Good evening, ladies and gentlemen, and welcome to Anika Therapeutics Third 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] And I will now turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

Thank you, Sandra. Good morning, everyone, and thank you for joining our third 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 third quarter 2018 financial results and key business highlights, which were summarized in our earnings release issued today. 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 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. Please turn to slide number two, as I now turn the call over our CEO, Joseph Darling. Joe?

Thank you, Sylvia, and good evening, everyone. Welcome to our third quarter 2018 earnings call. I am pleased to report that we made important progress this quarter in enhancing the foundational elements needed to drive near and long-term growth. I have long believed that a company and its growth are powered by a strategy that is focused on its people, its pipeline and profitability. So, I’d like to frame my comments within the context of those three areas. While we continue to successfully transform our Company within these three areas, I’m confident that Anika will be recognized as a company with clear values, defined success milestones, and ultimately increased growth, profitability and value for our shareholders. It is important to note that while we are focused on increasing our profitability, we know it may not come immediately. We are making investments in implementing initiatives to get us there. It takes time to deliver sustained improvements to profitability, but importantly, it is at the center of how we think and where we are going, and we know what we need to do to drive our next phase of growth. Before I get into the details, I want to comment briefly on the changes we are making today and our strategy to better position Anika for the future. While this kind of transformation won’t happen overnight, I am pleased with our third quarter results, particularly our bottom-line performance. As Sylvia will discuss in more detail, we have slightly lowered our full-year 2018 revenue guidance. We are keenly focused on the issues impacting our near-term results and believe the transformational efforts we have underway will enable us to emerge as the stronger company. We are focused on solid execution, driving improved operational and financial performance, and increasing efficiency and productivity. Last quarter, I…

Thank you, Joe. Please turn to slide number seven. Total revenue for the quarter was $26.8 million compared to $27.2 million for the third quarter of last year. As we anticipated, total revenue was down slightly year-over-year due primarily to the voluntarily recall initiated earlier this year for certain of our HYAFF-based products. Importantly, we expect to resume shipments of the impacted products before the end of this year. Global viscosupplement revenue in the third quarter increased 2% year-over-year due to strong growth in the international markets. International viscosupplement revenue increased 31% year-over-year, driven primarily by CINGAL. CINGAL international revenue grew approximately 180% year-over-year for the quarter and approximately 70% for the first nine months of 2018. Our continued and renewed efforts with our VP of International Sales will enable us to expand and grow our international viscosupplement franchise. And this will be with an increased focused on accountability and execution in markets where we serve. U.S. viscosupplement revenue decreased approximately $500,000 year-over-year for the third quarter due primarily to timing of product shipments and lower pricing. As expected, we experienced the impact on U.S. ORTHOVISC and MONOVISC product transfer prices from the decreased market pricing that occurred in the first quarter of this year. But, more importantly, ORTHOVISC and MONOVISC continued to maintain a strong position in the U.S. market. Since its initial launch in the second quarter of 2014, MONOVISC experienced 14 consecutive quarters of year-over-year growth. Our partner has indicated that they continue to see an increase in patients placed on our viscosupplement as a result of taking share from competitive products. On a year-over-year quarter basis, ORTHOVISC end user unit sales experienced a low single digit percentage decrease while MONOVISC end user sales experienced a 20% increase in volume. During the third quarter, we also experienced…

Thank you, Sylvia. Please turn to slide number eight. As I’ve sated previously, Anika is a growth company, and by leveraging our strong foundation and executing on our strategic and operational initiatives, we are confident, we have the opportunities and the resources to accelerate our revenue and earnings growth over the next several years. As we discussed last quarter, we are in the process of developing a detailed five-year strategic plan, which I look forward to sharing in the coming months. As we continue our diligent work on the plan, we are focused on 5 clear opportunities to drive near-term revenue growth. First, are the ongoing efforts led by our new VP of international sales to assess and optimize distributor-led sales and marketing operations to improve market performance outside the U.S., and we’re already starting to realize the strategic and financial benefits of our efforts. In the quarter, we added four new distributors to our international network and expanded the reach of our viscosupplement supplement business in Europe, Asia and South America. Second is resuming the shipment of HYAFF-based products impacted by the voluntary recall, which as Sylvia noted earlier we continue to expect to occur before the end of this year. Third is driving the continued international growth of CINGAL. We are excited about our results and continued momentum in Canada and Europe, which has enabled us to deliver approximately 70% revenue growth year-to-date for CINGAL. Fourth is the upcoming U.S. commercial launch of our surgically delivered regenerative therapy for bone repair procedures. This treatment provides an injectable, self-setting osteoconductive, bone graft substitute that is resorbed by the body and replaced by the growth of new bone during the healing process. The current market size for treating injury with damaged cartilage such as tibial plateau fractures and stress fractures…

[Operator Instructions] And our first question comes from the line of Mike Petusky with Barrington Research. Your line is now open.

Good evening. Few questions. So, Sylvia, can you talk about MONOVISC and ORTHOVISC pricing sort of the trend year-over-year, rather than -- I think you said sequentially down, but how much is pricing down year-over-year in those products?

So, from a U.S. viscosupplement pricing standpoint, we do see that year-over-year pricing has come down. The decline in the first quarter, as we spoke about during our Q1 earnings call, was larger than expected in the high single-digit range. During the second quarter, we saw some stabilization of both ORTHOVISC and MONOVISC pricing. And in the third quarter, we saw some small continued decline for both products.

So, if we’re looking at kind of this pricing in the third quarter this year versus a year ago, was it down more than 10% for the products?

It’s less than 10% in a single-digit percent range.

Okay, all right. Very good. And then, Joe, if you could remind me. The extension piece of the CINGAL work that you guys have done, is that 13 weeks, is that finished now or is that about to finish?

Yes, Mike. First of all, thank you for your questions. And hello, back to you, by the way. We didn’t get a chance to say hello in your introduction. So, yes. So, the study-- that portion of the study is completed. We are going through the process of analyzing the data and putting all the data together to submit a package to the FDA.

So, really, there is -- there is probably not going to be an update in terms of the data until you talk to the FDA. Is that correct?

Mike, that’s correct. I’ve been consistent. In fact, I believe I mentioned on the quarter two earnings call that we would announce all the data upon completion of our meeting in agreement with the FDA after our first quarter meeting that we planned for 2019.

And then, just in terms of the commercial partnership that you hope to strike. I mean, is Mitek a part of that discussions or is it likely that you’re going to sort of go in another direction for future products?

We have to be obviously very cognizant of what a great job they’ve done for us and they continue to do for us. And I think I’ve mentioned previously too that the relationship has strengthened over time. So, while I’m not at necessarily liberty to say that Mitek is in the discussion, I wouldn’t rule them out. So, the reality is, especially when you take a look at the viscosupplements, the opportunity for continued partnership with a very strong partners such as Mitek has some benefits to it.

Okay. And then, just last real quick one for Sylvia. Sylvia, do you expect orthobiologics revenue to grow sequentially in Q4 versus Q3?

We do expect sequential quarter growth for orthobiologics for a couple of reasons. One is, we see continued strong international market revenue growth and we expect that trend will continue into the fourth quarter. And in addition to that as we -- Joe and myself both mentioned in our script section that we are executing a number of international market expansion efforts with our new VP of International Sales -- under his leadership. So, based on that we believe that the growth projections for orthobiologic is supportive.

Thank you. And our next question comes from the line of Joe Munda with First Analysis. Your line is now open.

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

We can, Joe. Good evening to you.

Good evening. So, couple of quick items here. I was just wondering if you can give us a breakout on international visco versus U.S. visco, as well as could you breakout CINGAL from the rest of orthobiologics?

For nine months year-to-date, international visco is roughly about 15% of our product revenue, give or take, and Mitek’s -- ORTHOVISC and MONOVISC contribution to our product revenue historically has been in the low to mid-70%, and that is consistent for this year as well. From a CINGAL perspective, hold on one second here. CINGAL’s contribution to our total revenue is approaching 5% for 2018, which reflected the robust growth that we discussed earlier.

So, 5% of orthobiologics or of total product revenue…

Yes, total. Correct.

Okay. And then, Joe, you touched a little bit on -- you had mentioned pricing pressure and payer controls there. I mean, are they going hand in hand, and I mean, give us a little bit more color, especially on the payer control side of what you’re seeing.

Joe, I think the way you posed the question pretty much almost itself answers that itself. Yes. It is a combination of the two. Typically, you see that not only with large payers, but with the regional payers as well. So, the two go hand in hand with each other. I wouldn’t necessarily separate them. But, for the most part, they do go hand in hand.

Does Mitek anticipate further sort of regional players putting in controls or are we at a sort of a plateau here?

I would say, we are probably pretty close to a plateau. I’m not really sure how to interpret the question, Joe. So, I apologize.

So, are you expecting more payers to essentially put more controls or payers that haven’t put controls on visco to begin doing so?

Yes. Joe, by control, are you referring to coverage or are you referring to pricing? I just want to make sure that we are...

I am referring to coverage, but are you referring to pricing?

Yes. So, from a coverage standpoint, I think, Anthem was a big news last year. And based on the information that we have on hand and including speaking with our partner, we’re not aware of any nationwide coverage related issues. So, that is currently the situation. From a pricing standpoint, as we all know, typically contracts will come up for renewal. So, as Mitek gets into the contract renewal discussions and those type of activities, we may see period-over-period related impacts. On that particular piece, we don’t have the exact level of visibility into the timing and the extent of those negotiations. So, we’ll share the information as they become available -- as it become available. But, at this time, we don’t see any major or dramatic changes, based on our conversation with Mitek.

Okay. That’s helpful. Thank you. Just a couple more here. As far as gross margin is concerned, you talked a little bit about some of the drivers. and I’m just wondering how much of that decline year-over-year on product gross margin is due to pricing itself?

The decline in product gross margin primarily are driven by three, I would say, roughly equal contributors, which I mentioned earlier. One is higher production costs; the other one is related to pricing, and I would call pricing/product mix; and the third one is really recall and the related recovery activities. So, those are really the three major drivers and you can think of them as kind of contributing more or less equally to the drop in the product gross margin year-over-year.

Okay. That’s helpful. And then, Joe, taking a step back here in big picture, at the end of the quarter, back in August -- I’m sorry, back at the end of 2Q, you talked about delivering double-digit growth going forward in 2019, 2020. I mean, is that still the bogey? Can you still get there? I notice there wasn’t really that not much commentary regarding that on this call. So, is that something that you still have your sights set on?

Joe, I’ll try to answer that question and then Joe will add additional color. From a 2019 standpoint, we haven’t given the guidance for next year, but what I can say is, we do believe that there are several positive and growth opportunities. And in particular, I would say that it’s the number one, the continued growth in our MONOVISC and CINGAL products; the second would be international distributor expansion under the leadership of our new VP of International Sales that Joe mentioned earlier; the third piece is related to the launch of our surgical bone repair product in the United States, which will bring incremental new product revenues for us; and then the fourth factor is the relaunch of the HYAFF products, post recall. As you recall, that represented about 3%, the three recalled products represented about 3% of our 2017 revenue. And then, from there, I think, target of partnerships and potential acquisitions could act as accelerator from a revenue standpoint. So, we’re in a process of preparing the 2019 budget, as we speak. But, we look forward to providing additional color and guidance during the fourth quarter earnings call.

So, does the milestone payment of $5 million fit into that equation as well? Should we still expect that in 2019?

We are taking a close look at that. We have received the preliminary Q3 information, and we’re analyzing rest of the year as well as 2019. So, as part of the increase in revenue, I think, we can put that under the bracket of MONOVISC revenue increase. In terms of the exact timing and whether or not it will be achieved is something that’s under review by ourselves as well as our partner.

Joe, you might recall that in the Q2 earnings, it was so close to the end of the year in our discussions with our partnership, we want to wait till we get closer to the end of the year to have a better feel for when we think that may potentially come in.

Okay. So, it’s just a question of timing then?

Yes.

And then, lastly, Joe, I mean, you talk about an intriguing model here with a small hybrid sales force, possibly -- in terms of size, what are you thinking? Are we talking 10, 20, or are we talking more of 5, like highly skilled people going out regionally?

Yes. The way we’re planning -- and that’s a great question, is obviously, you don’t need to scale up to a real big sales force. So, I’m thinking roughly in the neighborhood of 6 to 10 strategically placed, especially around some of the key teaching institutions in the U.S., where you can have more of an affect and an impact based on the population densities and such. So, we’re probably in the neighborhood of 6 to 10, Joe.

Thank you. And our next question comes from the line of Jim Sidoti with Sidoti & Company. Your line is now open.

Good evening. Can you hear me, Joe and Sylvia?

We can, Jim. Good evening.

Good evening.

Great. A couple of quick ones. One, the dermal products where you said you’re going to have some distribution changes in Europe, what percent of revenue was that in 2017?

In 2017, dermal was approximately $3 million from a product revenue standpoint. If you look at the year-to-date dermal business, I think, it’s sub $200,000. So, that business was heavily impacted by the voluntary product recall. In addition to that, we were working on distribution network upgrades and refreshment.

And then, R&D was down in Q3, it was also down in Q2 from where Q1 was. Should we assume that number starts to pick up again over the next few quarters as the clinical trials for the tennis elbow start, and also I guess increased activity with the HYALOFAST?

Yes. The short answer is yes. The downward trends for Q2 and Q3 were related to the completion of the CINGAL studies for six months follow-up as well as a three-month extension studies. Looking ahead for the fourth quarter, as you noted correctly that the OVT European post-market study will commence. So, that would add to the R&D expense line. And we also, in the fourth quarter, have CINGAL FDA related meeting preparation activities that we would incur additional expenses related to that. And for 2019, we do expect R&D expenses to go up, given the development programs that we have talked about.

And then, third your question on the bone repair product. Will that be launched through this hybrid sales force?

It will. So, it’ll be a combination of the hybrid sales force and a partnership model, Jim. So, it will be a combination of both. Yes.

And then, the last one from me is, the tax rate so far this year has been between 13% and 16%, should we assume that goes up in the fourth quarter or is that going to be a good number for the fourth quarter?

Jim, for the fourth quarter, the rates will go up slightly probably to the low 20%. The reasons -- or the reason why Q1, Q2 and Q3 were lower than expected were due to discrete non-recurring item, as well as some tax reform act transition implementation rules that recently came out. So, we were able to take additional credits or deductions -- sorry, I shouldn’t say credit, the additional deductions related to certain one-time events. I do not expect that the fourth quarter’s tax rate will be at the low rates that we experienced from Q1 through Q3.

And then, I just wanted to say, Joe, I can imagine how tough it is being a Yankee sitting up there with all those -- I hope you get through the next week or so.

I appreciate that, Jim. Thank you.

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

Good afternoon. I wanted to ask you about the core new distributor partners that were added during the quarter. With those new partnerships in place, do you feel like you have the distribution network you need to take CINGAL where you want to take it in Europe? Are there still some holes in the system that need to be filled?

I think it’s a -- Lisa, this is Joe, obviously, but I think it’s a combination of factors. One is, these are opportunistic for us to expand into, number one. Number two, with the new VP of International Sales, one of the things that we have spoken about is the commitment and accountability at the local distributorship level as well. So, as I look at the overall international market, where we are not performing, we need to take a hard look at; and where we don’t have a presence, that’s where we need to bring the new distributors on board. So, by the addition of these new four distributorships, that filled some of the gaps that we had on the international front, but I do believe we still have a ways to go in making sure we’ve got the right distributors in place in other parts of the world. So, it’s a constant process that the VP of International Sales will be going through to ensure we’re optimizing our international efforts.

Thank you. And our next question comes from the line of Andy Summers with Summers Value Partners. Your line is now open.

Hi. Thanks for taking the question. So, maybe just starting with CINGAL. Have you commented on the type of meeting you’re having with the FDA and the format of the meeting?

We have not, Andy. No.

Do you not -- that’s not something you’re willing to talk about?

I think right now that the way we’ve got the meetings set up with the FDA, it’d be kind of a complex conversation to have, which would put us in a situation from a competitor perspective not feeling necessarily the right comfort level over a call like this.

Okay. But, you did confirm that you’re going to have the nine-month data in the submission package. Is that right?

We’re actually going to take all the data including the nine-month data into the submission package, absolutely. Yes.

And do you expect to have the FDA minutes in the first quarter of 2019 as well from the meeting?

I would assume we would. I’d have to honestly get back to you on that to figure out exactly what we’ll have coming out of that meeting. I would assume, we would have the minutes, but…

Okay. So, once you have the minutes, then you’ll decide sort of the path forward and you able to communicate that with shareholders. Is that right?

Yes. The key is sitting down with them, walking through the data, talking about the different studies that have been done, and then making sure that there is agreement on a pathway forward to approval for the product.

Okay. And another large scale Phase 3 program could be one of the scenarios?

I’d rather wait till we sit down with the FDA before I make a commitment like that. But, CINGAL is a very important product for us. And as we articulated in this call today, it’s done very well for us in the international markets. We would expect to see the same in the U.S. upon approval of the product. So, we’re very committed to this product and the future of CINGAL coming into the U.S.

And have you quantified what you think the ex-U.S. opportunity is for CINGAL? It sounds like you’re roughly doing $5 million of sales now. What could that be over time?

I think, the opportunity is -- can be quite large. Right now, we’re in the process of building out a much broader distribution network outside of the U.S. The four recent additions are examples of recent achievements. Beyond these countries, we have additional target countries that we’re working on. And looking at the near-term approval charts, there’s about half a dozen or so countries that we expect to receive CINGAL approval within the next 12 months. So, from a revenue growth standpoint, we do continue to expect CINGAL to be a meaningful contributor for our revenue growth.

And just switching gears to the surgical bone repair product. Is the delay between the approval and the launch, is it solely due to this partnering concept or is there other gating factors that kind of caused the gap between the approval and the launch?

The simple answer to that is the approval this past December was a pretty rapid approval, which took us by surprise. So, we weren’t ready for scale-up in production, we weren’t ready with the commercial plan at that point. Purely what you’re seeing is really a reflection of unfortunately not being ready upon approval. And I want to do this right. Typically, you get one shot at a product launch. So, I want to make sure that when we launch the product that we’ve got the right people in place in the field, we’ve got a good strong distribution partner in place, and we can accelerate our penetration in the market by doing it correctly the first time.

Okay. And, can you comment on whether you’re expecting this to happen in July or more toward December of 2019, just around the second half launch...

Yes. So, what we’re looking at is, starting with what I’ll call a soft launch in mid-year, so you are in that June-July time frame and through there, and then accelerating the launch with the full partnership by that point in time. And part of the reason is, because I want to make sure that as we put these clinical marketing specialists in place and we see them in appropriately from a timing perspective that they have the adequate materials to go in and start converting accounts and use of the product. So, I think from my perspective, I want to call it a soft launch mid-year and then accelerate into what I would call a hard full-scale launch, as we move into the second half.

Okay. And then, could you provide a little more color around the market opportunity? Will this product replace something that’s already being used today or is this something that’s going to be new and additive to existing surgeries? Could you just talk about how this product is going to fit in to the paradigm here?

Couple of things. One is, there are competitive products in the marketplace. We do have an advantage with our setup time. The throughput through the OR should be quicker than competitive products, which is a big factor when you start to measure OR time on a per minute basis. So, we will also be capturing users that may not have wanted to use competitive products due to the time factor involved in setup of the product. So, on a high-level scale when you take a look at this particular product and the applications in tibial plateau fractures or even femoral neck fractures, stress fractures I think will play a bigger role as we move into this market.

And since we haven’t seen a partnership deal yet, can you just comment on whether or not you are expecting to receive some upfront payments along with a partnership or is this just basically just a royalty structure, or how are you thinking about the economics of a partnership going forward?

A couple of things, Andy. I got to be careful here, because obviously trying to explain this in an environment where you’re still negotiating wouldn’t be advantageous for me to put all the cards on the table. But, that being said, I want to make sure that we do have a model that obviously gives us more pricing authority over how the product is priced in the market, number one. Number two, we want to control a degree of the positioning of the product in the market. So, the economics of the deal, we can’t really talk about today, and I prefer to talk about that once the deal is all signed and delivered than speculating, because as you know, these things usually are a long process, so.

Thank you. And we do have a follow-up question from the line of Mike Petusky with Barrington Research. Your line is now open.

Yes. I’ll try to be quick here. Sylvia, just on your tax rate commentary. As you look longer term, I think at one point, there was maybe a thought that your effective tax would be more like 26%, 27%. Has that changed longer term? Have you guys -- as you’ve dug into it, found that maybe a lower 20% tax rate is more likely, or can you talk about that?

So, for 2018, after we reviewed all the recent tax reform implementation and transition guidance, we saw additional opportunities to lower our rate. And we currently feel that in the fourth quarter a low-20% is an appropriate rate. Going forward for 2019, we need to take a closer look at that during the budget process, and we will provide the expectation during the Q4 earnings call.

And then, Joe, just a quick one. When you think about strategic plan, longer-term strategic plan that you are going to, roll out, is that something you think could be ready to be shared with the year-end conference call or is that more of a longer term project?

Mike, couple of things. One is, the planned timeframe for completion, we’ve got to bring it through the Board as well, which we plan on doing early in the first quarter of 2019. So, it’s going to be sometime in the early 2019 timeframe before we can share, because obviously it’s got to be approved. But I think when we’re ready to share it, it will be very comprehensive for the future direction of where we intend to steer Anika from a strategic perspective.

And Sylvia, just last one. Do you have the depreciation and amortization expense and CapEx for the quarter by any chance?

Mike, from a depreciation and amortization standpoint, nine months to date, it’s approximately $4.5 million. And stock-based comp, which is also a non-cash item, that’s approximately $10 million. And from a CapEx spending standpoint, we are looking at approximately $4 million to $5 million.

Thank you. And I’m showing no further questions at this time. And I’d like to return the call to Mr. Joseph Darling for any closing remarks.

Thank you, Sandra. And thank you to all of you for your time today. We’re very proud of our progress in the third quarter. And we are very excited about the many growth opportunities in front of us. We look forward to continuing to update you on our progress as we execute on our initiatives to drive both near and long term growth for our shareholders. Thank you. And have a great evening.

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