Good evening, ladies and gentlemen, and welcome to the Anika Therapeutics Second Quarter 2019 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 call may be recorded. I would now like to turn the call over to Sylvia Cheung, Chief Financial Officer. Please go ahead.

Thank you, Catherine. Good evening, everyone, and thank you for joining our second quarter 2019 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 2019 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 Investor 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 and 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 two. Before we begin, please remember that certain statements made during this conference call constitute forward-looking statements as defined in the Securities and Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. The company’s actual results could differ materially from any anticipated future results, performance or achievements. Please see our SEC filings for more information about factors that could affect our results. Certain financial measures we will discuss on this call are non-GAAP financial measures. We believe that providing these measures helps investors gain a more complete understanding of our results and is consistent which how management views our financial performance. A reconciliation of these non-GAAP financial results to the most comparable GAAP measure calculated and presented in accordance with GAAP is available in the Investor Relations section of our website. I will now turn the call over to our CEO, Joseph Darling. Joe?

Thank you, Sylvia, and good evening, everyone. Welcome to our second quarter 2019 earnings call. In the second quarter we continue to transform Anika into a global commercial company positioned to deliver innovative products across the continuum of orthopedic and regenerative medicine therapies. We also generated strong earnings and cash flow in the quarter. We're realizing the benefits from our international commercial expansion initiatives as evidence by 28% growth in our International Viscosupplement Revenue year-over-year. As a result of our strong year to-date performance we are raising our revenue and adjusted EBITDA guidance for the full year of 2019. Sylvia will discuss our updated outlook in detail following my remarks. Please turn to slide number three. Before I discuss the quarter and our other ongoing initiatives, I'd like to start with an important update on CINGAL after expense of clinical, regulatory, commercial and business analytics [Indiscernible] discussions we have decided to move forward in our efforts to bring this innovative treatment to the U.S. market. Initially we will conduct the pilot study using a newly design clinical trial protocol which we will discuss with the FDA in the coming months. We believe that this approach best balance its time, cost and risk and we tend to use this pilot program to confirm our trial design, increase our probability of success in the Phase III trial and generate data that ultimately will be needed to sort FDA approval. In the analysis we conducted to reach these decisions. One of our most important considerations was the real world evidence demonstrated by the continued strong performance and growth of CINGAL in Canada and across Europe. International revenue from CINGAL increased 125% year-over-year in the second quarter. This success with over 100,000 procedures since launch together with the overwhelmingly positive feedback we continue to…

Thank you, Joe. Please turn to Slide number eight. Total revenue for the second quarter was $30.4 million compared to $30.5 million for the second quarter of last year. Our global orthobiologics franchise grew approximately $300,000 during the quarter primarily due to strong international viscosupplement revenue. Global viscosupplement revenue represented 84% of the second quarter total revenue. The U.S. viscosupplement revenue decreased approximately 6% year-over-year for the quarter. And during the second quarter U.S. ORTHOVISC and MONOVISC product transfer prices were impacted by the decreased market pricing that occurred in the fourth quarter of last year. As a reminder the transfer prices were based in-market net selling prices two quarters in arrears. This impact was partially offset by increased royalty revenue in a quarter which is calculated on the basis of U.S. ORTHOVISC and MONOVISC end user pricing during the period. On the sequential quarter basis, domestic ORTHOVISC end user net sales price increase around 20% and MONOVISC net sales price increased in a high single digit percent range. On a year-over-year basis end user volume for the quarter increased 9% for ORTHOVISC and 18% for MONOVISC. The net 6% decrease in the U.S. viscosupplement revenue was more than offset by international viscosupplement revenue growth of 28% year-over-year. This was driven primarily by CINGAL which achieved 125% revenue growth year-over-year for the quarter. Product gross margin increased to 78% for the quarter compared to 73% for the second quarter of 2018. The strong year-over-year increase in product gross margin was primarily due to prior year result included inventory charges related to solid HA product lines. In addition, a more favorable revenue mix also positively impacted the product gross margin during the quarter. Total operating expenses in the quarter were $18.5 million compared to $19.3 million in the second quarter of…

Thank you, Sylvia. Please turn to Slide number 10. As we look into second half of the year, we will continue to take advantage of the multiple levers we have to drive near to long-term growth across our business. These include advancing our hybrid commercial model and the launches of our bone repair, rotator cuff, cardiology repair therapies. Continued focus on the international commercial expansion of our orthobiologics franchise specifically MONOVISC, CINGAL and HYALOFAST. Also advancing our deep in innovative orthopedic and regenerative medicine pipeline including the commencement and completion of the CINGAL clinical program, and continuing to evaluate targeted partnerships and strategic tuck-in acquisitions that would compliment our product portfolio, enhance our commercialization capabilities and augment our technology. We also remained focused on solid execution across our organization and maintaining strong operational efficiency as we continue our disciplined and balanced approach to capital allocation. Before we open the line to questions there are three things about Anika that I hope you'll take away from our call today. First, we've taken significant steps over the last year to transform Anika into a global commercial company and position the company to accelerate growth and shareholder value creation in the coming years. Secondly, we are laser focused on delivering on many organic and external growth opportunities for Anika. We have actively redeployed resources and added world-class talent as we leverage our strong market position to achieve our growth objectives. And third, Anika as I mentioned in previous calls is having inflection point in its ongoing evolution. As evidence by a strong year to-day performance we are committed to sustain our legacy of operational excellence and financial discipline when we drive our next phase of growth. We are now happy to take your questions. Thank you.

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

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

Hi, Joe. Good afternoon.

So, my first question revolves around CINGAL and the study. I'm just curious if first question and then follow-up. Can you give us the context of why the decision to do pilot study 240? Why not do a bigger study or Phase III? And then you talked about the possibility of adaptive trial design. Could you roll that pilot study into a Phase III depending on the data that's coming out of that study? I'm just curious to get some thoughts and how much is that pilot study do you think it's going to cost from an R&D; perspective? Thanks.

Yes. Joe, great questions. It had a multitude of questions in there and we'll try to break it down and address each one, okay? First, we believe this approach best balances as I mentioned previously, time, cost and risk. And we intend to use this pilot program to confirm our trial design and increase our probability of success in a Phase III trial and potentially generate data that ultimately would be needed to support FDA approval. We expect to discuss the trial design with the FDA in the coming months. And there were a number of factors that solidified our decision to move forward on the planned pathway with CINGAL. One is that we've been so encouraged by the continued international revenue growth from CINGAL. As Sylvia and I both mentioned during the call, it increased 125% year-over-year in the second. The real-world evidence demonstrated by the continued strong performance and growth of CINGAL in Canada and across Europe with over 100,000 procedures since the launch further highlights to us strength of the product. So to meet the success together with the overwhelmingly positive feedback we continue to receive from patients and physicians has further reinforced our competence in CINGAL's clinical value as a safe and efficacious nano-fluid [ph] solution to provide fast and durable relief. In additionally, Joe, I'd like to add to that. We recently primary market research with over 140 interviews with U.S. treating physicians and the results from that survey underscore the clinical need the patient benefit and market opportunity to this elevated treatment in the U.S. All of these factors combined have increased our confidence in CINGAL's U.S. market opportunity which as I mentioned on the call to be approximately $1 billion. While the pilot study will delay the potential launch of CINGAL we also believe it will improve the probability of success by confirming our belief that the new study design including modification of patient and selection criteria would produce the pain-related outcomes that the FDA is seeking for successful NDA submission. Throughout this process Joe we also intend to explore potential collaboration opportunities in terms of beneficial to Anika that could enable us to share development with the strategic partner. Given all of this, it was clear to us that moving forward in our efforts to bring this innovative treatment to the U.S. market is the right decision. And I'll now turn it over to Sylvia to address some of your financial questions related to the cost of this type.

Yes. I think the other two parts, one is the adaptive design and the other piece is cost related to the CINGAL pilot study. For my trial design standpoint we do believe that the revised trial design will be successful in meeting the requirements that the FDA has. Our intention as Joe mentioned earlier is to talk with the FDA on a design over the next few months. And particularly or specifically there are three elements that are involved in a revised design. One is the placebo arm. The second one is a much larger TH arm, meaning the steroid arm. And the third is modifying patient enrollment criteria to target the profile of the patients for inclusion and exclusion purposes. These elements we believe are important in order to generate the data that we need and from a adaptive study standpoint, we have not yet had the detailed discussions with the FDA, but as I mentioned earlier we'll be conducting that in the coming months. From a cost standpoint, we estimate the cost of the pilot study to be in the mid to high single-digit million dollars range and this is included in the revised operating expenses that I discussed earlier. Joe, hopefully that answered your questions.

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

Good afternoon. Can you hear me?

We can, Jim. Good afternoon.

Great. So just few more questions on the pilot study. You said it'll take a year to complete. Is that a year to complete enrollment or a year to complete the entire study?

It's one year to complete the entire study. The follow-up period is six months.

Okay. So it'll be 18 months before you have the data from this pilot study. Is that correct?

Sorry, can you repeat that?

I guess, how long will it take to complete enrollment?

Well, it will approximately one year to complete enrollment. But I'm sorry, it will take approximately six months to complete enrollment. That reverse, Joe, apologize.

Yes. So overall it'll take us at roughly a year to complete enrollment as well as the six-month follow-up. From there we'll be looking to complete the statistical analysis. So the specific time frame, I think what you state at 18 months is roughly the timing that we'll be looking at.

Okay. So after 18 months you'll review the data and then assuming everything is okay you would commence a larger study. Is that correct?

Yes. Sequentially that would be the process. Having that said, we're internally looking at ways to shorten the clinical and the approval time frame. But at this point because we haven't had discussions with the FDA yet, we're not at the liberty of getting into specific details on this call.

Okay. So we shouldn't expect any revenue from CINGAL on the U.S. for at least three years it sounds like. Is that correct?

That is a correct assumption. I would say three to four years.

Okay. All right. I got it. And can you give us any sense what the cost will be in 2020 for the pilot study?

The overall cost as I mentioned earlier is in the high -- in the mid to high single digit million dollars. We'll be starting some of the expenses this year. A good portion will be next year as we commence enrollment and look to complete the study.

Okay. And you mentioned that you might partner with someone. Have you ever partnered on a clinical study before?

We have. In earlier in Anika's history we have partnered with a number of companies in terms of developing products. One comes to mind with the dermal filler product. We had also previously partner given that it was later in the development program partnered with J&J on clinical programs.

Okay. And so I assume that – all that comes with part of the negotiations for a distribution product or distribution contract [Indiscernible]?

Potentially, Joe. I think as part of the negotiations now obviously we're on a public call today, lot of opportunity, Jim, to really take advantage of the collaborative environment that we're in today and to look at potential partners. But I wouldn't really want to get into any more depth in that considering we're in the early stages of those conversations.

Okay. That's fine. And then just move over to the bone repair product, it sounds like you're going to start a pilot launch or initial launch in the second half of the year. Who's going to be selling the product in 2019? Will it be your people or will it be some of these regional distributors?

Well, it's going to be a combination of both. But clearly our sales directors are going to engage local distributors and obviously their responsibility for account management meaning selling directly into the accounts. So it's going to be a combination of the two. I'd say in the early phase of the launch you'll see primarily the focus of the sales directors personally selling the product as well.

Okay. And I assume that you'll evaluate how things are going with the initial launch and then you could use another distributor sometimes in the future if the product looks like it's selling well. Is that right?

Yes. We are very open to collaborative distribution arrangements with larger nationally based sales forces. But I think out of the gate to get the product up and running to your point, we want to focus on the local and regional distributors.

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

Good evening. I wonder if Sylvia could give us a little more color around the big year-over-year decline in cost of product revenue?

Yes. The year-over-year decline in product cost revenue are due to two factors. One was in Q2 of last year we had some inventory-related charges related to our solid AJ product lines which warrant requiring for Q2 of 2019. Secondarily, the higher than expected pricing in the U.S. for our ORTHOVISC and MONOVISC products led to a much more favorable revenue mix which also contributed to the improvement in the product gross margin or yes, the improvement in the product gross profit.

Okay. Thank you.

You're welcome.

Thank you. And our next question is a follow-up from Joe Munda with First Analysis. Your line is open.

Yes, Joe and Sylvia, a couple follow-ups here. Sylvia, you gave some pretty good color on pricing and volume. I missed some of that. Maybe you could review that. And then I guess your thoughts given the guidance -- your thoughts on pricing and as we go ahead here and look out over the rest of the year? Thanks.

Okay. So from a pricing standpoint on a sequential basis, ORTHOVISC increase in the 20% range and MONOVISC increase in the high single-digit percentage range. So this is Q2 of this year over Q1 of this year. And from a volume standpoint both products experienced volume increase largely due to our partner, Mitek's sales and marketing initiatives. ORTHOVISC volume increase year-over-year was 9% and MONOVISC volume increase year-over-year was 18%. From a second half of the year outlook standpoint, the guidance that we updated increase from my previous guidance was taking into account the very positive development that we saw in the first half of the year in particular second quarter of this year. Having that said, we also look at a longer-term historical trend, meaning that we took a look at the last 12 to 18 months of pricing trend. I noted that there was increase volatility. So as a result we wanted to be prudent and take a more balanced approach to our guidance adjustment. While we are very positive about futures results we want it to be prudent and we're taking a more cautious approach toward the second half of the year given the volatility that we saw over the last 12 to 18 months. Overall, we do believe that the volume for ORTHOVISC and MONOVISC will continue to drive the increase in revenue.

Okay. Thank you.

You're welcome.

Thank you. We have another follow-up from Jim Sidoti with Sidoti & Company. Your line is open.

Hi. Sylvia, you gave us pricing sequentially, but what was pricing year-over-year?

Year-over-year MONOVISC price increase while ORTHOVISC price was decreased from the year to -- from last year. So, let me just get to -- so ORTHOVISC price decreased year-over-year in the high single digit percentage range. And MONOVISC price increased slightly in a low single-digit percentage in Q2 versus -- Q2 to this year versus Q2 last year.

Okay. And so you had two very different types of quarters relative to the gross margin in Q1 and Q2. Do you expect the second half of the year to look more like Q1 or Q2?

Good question, Jim. Our expectation of cost of product revenue is built into the overall operating expenses and we don't separately provide margin guidance. And I think from a margin standpoint each of the quarters had their kind of one-time and unique activities behind them. I would say that keeping to the total operating expense guidance that we gave to project the profitability is the best approach. We will stay consistent with not providing product gross margin expectations.

Okay. Maybe you could answer this then. Were there any one-time items that positively affected the gross margin in Q2 or negatively affected in Q1?

In the in the second quarter I had mentioned that the one-time high off related product line inventory reserve in Q2 of last year was a factor that drove the increase in margin. So I think that should be taken into consideration, which means that without the adjustment last year the increase in margin would be lower year-over-year.

Okay. Then how about sequential -- was there anything different in Q1, Q2 sequentially that was one-time in nature?

Yes. From a Q1 to Q2 standpoint, we saw about 7% increased in our product gross margin. I would say that roughly half of that is due to revenue mix and that is largely due to the price increases that I mentioned earlier for ORTHOVISC and MONOVISC in the second quarter. So if pricing continues to trend up then I think it will positively impact our margin profile for the second half of the year. If it doesn't then it would have a more unfavorable impact. So that's one point to consider for the sequential Q1 to Q2 margin change. The other half of the increase from Q1 to Q2 is related to certain operating expenses and the timing of those events. And these are what I would call period expenses, meaning that they are charged to the period and some of them included utilities and purchase timing of purchases of supply, so those are more timing driven.

Okay. I guess I'm confused because overall you said U.S. revenue was down 6%, but pricing got better for MONOVISC year-over-year. Volume got better for both ORTHOVISC and MONOVISC year-over-year. So why was overall revenue down 6%?

Yes. So the missing piece is the pricing for the product that we shipped was down and I explained on the prepared remarks that the transfer price in Q2 was driven by the ASP in the fourth quarter of last year which was a low transfer price quarter. So a portion of our Q2 results was favorably impacted by the in-market price in Q2, meaning the royalty component. But the other portion which is the product shipment was unfavorably impacted by the low ASP from Q4 of last year which is just hitting this quarter's product revenue.

Okay. That makes sense. So then should we expect that transfer price to move up now since end market pricing has gone up? Should that transfer price go up in Q3 and Q4?

The transfer price for Q4 certainly would go up because of Q2's pricing improvement. What we at this point don't know about is the pricing trend for Q3 and Q4. So that is the element that we have to make some prudent and reasonable estimation based on historical trends.

Thank you. And I'm showing no further questions. I'd like to turn the call back to Mr. Joseph Darling for any closing remarks.

Great. First of all, I want to thank everybody for your time today. We are very pleased with our second quarter results and our progress transforming Anika into a global commercial company with the continuing elevated orthopedic through regenerative medicines. We look forward to continuing to update you as we execute our strategic initiatives in the year and a half. Thank you and have a great evening.

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