Good evening, ladies and gentlemen, and welcome to Anika's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Kristen Galfetti, Executive Director of Investor Relations. Please proceed.

Thank you, Gaylene. Good evening, everyone, and thank you for joining us. With me on the call today is, Dr. Cheryl Blanchard, President and Chief Executive Officer; and Michael Levitz, Executive Vice President, Chief Financial Officer and Treasurer of Anika. During today's call, Cheryl and Mike will review Anika's third quarter 2020 financial results and key business highlights, which were summarized in our earnings release issued today. A copy of the earnings release is available on the Investor Relations section of our website at anika.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 the 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, including statements with respect to impacts of the COVID-19 pandemic on Anika. These statements 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. 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 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 the U.S. GAAP, is available under the Quarterly Results tab in the Investor Relations section of our website. I will now turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Thank you, Kristen, and good evening. We hope that everyone joining us on this call remains in good health, while we navigate - continue to navigate the COVID pandemic. I am happy to report that the third quarter, showed positive momentum with continued gains in procedure rates and revenues relative to the impacted levels we saw in the spring and summer months, and we are seeing top line synergies from our recent transformative acquisitions with Anika's legacy business. I'm also very pleased with how the Anika's team has remained focused on execution, while successfully navigating the pandemic, as we see elective procedures, moving toward more normal patterns of activity. Please turn to Slide 3. As the integration of these businesses has progressed, our value proposition is clear. We are focused on creating and delivering meaningful advancements in early intervention orthopedic care. Our strategic plan to focus on Joint Preservation has expanded our addressable market from $1 billion for OA pain management to a much broader $8 billion addressable market that now includes faster growing segments of the orthopedic space, including sports medicine and extremities. By remaining uniquely focused on the Joint Preservation space, we are addressing significant surgeons and patient needs with a set of capabilities and technologies that leverage and complement each other to bring real value to the healthcare system and all of our stakeholders. We believe that Anika is unique in this focus. We are committed to investing and leading in high opportunity spaces within orthopedics including osteoarthritis pain management, regenerative solutions, soft tissue repair, and bone preserving joint technologies. By combining our ability to develop and offer new therapies across these key Joint Preservation spaces, we can provide full and unique solutions to our customers and leverage our commercial organization focused on the Joint Preservation orthopedic…

Thank you, Cheryl. I'm very excited to join the Anika team at such a pivotal time in the Company's growth and I look forward to our future successes together. If you would please turn to Slide 7. Total revenue for the third quarter 2020 increased 7% year-over-year to $31.7 million. The revenue growth was driven by $11.7 million in orthopedic joint preservation and restoration revenue, which rose $11.2 million from the prior year, primarily due to the acquisitions of Arthrosurface and Parcus Medical in the first quarter of this year. We are pleased that these revenues recovered significantly on a sequential quarter basis from the initial COVID impact that Cheryl mentioned, approaching pre-COVID pro forma level as procedure volume increased, our integrated sales team gained traction and as we introduced new products. This growth more than offset lower joint pain management revenue. As we mentioned on last quarter's earnings call, we had expected that orders from J&J Mitek, markets and distributes our MONOVISC and ORTHOVISC products in the United States would be lower in the second half of 2020 as a result of the COVID impact and Mitek's related ordering pattern. We expect Mitek to continue to manage their inventory levels in the fourth quarter as they work to fully address the impact of COVID by the end of the year. Also as expected, while down year-over-year due to COVID, our royalty revenue from Mitek recovered notably on a sequential quarter basis. As patients returned to doctor's offices and end-user sales in MONOVISC and ORTHOVISC rebounded from the initial COVID impact. As a result of the strong growth of our joint preservation and restoration sales as well as the unfavorable impact on the ordering by our joint pain management distributors, our revenue mix diversification accelerated notably in the third quarter,…

Thank you, Mike. Please turn to Slide 8. Our performance in the third quarter underscores the resolve of our leadership team and the strength, depth and diversity of our product portfolio propelling this organization forward. We are very pleased to see procedure volumes trending toward pre-COVID levels and are energized to position the new Anika to continue to provide products across our new, more diverse product portfolio by integrating the strengths that each legacy companies bring to the table. Our strong financial position and continued investment in R&D with our unique focus on joint preservation and an expanded $8 billion total addressable market positions us to address large and higher growth segments within the orthopedic market. This along with leveraging our commercial teams focused on the Joint Preservation cover point will be our growth catalyst into the future. Our expanded and talented team will continue to focus on delivering value to all of our stakeholders and we look forward to sharing our successes with you through future discussions. Please turn to Slide 9 and we're now ready to take your questions. Thank you.

[Operator Instructions] Our first question is from Jim Sidoti with Sidoti. Your line is open.

Can we just go through the revenue in the quarter a little bit. If you break out the revenue from the acquisition, your core revenue was about $20 million, compared to about $30 million a year ago. Now I don't think procedures were down 50% from a year ago. So, is that because some of the - some of the goods Mitek buying in June, and push-pull some of that revenue into the second quarter and can you comment on pricing.

Jim, this is Mike, I'll answer that question. So, you're correct that this is related largely to order timing, as was said on the last earnings call. Mitek had kept their order flows steady into the second quarter and therefore the impact of COVID on their purchases from Anika did not really reflect COVID until the third quarter as it related to their purchases from us. As a reminder, remember the revenue from Mitek is split between a combination of their purchases from us and then also the royalty fees that they pay us for sales they make to end customer. And so as I think we've said on the last quarter, we expect that the second half of this year to have lower revenues from Mitek as a result of their ordering pattern in 2020. But as I - as I said a little bit ago, we expect that to be resolved by the end of the year as they're continuing to adjust their inventory levels for COVID here as we go into the fourth quarter. In terms of the change year-over-year - the change year-over-year was largely driven by the volume that you saw there and that I just described. Pricing was not as big of an impact, volume was much more significant. And I think the pricing comments are things that I think that J&J Mitek would speak to more than we would, but I would say that from understanding our trend, it really looking at the volume is the important piece there. We did say that sequentially, we saw a nice recovery from the second quarter to the third quarter within the Mitek business, the joint pain business associated with the recovery of end user sales that we saw there.

So you say there could be some more inventory rationalization in the fourth quarter that it will be probably Q1 before they go back to their normal purchasing level. Is that right?

Yes, that's correct. And that's consistent with what was said on the call last quarter, really is the first half, second half impact and we expect that impact that we saw in the third quarter will continue on the purchases that we - that Mitek makes from us. We have a really good relationship with them and so we're really looking toward getting through COVID together and managing that out so that we can continue to grow this business. Yes.

So if we look at the business longer term, you did about 115 - $114 million, $115 million in 2019. I mean is there any reason why, and I'm not going to pin you down to a exact start but is there any reason why annual sales should get back to that level at some point in the next year or so.

Jim, I would just say, obviously we're not talking about guidance, but in terms of direction the Company laid out strategic targets of doubling the revenue by 20.4% and also driving double digit profitability. And that's exactly what we are focused on. We have not changed our focus one bit. So I think it's fair to say that in many ways, kind of a new Anika because historically and you saw that in the composition of the revenue. A year ago, 93% of the revenue came from joint pain - joint pain management part of our business. And now, that's down to 58% this quarter. And so, a significant part of our business is coming from the joint preservation and restoration, which we saw nice growth from in the quarter and we are very excited about where that is going. Cheryl mentioned procedure volumes are increasing faster in the surgery side, surgery center setting, than they are in the places where you might get your shots for viscosupplement and so we see a little bit of that dynamic playing out as well. But in terms of growth in the business, yes, I mean, we are very focused on our long-term target.

So there is no fundamental change with your relationship with Mitek, so once the noise from COVID dissipates, there's no reason why that chink it back to at least, where it was in 2018. It sounds like to me.

Yes, I think that first of all, they continue to be a very good sales and marketing partner for us with these products, they are very dedicated to these products. It's certainly a very important part of their business. And our good relationship continues and we see them being appropriately focused on this. You know, again, we're not giving guidance because of COVID which I know you understand Jim. But we remain bullish on this business along with them.

And then last question on R&D. Now that you're starting to ramp up the trial for CINGAL, do you expect those costs and again, I know you're not going to give guidance, but directionally should we model those cost ticking up as we get through the next three or four quarters.

Yes, Jim. Without giving guidance, and obviously we're going to give you guidance as soon as we can and but directionally Anika has been a company that is focused on R&D and innovation and that's going to continue. You're going to see an R&D spending as it's been in our numbers today, both on the traditional pain management side, but also with their R&D roadmap you can see a lot of the new areas where we're making investment. On the clinical trial front as Cheryl said, we've now just begun kind of moving forward with those, now as COVID is settling in a little bit, moving on with those clinical trials. And so those costs are going to be coming into our numbers, and that's going to be impacting the number as we go forward. But broadly speaking, nothing in what we're talking about is different than the historic direction and investment as an innovation company nor in line and they are in line with our double-digit EBITDA growth targets as we come out of '24.

And then, sorry I guess I lied, I have one more. Are you satisfied with the size of the sales force where it is or do you, as you add these new products, do you think you'll - will add salespeople as well.

Yes, that's a great question. First, I'll tell you, we're very bullish on this business and feel like that investments that we made with the acquisitions and really kind of bringing together the sales forces from all three legacy companies. We talked about the fact that that was really a transformative move that was going to be an investment for the company, but an investment that we work to pay off as we scale the sales line. And our ability to really drive into that focus call point of the Joint Preservation clinician that we call on. So we'll continue to obviously to look at all of the metrics as we run the business. But we feel like we are well positioned with a really strong commercial team right now to continue to drive an awful lot on the topline and especially as we launch a lot of the new products that we've announced in the last couple of quarters and that we've got in development coming out here probably over the next six to eight months.

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

On those four columns where you essentially lay out the global market opportunity, are there, are there areas where you guys are more inclined to sort of internally developed products and solutions or versus sort of inorganic, I mean are there biases in certain of these categories where you say, hey, we got, we sort of got to buy our way in there but we really feel like we have an opportunity to develop special things that. Can you talk about that a little bit?

Absolutely. I mean I'll tell you a couple of things, if you focus in on the regenerative solutions call on for a second. We definitely planned to leverage the 25 plus years of expertise that Anika has invested developing out hyaluronic acid based, biomaterials technologies for that - for those regen med solutions. That said, we're not, we're continuing to look at new technologies from an opportunistic perspective that could represent bolt-on opportunities, that could represent adding another regenerative platform. We're open to the inorganic exploration piece of that also. And then on the soft tissue repair and the bone preserving joint technologies pieces. Those are really areas of expertise and technology platforms and manufacturing capabilities that we acquired on the soft tissue repair side through Parcus Medical and on the bone preserving joint technology side through Arthrosurface. So while we will be focused on our internal capabilities there, we definitely have interest in continuing to build out in the hand and wrist, in the foot and ankle, in extremities in general, and so we will continue to look at inorganic opportunities in some of those areas also.

Can you just remind me, and maybe a few other people and while as we've talked about this. How many, how many patients, I think on HYALOFAST I think it's 200 you're looking to enroll but on CINGAL what's the patient target and if I'm wrong on HYALOFAST please correct me.

Yes, it's around that number on HYALOFAST and I'm trying to find the exact numbers, I don't want to give you a wrong answer. The thing that I can't comment you on the CINGAL pilot trial is that it's really more focused on a bigger placebo and TH arm that kind of addresses the needs that the FDA put in front of us. So that trial design is really focused on making sure that we drive that piece of those pieces of the study arm.

Right. And what is - was that six months, 12 months like I can't recall.

Well, again with - the original timing for that was the entire study would take about a year, but that was pre-COVID. So again, we're not giving guidance on that timeline right now simply because we just at this point in time, don't really have a sense of what enrollment rates are possible because of COVID.

But Cheryl, would you mind giving a sense of when that initial patient - like was that patient enrolled in July or just in the last few weeks or when did you really…

Yes, the patient - actually the trial we started in September. So that first patient was enrolled in September.

And then I guess just in terms of, and I don't know how close you are to be able to speak to this, but just in terms of the last three, four weeks with the sort of the elevated spikes in COVID across most of the country, have you guys heard anything either from ASCs or whether you're sort of plugged in or some of the office based docs, you know about any changes in how they're seeing patients or how they're sort of allocating their time?

Yes, I think in general what we're hearing is that the - certainly the ASCs are coming back to fastest, but we are also hearing that there are as parts of the country are impacted by COVID that things will shut down temporarily as things despite so certainly the ASCs are coming back to fastest but are still kind of at risk for continued lumpiness I would say, because of COVID and then the in-office injectable procedures has just come back more slowly than the ASC. So, again I said, sort of the ASC recovery we're seeing is at about 90% and the in-office injections are ranging more between 75% to 85% of pre-COVID numbers.

All right. And maybe this might be more for Mike. But, Mike, as you guys think about sort of longer-term gross margin, just based on your current product portfolio and assuming sort of a normalized environment and no sort of unusual accounting related to M&A, I mean can you guys get back to the mid, mid-upper 60s or what's the longer-term reasonable gross margin target for you guys based on sort of your current product portfolio under normalized condition.

So if you look at the numbers for the quarter, we had a gross margin of 55% and we said that about, there was a 15 point unfavorable impact of the acquisition related accounting and that acquisition accounting related to the inventory fair value step up, the amortization of the sales technology intangibles and so on. So if you take out the acquisition related and do more of an apples to apples, as the historic level that would be around 70% and you know as you know, I'm new to the story here. I've only been onboard for not even three months now. But as I look at historic transcripts, I believe that it's been said in the past that 70% was more of the normative gross margin that the company had talked about. But I really - I can't comment further than what the company has said before but I would say that we now have joint pain management and Joint Preservation products in our mix. Obviously, COVID is creating all sorts of interesting impacts as we've described, and I think we'll all be happy when we are through that, but even in the midst of COVID, our gross margin this quarter was at 70% when you exclude the acquisition related accounting. So I don't think that that's all - all that different from where the company has talked about today.

And Mike, I've got those clinical trial number for you. The CINGAL pilot study is scheduled for 230 patients in total and the HYALOFAST trial is 200 patients just to give you a better update.

So just last question. So on HYALOFAST, previous management, I mean man, the enrollment for this thing has been several years. Can you talk about strategically. And again, I know it's the COVID environment so where everything just harder, but strategically, have you guys thought about ways to sort of unlock and sort of get that trial sort of fully enrolled and done?

Yes in fact, we had an accurate plan to do that and COVID hit. So we'll be - we changed the protocol, expanded the number of site and move to had implementing and network of international site that would have allowed us to significantly to increase enrollment rates and we did all that in, completed literally right the COVID hit. So our fortunately, our plans to do just get the thing enrolled in a very timely manner were interrupted by COVID. Again we've - we started enrollment in this trial, but we've got a number of International set lined up that we expanded do. And so I'm not giving any guidance and timing for that at the present time, simply because of the COVID dynamics, it's just difficult to know how quickly we will be able to evolve even in those international sites.

This concludes the question-and-answer session. I'd now like to turn the conference back over to Cheryl Blanchard for closing remarks.

Thank you for your time today everyone. We look forward to updating you as we continue to deliver progress on our strategic initiatives. Have a great evening. And please stay well.

This concludes today’s conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.