Good afternoon, ladies and gentlemen, and welcome to Anika's First Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded on Tuesday, May 9, 2023. I will now turn the call over to Mr. Mark Namaroff, Vice President, Investor Relations, ESG and Corp Communications. Please go ahead.

Thank you. Good afternoon, everyone. Thank you for joining us for Anika's first quarter conference call and webcast. Our Q1 earnings press release was issued after the close of the market today and is available on our Investor Relations website located at anika.com as our supplementary PowerPoint slides that we 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 #2. Before we begin, please understand that certain statements made today during the call 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 includes 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, the reconciliation of GAAP measures, they provide an even more complete understanding of our business. The reconciliation of these adjusted non-GAAP financial measures to the most comparable GAAP measurements are available at the end of the presentation slide deck and our first quarter 2023 press release. And now I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Thanks, Mark. Good afternoon, everyone, and thanks for joining us. Please turn to Slide 3. We're pleased to report that Anika had a positive start to the year. While our reported revenue showed growth of 3%, the core parts of our business were up 9% in Q1 as we've seen the environment for some orthopedic elective procedures improving. Osteoarthritis Pain Management revenue was stronger than expected in the quarter and remains a market-leading business that continues to win globally. We were excited to see double-digit growth in Joint Preservation and Restoration in the quarter, which included early traction from our recent product launches with X-Twist and RevoMotion and international growth, driven by geographic expansion and timing. Our OA Pain Business, including our sales and marketing partnership with J&J Mitek for Monovisc and Orthovisc in the U.S. continues to provide a healthy financial foundation to support the investments driving our growth strategy. In addition to our market-leading products in the U.S., we're also particularly pleased with our strong international performance as we grow market share of our OA pain products, especially Cingal as more and more clinicians and their osteoarthritis patients realize the benefits of this truly next-generation non-opioid OA pain product. With respect to Cingal, we are actively engaging with the FDA regarding next steps for U.S. regulatory approval and exploring commercial partnerships to advance Cingal in the U.S. and select Asian markets. We're excited about our continued progress and momentum in our Joint Preservation and Restoration portfolio. We had great traffic and training opportunities at our booth at the American Academy of Orthopedic Surgeons meeting in March, with a lot of interest across our full Joint Preservation portfolio. We're building traction and adoption as we continue to hear great feedback from surgeons following the Q1 full market release of…

Thank you, Cheryl. Please turn to Slide 6. I will now walk you through our financial results for the first quarter of 2023. . I'd like to remind everyone that beginning in the first quarter, veterinary sales historically reported within OA Pain Management are now included in the non-orthopedic product family for all periods presented. Total revenue for the quarter was $37.9 million, an increase of 3% over the prior year as continued growth in OA Pain Management and accelerated double-digit growth in Joint Preservation and Restoration were partially offset by lower ancillary nonorthopedic revenues. The lower nonorthopedic revenues reduced total company growth in the quarter by approximately 6 percentage points. Revenue in our largest product family, OA Pain Management, increased 8% to $22.6 million due primarily to favorable ordering patterns from J&J Mitek and sales growth on increasing customer demand. As a reminder, revenues can vary significantly on a quarterly basis based on ordering patterns by our partner in the U.S. and distributors internationally. However, that quarterly volatility generally stabilizes on an annual basis. Our Joint Preservation and Restoration revenue in the quarter increased 11% to $13.5 million on growth from our new products as well as geographic expansion and favorable order timing internationally. Our nonorthopedic revenue declined 49% to $1.8 million primarily reflecting unfavorable order timing by our veterinary distributor as well as our exit from legacy product lines that do not support our growth and profitability objectives. Our gross margin in the first quarter was 60% and includes the impact of $1.6 million of noncash acquisition-related expense amortization from the 2020 acquisitions of Arthrosurface and Parcus Medical. Our adjusted gross margin, which excludes the acquisition-related amortization, was 64% in the quarter, in line with the same quarter last year. From a spending standpoint, our operating expenses totaled…

Thanks, Mike. Please turn to Slide 8. Before we open the call up for Q&A, I want to reiterate our excitement for the coming year. As our first quarter results demonstrate, we're just starting to realize the significant potential of our comprehensive and expanding portfolio. Our targeted investments have helped us build a uniquely focused joint preservation portfolio across the continuum of care and regenerative solutions, sports medicine and Arthrosurface joint solutions. Anika is well positioned to continue to execute on our growth strategy with multiple near-term value drivers, including the full market release of X-Twist now underway and of RevoMotion later this year, and the launch of our HA-based arthroscopic regenerative rotator cuff patch system in 2024. And finally, we have a healthy balance sheet with a solid cash position and no debt, positioning Anika to drive significant shareholder value. . I would like to take a moment to thank all of our employees for their continued hard work and dedication to supporting our efforts. We're building momentum as we work to achieve our mission of restoring active living for people around the world. And with that, we'll open up the line for questions.

[Operator Instructions] Your first question comes from the line of George Sellers from Stephens, Inc.

This is Harrison on for George. I wanted to start by asking you about what you're seeing in terms of procedures moving to the ASC specifically in terms of the reverse shoulder. I know the RevoMotion was designed with the ASC in mind. So what kind of impact are you seeing from that dynamic now while still in the limited market release? I mean how do you see that market moving longer term?

Thanks for the question, Harrison. It's a great question. And we did design RevoMotion with the ASC in mind. We are in our limited release, we are seeing procedures done in the ASC and the hospital setting. And the majority of that market, those procedures are still done in the hospital setting just because of the current situation with reimbursement from CMS. But the patients that qualify and the payers that are inclined in that direction will support those procedures being done in the ASC. So for our limited release surgeons, whatever their respective share of patients that they do in the ASC, we are seeing it being used there with really great feedback. And the feedback in general on that system has been very positive. I mentioned in my prepared remarks that we're seeing really great X-rays coming back from the surgeons. The surgeons are reporting that their patients are doing very well. Many of them out to 4 months at this point in time. And that the system is working very well in both the hospital and the ASC setting. So we look forward to continue to serving both of those call points with the opportunity for our system to really have uptake in that ASC because of the way it was designed.

Yes. That's great. Sounds good. I had another question on Tactoset, the additional 510(k) clearance. I was wondering how we should think about that market opportunity? I know you've tagged Tactoset as a $100 million-plus market. Is that additional clearance going to be incremental to that $100,000 -- or sorry, $100 million market? Or is that just kind of filling out the market?

Yes. We really felt like bringing that bone marrow aspirate indication to Tactoset was still targeting that $100 million market and was an important part as we continue to build out that franchise. So I would think of that market opportunity really bringing that additional 510(k) clearance to fill out that full market of $100 million.

And your next question comes from the line of Mike Petusky from Barrington Research.

Yes, a couple of questions. Mike, on the R&D expense, when you refer to the global requirements, I'm assuming, is that an MDR or is there something else there that's driving incremental costs? And can you just speak to sort of what's the new normal in terms of R&D expense going forward?

Mike, yes, you're absolutely right. The increased regulatory requirements are largely associated with MDR in Europe, but they're not limited to that. So we had in the quarter, about $800,000 of external spend alone related to MDR. We think it's going to be probably $3 million to $4 million for the full year because there is a bolus of costs associated with getting all of those filings in and all the associated testing and work to support those filings. So it is definitely an incremental spend, and it's something that we would expect will come down over time as we get through this because a lot of that spend, the majority of that spend is related to our legacy products where we sell those in Europe and globally. But it's not just limited to MDR. So when we think about the incremental cost, there's the external cost associated with MDR, and then there's the internal costs to support all of that extra work, the complexities associated with that. And what we're seeing is the same discussions that you're hearing on the MDR side, you're seeing expanded global requirements. We're seeing expansion globally in our business, both in visco and in sports med, so between joint preservation and OA pain management. As we enter in these different countries, there's just more work and more complexity. So we've got the external costs associated with the MDR and then we've got the work internally supporting those. And those are the things that are driving the R&D cost up.

So I mean $8.5 million, $9 million a quarter. I mean is that where we sort of -- sort of peg this going forward? Or I mean, can you just speak to that?

Yes. As I said, there's about -- so as I said, there's about $800,000 this quarter related to MDR. And I think it's going to go up and down on a quarterly basis depending on the work. I do expect it's going to be $3 million to $4 million of cost which is probably maybe $2 million or so higher than last year if you want to look at it from a run rate basis. And then there's the -- as I said, the incremental costs associated with all the internal teamwork to manage all these different efforts. So -- we haven't given guidance specifically for the line items within OpEx. But I did reiterate our guidance expectation from a total EBITDA standpoint. So nothing has changed as it relates to our expectations for the year.

Okay. And then I guess on Cingal, Cheryl, the conversation with the FDA, and I don't know how active these are. But I mean, when would you expect some road map as far as, hey, this is what you need to do or don't need to do sort of to move this forward down the track. I mean when do you think you'll have a sort of a sight line towards what you need to do?

Yes. Great question. And we are actively engaging with FDA right now. It is difficult to predict timing in some cases with active interactions with the FDA. But I would tell you that those engagements are actively occurring. And I would look forward to being able to give an update to you all as soon as possible.

Can I just ask you -- and I understand speculation, but I mean, do you think by the timing of the next conference call, you'd likely have a path forward? Or do you think it could drag throughout -- longer into the year?

Yes. I don't know that it's healthy for any of us for me to speculate on timing. Like I said, we are actively engaging with them. And I -- as soon as I have an update, I will provide it.

Would that be the kind of update that would wait until the conference -- quarterly conference call? Or would that actually be a press release?

Not necessarily. It could be a press release. It could be an update that I give at a future investor conference. It just kind of depends on the timing of it and the content of it. But it doesn't necessarily have to wait until the next conference call.

All right. And then I was just wondering -- and this may also be tough to provide. But obviously, love to hear any further commentary around the X-Twist. I know it's very early innings, probably the top of the first inning. But I mean anything you can say around number of docs that have tried the product, reorder rates? I mean any -- anything you can share there even anecdotally as far as what getting traction means?

Yes. I mean, I guess what I would say is we are -- we really are building traction and adoption. We've done a lot of training. We are starting to see additional kind of depth in accounts with additional surgeons and ASCs that are beginning to use it. . It's still early days. We're a quarter into the full release. So that's why we're not providing like specific numbers at this point in time. But we are really getting a lot of very positive feedback on the product itself, and we are seeing really nice traction once adoption occurs within a given account. So I look forward to giving additional metrics on that going forward once we have a bit more of experience under our belt. We're just now one quarter into a full market release.

So -- and then just last question on the -- obviously, balance sheet remains pristine. Are you guys seeing any interesting assets? Are you being shown things? What's the valuations? I mean, what -- is there anything you can sort of talk about there?

Yes. We continue to look at opportunities that we think are on strategy for us. We feel like there are things that we will continue to look at, valuations remain high. And I've seen other CEOs make the same comment in the last couple of weeks with earnings calls. And at the same time, I think we have a pretty significant pipeline that we've developed that we're pretty focused on driving commercially right now. And I'm always balancing distraction with what we've got right in front of us. So we'll stay focused on what we've got coming into the market right now and continue to look at things that might be available out there from an inorganic perspective.

And your next question comes from the line of Jim Sidoti from Sidoti.

The settlement you made with the -- related to Parcus and the shareholders too, those were both completed in April. So I was surprised to see that they were on the March quarter income statement. Why was that?

Jim, we will see costs associated with both of those in the first quarter and in the second quarter because you're absolutely right, they were both resolved in April. For the arbitration settlement, that was an ongoing contingency. And under GAAP, you would record that in the current open period. And so we recorded a settlement there of $3.25 million in the first quarter. . And we've broken that out separately and are excluding that from a non-GAAP basis. Also, in the first quarter, we had our own legal costs associated with Parcus arbitration and otherwise. And so we've kind of taken that amongst other related nonrecurring costs and call that out as $1.7 million in the quarter and not related to those legal costs and others that we believe to be nonrecurring. So you've got that. And then we also incurred $800,000 of costs associated with the activist matter. That was costs incurred in the first quarter. We will have -- we estimate another maybe $2.5 million of nonrecurring costs in the second quarter. And that would include on the activist side, our cost as well as the cost that we are going to cover under the cooperation agreement that were incurred by the activists. And then we also have the costs that we -- our internal legal costs associated with the Parcus arbitration matter in the beginning of this quarter. So -- we've called them out as nonrecurring. We've got $5.8 million of those in the quarter, as I said, another $2.5 million in the second quarter. And we've broken out the settlement and the activist matter as non-GAAP adjustments. The ongoing legal costs, they've been in our run rate and haven't been material enough to call out before. We're calling them out now. Those are not excluded for non-GAAP because we're treating those consistent with how we've treated them before. But we wanted you to understand they were elevated in the quarter and that's why we called them out as nonrecurring.

Okay. I got it. Now do you think you'll have an additional charge in the second quarter for Parcus as well?

Yes, that was included in what I was just describing. So I think there's $2.5 million. Again, this is our legal fee, how all the costs come in. But $2.5 million all in of nonrecurring costs. And I would say, a small amount of that is the finishing up of the Parcus arbitration from our internal spend.

Got it. Got it. Okay. Now with regards to the rotator cuff patch. I think you filed to that last year. Are -- do you have the approvals to launch that at this point? Or is there still regulatory work to be done for that?

Jim, yes, there were multiple 510(k)s that we filed. This is a -- it is a regenerative patch based on hyaluronic acid and also other elements of a full system. So that's why there are multiple 510(k)s. We are not announcing kind of the parts and pieces as they come along, but we will provide a more fulsome update once we have everything fully cleared through the FDA. And because one element of that is a regenerative patch, that tends to take longer from a time frame perspective relative to how you might think about normal turnaround time for 510(k)s. If there's an element to it that's regenerative in nature, they tend to take longer. So the timelines that we've provided, we still feel good about. And there -- that's what's in the update that we have communicated. And as soon as we have anything more fulsome to announce, we will do so. We'll look forward to that. We're very excited about the system. We think it really completes the full continuum of care on the rotator cuff side, and we see an awful lot of advantages of this system relative to the first-generation collagen patches that are in the market today. So we look forward to updating you further on that.

Okay. And then with regards to HYALOFAST, I think you said you had 1 more patient to complete the enrollment. And I assume it's a 12-month follow-up on that. And then I guess you're giving yourselves time to submit the PMA and then to work with the FDA. Is that why you have a 2025 estimate for that?

Yes. So you're correct. We have 1 more patient to enroll, and we'll be as excited as anybody when we get that study fully enrolled. The team is working hard on that. That has a 2-year follow-up, which is why the PMA filing is 2025. So that will be the clinical module of that will be the last module filed. But we're still on track to file that in 2025. And as soon as we have the final enrollment to announce, we will do so.

Okay. So if you file in 2025, I would think back and forth with the FDA, you anticipate a launch sometime in 2026.

Yes. We haven't provided guidance on launch timing until we get a little closer. But suffice it to say that we'll get everything filed in 2025.

Okay. And then the last one for me. On Cingal, it sounds like you're pursuing strategic agreements. Would they be structured similar to the agreements you have in place now for your OA Pain Management products. Would you have milestone payments attached to that? Or would that just be a straight distribution agreement?

Yes. I think you can think about especially the ones in select Asian markets to look more like kind of a biotech pharma type arrangement in terms of structure. And in terms of the one in the U.S., we haven't really talked much about how those would be structured. But the select Asian market type agreements are probably more how you would think about a strategic relationship that has structured payments in addition to supplying product.

Thank you. There are no further questions at this time. And that does conclude our conference for today. Thank you for participating. You may now disconnect.