the second half of the year, we believe that we will continue on that path. And for the full year netting out to somewhere around the high 60% where we feel comfortable guiding certainly internally we are targeting better outcome. But from a guidance standpoint, the high 60% round up level is where we feel we will be able to achieve for the full year.

Okay, great, that super helpful. And then just related subjects, the effective tax rate in the first half also was you know about half of what I had assumed kind of a normalized effective tax rate for you guys would be this year is kind of 27%-28% more like it in the second half?

Yeah, good point, Mike. The effective tax rate for the first in the second quarter also had a couple of nonrecurring or infrequent activities namely in the first quarter, we have a loss situation as a result of some non-cash charges related to the CEO transition or the former CEO's equity compensation expense, which we talked about during our last call. During the second quarter, we also have some tax benefits related to exercise of employees stock options and the order of magnitude of about 1.3 million which drove the tax rate down. And typically from an expectation standpoint, we do not project timing an order of magnitude of employees stock option exercises which was the reason why they were not included in the guidance previously stated./ So taking the Q1 and Q2 events into consideration, we expect that the full year 2018 effective tax rate will be around the low 20% range when we look at the second half of the year and also smoothing out the impact from Q1 and Q2. I hope that's helpful for you.

It is. Can I just think one more in for Joe?

Sure, go ahead, Mike.

So Joe, I guess I want to ask about CINGAL, and you know you said that the data may be sufficient to you know still get the product approved. But I guess I'm wondering you know if you really think you have the goods here with this product and you think kind of the steroids, the behavior of the steroids was sort of almost an outlier, why not go for the kind of labeling and pricing that you really want here and spend a few million dollars to do more clinical work where you can go back with a more impressive package and hopefully get the kind of labeling and pricing that you want. I guess why isn't that the view?

Well it actually is the view and part of the – and it's a very good question Mike first of all, but it is part of the view, it is part of the consideration as that were evaluating overall as the strategy. You know the reality is that you know we do need to get with the FDA. We do need to sit down with them. You know was interesting because yesterday there was a release put out and the title of it was guidance to put more combo products in device due out in the fall. And you know the commissioner of FDA was talking about that there may be new product guidance to move, more products into the device room either the end of the summer or the early fall. It's a public information, it's out there. So I think the timing is very interesting here. And as you look at outside the U.S. where CINGAL has been approved, that's really been approved as a device outside the U.S. So you know we're looking at every angle. I think we're doing the right amount of delegates here in assessing the best strategy to bring forward for the optimum labeling of the product and trying to do this in such an expeditious fashion. It's really dependent unfortunately on the availability of the FDA to meet with us. So we're pushing hard to meet with them so as soon as the 39 week study is completed, not the data has been compiled, we feel as though that we're hoping will have a compelling package bring to the FDA.

Just a really quick follow-up on that. With FDA's press release, the 39 week data and when you expect to be able to do that approximately?

We don't plan press releasing yet, because you know the totality of all the information that we're capturing, we feel is important. So I don't want to pre-release if you will the FDA, before we sit down with the FDA, I think it's important that we get the strategy right, we go in and we have a deep conversation around the results and talk about the totality of the information versus just a single point in the study. So we don't have any intention at this point of releasing until after we meet with the FDA.

Okay, gotcha. That's helpful. Okay, thank you so much guys. Really appreciate it.

Yeah, thank you, Mike.

Thank you, Mike.

Our next question comes from the line of Wally Walker with Hana Road Capital. Your line is open.

Thank you, good morning and congratulation on solid quarter.

Thank you, Wally, good morning.

Thank you.

Good morning. Question on your 2018, just to make sure I am thinking about it correctly. Based on what you're saying relative to the first half of 2018, it is that if you are saying that revenue will be higher, production revenue will be higher in the second half and operating expense will be lower in the second half relative to the first half, is that correct?

Wally, yes, this is correct.

Okay, that’s I have. Thank you.

Thank you, Wally.

[Operator Instructions]. We do have a follow-up for Joe Munda with First Analysis. Your line is open.

Yes, thanks for the follow-up, Joe, real quick two follow-ups. Just off of the last caller's question, you know the back half growth. There are other components outside of orthobiologics given their place here and the growth rates on those are moving around as well as total amount each quarter. I guess the question is, you know how much, is the growth in product going to be driven by orthobiologics versus some of the other products in the pipe given Sylvia's comments about transfer pricing coming down. And just a little bit of color there? And do you guys have a schedules meeting already with the FDA or you still trying to figure out a time to meet with them?

I am going to take part of that questions, Sylvias is going to take the other half Joe. We're in process with FDA, we're in discussions for nailing down the date. We don't have a definitive date, but we are working on that as we speak and we are targeting for Q4. You want to?

So with regards to your question about revenue growth and the key drivers, I would say that the biggest driver from a growth standpoint remains within the orthobiologics franchise and in particular the MONOVISC and CINGAL products. Both products we are expecting double digit growth for 2018. Now of course for the full year, we have been stating a flat product revenue expectation and that is primarily due to; one, the voluntary product recall which we announced earlier this year. And if you recall we had said that it was roughly about 3% of our total revenue in 2017. While we remain on target to resume shipment by the end of the year between Q1, Q2, and Q3, we have suspended shipment on those three impact of products. Secondarily, the price erosion that we talked about in Q1 related to the U.S. fiscal viscosupplementation market has been reflected in our forecast and we are pleased to see that in the second quarter. There is a stability from a pricing standpoint both for ORTHOVISC and MONOVISC. And looking at the remaining franchise, we expect that the dermal franchise will be down year-over-year due to the voluntary recall impact and sonic franchise will see increase but on a gross dollar basis it's not a main revenue contributor for the company. I hope that is helpful in terms of understanding the moving parts in 2018 as it relates to product revenue growth.

Yes, that's extremely helpful, I appreciate it. And then just one last one Joe and I'll end it there. You talked a little bit about the HYALOFAST trial itself some randomization issues in doctors is reluctant to enroll, I guess could you give a little bit of color as to what is going on there, I know it's pushing the timeline back and HYALOFAST is a key component to the pipeline of products. So I'm just curious to get a little bit of color what's going on as far as HYALOFAST is concerned?

Yeah, you know when you get that and in it's a great question Joe, I am glad you followed up with that. When you get to the microfracture arm as the lesion become larger as part of the randomization process depending upon what patients are coming through, what happens as is that you know microfracture for larger lesions is not necessarily well, it's more any fact, let me put it that way, so it's not as attractive as it is in small lesions. So it's a trend that we're seeing that's coming up as part feedback from our sites especially in the U.S. where they are reluctant to randomize to that side of the arm up microfracture with larger lesions, due to ineffectiveness of microfracture with the larger lesions.

Okay and so how do you resolve some of that, how to get pass I guess that hurdle if you well?

Yeah, I think there's a couple of things. One is, we're going to be talking to our advisory board for input on that process. Second, I think we have to manage these sites tighter at a closer working relationship. I think also to that you know the education aspects of some of these sites with the different types of lesions is critical. So there are several things that we're doing to improve the knowledge base around the randomization of the product to either arm. Right now I would just tell you until we can sit down and that's why we said we'll get back to everybody ASAP. I feel more comfortable after we had these meetings of really give me a better perspective on it. But right now until we can get better management of these sites, more increased focus with the sites and talk about the ramdomization that's as best we can do given the current environment of their perceptions of, which is a true perception by the way microfracture with larger lesions.

Okay, thank you.

Thank you, Joe.

I'm not showing any further questions, so I'll now turn the call back over to CEO Joseph Darling.

Thank you. Thank you all today for your time today. We are very proud of our financial results for the second quarter and proud of the organization we have built. As we look to the future, we are excited about our prospects, we look forward to sharing additional details about our initiatives and the five years strategic plan in the coming months. Thank you for your time this morning and have a great day.

Ladies and gentlemen this does conclude the program, you may now disconnect.