Good evening, ladies and gentlemen, and welcome to Anika Therapeutics Fourth 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] As a reminder, this conference call is being recorded. I will now turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

Thank you, Ashley. Good evening, everyone, and thank you for joining our fourth quarter and full year 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 fourth quarter and full year 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 1. 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 see our SEC filings for more information about factors that could affect our results. Please turn to Slide number 2 as I now turn the call over to our CEO, Joseph Darling. Joe?

Thank you, Sylvia, and good evening, everyone. Welcome to our fourth quarter and full year 2018 earnings call. 2018 was a pivotal and dynamic year for Anika as we continued to deliver strong earnings and cash flow while building on the foundation that will drive Anika's next phase of growth. Our fourth quarter and full year results are a snapshot of a company undergoing a transformation. The 2018 performance highlights our ability to capably manage the elements of our business that are within our direct control with strict financial discipline and an eye toward generating cash and returning value to our shareholders. More importantly, we continue to focus on strategic growth initiatives to address near-term challenges relating to the structure of our legacy contracts. Overall, Anika remains a profitable and cash producing growth company and I am very confident in our future. We are executing against our strategic vision of being a global commercial company that delivers a continuum of innovative orthopedic therapies. We are assured of our value proposition to patients, physicians and our shareholders. And I know that by leveraging our strong foundation and executing on our new and ongoing strategic and operational initiatives, we have multiple opportunities as well as the resources to drive revenue and earnings growth over the next several years. We are also making solid progress towards developing and finalizing our five year strategic plan, which will guide our continued transformation into a global commercial company. While we have indicated some of the broad elements of that plan, we look forward to sharing specific details later this year following board review and approval. Last quarter, I spoke about our people, our pipeline and profitability being the key drivers of our future growth. Through that lens, 2018 marked the beginning of a transformative period. Just…

Thank you, Joe. Please turn to Slide number 6. Total revenue for the fourth quarter was $27 million compared to 29.4 million for the fourth quarter of last year. Total revenue for the full year of 2018 was 105.6 million compared to 113.4 million for 2017. As we anticipated, the decrease in both periods was primarily due to lower U.S. viscosupplement pricing and the impact of the voluntary recall. Prior year full year results included $5 million in milestone revenue generated in 2017, which did not recur in 2018. For the full year of 2018, global MONOVISC revenue increased 12% and CINGAL international revenue grew 34% showing the strength and the uptick in adoption of our single injection product lines. As a result, global viscosupplement revenue was up slightly for the year despite lower pricing in the United States. For the full year, U.S. ORTHOVISC end user sales volume experienced a 6% decrease while MONOVISC end user volume increased by 26%. On a full year basis, pricing for ORTHOVISC and MONOVISC in the U.S. experienced a decrease in the low to mid double-digit percentage range. While pricing pressure is impacting the overall U.S. viscosupplement market, we continue to see strong total patient and volume growth for our viscosupplement products driven by demographic trends, the reliable safety profile of our brands and the efforts of our U.S. partner with investments in their field-based organization. Product gross margin increased to 74% for the fourth quarter compared to 69% for the third quarter of 2018 and 70% for the fourth quarter of last year. The increase in product gross margin is primarily due to the improved manufacturing efficiency and changes in product mix. For the full year of 2018, we delivered a strong product gross margin of 70%. Total operating expenses in the…

Thank you. Sylvia. Please turn to Slide number 8. As we look ahead to the remainder of 2019, we are continuing to take important steps to transform our business with an emphasis on our people, our pipeline and ultimately on maximizing profitability. We will continue to take advantage of the multiple levers we have to advance our long-term goal of returning to double-digit revenue growth. Our first lever is the development of our hybrid commercial model. We intend to structure any new partnership contract to provide more favorable economics in greater control over market access, sales and marketing, minimum annual growth objectives and pricing than our previous commercial partnerships have had historically. We are confident that this hybrid commercial model will deliver the greatest value to Anika and our shareholders and it will enable us to better control our own destiny towards increased profitability and growth. We are actively evaluating a number of potential commercial partners with established orthopedic surgical sales forces that would fit with our organization and can support the launch of our bone repair therapy planned for the second half of this year. We are already implementing brand development initiatives and measured operational scale up activities. We plan to hire a small field-based team of elite and highly skilled regional sales directors in the second quarter of this year who will be strategically located to effectively drive prelaunch activities and awareness, build relationships with key surgeons and accounts and train our partner sales force when appropriate. Our second lever is the continued international expansion of our orthobiologics franchise mainly MONOVISC, CINGAL and HYALOFAST. I am confident that with the new leadership on the ground, we can drive greater growth in these products and continue to expand our commercial network. Additionally, our new VP of International Sales is…

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

Thank you. So anyway, so let's talk about CINGAL U.S. first. In terms of sort of the cadence of what you guys expect to happen, I mean do you think you'll have clarity in terms of sort of the go-forward path first half of this year and then start to execute in the back half or do you think this could sort of drag out and you not have a great sense for several months?

Mike, thank you for the question. We, as Joe had mentioned, are waiting to receive the written minutes from the FDA and based on that, we'll look to have additional discussion with the FDA. Our plan and goal is to work expeditiously, but we have to also rely on the FDA's response and the timing of their response. So at this point, I don't have a specific -- we don't have a specific month, but we do expect that within 2019 we would have clarity surrounding the pathway in terms of study scope nature and all the critical elements related to that.

Mike, I'll just add to that. The key for us is first to Sylvia's point obtaining the written minutes, sitting down with FDA to make sure that we're in alignment on the pathway forward to get this done as expeditiously as possible. So just reinforcing, we like to do this as quickly as possible; but right now we're pretty much dependent on the pathway that the FDA is going to lay out here in a little bit.

Can I just ask, Sylvia, your guidance on OpEx? I'm assuming that assumes that there is some increased spend in R&D related to a new trial. Is that fair to say?

I would say that there is not a significant amount in that. The guidance really reflects the development in clinical programs that we articulated in the script section meaning the continued enrollment of HYALOFAST or product development for the rotator cuff therapy as well as some post-market clinical studies related to our European approvals, one is ORTHOVISC-T which is the tennis elbow products and the other one is our MONOVISC product. There will be some strategy related work and planning work on that, but not the actual study itself.

You didn't specifically give guidance around gross margin, but if I just sort of do the math of what you've sort of given, it feels like sort of upper 60%s. Is that in the ballpark of what you guys are sort of internally assuming on gross margin?

We prefer to keep the guidance to what we just spoke about in terms of operating expenses. In terms of the product gross margin, as you know, it's impacted by our ability to continue to control cost as well as the market impact of pricing. So the range that you stated I think is a reasonable expectation from your part, but we're not going to provide a specific quantified set of numbers at this time.

Just one more real quick. Joe, obviously there's a lot of interest and excitement around the longer-term potential of HYALOFAST, but there's probably a lot of internal frustration there that you guys can't seem to really get a footing in terms of enrolling that trial. Are there things that you guys can do to sort of juice the process a little bit and expedite things so we can see this progress a little bit?

Yes. I think what's important for us, Mike, and that's a great question, is a couple of things we're doing. One is we are getting our internal clinical team in the field to the study sites more frequently and helping in the patient selection criteria and keeping them educated on how to look for the appropriate patients. So, that's number one. Number two is we've increased our internal activities in what I would call weekly updates on how we're progressing on our clinical study. So, we're keeping a very close eye on this recognizing the enormous capabilities the product has in the market. It is frustrating, but I think we've got a good plan in place to work with the study sites, increase the enrollment and try to get this done as quickly as possible.

Is there any kind of aspirational goal? I mean are you shooting for full enrollment by the end of this year or by the end of next year? I mean is there a way to think about this in terms of what you guys really want to accomplish?

Yes, aspirationally...

Tomorrow?

Or yesterday, right? No, I mean we've got to be realistic too. We want to do the study the correct way so we want to make sure aspirationally that we're really holding the team accountable, getting them in the field more frequently and getting them in front of the surgical sites more often and frequently to help on the patient enrollment. But it's -- to put an aspirational goal in there I think is counterproductive. It's more what's realistic and working with the sites in tandem to make sure that we're optimizing the protocol.

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

Just a couple of quick questions here. First off, Joe, can you give us some color in regards to the meeting with the FDA? I know you had gone in, I think last we spoke you were putting this data package going in with your best shot. Coming out of there even though you don't have the minutes, you're convinced that you're still going to have to go into a Phase III trial. Maybe could you give us some thoughts of the interactions with the FDA, it's been the constant talk amongst investors trying to figure out what the FDA would do here. So, I mean could you give us some color there? And then in addition, a little bit of talk about the growth outside the U.S. with CINGAL. Sylvia, if you can provide us with maybe what CINGAL was as a percentage of revenue. I'll jump back in the queue and I'll come back with a follow-up.

Yes. First, good afternoon, Joe. Thank you for the question. I'll take the first part and Sylvia will take the second part. So relative to give you a little color on the interaction with the FDA; it was a very productive meeting, lot of discussion back and forth obviously on the data. I think 1 thing that I would say is it clarified some key points that I think we've got to take into consideration, but it was a healthy amicable discussion around how to get this product into the market. And what's key for us now when you had that conversation, you've got to wait for the meeting -- excuse me, the meeting minutes to come through so that we can put pen to paper, develop a protocol that's acceptable and move forward. So I'm not quite sure what more color I can give you than that aside from it was a good conversation, productive, very upbeat; but obviously it's going to require some further clinical studies to get the product approved.

I guess what I'm looking for is I mean you presented the extension study data to them, were they dismissive of it in the fact that you feel like you have to go back and do another trial or I mean are they supportive towards HA products being in the marketplace? Anything along those lines as you move forward here? Because as investors look at the company and they look at CINGAL as the near-term next leg of, if you will, growth; I think that any color you can provide as far as them being supportive where hey, yes, HA products being in the marketplace, I think investors would love to hear about that.

Yes. So first of all, the extension study was not part of the original FDA protocol so that was really more of a gimmick to get the extended time period, if you will, on the durability of pain relief. So, I want to make that clear. We felt we could use that data, but clearly because it wasn't part of the protocol, it didn't fall necessarily within the scope of what I would like to have seen FDA reaction from. That being said, I think the agency is supportive of HA products. But they want to make sure that the clinical studies achieve their primary endpoints and that's their expectation. And they pretty much are holding hard lines now towards the primary endpoints as we've seen with not only us, but other companies. That's why I want to be a little cautious and waiting for the meeting minutes to come back from the -- the written ones, Joe, to come back from the FDA. Sylvia, you want to take the second part?

Sure. With regards to international CINGAL revenue, year-over-year growth was 34% as we mentioned earlier and as a percentage of product revenue is close to 5%. And from a growth expectation standpoint, we do see that the product is very strong and should generate double-digit percentage growth in the next period in 2019.

I have just two more quick ones, if I may. You talked about milestone revenue not in your forecast for 2019. I think had it forecasted in our models, maybe a little bit of background there. And then as far as the split between MONOVISC and ORTHOVISC, if you can give us maybe a mix split for orthobiologics MONOVISC versus ORTHOVISC? Thank you.

Okay, sure. With regards to the milestones, I think you're referring to in the contract, there is a potential additional sales threshold milestone which we originally expected in 2018. Without the -- a little bit background information there. Without the pricing decline that we saw in 2018, that mix sales threshold milestone would have been achieved with the volume increase. Unfortunately as a result of the continued pricing erosion which we reported on over the last few quarters now and under the existing contract's terms, we've come to the conclusion that achievement of that milestone is no longer attainable, which is the reason why we or why I made the statement earlier in terms of not expecting that in the revenue. With regard to the ORTHOVISC and MONOVISC revenue split, I think you're referring to the United States -- the domestic split. We actually see that for the full year of 2018, MONOVISC is slightly higher from a revenue standpoint over ORTHOVISC. So, we've now really turned the tide. It used to be, as you remember, a heavier portion on ORTHOVISC. Now we're seeing that MONOVISC is taking over that split between the two product lines. Hopefully, that answered your question, Joe.

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

Good afternoon. Sylvia, I wanted to ask you about the product gross margin in the fourth quarter. You mentioned the improvement was a result of operating efficiencies and improved product mix. If you had to assign a weight each of those, what would it be and could you give us a little more color about the improvement in the product mix?

Sure. To assign a portion of the product gross margin improvement between the two factors, I would say that it's heavier toward manufacturing efficiency and slightly lower on the product mix side. The second part of your question is related to kind of the details behind the initiatives that we have. As Joe mentioned before, our new VP of Operation joined the company a few months ago and he has been very focused company a few months ago and he has been very focused on looking at reducing product cost. So, we have a pretty comprehensive view not only in terms of looking at efficiency, but also looking at raw material costs and so forth. And a lot of the manufacturing efficiencies that we are looking to achieve are through automation and scale. So, we are looking at every aspect of our manufacturing production to see that we can improve the efficiency as well as reducing the per unit cost for our products.

And I wanted to ask Joe a question about the tennis elbow product. Could you provide us with a little more detail regarding the progress towards partnerships to drive sales of the tennis elbow product in Europe and the status of the U.S. Phase III clinical study?

So, the tennis elbow product is currently CE marked as you know. One of our initiatives in 2019 is to commence a post-market study, which will help us get clinical information in the marketplace so that we can help to drive commercial demand in the OUS market. And from a commercialization standpoint, we utilize country level distributors to market our OVT or tennis elbow product outside of the United States. With regard to the domestic market, we are planning on employing a partnership approach on that product. As you pointed out, we do have a protocol that the FDA had approved and from a prioritization standpoint, we're looking to focus on our -- focus our R&D effort on the programs that I discussed earlier and this one potentially will be a collaborative initiative on our part and on our partner's part. So, that is at a high level where we are in terms of the domestic and international tennis elbow programs.

Yes. Lisa, just point of clarification. OUS we use local distributors, U.S. obviously we're looking for that broader partnership domestically. So, I just want to make sure that we were clear. There are independent distributors outside the U.S., but when we look for partnerships in the U.S., we're looking for the broader national partnership.

Thank you. And we have a follow-up question from the line of Mike Petusky with Barrington Research. You may proceed.

Yes. Just sticking on the partnership theme, Joe. Obviously you're targeting a commercial launch for bone repair in second half '19. I guess are there multiple discussions taking place, are there end stage discussions taking place? Can you just give a sense of is this likely to be sort of an early second half launch? Are you close in terms of signing an agreement there and when you do sign an agreement, is that the type of thing that you guys would press release? Thanks.

Yes. So to answer the very end of your question, we would press release it. No question about it. Secondly, we are in multiple discussions, Mike. We're at different stages so it's kind of hard to segment for you where those different stages are based upon the number of discussions we're having. I think the good news is there's a pretty high interest level in partnership opportunities in partnering with us for that particular product. And it's probably what you think it would normally be for what we're looking for and that is an established large orthopedic sales organization that has the capabilities for depth of reach into the physician community. So, I think we're in a pretty good spot. Our target is soft launch in Q3 so we hope to have the partnership announcement by the end of the first half of this year, but we've got flexibility in that. The soft launch just for clarity is where you go out and you start to build market awareness and you develop your key opinion leader base, you start getting some trials and usages with it, then you go into the full hard launch. So I think we're in a pretty good spot, feel pretty good about it. Feel good about the number of discussions we're having and the depth of those discussions.

And we have a follow-up question from the line of Joe Munda with First Analysis. Your line is now open.

Just really 1 quick follow-up in regards to the bone repair product. Is that going to be booked in surgical and I'm guessing does the 2019 guidance reflect contribution from bone repair and if so, ballpark what are you guys looking for as far as maybe potential revenue first half of your launch?

The bone repair product would be included in orthobiologics because of its orthopedic intended use. The surgical franchise is primarily anti-adhesion related surgical products. With regards to the revenue expectation; given the timing of soft launch in the third quarter and a full launch toward the end of the year, we expect that the revenue contribution would be less than $1 million in 2019. And sorry, Joe, remind me about the last question, I think there was a three part question.

Just I was looking for expectations in '19 for the soft launch and where you guys were going to be booking the revenue. I think that's all I had.

Yes, I think I answered both.

Yes.

Thank you. Ladies and gentlemen, this concludes today's Q&A session. I would now like to turn the call back over to management for any closing remarks.

So, thank you for your time today. We are pleased with the progress that we are collectively making across our organization to transform Anika into a global commercial company and gain greater control of our future. We are very excited about our growth prospects and we look forward to continuing to update you as we execute on our strategic initiatives in the year ahead. Thank you and have a great evening.

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 wonderful day.