Good morning, ladies and gentlemen, and welcome to the Third Quarter 2015 Anika Therapeutics Investor Conference Call. My name is Kaylee and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference call. [Operator Instructions] I will now turn the call over to Christopher Ranjitkar, Investor Relations and Corporate Communications Manager. Please proceed.

Good morning, everyone. And thank you for joining our third quarter call. Joining me on the call today is Anika's President and Chief Operating Officer, Dr. Charles Sherwood; and our Chief Financial Officer, Sylvia Cheung. During today's call, we will review our third quarter 2015 financial results and key business highlights, both of which were summarized in our earnings release issued yesterday after market close as well as a corporate news release we issued this morning, both of which are available in the Investor Relations section of our website at anikatherapeutics.com. In addition, a slide presentation is posted on our website in the Investor Relations section under the events, webcasts, and presentations tab. We invite you to take a moment to open the file and follow the presentation along with us. Following prepared remarks by Dr. Charles Sherwood and Sylvia Cheung, we will open the floor to questions. Please turn to slide two. Before we begin, please remember that the statements made during this conference call constitute forward-looking statements as defined in the Securities and Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. The company's actual results could differ materially from any anticipated future results, performance, or achievements. Please see our SEC filings for more information about factors that could affect our results. I'll now pass the call over to our President and CEO, Charles Sherwood.

Thank you, Christopher, and good morning, everyone. As mentioned, in addition to last night's earning release, we also issued some significant news in a separate release this morning. While that news might be top of mind for many of you, I want to start today by discussing the dynamics of our robust third quarter. Sylvia will then give some brief financial remarks and I'll finish by reviewing our decision to develop a direct commercialization capability and the significance of hiring Richard Hague as our Chief Commercial Officer. Please now turn to slide number three. To start off, Q3 was another strong quarter for Anika. Important progress was made on many fronts. Product revenue growth outpaced our expectations, end-user demand continues to grow, and our pipeline is advancing as planned. We have a lot of momentum in our business operationally, clinically, and commercially. During the quarter, strong end-user demand continued to propel product revenue upwards. Our viscosupplementation business continued its solid performance, with both Orthovisc and Monovisc holding leadership positions in the U.S. market. We are well on our way to achieving our goal of gaining the number one overall position in the U.S. market in 2017. As expected, the Mitek inventory rebalancing concluded during the third quarter, and Sylvia will discuss this in a little bit of detail. With that behind us, we have full confidence that normal growth patterns for our viscosupplementation business will resume. In turn, we expect revenue growth for the year to reach low to mid-teens. This translates to a significant uptick in revenue in the fourth quarter. Let's now move to our pipeline, on slide number four. Before I go into specifics, I want to provide some overarching commentary. Anika is truly a global integrated orthopedics medicine company with a worldwide reach. At the most…

Thank you, and good morning. Now if you could turn to slide number five. As Chuck noted, we achieved robust performance in the third quarter. Once again, Orthobiologics' end-user demand continued to be the main driver of product revenue growth of 8% over last year, beating the expectations we set last quarter. I want to reiterate that the Mitek inventory adjustment we had discussed in earlier quarters was resolved in Q3. We're pleased with this event has concluded and that our product sales for Mitek are returning to normal growth patterns. At the end of the quarter, both our flagship product continued to make advances in the market. Collectively, Orthovisc and Monovisc achieved a 27% share of the U.S. viscosupplementation market, up 6% from the beginning of this year. Our product revenue growth in Q3 is also highlighted by increased demand internationally, despite the stronger U.S. dollar this year. On the bottom-line, Q3 net income was $8.4 million or $0.55 per diluted share compared with $6.2 million or $0.40 per diluted share last year, representing growth of 37.5%, which we are very pleased with. The robust improvement in our results was driven by a more favorable revenue mix as well as lower operating expenses. Moving on briefly to our balance sheet, which continues to be strong, at September 30th, total cash and investments was approximately $130 million. The $34 million -- $24 million increase from last year was driven primarily by solid operating income performance and cash proceeds from exercises of stock options during the period. We expect to expend approximately $25 million of cash over the next 18 to 24 months for the move of manufacturing activities from Italy to Bedford, Massachusetts, and the build out of our existing facility, which Chuck commented earlier. Now moving on to guidance. With our solid performance, we continue to expect total annual product revenue for the year to reach the low to mid teen percentage range. This excludes any milestone and contract-related revenue. With Mitek's inventory reset concluded in the third quarter, normal inventory purchase pattern has resumed this quarter. Also, we expect U.S. Monovisc annual end-user sales to exceed $50 million in Q4, triggering the next milestone payment of $5 million, which is per our existing contract with Mitek. In conclusion, Anika's financial picture is bright. Solid topline performance is supported by sustained growth in end-user demand. Our flagship products, Orthovisc and Monovisc, maintain competitive positions. We have a robust balance sheet due to our strong operating performance and we believe these dynamics bode well for ongoing success. We look forward to updating you on our Q4 results in February of next year. This now concludes the financial portion of our remarks today. And I will turn the call over back to Chuck.

Thank you, Sylvia. Please turn to slide number six. These results indicate we are in a great position as we look to close 2015 and prepare for additional progress in 2016. With the mechanical headwinds of the inventory sell-through behind us, we will once again be producing the kinds of numbers that indicate great innovative products and attractive growth. We're making the plans and laying out the commercial strategies for the important next steps at Anika. And before we begin Q&A, I thought that I would outline our thinking, some strategy decisions and what that all means to you and to the company. Most of you will have noted the release we issued this morning announcing the hire of Richard Hague as Chief Commercial Officer, as well as our decision to, for certain pipeline products, develop a direct commercialization capability. We had previously indicated that we were assessing that potential. Ultimately, the decision came down to defining Anika as a company. As we have discussed going direct in the U.S. with some products such as Cingal, the primary pushback has typically been something along the lines of don't fix it if it's not broken. Or why take the risks of another approach when you've had success with the current one? Well, my response to that line of reasoning is that while it may be a route that has worked, it isn't the route that maximizes value and takes Anika to the next level of scale and achievement. The distribution model does work beautifully for our current portfolio of products and we have no intention of interrupting that success. However, for a product like Cingal, where we have been looking to expand into additional customers and markets, the benefits of a direct commercialization organization are multiple. So, here are what I…

Thank you. [Operator Instructions] Our first question comes from the line of Mark Landy with Northland Capital Market. Your line is open.

Good morning folks. Thank you for taking my question.

Good morning Mark.

Good morning

So, Chuck, just on your last comments, I guess just to put it out there, I just want to confirm that you're really telling us that you are going it alone with Cingal. So that's the first one. But secondly, you did mention there are various ways to go about this. And one was using a contract sales organization to start out with and then bring those capabilities in-house. Now, is there a CSO out there that has experience with these types of products? And if so, is that the way to go in terms of picking those that have the best experience with hyaluronic acid-based products? And then following up with that is what are your thoughts about coexisting with J&J? I mean that's a question that I get all the time as we've spoken about going direct with Cingal. So, I'll leave you with those and then I do have one or two follow-ups on a different topic.

Okay. I'll just very briefly -- I'm not going to mention any names. But the CSO approach has been successfully used in orthopedic products and specifically in the viscosupplementation area by two companies already. And it has worked very well for both of those products, one of which is up there as -- it's not a market leader, but it's right behind the market leader. So, we believe that that is, for the reasons I stated in the text, a good way to go. As far as the J&J relationship, I think that, of course, they would like to have a partnership around Cingal as well. But we have had a lot of discussions recently. And also covered in the text, I believe that we can maintain a good relationship. They're investing in a trial for hip OA, and we're looking for other creative ways to even strengthen the partnership with them and those discussions are ongoing. We will see what we can find and how we can make that work. But I think the relationship remains strong and both parties are dedicated to keeping it that way.

Okay. Thank you. Sylvia, just looking at the balance sheet, specifically accounts receivable, it stepped up over the last two quarters. I think it was up $3 million sequentially from the first quarter to the second quarter and looks like it was up around $4 million sequentially. So, up $7 million to $23 million from $17 million. I'm just rounding those numbers out. What is driving that? I think that has been the biggest step up that I can remember. I might be wrong.

The primary reason for the increase in accounts receivable is related to the royalty component of our product revenue from Mitek. And that is typically calculated at the end of the quarter, billed, and collected subsequent to the quarter. So, -- and it really coincides pretty nicely with our market share increase and increase in royalty revenue. As that portion of the revenue increases, the receivable balance increase and we don't get paid until subsequent to the quarter.

Okay, excellent. Thanks for that. And then on gross margin, I guess just the P&L margins, gross margin, SG&A, I think I ask you this question last quarter, how should we think about gross margin. There was a tremendous step up in gross margin and also a corresponding pretty decent decline in the SG&A margin. How sustainable are the current gross margins? How does the restocking at J&J then affect the gross margin? As we look at the P&L, how should we think about the margins going forward, because they have stepped up over the last two quarters to pretty sizable differences versus the past?

Right, right, good question. So, in terms of the product gross margin, one thing to keep in mind, as we have been discussing about over the last couple three quarters, is the Mitek's inventory reset. What that means for Anika is the product revenue portion of the revenue has become a smaller portion and the royalty revenue, because of the end-user share growth, has become a higher portion. And that directly increases our product gross margin, which is the reason why for Q1 through Q3, we're seeing a higher than normal product gross margin. We do expect in the fourth quarter that as we're currently experiencing the normalized product purchase pattern that the product gross margin will decline from the high 70% that you're seeing. Going forward, I think product gross margins in the near-term can maintain in the low to mid-70%. Obviously, there are a various number of factors that impact product gross margin, from pricing to product mix to revenue mix, meaning product versus royalty, as well as our ongoing cost reduction initiatives, the timing of those activities and the extent that we can realize the savings. So, taking all those things into consideration, I think a low to mid-70% is a reasonable range for the next year.

Thank you. I'll get back in queue.

You're welcome. Thank you.

Our next question comes from the line of Joe Munda with First Analysis. Your line is open.

Good morning Chuck and Sylvia. Thanks for taking the questions here. First off, the expected uptick, I guess, in product revenue, how much of that is pricing versus volume? I'm just trying to get a sense of what's driving these expected gains for the fourth quarter.

Right. With regards to volume and pricing, the units -- I'm talking about at the end-user level has been growing as we take shares. And based on the data that we have, pricing hasn't really changed that much this year. The primary reason for the significant uptick is really the fact that Mitek has concluded its inventory rebalancing efforts and we have received orders. They are on hand for the fourth quarter, so we know exactly what's going out the door. And we are also seeing the continued end-user share increase. So, the combination of the two is leading to the increase in the fourth quarter that we stated earlier on this call.

Okay. That's helpful. As far as the new indications or new market opportunities that you talked about, Chuck, in the past, you had mentioned possibly rheumatoid arthritis as one. Any updates there? I don't see -- it was left out of the presentation. But it was a very interesting point that you had made up in the last quarter and I was wondering if there's any updates on that.

Well, things like that rheumatoid arthritis is definitely a program in the research stage. So, we should have some feasibility demonstration in the next year and a half. So, that's -- from a revenue perspective, that's way out there. We're looking at some other indications where we may be able to use HA-based products in outside of osteoarthritis, and we're still -- we're getting very close to launching some developmental programs in that area. And in our parlance, what I mean by developmental programs is we allocate funding and we start to develop products. So, it's not exploratory anymore; it's in the development mode. So, once again, some of those may take -- certainly, in the United States, these things will take a while to develop. Outside of the United States, things could possibly move much more rapidly. Also I think down the line at some juncture, we believe that the classification of hyaluronic acid will shift over to drug because HA does have some implications in some of those areas. So, we're actively taking a look at that and looking at ways to use HA that might be truly beneficial and biologically active. More on that in the future.

Okay. As far as the build out of the facility, Sylvia, you mentioned $25 million over the next 18 to 24 months. Is that more of a capacity constraint issue at the current facility? Or is it uptick in demand? Can you give us some sense of -- that seems like a pretty big investment to be making over the next two years call it.

Right. It is certainly a very important investment we're making. Primarily, it's not a capacity issue; it's adding to our capabilities. What we're moving over are product lines that are in the family that are named HYAFF, which is our solid HA technology platform. Currently, our facility has adequate capacity for adding this function, but the products that we're currently making in this facility are all gel-based. So, to add that added capability of making solid-based products, we need to outfit a portion of our facility, add new equipment, improve processes. And those are the drivers for the $25 million capital project that I described earlier.

Yes, I would just add a little more commentary. So in order to -- we outsource the manufacturing of these HYAFF products right now. So, our Italian subsidiary doesn't make these products; they outsource it. So, now they are going to outsource it here to Bedford. Second, bringing it here, getting control of the manufacturing will allow us to much, much more rapidly develop new products around that technology. So, that's a big deal. Second, as part of this build out, we're adding enhanced and automated packaging capabilities. We're expanding our warehouse. We're doing a whole bunch of things that will also benefit our entire product line. So, -- and maybe even have some cost impact -- cost reduction impact as well. So, it's not simply just moving equipment from Italy to the United States. It's quite a bit more than that.

Okay. I'll hop back in the queue.

Thank you. and I'm showing no further questions at this time. I'd like to turn the call back over to management for closing remarks.

I guess we can probably turn the call back to Joe and Mark, if they have one or two additional questions, if they do.

I'm showing a follow-up from the line of Joe Munda with First Analysis.

Yeah, thanks for taking the follow-up. Chuck, on the Orthobiologics side, can you give us some sense of what the mix was Orthovisc, Monovisc as well as possibly international versus domestic?

Yeah, I'm going to let Sylvia take that one.

International versus domestic. Currently, it's about 80-20, primarily domestic versus international, although the growth rate for international is a lot higher. It's about 30% internationally, as we add additional territory and work with our existing distributors to expand market presence. Sorry; what was the second question?

The split between the two products, Ortho and Mono.

We have not historically given that data out in the past. I'd like to continue with that approach.

Okay. As far as some of the issues as far as reimbursement on the insurance front for OA injections for osteoarthritis, Chuck, any color you can provide there? There seemed to be a lot of pushback in our review from some of these insurance providers. Some of the doctors we had talked with had seen some issues as far as reimbursements are concerned. Can you give us a little bit of color of something you are seeing on your side? Any help there would be great.

Yeah. It's a very, very, very complicated issue. So, I'm going to start simple. I think we had some -- when you launch a product initially, like with Monovisc, we had some initial pushback until we really got the J-Code. Right? So, there was a slow adoption. Even after we got the J-Code, there were some skepticism about whether it was actually going to work. So, it has taken some time to bring that along. And we're going -- quite frankly, we will have the same issues with Cingal when it comes along because these are the issues that come along with a new product launch. Further color, I think that it seems from what we know, and Mitek probably knows a little better because they are a little closer to it, was that the whole brouhaha over the AAOS guidance and all of that has kind of settled down now. There are still some private payers, embarrassingly enough, Blue Cross Blue Shield in Massachusetts that don't cover viscosupplementation products. But more and more are coming into the fold because the products do work, despite what the AAOS said. So, I think that's settling down. I think the landscape is probably changing a little bit with tiered products and preferred products and payers trying to work better deals and all of those kinds of things. So, that's an ongoing process. I don't think because our product is growing that we're disadvantaged in that area. But it's something that I know Mitek keeps paying attention to. And I think that as we move forward, becoming a preferred product, maybe having to work some sort of a large buying deal or things like that, maybe may become more important. I've said in previous calls that I think we should be in a better position because we offer a single and a multi-injection product, both of high quality, both with impeccable safety records. But we need to make sure that that happens that way. I think adding Cingal will just help us even more. But we will have to see how this plays out. So, for now, I think the takeaway is things are stable, but we have to keep an eye on this and make sure that we are in the mix as or if things do change again.

Okay. And then I guess my final question on the commercialization strategy going forward and your relationship with DePuy Mitek, I guess is could J&J come back to you guys, let's say, a week from now and say hey, we want to work a deal with you on Cingal? Is that something that could be -- could that change your strategy going forward? Or are you guys pretty much -- your mind is set on a direct commercialization strategy?

Well, I think our mind is pretty well set on a commercialization strategy, for the many reasons that I said. However, if J&J has some proposals to enhance our partnership that make sense for both of us, then we would be foolish not to listen. But to fold Cingal into the same sort of relationship that we currently have for J&J, we don't feel makes a lot of sense at this juncture. So, I firmly believe that we will find ways to strengthen the partnership. But one of those ways will not be to just license Cingal to J&J.

Okay. And I have just one follow-up. In the past, you guys have talked about acquisitions. The balance sheet is getting stronger every quarter here. But with all the initiatives you have going on, has that gone on the back burner? Or are you still trying to look at potential opportunities?

The strength in the balance sheet certainly is a good reflection of the success of our business model. We still have interest in M&A. I'll be honest in stating that the level of focus has not been as high in the recent past as we would prefer, given all the other initiatives that you just heard us describing, including Cingal, U.S. regulatory pathway, our manufacturing expansion, as well as direct U.S. commercialization. Having that said, we're still interested in this area and we are looking to add additional internal resources and external resources to more seriously focus on this area in terms of looking at potential companies or strategic alliances that would help either expand our technology platform or accelerate our revenue growth. So that certainly is part of our cash deployment option that we have. We have already described for you the capital expenditure, the direct commercialization. We'll utilize initially some of the cash. And then longer term, I think M&A is certainly in the whole continuum of option that we have. And while we're on the topic, I would like to mention that from a return to shareholder standpoint; it is a topic that we review periodically internally as well as with our Board of Directors. But at this particular point in time, we don't have any definitive plans to announce or discuss.

Okay. Thank you very much.

You're welcome.

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

Hi, good morning. Sylvia, I just want to make sure I understand the $5 million related to Monovisc. You expect for that to hit in the fourth quarter, correct?

Yes, that is correct. We expect Mitek to achieve above $50 million of end-user revenue. And contractually, we would receive $5 million of milestone revenue as a result of that achievement -- sales threshold achievement.

Right. I'm just asking from a standpoint of modeling. We should be modeling that in the fourth quarter?

Yes.

Okay. All right, great. And then just on the Cingal regulatory path, are there any more meetings that need to happen? Or essentially are you guys now just waiting on a decision?

We're waiting for the decision, which is going to come before the end of the year. We're pressing to get it as soon as we can. If it's a drug lead, as we hope, then that's it. We're done. We just send in or just remail the PMA. I'm sorry; if it's a device lead, we do that. If it's a drug lead, we will have to have a meeting with the drug folks to figure out how we're going to move forward.

Is there any dialed-in timing besides just before the end of the year? Have you guys been given any guidance; hey, it should be by December 2015? Or is it just you don't know?

Well, we don't know. I mean there's a -- they are supposed to deliver something in 60 days, and I don't remember the exact date we filed. But the timing fits before the end of the year. They don't always meet those time frames. So, I think that's why I say we are pushing all the time. And we do believe we will hear by the end of the year. We've talked to them a lot. This shouldn't be that difficult.

Okay. All right, terrific. Thank you. Nice quarter.

Thank you.

Our next question comes from the line of Jim Gentrup with Val Vista. Your line is open.

Good morning Chuck, Sylvia. How are you?

Good morning Jim. How are you?

Good. I may have missed this, so I apologize. But the $25 million spend that you are talking about, is this mainly going to hit your P&Ls as an expense item throughout the next I think you said 18 months? Or is some of this expense going to be capitalized?

It's all capitalized. This is a capital expenditure related to the move of our currently outsourced manufacturing of our Italian subsidiary's product from Italy to our Bedford, Massachusetts, manufacturing facility. And this capital project will go on for the next 18 to 24 months and the current estimated cost for that is around $25 million.

Okay. That's perfect. And then the commercial efforts that you're talking about regarding -- surrounding Cingal, I would imagine that would have a pretty good impact as well on your P&L because of the expense tick up. Or can you give us a little more color there?

Sure. Certainly from a topline product revenue standpoint, we will, as a result of directly commercializing it, capturing 100% of the end-user revenue versus the current partnership model, which is anywhere between 25% to 40% of the end-user revenue. From a product margin standpoint, it would certainly help bump-up the gross product margin as a result of that. But keep in mind that the distributor model is not going away. So, we're going to be seeing a hybrid mix of distributor and direct and depending on the size and scale of that, it will vary over time. And certainly from an operating margin, bottom-line standpoint, once the initial prelaunch and the initial launch activities are through, on a normalized basis, we expect to achieve better operating margin at a stabilized level. So, overall, we do see that -- as Chuck had commented on earlier, this mix of distributor as well as direct model will maximize our financial results.

And -- no I was just going to ask internationally, are you -- with Cingal, would you still use distributors internationally even though you would manage it directly?

We're still trying to finalize those plans. But I think that's the operative assumption, yes. I wanted to make one other point about the expense and the timing and all of -- the timing of the expenses for either the contract sales organization or building sales force. We need to understand the regulatory pathway a little bit better to really tighten up on those expenses and be able to give you any kind of guidance. And fortunately, we'll know that in two months. But it really depends on whether it goes device or drug because if it goes drug, there may be more work, a little more time. If it goes device, it may go quicker. So, that would then allow us to better plan our expenditures and all of our activities. So, we're in a wait and see kind of mode for another couple months.

And Chuck, that's mainly -- you're talking -- when you talk -- you're speaking mainly of domestic revenue?

I'm speaking of U.S. But the U.S. is the place where we are doing the direct effort. Where we're forced to get --

Right, right. But you could very well have revenue from Europe and Canada as early as, I guess, early 2016?

Correct. And it's most likely that those would be revenue -- that would be revenue through the partnership model.

Right. Okay. All right. Thanks, guys. I appreciate it.

Thank you. Our next question is a follow-up from Mark Landy with Northland Capital Markets. Your line is open.

Thanks for taking my follow-up. Just following up on Joe's question regarding use of cash and cash, I'm going to turn the question around a little bit because there's a lot going on here and some of these are hypothetical, so please accept them that way. But assuming Cingal has to go down an NDA pathway and there is the requirement for more clinical data, and then to build out the Cingal capability for U.S. sales, I mean also some of the pipeline products that you have, Chuck and the plans that you have, which are quite broad. I know $140 million sounds like a lot of money. But do you feel that you are sufficiently funded to be able to execute on that business plan with what you currently have in cash?

The short answer, Mark, is we do. From a Cingal clinical standpoint, we do obviously look at what the possible scenarios would be. And any additional requirements, which we currently don't believe would be significant, would be able to be funded through our operating cash. And keep in mind that the Monovisc is still in early stage of launch -- I shouldn't say launch, post-launch period and still have some room to grow and take share. And on a combined basis for Orthovisc and Monovisc, we are looking to achieve a number one position by 2017, which means that from now till then, we are expecting to see growth. And with the growth in revenue, it will bring additional income and cash for us to fund those activities. And the timing of U.S. commercial launch -- that is, at this point, I think a little bit too early to speculate when exactly that's going to be. I think that once we hear the answer from FDA's OCP office, we would have a much better sense as to timing of approval and prelaunch activities.

Okay. So fair enough. So, I think maybe just let me try and put it in a more global sense. We've often asked what you're going to do with the cash. There is a big cash hoard on the balance sheet. But is it fair to assume now that your plans and the business plans have now grown into that balance sheet balance and that really we shouldn't really be expecting anything outside of having now the cash on hand to fund the business activities that you have planned over the next couple of years and that that really is the earmark for the cash. And that investors should really understand that there is a use for that cash and it's not just sitting around waiting for a rainy day?

That is correct. And it's a fair summary of the statement that I made

Okay. Thank you Mark.

Thank you. This does bring us to the end of our call. I'd like to turn the call back over to management.

Thank you, Kaylee. And thanks for a good round of questions from all of you. And we're excited about lots to do, but there are lots of good things happening. We're excited about some of the near-term events and we look forward to communicating with you on our 2015 year-end performance. Thanks.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a wonderful day.