Good evening, ladies and gentlemen, and welcome to Anika Therapeutics Fourth Quarter and Full Year 2019 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

Thank you, Lide. Good evening, everyone, and thank you for joining us. With me on the call today is Dr. Cheryl Blanchard, Interim Chief Executive Officer; and Jim Loerop, Executive Vice President of Business Development and Strategic Planning. During today's call, Cheryl, Jim and I will review our fourth quarter and full year 2019 financial results and key business highlights, which were summarized in our earnings release issued today. A copy of the earnings release is available on our 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 & Presentations tab. We invite you to take a moment now to open a file and follow the presentation along with us. Please turn to Slide 2. Before we begin, please remember that certain statements made during this conference call constitute forward-looking statements as defined in the Securities 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 these measures provide -- help investors gain a more complete understanding of our results and is consistent with how management views our financial performance. A reconciliation of these non-GAAP financial results to the most comparable GAAP measurement, calculated and presented in accordance with U.S. GAAP, is available in the Investor Relations section of our website. I will now turn the call over to our interim CEO, Dr. Cheryl Blanchard. Cheryl?

Thank you, Sylvia, and good evening, everyone. Before we discuss our financial results and outlook for the year ahead, I'd like to start by remembering Anika's President and CEO, Joe Darling, who passed away unexpectedly on January 29. When I interviewed to join Anika's Board, Joe talked about Anika and the people who make up Anika with a passion you hope every leader exhibits about his or her company. Joe was a wonderful leader and a trusted colleague who led the beginning of our transformation into a global commercial company. Over the last 2.5 years, he set Anika on its current path, reinforcing its strong foundation, leveraging its strengths and embracing innovation. Most recently, he led the development of our 5-year strategic plan, which will continue to guide our growth over the next several years. Joe was a great man with a well-deserved reputation in our industry for being a strong leader who is passionate about health care. Though certainly we'll miss his leadership, we'll miss his character, humor and friendship even more. Our thoughts and sympathies go out to his wife, Maureen; and children, Jon and Jordan. We are grateful to Joe for all that he did for Anika, and we will continue to work to honor and build on his legacy. Some of you have asked about Joe's passing. While we will continue to respect his family's wish for privacy, I can share that in early 2019, Joe informed the Board that he was experiencing some health issues. Following that communication, the Board and Joe were in regular contact regarding his health. He continued to perform his responsibilities well throughout 2019 and into 2020 and over-delivered progress against our strategic goals. Based on ongoing dialogue and Joe's exemplary performance record, the Board remained confident in his ability to…

Thank you, Cheryl. Please turn to Slide 9. I will start by discussing our integration plans for Parcus Medical and Arthrosurface and touch on some of the key targets that we are looking to achieve in the near term. Similar to how our acquisitions were focused on delivering growth, we view the integration process as a growth story. We are deploying an efficient matrix organization with local management. Our focus is on adding capabilities rather than consolidating them. When we first announced the acquisitions, we were confident that both Parcus Medical and Arthrosurface were highly synergistic with Anika's technology platform, and that has become even more evident following the completion of both transactions. Anecdotally, I can share that on the commercial side, we have already heard from distributors across all three companies about adding products from the combined company with significant cross-selling opportunities. We are encouraged by the positive feedback we have received thus far, and we will work to capture these revenue growth and cross-selling opportunities as we continue the integration process. In the immediate term, our goal is to focus on product portfolio cross-training and leverage our consolidated distribution network to commercialize TACTOSET. Longer term, our goal is to optimize our commercial infrastructure, reap the benefits from cross-selling and increased profitability. The acquisitions of Parcus Medical and Arthrosurface also expand our innovative product pipeline and enable us to increase the number of new products we will bring to market in the coming years. We are currently using our stage gate process to evaluate our enhanced pipeline following these acquisitions and prioritize resources towards supporting programs with the highest growth potential. We will share our pipeline road map later this year after completing this assessment. In the near term, we expect that the acquisitions will be accretive to earnings on a non-GAAP basis by the end of 2021, deliver double-digit revenue growth and contribute to achieving a vitality index at above 25%. I will now turn the call over to Sylvia to review our fourth quarter and full year 2019 financial results. Sylvia?

Thank you, Jim. Please turn to Slide 10. Total revenue for the fourth quarter increased 10% year-over-year to $29.8 million compared to $27 million for the fourth quarter of 2018. Revenue growth for the quarter was driven primarily by global viscosupplement products, which delivered worldwide growth of 11% year-over-year. Total revenue for the full year of 2019 increased 9% to $114.6 million compared to $105.6 million for 2018. Domestic viscosupplement revenue increased 8% year-over-year for the quarter. During the fourth quarter, U.S. end user average selling price increased around mid-single digit for both ORTHOVISC and MONOVISC on a year-over-year basis. On a sequential quarter basis, U.S. end user net average selling price decreased in the single-digit percent range for ORTHOVISC and MONOVISC. On a year-over-year basis, end user volume for the quarter increased 5% for ORTHOVISC and 13% for MONOVISC. International viscosupplement revenue increased 24% and 20% year-over-year for the quarter and for the full year, respectively. Product gross margin was 71% for the quarter compared to 74% for the fourth quarter of 2018. The year-over-year decrease was primarily due to certain inventory charges and changes in the product revenue mix. For the full year of 2019, we delivered a strong product gross margin of 75%. Total operating expenses in the quarter were $25 million compared to $17.2 million in the fourth quarter of 2018. The year-over-year increase in total operating expenses was due primarily to higher SG&A expenses related to the acquisitions of Parcus Medical and Arthrosurface, the U.S. commercial launch of TACTOSET as well as the higher cost of product revenue. Acquisition costs totaled $2.9 million for the fourth quarter of 2019. For the full year, total operating expenses were $80.4 million compared to $83.8 million for 2018. Net income for the quarter was $4.1 million or $0.28…

Thank you, Sylvia. We're pleased with the company's performance in 2019 and look forward to continuing our momentum in 2020. We are well positioned to achieve our strategic initiatives, and we are confident that we are becoming a leader in sports and regenerative medicine, while also doubling our total revenue over the next 5 years. We're now happy to take your questions. Thank you.

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

Can you hear me okay?

Yes, we can, Joe.

First off, I want to convey our sincerest condolences regarding the passing of Joe. He was a really, really great guy to work with. That being said, I wanted to talk to you a little bit about the guidance in the quarter. In regards to the quarter itself, can you give us some sense of what the split was in the mix, MONOVISC, ORTHOVISC and then maybe the contribution from CINGAL in the quarter? And then my second question in regards to the guidance, can you give us some sense of what the incremental contribution will be from Parcus and Arthrosurface in 2020 in terms of your forecast?

Okay. So I think -- I just want to make sure. The first question is on ORTHOVISC MONOVISC mix, and the second is on CINGAL, and then the third question is on the revenue contribution from Parcus and Arthrosurface. In terms of the split of revenue for MONOVISC and ORTHOVISC, MONOVISC is roughly 45% to 50% of our total revenue for the year, and ORTHOVISC is roughly between 35% to 40% of our total revenue for the year. CINGAL continued to grow very strongly. And we have mentioned that for the year, the growth year-over-year is close to 30%, and as a percent of total revenue, is roughly about 5% of our total revenue.

For the year?

For the year, yes. We would like to stick to commenting on year just because of the inherent quarterly variability because of our distributor model. Yes. So thank you for your understanding on that. With regards to revenue contribution, so we provided our consolidated total revenue guidance for the year, which is between $160 million to $165 million. We do not plan to provide guidance on a company-by-company basis. Having that said, I can reiterate, Parcus from a historical standpoint, they achieved $13 million of revenue in 2019 and delivered 15% growth year-over-year for 2019. And Arthrosurface revenue for 2019 was $30 million, and they achieved 10% growth year-over-year from '18 to '19. And our expectation is that they will continue double-digit growth this year and into the future.

Our next question comes from the line of Mike Petusky with Barrington Research.

I guess just from a modeling perspective, are you going to sort of separately -- in terms of these new businesses, are you going to break them out, are they going in other revenue? How are you disclosing that piece of the business going forward?

Yes. So from a reporting standpoint, we'll consolidate Parcus and Arthrosurface. The revenue product families will be recasted. Instead of having the historical orthobiologics, surgical, dermal and other, we will be recasting the revenue into 3 revenue product lines or 3 families. So joint pain management will be a human and animal viscosupplement products, meaning ORTHOVISC, MONOVISC, CINGAL and HYVISC. The joint preservation and restoration care products will be the surgical products from Parcus and Arthrosurface as well as our own legacy surgical products, like HYALOFAST, as well as TACTOSET, which is newly launched in December of 2019. All the other product lines, the ophthalmic products, the wound care, dermatology products and anti-adhesion products will be grouped in the other category. I think this provides a better visibility in terms of understanding our office-based products, which would now be in the pain management category; and the operating room-based surgical products, which we have full control of because of our hybrid and direct sales model. And that would be in the orthopedic joint preservation and restoration care product line. So hopefully, that's clear and it's helpful for you, Mike.

You probably added an hour to my evening, just telling you that. That's fine. Yes, we'll figure it out. And then in terms of the integration expenses, is that just going into SG&A? Or is it going to be a separate line item for that each quarter going forward?

Yes. So on the estimate, the preliminary estimated purchase accounting, integration and acquisition costs, it's roughly about $27 million. There are really 3 buckets and most -- the majority of that will go through the cost of goods sold line, which is related to purchase price accounting and having to mark up the inventory balance to fair value. And this was the reason why, in the script section, I mentioned that the product gross margin expectation for 2020 is in the low 60% range. And that is due to the result of purchase price accounting, having to mark up inventory. And the remaining portion will primarily go through SG&A.

Okay. Okay. And then on -- just in this quarter, do you by any chance to have CapEx for the fourth quarter handy?

CapEx is roughly about $300,000 for the fourth quarter and close to $3 million for the year.

Okay. And just, I guess, one other question. Is there any change in emphasis, strategic vision in terms of the leadership transition, capital allocation priorities? Is there any change relative to what we had been hearing, say, the past 6 to 12 months?

This is Cheryl. I'll take that one. I would let you know that there are no changes, that the five year strategic plan that we've been talking about is the way we're moving forward and nothing has changed in that regard. So no change in assumptions there.

Our next question comes from the line of Jim Sidoti with Sidoti & Company.

Can you hear me?

Yes, we can, Jim.

Yes.

Great. I just want to get some more color on that $27 million of charge -- integration charges in 2020. Will that all be onetime and will those recur at all in 2021?

Yes. So most of the -- that charge would be onetime, and most of it is noncash. And I think it may be helpful, given the size and the fact that there's a repeat question for me to provide a little bit more color. Earlier, I was saying that there are 3 buckets of these acquisition-related expenses. The first bucket is really purchase price accounting, which includes fair valuation of the assets and related amortization costs. So the majority of the valuation is going to be based on what we -- half at this point will be on inventory. And that charge is noncash, and we expect that majority of that will flow through 2020. So that's a onetime event. Some of the purchase price accounting will have ongoing amortization effect, but that's a smaller portion, and I'll get into, at a high level, the split. Acquisition costs is going to be related to banking, legal, accounting and other professional costs, and those are purely onetime. And integrating-related expenses are routine in nature from that integration standpoint. These are professional fees, and some of it is related to -- will be related to system costs, and those will be onetime as well. So when we look at the $27 million estimate, I would say that roughly about 80% of that would be noncash, and the majority of that will be onetime charges.

Okay. And will there be more in the first quarter, because that's when the deal is closed? Or will they be -- will it be spread out throughout the year?

Yes. So from a timing standpoint, I would say roughly about 1/3 would be in the first quarter, and this is due to the timing of the closings of Parcus and Arthrosurface transactions. And the remainder will be roughly evenly spread between Q2 and Q4 of this year.

Okay. So based on your share count, you're talking about a hit of about $1.30 a share, and you're saying about $0.40 of that will wind up in the first quarter?

Roughly, yes.

We have a follow-up question from the line of Joe Munda with First Analysis.

Sorry. Sylvia, I was on mute. Real quick. So if we were to back out that impact to gross margin essentially from the $27 million -- I know you gave us some data, and I'm trying to run through the numbers here. But what would product gross margin be without the impact of the $27 million? Would it still be in the mid- to low 70s for 2020?

We're not in a position to break out the business and the different line items on the P&L with and without the acquisition. What I can share is that the reason why the product gross margin is expected to be in the low 60% range comparing to the previous historical 70% product gross margin achievement is due to the noncash acquisition-related, the expected -- estimated noncash acquisition-related adjustment. We do expect that starting 2021, we'll be back to the historical level of product gross margin.

Okay. So there's nothing else in there other than the acquisition-related charges that is driving gross margin down? Just -- is that the way to think about it?

Yes. I think there are a number of, as you know. The largest one is the noncash item that I spoke about. On the prior investor call, we had talked about the product gross margin for the 2 acquired businesses are slightly lower than Anika's historical consolidated product gross margin. So that is one factor, but it's a smaller factor. And product gross margin, as you know, is also directly impacted by pricing. So I don't think on this call, we -- it's appropriate to get into a detailed discussion on each of these points. The key takeaway is the main driver for the product gross margin to be in the low 60% range is due to onetime noncash charges related to the Parcus and Arthrosurface acquisitions.

Okay. And then just one more here. And then on the adjusted EBITDA that you're looking for $47 million to $57 million. In your prior comments regarding the acquisition, you were talking about them weighing on EBITDA or having an impact in '20 and then bouncing back in '21 and being non-GAAP profitable as a result. Can you give us some sense of what the impact to EBITDA is from the combined businesses in '20, the expectation?

Yes, our policy is to provide the EBITDA guidance and expectation on a consolidated business standpoint and not brick into the individual business entities. What I can share with you is our goal, and we have plans in place and are on our pathway to achieve those, is to have the 2 acquired businesses, the EBITDA positive as well as the net income -- non-GAAP net income positive or accretive for us starting in 2021.

We have a follow-up question from the line of Mike Petusky with Barrington Research.

Yes. So Sylvia, on the effective tax rate, it looks like you guys are expecting more like mid-30s in '20. And could you just, I guess, explain that and then talk about, is that sort of the new normal as we move forward? Or do we go back post the integration of all this to sort of a mid-20s range for effective tax rate?

Yes. The current expectation on the effective tax rate is in the mid- to high 20% range. Obviously, as you can imagine, after the acquisition of 2 new entities, there's a fair amount of work to do on a number of fronts, including purchase price accounting, looking at the tax positions for each of the 3 individuals. So there is a lot of detailed work that we're currently focusing on, and we'll look to update and provide additional information in future quarters. The information that we have provided in the earnings release as well as on this investor call are based on our best estimates. And as you all know, the acquisitions just recently closed within the last few weeks. We've done a lot of work in terms of looking at the 2 businesses and put together our best set of estimates. And throughout this year, we'll be looking to report actuals and providing information on the differences and any material updates that we have.

Okay. Sylvia, so -- okay. So I'm looking at Page 3 of the release where you essentially say estimated provision for income tax is $1.7 million on net income of $5 million. Obviously, that's 34%. And it's the same for the high end of the range. Are you saying that your estimate is now lower than what's in this release? Or am I just misunderstanding, which is very possible at this point?

Yes. I think there -- on Page 3 of the earnings release, if you're looking at the estimated provision for income tax, that should equate to about mid-20% to high 20%.

Okay. I see. I'm sorry. It's on -- against pretax. Sorry, I've been working -- 14 hours already today. Sorry.

I'm showing no further questions in queue at this time. I'd like to turn the call back to Cheryl Blanchard for closing remarks.

Thank you for your time today. We look forward to updating you as we continue to deliver progress toward our strategic initiatives. Thank you, and have a great evening.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.