Good evening, ladies and gentlemen, and welcome to Anika's Fourth Quarter and Full Year 2020 Earnings Conference Call. As a reminder, all participants are in listen-only mode and the conference is being recorded. After the presentation there will be an opportunity to ask questions. [Operator Instructions] I will now turn the call over to Mark Namaroff, Executive Director of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Sherese. Good evening everyone, and thank you for joining us for Anika's fourth quarter and year end conference call and webcast. Our Q4 and year-end earnings press release was issued after the close of the market today and is available on our Investor Relations website located at www.anika.com as well as the supplementary PowerPoint Slide there'll be used for the discussion today. So with me on the call today is Dr. Cheryl Blanchard, President and Chief Executive Officer; and Mike Levitz, Executive Vice President, Chief Financial Officer and Treasurer. During today's call, Cheryl and Mike will review Anika's fourth 1uarter and year-end 2020 financial results with key business highlights, as well as discuss our view of 2021 and then we'll have time for questions. Please take a moment to open the slide presentation referred to Slide number 2. Before we will begin, please understand that certain statements made during the call today constitute forward-looking statements, as defined by the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations, including statements with respect to the impact of the COVID pandemic on Anika, and are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results, performance or achievements. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. Please also see our SEC filings and our most recent Form 10-K and 10-Q for more information about risk factors that could affect our performance. In addition, during the call, we may refer to a number of adjusted or non-GAAP financial measures, which are used in addition to results presented in accordance with GAAP or Generally Accepted Accounting Principles. We believe that non-GAAP measures provide an additional way of viewing aspects of our operation and performance. But when considered with GAAP financial measures and the reconciliation of GAAP they provide it even more complete understanding of our business. A reconciliation of these adjusted non-GAAP financial results to the most comparable GAAP measurements are available at the end of the presentation slides and on our fourth quarter press release. And now I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Thanks, Mark, and good evening everyone. 2020 was a critical year in Anika transformation from largely a single technology and customer company into a global joint preservation company that creates and delivers truly meaningful advancements in early intervention orthopedic care. Starting with the late 2019 launch of our innovative hyaluronic acid or HA-based regenerative solution, Tactoset, which is a differentiated product designed to treat insufficiency fractures that is gaining real momentum. Followed in early 2020 with the acquisitions of Arthrosurface and Parcus within days of one another, and the tremendous work integrating our business in 2020 through COVID, Anika is positioned to become a leader in high opportunity spaces within orthopedics including osteoarthritis pain management, regenerative solutions, soft tissue repair, and bone preserving joint technologies. We're still in the midst of this transformation and are very excited about our future plans for value creation for all of our stakeholders. Let's dive into the quarter and 2020 highlights. Please turn to slide 3. We successfully navigated the year through COVID, ending with revenue in the quarter, up 10% compared with 2019, driven by our Joint Preservation and Restoration business following the acquisitions of Arthrosurface and Parcus Medical that closed in Q1 of 2020. We saw continued momentum in Joint Preservation and Restoration through our commercial efforts and delivered sequential growth as well despite further COVID headwinds from the post-holiday COVID surge that attenuated elective procedures in late Q4. We see strong demand for our Joint Preservation products and believe we have a right to win as orthopedic surgeons view our minimally invasive and regenerative portfolios favorably, particularly in the ambulatory surgical center setting. Our Joint Pain Management business had lower revenue for the quarter as a result of COVID dynamics impacting J&J Mitek's ordering patterns in the second half of 2020…

Thank you, Cheryl. I'll now walk you through our results for the fourth quarter and full year 2020. Please turn to Slide 7. Total revenue for the fourth quarter of 2020 increased to $32.7 million, up 10% year-over-year and up 3% from the third quarter, due primarily to the growing Joint Preservation and Restoration revenue streams of legacy Arthrosurface and Parcus, which we acquired in early 2020, offset by lower Joint Pain Management revenue due to the negative impact of COVID and related ordering pattern to J&J Mitek, our largest customer. Joint Preservation and Restoration revenues totaled $13.1 million in the quarter, up $12.6 million year-over-year primarily due to the acquisitions of Arthrosurface and Parcus Medical. On a sequential basis, our Joint Preservation and Restoration revenues increased 12% from the third quarter, in spite of incremental post-holiday COVID headwind and continued strong recovery from the initial COVD impact earlier in 2020. Despite those headwinds in the latter half of the fourth quarter and into early 2021 associated with the COVID spikes and winter storms, the momentum in this business - in this part of our business remains strong. In the fourth quarter before the COVID spike, underlying demand approached pre-COVID pro forma level as procedure volumes recovered and our integrated sales team continued to gain traction. Joint Pain Management revenue totaled $16.9 million in the fourth quarter, down 36% year-over-year and down 9% sequentially from the third quarter. As we mentioned in previous earnings call, we expected that product shipments to Johnson & Johnson Mitek, who markets and distributes our MONOVISC and ORTHOVISC products in the United States, would be lower in the second half of 2020 than in the first half as a result of COVID and Mitek's related ordering pattern, which pushed a significant portion of the initial…

Thank you, Mike. If everyone could please turn to Slide 9. I would like to let you know that we plan to host a Virtual Investor Day in late spring where we'll outline our strategy, technologies and new product development roadmap, and introduce you to our new management team. Please stay tuned for more details from Mark Namaroff, our Head of Investor Relations. As we all know, 2020 was a challenging year on many fronts for all of us both personally and professionally. I have now been CEO - in the CEO role for a year with the work-from-home order implemented just a couple of weeks after I started. I'd like to wrap up the call today by thanking the team members at Anika. As you just heard, the Anika team truly accomplished many great things during this transformational year for the company. I'm very proud of our employees working through adversity for most of the year, while accomplishing so much to transform our business into a focused orthopedic solutions company. The health and safety of our team remains our top priority at Anika. Our employees are our greatest asset. And while we continue to work remotely across most of our business locations, we are taking the necessary precautions to keep our employees safe and healthy. For those who have continued to be on-site or traveling to support our customers, I'd like to extend an extra thank you. In closing, we're a passionate team. We are working closely with key clinicians who are equally passionate to bring solutions to their patients. We're energized to create a truly meaningful advancements in early intervention orthopedic care. Quality and compliance are core values as we do this important work. And our team is driven to develop and deliver solutions that restore active living for people around the world. Thank you all very much for your attention and support of Anika, and we can take your questions now.

[Operator Instructions] The first question comes from Jim Sidoti with Sidoti & Company. Please go ahead.

Two questions one with J&J, do you have any visibility into whether inventories is down. Do you think - I know you said low single-digit growth for the year, is that something you think starts out right away or is that a back in, back half of the year, where you really see that growth?

Hi Jim, this is Mike. We expect that the growth is going to increase through the year given COVID lifting and how that all plays out. There is still. We believe that they got to most of the inventory through the end of the year. The COVID spike at the end of around the holidays didn't help. So there's a little bit coming in, but I think the important thing in terms of the modeling is that we believe that business is really now stabilized. There have been a number of dynamics at play with COVID and everything else and that really is we really believe that from our conversations with J&J Mitek that that has stabilized. So, I think in terms of modeling it, generally I think historically, their business tends to strengthen in the second quarter and, but with COVID, this is a little harder to look at normal seasonality, as you go forward here.

Okay. And with regard to seasonality typically for orthopedic companies Q4 is the strongest quarter of the year and Q1 comes in a little bit lower. Would you think that will be the case for you guys as well. Should we expect Q1 to be down from Q4, 2020?

Yes Jim, I've given specific guidelines for Q1. But I think what you're saying is absolutely - what we typically see right. It's strong Q4, lower Q1, we're seeing that. We'll see that more in the Joint Preservation business, I think generally than we've seen in the Mitek business. Just because J&J tends to - they manage their own inventory levels throughout the year. So it may not follow the normal seasonality on the transfer products. But yes, I think that's definitely true also with COVID lifting through the year. I think you're going to see the businesses continue to strengthen. We've seen a lot of demand in our joint preservation business. But as we saw at the end of Q4 and even into the beginning of Q1 that procedures are just getting, are just getting postponed. A place may have a COVID lockdown or people may be quarantined and then may push off the procedure for a couple of weeks. So we saw that dynamic in the latter half of Q4. We see that - we expect to see that here in the beginning of 2021. But the demand remains very strong, and our team is very energized about the opportunity there this year.

And I guess one thing that will offset that a little bit, too, is for Q1, 2021, you'll have the full quarter for Parcus and Arthrosurface whereas in 2020, you only had, I think, about six or eight weeks of those products.

Yes, that's correct. We had - one of the acquisitions closed at the end of January, the other at the beginning of Feb. And last year, we had about two months of activity for the acquired companies, and now we'll have the full three months. So that will definitely help. There are dynamics in the first half, obviously, because COVID hit in Q2. But then as we saw with the Joint Pain Management business, that impact really came into the third and fourth quarters. So there's going to be some interesting dynamics as we go through the year. But I think what we were trying to communicate is we - while we may not have clear sight here on a quarterly basis, the business remains very strong, and our team is as excited about where we're going and how this is all coming together.

Okay. And then two more for me, can you talk about the sales force, where it was in the end of the year and what are your plans for 2021?

Yes, let me talk about that, Jim. First of all, I would tell you that we are really excited with where we landed in the year from an integration perspective. We were, we talked in the past about the fact that we effectively accelerated our integration activities on the sales force, the commercial team side. And so we really have, especially in the U.S., a fully integrated hybrid model where we've got over 30 direct employees and then over 100 independent distributors that they also work through. So we continue to do work on the integration side around commercial and sales operations, implementing systems and processes that are going to allow us to efficiently scale that business. And we'll be working on those things into this year, into 2021. But we're really happy with where we landed on sales force integration and the strength of the sales force. They've all been cross-trained. They're selling the full bag across the legacy Parcus, legacy Arthrosurface and legacy Anika businesses. So we have a dedicated sales force that's focused on the soft tissue space, on the regenerative space and on the bone-preserving joint technologies, focused on that surgical call point with a full bag. So we're pretty excited about where we landed with that sales force.

I guess what I'm trying to get to is do you expect a significant increase in the sales force in 2021?

No, we don't. We feel really good about the fact that we were able to bring three legacy sales forces together. And we feel like we've got a really strong team of people that are ready to drive all of the cross-selling opportunities, especially over the next couple of years as we launch new products into their hands.

Okay. And then the last one from me is - I am sorry. Go ahead, Mike.

Jim, just the only thing I would add is, as it relates to my comments around the sales and marketing spend. We do expect that to increase through the year because we suspended a lot of the marketing efforts last year with COVID, trade shows and the like. And so as things open up, we do expect those costs to increase. And then also, commissions are going to be increasing as the sales grow. And that's something that, in the old Anika model, you wouldn't have seen. But now that we've moved to more of a direct commercial model, you'll be seeing that coming through as the revenues grow. We're also surrounding that commercial team with more infrastructure support, in addition to the marketing side, just commercial operations. And the other thing is because we see - going from the historic business model to this larger $8 billion market opportunity with the kind of products that we're bringing to market. We want to make sure we can capture that value. And so that's where - when I made comments about the incremental investment, it's not in the number of salespeople, we believe that the combination of the direct team and the distributor force that we have is entirely appropriate, but it's the rest of the support piece and the marketing that goes with it.

Okay, all right that makes sense. And then last one from me, you mentioned a couple of times during the call that you're thinking on track to double your revenue by 2024. Can you just remind me, is that - does that include acquisitions? And at this point, I mean, are the acquisitions something that you would plan more two or three years from now? It seems like you have quite a bit on your plate for 2021, at least?

Yes Jim, specifically, when Joe Darling laid out - our former CEO, laid out that target in 2019, 2019 was the baseline year. So, we had $115 million roughly in 2019. So doubling the revenue by 2024 would simply be $230 million. And in terms of how we get from where we are, where we just closed the year, at $130.5 million to the $230 million, our model behind that is entirely organic. We are not banking on any one particular product to get there. We have a number of products that Cheryl walked you through across extremities and sports medicine. The exciting products we sell outside the United States like CINGAL and HYALOFAST are also not in that model because they will be growth drivers beyond 2024. They won't be in the U.S. market necessarily at that time. And so, our model is based entirely on an organic growth trajectory driven by sales force execution. First and then also by the exciting products that we have that leverage, the regenerative capabilities into sports medicine and extremities that being said, we recognize we have a big opportunity here. And so, and we have a strong balance sheet, so we are being opportunistic. If there are bolt-on acquisitions that make sense and support our strategy for growth at both the top and the bottom line. Then we are definitely open to M&A where it makes sense on a bolt-on basis. But key point is the targets that we've laid out are not dependent upon, any home runs with any individual products, nor are they dependent upon acquisitions. Those would all be upside.

So it seems pretty...

The starting point really is from 2019, just to be clear, Jim.

Okay all right.

Yes.

But based on what you've said so far for 2021, it seems pretty clear that you think 2022, 2023, you're going to see a pretty significant acceleration in top line growth as COVID subsides and as these new products start to gain some traction.

Yes, I mean, I think one of the things, just doing the math, obviously, just kind of acceleration step, given we're making investments. And those investments then will take time to pay off. But that being said, to get there, it takes mid-teens revenue CAGR. And if you look at what we're doing, we closed last year over 10%. Here, we've got a target that's, even with COVID through a good portion of the year, we've got it at double-digit growth at the midpoint. And that's driven by growth in Joint Preservation and Restoration in the 20s to 30s percent range. So we've got very robust growth there. And we really believe there's a lot of opportunity ahead of us. And now that the - our larger business, the Joint Pain Management business has stabilized, that's a very good business for us as well, especially on the profitability side as you can see from the legacy business model. So, we're excited about how this all fits together.

The next question comes from Mike Petusky with Barrington Research. Please go ahead.

A few questions, so Mike, I guess the R&D expense in the quarter was quite a bit higher than I was anticipating. I mean is that sort of the new level, or were there sort of one - more sort of one-off things in there that sort of took it to sort of a $30 million run rate for a year?

Hi Mike, a couple of things, so there were some one-time items in there, and one of which we called out in our non-GAAP reconciliation. There was a write-off of IP R&D, in-process research and development from the legacy S.r.l. acquisition a number of years ago. That was about $1.4 million. But there were some offsetting items in there as well that were one-time in nature. So in terms of thinking about how that lays out in the coming year, Cheryl gave an update a bit on what we're seeing on the clinical trials. Obviously, things are delayed because of COVID. But we do expect them to open up as COVID lifts up. And so as enrollment continues for the CINGAL pilot trial and for the HYALOFAST clinical trial, you will see potential lumpiness in the R&D line in 2021. There are a number of investments that are laid out on that page that Cheryl walked through in terms of - from a development standpoint. And so, we're really trying to be thoughtful about making the investments now to leverage the commercial opportunity that we have. And so yes, I think it's fair to expect that R&D is going to be higher in 2021, as I described, and higher as a percentage of revenue. But a lot of that is - you've got clinical trials and the timing of those clinical trials really will play - will impact that.

Okay. Can I ask - since both CINGAL and HYALOFAST are now pushed out to beyond 2024, what do you guys anticipate spending in terms of R&D between now and 2024 on those efforts, just those two?

Yes, I don't believe we've called that out before, Mike.

You called out?

Yes so, yes, I don't know that I'm prepared to walk through how much we're going to be spending on those. There's a number of different ways we are looking at approaching those opportunities. And the other thing I would say, just to help understand how we're thinking about it, it's a couple of things. I think if you kind of go back a couple of years, I think they were really - the predominant conversation on the R&D front was really around CINGAL and HYALOFAST. I think in understanding how we're thinking about it now, there are a number of other opportunities that are - that we're excited about across these bigger markets. And so, we're working through what's the best driver of our future value and how we lay out that spend. So we're cognizant not just on driving the top line, but also the bottom line. And that's why we - our 2024 targets that we keep reiterating are not just about the doubling of revenue, but also about double-digit EBITDA growth. But the phasing of that timing between now and 2024 will - our plan is to give you more clarity around how we're thinking about all of this at our Investor Day. So that you can see how we get from here to there.

Right. Are there - and I'm not necessarily calling out these two products. But were there any products, or are there any products that sort of have been on the drawing board for a while that, as you guys look at this with fresh eyes as a fresh management team. You say, wow, maybe longer term, we can get a return on investment in other places and maybe some of this doesn't make sense longer term, even though maybe you're down the track? I mean are there projects like that?

Well, it's a really good question - with the new management team coming in, you might imagine we've done a lot of detailed analysis around that. And I will tell you that we remain very bullish after a pretty detailed market assessment of the OA pain management space of CINGAL in the U.S. And we also are remaining to be very excited about HYALOFAST in the U.S. We've got experience with those two products outside the U.S. We sell them both in over 30 countries. And we see what they do relative to things that they may be competing with coming up in the U.S. While that landscape has certainly changed over the time period that these have been in development, those areas remain very exciting to us. That said, the strategy of the company has really taken us in a different direction where the strategy isn't all about HYALOFAST and CINGAL as it was. And it is a more comprehensive, built-out strategy across really the continuum of care in the early intervention orthopedic space. While we like those two products in the U.S., they are a part of the story, and they are not needed. They're not in our model, for doubling the revenue by 2024. We continue to take a look at where we make investments. And we feel like we're structured to be able to invest in other high-opportunity spaces in the U.S. and globally, notwithstanding what we continue to do with HYALOFAST and CINGAL to get them into the U.S. We just think, in general, there are so many opportunities in these areas. And continuing to leverage the HA technology in, like, rotator cuff and other soft tissue areas, additional sports med products, additional bone-preserving joint technologies. You're going to see a good cadence of product launches in the near-term. So the company is not waiting around for HYALOFAST and CINGAL in the U.S.

Right okay, got it.

The other I like to add, just for clarity too, Mike, is we are deciding what we're not going to do. So there was a charge I just described to Jim in the fourth quarter - or maybe I described it to you, forgive me, of $1.4 million of writing off in-process research and development costs. That's specifically associated with some historic programs that we decided we're no longer going to pursue. The company also wrote off certain costs in the second quarter, what we refer to as product rationalization for certain programs and things that we were no longer going to pursue. We are very cognizant of our size and the importance of focus. And so, we are being very thoughtful in terms of where we're spending our time and our resources. And we're looking at it based upon what drives the most value. And as Cheryl said this tie-in of HA, the regenerative capability with sports medicine and extremities, is, an important aspect of the different programs we're focused on. So we're in the early stages of that. As you know, there's been a lot of change in the management team. The team is really gelling together. I've been here now six months, and we've got a really solid team that are really looking hard at these questions of where we deploy our resources to deliver the top line growth, but also to be very cognizant of the bottom line.

Got you. So I guess in terms of just general capital allocation, could you guys sort of lay out the priorities? I mean, certainly, you're investing in your business and in R&D in your commercial capabilities. But beyond that, I mean, is for the $100 million on the balance sheet and any cash flows you generate, I mean is M&A 2021 possibility, is share repurchase? But I don't know if you've ever considered a dividend, just curious about capital allocation priorities, how you would rank them. Thanks.

Sure. Mike, I'll take that one.

Go ahead, Mike, and then I can add some comments.

Great, thank you. Our opportunity, I think, to drive the most value off of the platform that we're establishing here now that we have Parcus and Arthrosurface is organically, and that's why we're making the investments that we are, and we're sacrificing some of the profitability in the short-term to do that. That being said, as we build this platform of capabilities, there are a number of things we'd like to bolt on and add to this. And acquisitions are definitely an area that could make a lot of sense for us. We've got a big market out there that we want to be able to address. Now the timing of that, is it in 2021, is it - how quickly, that remains to be seen. We're focusing a lot of 2021 is on building these capabilities, systems, processes, other things. If the right opportunity comes along, we're definitely openly considering those things. But it needs to make sense and it needs to be something we can execute on, not just in acquiring it, but integrating it and driving value from it. So I think as we go forward into the future years, you're going to see more of that conversation. But we're not ignoring opportunities as they arise this year.

Yes, thanks, Mike. And I would just add on, we are still very focused on completing a successful integration of the two deals that we did last year. But we continue to look for bolt-on opportunities and other potential transformational opportunities, but still considering the right level of financial discipline and really aligning - now that we have a commercial team, aligning to our commercial fit. So, I do think there are opportunities there, and we continue to be out looking.

Got you, and just one - really quick one, oh sorry.

I'm sorry, Mike. Just one last point is, I think - we're focused, obviously, on value creation for our shareholders. And we're looking at how do we, deliver that greatest value creation. We've got some very fast-growing revenue streams, and we've got gross margins - approaching 70% range and opportunities to expand that. And so, as we think about what's going to drive value, that's why we're looking at M&A and those other things on top of the platforms we're creating, because we believe we are building a very strong foundation here. And it's really around value creation for shareholders that we're looking at that capital allocation.

Got you, got you, okay. Just one last quick one Cheryl, you made an allusion to, hey, Tactoset, we've had it sort of in the bag for about a year at this point. You, I think you termed that we're getting traction or getting good traction, something along those lines. Are you willing to quantify - I mean has that product gone $1 million? I mean what kind of contribution is it actually making at this point?

Yes, we haven't quantified it, especially since we lifted guidance, but it is gaining significant traction and we like where it's headed. I don't know if at some point, we're going to be willing to break it out. But right now, we're not. But I like what that product is doing. It also gives me continued confidence in our current pipeline as we continue to leverage the HA technology platform and what we see it doing with HYALOFAST outside the United States and with Tactoset as we currently have it launched in the U.S.

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

Great, thanks, Sherese. And I just want to thank everybody for your attention today and wish everybody to stay safe and healthy, and we will talk soon. Thanks again.

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