Good evening, ladies and gentlemen, and welcome to Anika's Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. I will now turn the call over to Mark Namaroff, Vice President of Investor Relations, ESG and Corporate Communications. Please proceed.

Thank you very much. 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 and open the slide presentation and refer to Slide number2. 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. 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 most recent SEC filings for more information about risk factors that could affect our performance. In addition, during the call, we may refer to several 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 operation and performance. But when considered with GAAP financial measures 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 presentation slide deck and our third quarter 2022 release. And now I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Thanks Mark. Good evening, everyone, and thanks for joining us. Please turn to Slide 3 as I review the third quarter highlights. As we near the end of the year, I'm pleased to reflect on Anika's continued journey toward becoming a global leader in joint preservation, one of the highest opportunity spaces in orthopedics. We accomplished much this quarter, including reporting the exciting results from the conclusion of our third Phase III clinical trial for our next generation OAP management product, CINGAL making significant progress towards completion of enrollment in the pivotal Phase III clinical trial for HYALOFAST, our single stage cartilage repair product, and receiving great surgeon feedback during the limited launch of our X-Twist Fixation System for sports medicine, soft tissue repair. We continue to make progress towards sustainable, above market growth and profitability, including increased year-over-year revenue growth. That said, it is no surprise that, the sector in our business continue to be impacted by ongoing disruption from the macroeconomic environment in which we are all operating, which has continued to impact certain elected procedures and continues to cause supply chain issues across our business. Third quarter revenue was $43 million up 2% from the same period last year, driven by growth in joint preservation and restoration, which was up 6% and by last time buys of certain non-core, non-orthopedic products in the quarter. Our OAP management revenues were down in the quarter based on J&J Mitek's order timing in the third quarter of last year, but that was offset in part by our international viscose sales, which continued the strong performance in the third quarter that we saw through the first half of this year. While staffing and supply chain issues remain headwinds across our portfolio, we continue to benefit from our newer products such as…

Thank you, Cheryl. Please turn to Slide 9. I will now walk you through our financial results for the third quarter of 2022. Total revenue for the quarter was $40.3 million, an increase of 2% over the prior year, with the growth driven by joint preservation and restoration, and last time buys in north non-orthopedic sales. Revenue in our largest product family OA Pain Management decreased 2% to $25.7 million due to ordering patterns from J&J Mitek with outsized transfer sales in Q3 of last year. This decrease was despite continued strong growth in our international viscosupplement sales. As a reminder, revenues in OA Pain Management can vary significantly on a quarterly basis based on ordering patterns by our partners and distributors, both in the United States and internationally. More so over the last couple of years due to the global impact of COVID, but that quarterly volatility generally stabilizes on an annual basis. Our joint preservation and restoration revenue increased 6% to $11.8 million on improved procedural volumes year-over-year, but that growth was limited in the period due to the market dynamic Cheryl described, impacting the prioritization of elected procedures, as well as supply chain challenges. Our non-orthopedic revenue increased to $2.8 million compared with $2.2 million last year on last time buys for certain legacy products. Our gross margin in the third quarter was 57% and includes the impact of $1.6 million of non-cash acquisition related expenses from the 2020 acquisitions of Arthrosurface and Parcus, as well as a product rationalization related reserve of $2.6 million associated with legacy non-orthopedic products that we no longer expect to sell. Our adjusted gross margin, which excludes the acquisition related expenses and product rationalization charge was 67% in the third quarter up from 66% last year. From a spending standpoint, our…

Thanks Mike. Please turn to Slide 11 as I wrap up the call before we open the line up for questions. I would like to close by highlighting that Anika is uniquely positioned for success with a strong cash position and no debt, robust foundation of clinical data and a comprehensive portfolio of product and technology solutions and new product pipeline for osteoarthritis pain management, regenerative solutions, sports medicine and bone preserving joint technologies that we are delivering on. We have multiple near-term product launches, starting with X-Twist planned over the next 18 months, which will be important catalyst for growth and value creation in the coming years. While we expect some of the macro headwinds to continue in the near-term, we have actively taken steps to position Anika for consistent above market growth and profitability. All of us at Anika are taking strategic and pragmatic steps to tackle the ongoing challenges head on as we continue to deliver differentiated high-quality products to our customers and their patients and drive value for our shareholders. I'd also like to take a moment to thank all of our employees for their dedication and hard work. It is because of their contributions that we continue to make strong progress on our evolution toward becoming a leader in joint preservation. And together, I look forward to achieving the many more milestones to come on our journey. Now we'll open up the line for questions.

[Operator Instructions] We'll take our first question from George Sellers with Stephens Incorporated. Please go ahead.

Congrats on a great quarter. I guess, I want to start with sort of the underlying macro conditions and what you saw sequentially in the quarter and maybe also what you're seeing sort of quarter to date. Are there any areas of improvement in terms of the supply chain, and maybe procedure volume and staffing shortages? And how should we think about that going forward? Thank you.

Hi, George, and thanks for the question. Let me make some comments on the macro conditions, and I'll start out with supply chain. I think, we are frankly in the same boat that the broader market is in around supply chain. We see broad impact around supply chain with respect to things ranging from raw materials to key components. And we have teams of people that are micromanaging this on a daily basis. And frankly, I think that shows in our ability to deliver product. And while that can hit gross margin, frankly, we've even continued to drive reasonable gross margin even in this difficult environment. So, I would like to say that we see it starting to give us some relief, but I think across the business we will continue to manage through supply chain issues for a bit of time to come. That said, on the joint preservation side of the business where we've seen the largest impact, we do expect to see some relief coming, especially as we move toward full release of X-Twist in the early part of 2023. From a procedural basis, what we see are different parts of the market recovering faster than others, and specifically in orthopedics, and we've seen this with reports of the large market players in that space. The hip and knee business is coming back at kind of high single digit levels, but the sports extremity and trauma segments have not come back as quickly. And so, that's really what we're referring to relative to the market dynamics.

Okay. That's really helpful. And then following up on the joint preservation and restoration commentary there, it sounds like mostly what's driving the reduced expectations for this year is macro related, but is there anything else in there that we should be aware of in terms of what's limiting maybe that growth there? And anything we should read into in terms of the growth outlook in 2023? Thank you.

Yes. Regarding joint preservation, we are incredibly optimistic and confident about that business. The adjustment that you see for the rest of this year is really related to the supply chain issues that we just discussed, and really being able to come up to, frankly, the demand that we're seeing in the market on X-Twist. The great news about X-Twist is we've seen incredible feedback from the limited market release and its generated significant demand that we simply haven't been able to meet in the, in this, sort of the last part of the third quarter. And as we see demand continuing to ramp into the fourth quarter, we fully expect to have that issue addressed into early 2023 with the full release. So we remain excited. We are getting great feedback. It's a great product and we look forward to being able to meet the demand around that supply chain issue in early next year. Mike, I don't know if you have anything to add to that?

Yes, thank you, Cheryl. Hi, George. The one thing I would add is, as you mentioned, the macro environment is not just impacting supply chains also impacting which elective procedures are being done. And as we've talked about what's going to drive our business over the coming years, it's these new products like X-Twist, like the shoulder related new products and implants and regenerative. And those new products that we're introducing here over in 2023 and over the next 18 months are targeted at the high opportunity spaces. And so, when you think about the macro environment, we really are pleased that the areas that we're coming out with innovative and differentiated technologies and products are those high opportunity spaces. So that positions us for the accelerating growth as we go forward.

Okay. That's really helpful. And then maybe if I could just squeeze one last one in here. As we think about some of these launches in 2023, how should we gauge sort of expectations? Or what should we be thinking about in terms of the build out from a sales perspective and a marketing perspective as well?

Yes, I mean, I think we're excited to be able to get to announcements on our next product launches, obviously, Wrist, Tactoset, X-Twist, or all the recent ones we've announced. And I think that demonstrates our ability to develop great products to really put together strong commercial programs, and frankly, training and education for the surgeons to really feel comfortable using them. So, as we move into these next product launches in 2023, what we see is continued ability to execute on that work in a very successful way, given the demand that we've seen with what we've done so far, continuing to train on the safe and effective use of that product as we are able to drive that into the market and meet the demand that we're already seeing. And frankly, as we've talked about, accelerated growth in 2023 and 2024, it's those new products in the JPR space that are really going to drive that.

Okay, thank you for the time and congrats again on the quarter.

Thanks, George.

We'll take our next question from Mike Petusky with Barrington Research. Please go ahead.

Yes, good evening. So, a few questions on CINGAL, is there a timetable for speaking or meeting with the FDA at this point, or a general hope that you guys have?

I mean, we expect that we'll be meeting with them in the next few months. I think that's a reasonable timeframe to expect based on the process that we're following, Mike.

Okay. All right. And then sort of switching over to JPR. On the supply chain, I mean, are there mitigation efforts that you guys can take getting, bringing in additional suppliers there? Are there things that you can do on your end that can sort of mitigate these issues or not really?

Yes. It's a great question. The answer is yes and we have been. I will tell you our teams are working like mad on a day-to-day basis, micromanaging the issues. And that's why we are confident in our full launch timing for early 2023 and that we are on-track to be able to supply product for the full launch and frankly meet the demand that we have seen building in the marketplace. It's obviously very frustrating to not meet the demand that we have, but it's very exciting to have the demand and to know that we have got a great product, so that when the supply chain issues are resolved, which are badly, completely external to the Company, but the folks that the Company are working like crazy to address them. And so, that's why we are bullish about that launch in early 2023 with full supply available.

Okay, terrific. And then just staying on JPR, when those assets were first acquired I think the thought was, hey, this business can be a double-digit grower. Obviously, it's due to a bunch of external headwinds. It's not going to be that in '22. But when you think about -- and I'm not talking about '23, I'm just talking in general sort of three to five years normalized backdrop based on what you believe. I mean, is this -- because when these assets were bought, the idea was this business will grow double-digits. I mean, is that still sort of the internal belief there or any thoughts around that?

Yes, Mike. This is Mike. Absolutely, we absolutely view this as a strong double-digit growth part of our business. One of the things that I think is important to understand is, we are moving from a historic business that it was a $1 billion addressable market to a much larger market. And we are a very small player with some really interesting differentiated technologies that now as you look at the new products that are coming out that we are going to be talking more and more about over the coming quarters. And you can see it in the slides, the call slides there we talked about the sizable market opportunity, the $600 million plus market opportunity for the X-Twist just in rotator cuff, it's $100 million market and it's used in other parts of the body as well. And that's really a platform technology that we are going to be continuing to innovate on top of -- shoulder implants is an even bigger market. And so, we are a small player in a very big market and have a real right to win. So yes, I mean, I think we have been able to demonstrate strong growth when we have introduced new products. I mean, like Tactoset, we've talked about in the past about how much that's grown since 2019. And just this year and if you look at this quarter, we had 30% growth roughly. So, I mean, it is a healthy product that's differentiated, that has a lot of room to grow, that being Tactoset. And then when you introduce a product like X-Twist where it comes right alongside Tactoset now with the new hardware augmentation capability in the shoulder. There is a lot of opportunity in this space and that's why we are making the investments that we are.

Okay. Mike, you just ruined my last question. I was going to ask you, would you share how much Tactoset grow in the quarter, but 30% or better, I guess. Thank you so much. Appreciate it.

We'll take our next question from Jim Sidoti with Sidoti & Company. Please go ahead.

And just follow up. I got to believe that there are people in Anika that expect this to be a double-digit grower in a relatively near term and 6% growth is nothing that means out, but I think you guys are planning on getting to a faster growth rate pretty quickly. And to do that, what do you have to do other than the supply chain issues? Do you think you have enough surgeons trained? And do you think that you'll have the products available in 2023 to start to hit those metrics?

Hi, Jim. Thanks for the question. The answer is that we do think we'll have the product available especially around X-Twist. We do think that we are on track, and frankly we are on track for those additional product launches, and we're excited to be able to talk about them as soon as we get to first surgeries here soon. And we think that we've got continued acceleration with training programs. We've trained a lot of surgeons, but we will continue to train at a faster and faster rate, especially as we launch those new products that's key. And we think we've got the commercial team in place that is excited and ready to continue to drive those new products into the market. It definitely true that the market dynamics here recently, and you can see this with the larger reporting companies have been different in the sports and extremity space than they have in the larger hip and knee reconstructive space. That said, you're right, 6% with nothing to sneeze at this quarter relative to what we saw in the market. So, we're excited, we're confident, and we think we do have everything in place to really drive that acceleration.

How about instrument sets? Do you have those available when these products come out?

Yes. In fact, X-Twist it comes with its own instrument set effectively. So, it is an all in one deal. But there are other instrument sets that we want to make available to our customers so that we have greater mind share when we're in the OR and we're able to do a lot more cross-selling around with X-Twist and Tactoset and OVOMotion and like one way in the Shoulder and in Sports. So, we continue to bring additional instrument sets, but also additional inventory so that we can be there in the OR with what they need.

And then with regard to CINGAL, you've completed three trials. I don't think there's any issue with safety. I think all three trials that hasn't been an issue. You've shown superior performance now compared to the existing products both the OA and alone and the steroid. What do you think the next hurdle you have to jump over to get approval?

It's a great question. We've talked about the fact that the FDA has changed the way they regulate this product from the start of our first clinical trial until where we are now. We are very confident about the data package that we will bring to discuss with them. There is an incredibly favorable safety profile. The safety profile is basically no different than HA alone, which is significant in this space and relative to some other studies that have been published on other products. And we have now demonstrated superiority to the two active ingredients into placebo, which is what the FDA wanted us to do. So, we are excited to bring that data package to them and have that discussion with them.

And has the most recent data has that spurred any interest with your partners?

So, we obviously have talked about the fact that we are interested in exploring potential partnership opportunities both in the U.S. and in some select Asian markets where we don't currently sell CINGAL today. And we'll obviously give you an update, if we move in that direction.

At this time, I'd like to turn the conference back to Dr. Blanchard for any additional or closing remarks.

Well, thank you all very much for your attention and interest in Anika. We look forward to speaking next on our fourth quarter yearend call in March. And I wish everyone a great night. Thanks.

Ladies and gentlemen, this concludes today's conference. We appreciate your participation. You may now disconnect.