Good afternoon, ladies and gentlemen, and welcome to Anika's Third Quarter 2021 Earnings Conference Call. Today's conference is being recorded. I will now turn the call over to Mark Namaroff, Executive Director of Investor Relations and Corporate Communications. Please proceed.

Thank you, and good evening, everyone. Thank you for joining us for Anika's third quarter conference call and webcast. Our Q3 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 are the supplementary PowerPoint slides that will be used for the discussion today. With me on the call today are Dr. Cheryl Blanchard, President and Chief Executive Officer; and Mike Levitz, Executive Vice President, Chief Financial Officer and Treasurer. Please take a moment to open up the slide presentation and refer to Slide number 2. Before we begin, please understand that certain statements made during the call today 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 and 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 forward-looking statements presented today. Please also see our SEC filings and our most recent 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 include adjusted gross margin, adjusted EBITDA, adjusted net income and adjusted earnings per share which are used in addition to results presented in accordance with GAAP financial measures. We believe that non-GAAP measures provide an additional way of viewing aspects of our operations and performance, but when considered with GAAP financial results and the reconciliation of GAAP measures, they provide an 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 available presentation slides and in our third quarter press release. And now, I'll turn the call over to our President and CEO, Dr. Cheryl Blanchard.

Thanks Mark. Good evening, everyone, and thanks for joining us. Please turn to Slide 3. Let me start by expressing my hope that everyone has been able to stay safe during these disruptive times and that we continue to prioritize the health and safety of our employees. I'll plan to review some highlights from the quarter and then Mike will go into the financial details and review the outlook for the remainder of 2021. I'm pleased to report another solid quarter, with revenue up 25% over Q3 last year, primarily due to some COVID recovery and related timing of orders in our joint pain business. Our joint pain management business was up by 42%, as last year, the Q3 orders were the first to be impacted by COVID and this year on J&J Mitek order timing. While there is lumpiness on a quarterly basis, the full-year for this part of our business is coming in just as we expected as end market injection volumes have largely stabilized. ORTHOVISC and MONOVISC combined remain the number one HA viscosupplements in the U.S. Joint Preservation & Restoration revenue was lower by 4% over last year due to larger than expected COVID headwinds, driven by the Delta variant causing rolling shutdowns at various sites of care. As a result, elective surgery volumes were lower than expected in the quarter. And even as the Delta spike begins to wane, we're seeing and expect to continue to see healthcare worker shortages constrain surgery volumes in line with broader market reports. As a reminder, Q3 of last year was where we saw a significant recovery from the first wave of COVID in our Joint Preservation & Restoration business. Unfortunately, this year, we also saw industry events either dramatically scaled back or canceled, and the lack of access…

Thank you, Cheryl. I will now walk you through our results for the third quarter of 2021. Please turn to Slide 6. Total revenue for the third quarter of 2021 was $39.5 million. That's an increase of 25% from the third quarter last year. The year-over-year increase was due primarily to recovery from the initial impact of COVID on prior year sales and unfavorable order timing in our joint pain management product family, where revenues rose 42% to $26.2 million in the quarter. As a reminder, for year-over-year comparisons, ordering patterns in the prior year delayed a significant portion of last year's initial impact of the COVID pandemic on this product family from the second quarter of 2020 to the second half of last year. Revenues in our joint pain management family that can be lumpy from quarter-to-quarter based on ordering patterns, but that quarterly volatility generally stabilizes on an annual basis. The Delta variant presented headwinds for our Joint Preservation & Restoration business in the third quarter, where revenues totaled $11.2 million, down 4% from last year. Elective procedures were limited in the quarter due to the surge of the Delta variant of COVID, which resulted in cancellation or delay of procedures as well as reduced access to potential surgeon customers, with a cancellation or significant reduction of planned Trade Shows and medical education events. Our other revenue rose to $2.2 million in the third quarter compared with $1.5 million last year. Our gross margin in the third quarter was 58%. That's up from 55% in the same period last year. That includes the impact of $3 million of non-cash acquisition accounting related amortization and fair value step-up expenses associated with the 2020 acquisitions of Arthrosurface and Parcus. Excluding these charges, adjusted gross margin was 66%, down from 70%…

Thanks Mike. Please turn to Slide 8, everyone. While we expect to see some short-term fluctuations, both positive and negative, as we transform the business during COVID, Anika remains focused on executing our growth story, and we remain on track to achieve our stated long-term targets. We made meaningful progress this quarter on our new product development pipeline, commercial execution, and building out the people, processes and systems to scale this business, and these efforts will drive real value for all of our stakeholders into the future. Lastly, I'd like to note that this quarter was one marked by tremendous operational execution and the team is continuing to really come together. As always, I'd like to thank the Anika employees for their hard work through these trying times as we continue our transformation. We're happy to take your questions now.

[Operator Instructions]. And we can go to Young Li of UBS.

All right, great. Thank you. Good evening, everyone. Thanks for taking our questions. I guess maybe to start, just on the guidance. As it implies Q4 revenue is that the -- it's going to be the lowest dollar number for the year despite typically Q4 seasonally stronger. Can you maybe talk a little bit about some of the assumptions that you have baked in and the level of conservatism there? And then maybe within that, if you can focus a little bit on the Joint Preservation & Restoration guidance, the revenue implies sort of a flattish number from Q3. I guess I was just wondering if you can flesh that out a little bit, given it's typically seasonally stronger as well?

Absolutely. Hi, Young, it's Mike. Let's see, first of all, so the guidance for Q4, we're giving guidance for the year and obviously, with only one quarter left that highlights Q4. Let's just take it in pieces. So the largest part of our business is Joint Pain Management, obviously. And what we said there is that we are leaving that guidance unchanged for the year at the mid-single-digits. What we saw in the third quarter of this year was higher transfer sales due to order timing from our strategic partners, including J&J Mitek. That was purely timing on their part. And so we did not change our guidance at all for the year. And so due to that same timing, those transfer shipments will go down. So there was volatility in those orders. That does happen from time-to-time as our strategic partners will manage their own businesses. As it relates to that business, one of the things that we saw there was the variance between -- in Q3 was really around the timing of those transfer shipments. The underlying -- we also get royalty revenue from -- in that business based on end user sales. And that was -- that royalty revenue was actually down low-single-digits, somewhat consistent with what we've seen in our direct business as well. So really, the timing in Q3 was a function of just the timing of ordering patterns. So because that's the largest part of our business, it does mean that we're going to have lower sequential shipments still larger than last year in the same quarter, but lower sequential shipments in Joint Pain Management and it's just due to timing. As it relates to joint preservation, you're absolutely right. Based on our guidance, it implies that at the midpoint, we're consistent in Q4…

And Young, I would just add, just to keep in mind that even in light of the COVID disruption and the staffing shortages and the unpredictability that we're still looking at upper teens percent growth, which is above market growth in that Joint Preservation & Restoration business.

All right, great. Appreciate all the details there Cheryl and Mike. I guess maybe just a follow-up. I was wondering, can you make any comments about what you saw in October? Just some of the companies in MedTech have made some comments about October trends. I was curious if you can share a little bit about what you're seeing.

Sure. Young, it's Mike. Any one month, obviously, is only one month, and there's a lot of volatility in different regions. We did see a nice recovery in the United States in October, but we saw a pull back outside the United States in October. And I'm speaking on our direct business. So I think there are things that could make us more optimistic coming out of October from what we saw. At the same time, we've all been through this together on COVID, and it is volatile. So I think we're comfortable with the guidance that we're seeing. It's too early to see how things are going to go at. But so far, the business is solid. We're not seeing losses from a competitive standpoint. It's really around what's going on in the marketplace outside of us that's really driving these dynamics.

Yes. And I would say that I think we, along with every other report you read right now, are seeing just volumes impacted, surgical volumes impacted because of the healthcare worker shortages, and trying to be predictive around where that goes right now, especially with the vaccine mandates coming online, I think, is difficult. And so we just wanted to be thoughtful about that.

The next question comes from Jim Sidoti of Sidoti & Co.

Hi, good afternoon. Thanks for taking the questions. I just want to be clear, the slowdown on joint preservation do you think this is a relatively short-term phenomenon? I mean it sounds like you're still, I think your long-term goal of doubling revenue by 2024 is intact; is that correct?

Yes, hi, Jim, it's Mike. Absolutely. Yes, we are laser-focused on those longer-term targets. And we're really excited, and we tried to highlight in some of our prepared remarks around just the operational execution that's happening. We're very pleased with the risk launch; we're pleased with the additional indication for TACTOSET, with the integration with Parcus and Arthrosurface with our ERP system. So all of the things that we've been saying that we were focusing on, we're really driving that execution. We obviously can't control the market in the short-term. I think there is the opportunity that COVID could longer term be a benefit for us because it's accelerating the trend to the ASC, the surgery centers. So -- but in the near term, COVID is definitely a headwind and -- but it does not, in any way, diminish our climate around the Joint Preservation business. One of the things we said at the Investor Day and we've tried to lay out is they're really -- we're making the investments now that are going to be driving that accelerated growth in the 2023 and 2024 time frame. And that's exactly what we expect at this point.

So it doesn't sound like you're making any change to those plans as a result of this pickup you had in Q3 and Q4?

We're not making any changes to our long-term objectives, no. One of the things that we'll do is we're going to continue to see, as I think the other folks in the space are looking to see, how long does COVID last? How long does this continue? And we look forward to speaking to you and our investors in our year-end call, and we can see how this all plays out. So there is a near-term impact, absolutely. But in terms of the value drivers, the catalysts, the -- our differentiated products and our focus in joint preservation in a large and growing market, none of those dynamics have changed. But definitely, COVID is a near-term headwind.

All right. And then on the balance sheet, inventory came down pretty significantly. Is that related to the shipments to Mitek? Or was there something else there?

There was nothing meaningful on the inventory side. Sometimes things will swing between categories on the balance sheet, if there's long-term inventory or short-term inventory between current assets and long-term, and sometimes that can lead to swings. But there's nothing meaningful changing on our inventory levels. We are watching on the supply chain side, as Cheryl mentioned, the same things that other people are seeing, we also see as risks and we always try to make sure that we have enough inventory so that we don't experience any challenges, but it's something we're watching very closely as we go into 2022.

And then last question is on the sales force. I mean has the recent pickup in COVID cases kind of slowed you down in terms of expanding the sales force? Or what are your plans going forward with regards to sales force expansion?

Good question, Jim. This is Cheryl. I'm happy to talk about that. We've talked about the fact that we really don't have specific sales force expansion plans from the point in time where we completed the Parcus and Arthrosurface acquisitions. It was really about integrating and optimizing the sales force, the distribution network, implementing the systems and processes to really scale the commercial execution, and that's what we've been focused on. It is going well. It's obviously been frustrating for all of us that we haven't been able to get in front of customers, like we would otherwise have planned notwithstanding COVID, getting to congresses and meetings, implementing training on the safe and effective use of our products, all those opportunities have just been made much more difficult by the COVID dynamic. That said, we haven't stopped. We've pushed through, I think, as best as everyone has been trying to. And I think it's a broader market dynamic. But for us, it really has hampered our ability to get in front of the surgeon community to tell the Anika story. The AAOS example I gave was a perfect example of that. We have plans coming into the end of this year and into next year for significant training and the safe and effective use of our products, for presence at all of the meetings. And I think we, like everyone else, have our fingers crossed that they all go ahead the way that they're planned. But the sales force, I would tell you, is extremely excited about the portfolio of products that we've put together, about the new product launches that we've announced late last year and into this year, and the new product development pipeline, and the tools that we're giving them to really get the news out about what Anika is doing. So we're in a good place, and we look forward to kind of emerging from this dynamic that we all find ourselves in.

Yes. I guess I do have one more. I mean is there any reason to think that these procedures that have been postponed in Q3 and Q4 are going to be lost? Or do you think that there's a fairly significant likelihood that there's some pent-up demand out there and those folks will get these procedures done at some point in 2022?

Yes. I don't think they're lost. I mean pain is a motivator, and these orthopedic conditions don't just magically go away. That's why people have them treated. I think the question is a matter of timing. And I think the question is also a matter of bandwidth for the healthcare system, because we really are seeing the impact of lack of availability of healthcare resources to actually do the surgical volumes that used to be done all the time. So I don't think these cases are lost. I think it's just a matter of timing and what the recovery curve looks like.

And our next question comes from Mike Petusky of Barrington Research.

Good evening. A few questions. Cheryl, did you say -- I didn't quite catch it, did you say the enrollment was done in November on CINGAL pilot or will be done later this month?

It will be complete by the end of this month.

Okay. Got it.

Yes.

Okay. All right. And then, Mike, I guess, on the pain management quarter, obviously, big quarter, favorable timing. Do you have any concerns around sort of another stocking issue that sort of then impacts the next couple, two, three quarters? Or what are your thoughts around that?

Hi, Mike. In answer to your question, that's always something that we watch. And the short answer is we do not expect that there will be stocking excess stocking at the end of the year. So one of the reasons that we -- we and our partners, the largest of which is J&J Mitek, we're in regular contact with them, and we know they need to manage their business. And so they're -- if they want to buy product, they're going to buy product. We also don't want to have excess stock and so -- and neither do they. So we believe that the takedown in the lower shipments in the fourth quarter is sufficient based on the demand that they expect that we will not have excess inventory going into the year. Obviously, with COVID, it's hard not just for us, but it's hard for our partners to perfectly predict things. So it's something we're watching. Outside of the COVID dynamics, things -- there's a lot of positives across our business. But it's just uncertain at this point how COVID is going to play out. So short answer is no, we do not expect excess inventory coming out of 2021.

Can you talk about -- and I know at times we've talked about this before, but just sort of refresh everybody's memory, including mine. In terms of -- you've got $90 million on the balance sheet. Certainly, I suspect that you're always considering various ideas, assets that may be out there. Can you just talk about and prioritize in general capital allocation priorities?

Yes. Absolutely happy to. So the company historically had a much higher amount of cash on the balance sheet and deployed that cash in 2020 in a few different areas. One of -- first of all, M&A was a big piece of buying Parcus and Arthrosurface as well as investing in the commercial business, which we've done in 2020 and 2021. So we recognize the value of acquisitions as to augment the strategy, but our first priority in terms of use of cash is investing in the organic business. And you've seen that this year in how we've accepted lower than historic EBITDA because we want to build the capabilities and team and all those things enable us to scale this business. So we are intentionally investing organically. We also recognize, as I said, with Parcus and Arthrosurface, as an example, that acquisitions can be an important part of our strategy. But our expectation is that we would be doing tuck-in acquisitions, not major acquisitions at this point. We have a significant opportunity in front of us. When we increased the addressable market from $1 billion to $8 billion by moving into joint preservation, we're still a very small player. And so we are focused on driving the organic and inorganic investments that will help us in the future. But those are -- because of the big opportunity in front of us, our capital deployment would be for growth, first organically and secondarily with tuck-ins in the near term where they make sense. Valuations are always something we watch.

Okay. And I would assume that even though the company historically has done a bit of share repurchase here and there, I assume that's not really on -- not a front-burner item at this point?

The company has done share repurchases in the past. And I mean that's always something that the company can consider, but we believe the primary drivers of shareholder value are one, we've diversified our revenue over the line, by doing the acquisitions we did and the product launches. We believe that the primary way that we're going to drive shareholder value is deploying this -- the cash for growth first. That said, if we don't see those opportunities in front of us, then we definitely recognize buybacks or can be a meaningful opportunity.

Do you guys have any way to quantify sort of the impact of COVID in the third quarter on your Joint Preservation & Restoration business? I mean, is there any way to say, hey, that cost us we think it cost us $2.5 million or $3 million. I mean, do you have any way to assess that?

That's a really hard -- that's a really thing -- that's a really hard number to quantify, frankly. I think -- if you think about our guidance for the year, that guidance was based upon the opportunities that we had in front of us, had we been able to -- I mean, had COVID been lifting. We expected the COVID would have lifted in the second half of the year before the Delta variant. That's what it look like it was going to happen. So I think we were comfortable with our guidance, had they not been the Delta variant. And so I don't know that I could quantify it, but because it had a direct impact in terms of electric procedures, it had an indirect impact in terms of shortages of staff as well as the lack of ability at these conferences that we attended or conferences that were canceled to get in front of surgeons with the -- with our products and our capabilities. So it had a wide impact on us, and -- but it's a hard number to quantify.

Yes. Mike, I would just add, obviously, keeping track of other companies reporting out in our space. On the Joint Preservation & Restoration piece of our business, I actually think we're either in line or better than they are. So I don't think it was an outsized impact on us by any means because I think we've got a lot of innovative products that there's interest in. So I think we do find ourselves in an interesting position from that perspective, but it's very difficult to quantify.

And Cheryl, just one last thing, and I'll let others get in, if there are others. TACTOSET, I mean, I know you all are excited about it. I'm sort of excited about what I think it could be. You always -- not always, but you always say some language around, hey, great momentum, great traction. We're getting somewhere with this. Is there any like either anecdotal or sort of actually putting numbers to the progress you're making? Either, hey, the spending new docs to try the product or whatever, like I'd love to have a sense of what great momentum, great traction actually means I suspect I'm not the only person that feels that way. Is there anything you could add to that?

Yes. I mean we've talked about the fact that we're not going to breakout individual products, but it's a fair question. I'll tell you that it's doubled in size this year. So we see very nice growth numbers around it. We have just opened up an additional market expansion opportunity for ourselves with this new 510(k) that we just got cleared that is an indication that nobody else has in the space and a very meaningful one at that. So and you've heard me say there's another 510(k) that we plan to file next year to continue to expand off that platform. We also talked about the fact that the insufficiency fracture market, which is the first indication we launched that into was about $100 million accessible market opportunity in the United States. So perhaps that helps kind of size out for you.

No, it seems like an exciting opportunity. Would -- again, one more detail, but yes, it's absolutely exciting. All right. And that's all I got. Thank you so much.

Great. Thanks Mike.

Ladies and gentlemen, that concludes the question-and-answer session. I'd now like to turn the call back to Dr. Blanchard for any additional or closing remarks.

Great. Thank you all very much for your attention and interest in Anika, and we look forward to speaking to you all next on our Q4 call next year. Have a great night.

Ladies and gentlemen that concludes today's conference call. We thank you for your participation. You may now disconnect.