Good evening, ladies and gentlemen, and welcome to Anika's Second Quarter 2023 Earnings Conference Call. [Operator Instructions]. I will now turn the call over to Mark Namaroff, Vice President, Investor Relations, ESG and Corporate Communications. Please go ahead.

Thank you, and good afternoon, everyone. And thank you for joining us for Anika's second quarter conference call and webcast. Our Q2 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 number 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, and 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 second 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. I'm very pleased to say that Anika delivered strong second quarter results with 12% overall revenue growth driven by our OA Pain Management business with strong gross margins and improved bottom line performance. Looking at the core parts of the business, which excludes non-orthopedics, we grew 16%, which is an outstanding result as our products continue to gain traction in the markets we serve. Our OA Pain Management business was stronger than anticipated with 22% revenue growth led by accelerating Monovisc growth globally, strong Cingal growth outside the U.S. and favorable product order timing from J&J Mitek in the U.S. Now halfway through the year, based on the very good results to-date, we're raising our outlook for this product family for 2023, as Mike will describe shortly. Our OA Pain Management products have the best clinical performance of any on the market. We're pleased to see J&J's robust results as they continue to further expand our number one market share position in the U.S. OA Pain Management market and the strong performance of our international team with Cingal, together with Monovisc and Orthovisc, posting double-digit growth in the quarter. Cingal is truly becoming the next-generation non-opioid OA pain product of choice in over 35 markets outside the U.S., and we're looking forward to U.S. market approval. On that topic, our interactions with the FDA regarding bringing Cingal to the U.S. have been progressing since last fall when we successfully met the primary endpoint of our latest Phase 3 pivotal trial. We are pleased to have had a Type C meeting with the FDA in the second quarter as we actively engage with them toward U.S. approval. With respect to our ongoing processes to source and…

Thank you, Cheryl. Please turn to Slide 5. I will now walk you through our financial results for the second quarter of 2023. I'm pleased to report total revenue for the quarter grew to $44.3 million, an increase of 12% over the prior year, on growth in OA Pain Management and Joint Preservation and Restoration, partially offset by lower non-orthopedic revenues. The lower non-orthopedic revenues reduced total company growth in the quarter by approximately 4 percentage points. Revenue in our largest product family, OA Pain Management, increased 22% to $29.3 million due to sales growth on increasing global customer demand led by Monovisc and Cingal, and favorable ordering patterns from both J&J Mitek in the U.S. and from our international distributors. As a reminder, revenues can vary significantly on a quarterly basis based on ordering patterns by our partners in the U.S. and internationally. However, that volatility generally stabilizes on an annual basis. Our Joint Preservation and Restoration revenue in the quarter increased 5% to $12.7 million on early growth from our recent product launches such as X-Twist and RevoMotion, the latter of which remained in limited release in the second quarter but moves to full market release in September, as Cheryl highlighted. Our non-orthopedic revenue declined 33% to $2.3 million, primarily reflecting unfavorable year-over-year order timing by our veterinary distributor as well as the continued impact from our exit from legacy product lines that do not support our growth and profitability objectives, which saw higher revenues last year from last time buys. Our gross margin in the second quarter increased to 65% and includes the non-cash impact of $1.6 million of acquisition-related amortization expense from the 2020 acquisitions of Arthrosurface and Parcus Medical. Our adjusted gross margin, which excludes the acquisition-related amortization, increased to 69% in the quarter, up…

Thanks, Mike. Please turn to Slide 7. Before we open the call up for Q&A, I want to reiterate our excitement as the progress we've made in building on Anika's historic strength in hyaluronic acid addressing OA Pain to now assembling best-in-class solutions across early intervention orthopedics. We're pleased to see the acceleration in growth of our already market-leading visco supplement for OA Pain Management, the tremendous opportunities afforded by our next-generation non-opioid OA Pain Management product, Cingal, the growing strength of our HA-based regenerative portfolio, including meaningful differentiated regenerative solutions for cartilage and rotator cuff repair and the progress we've made in further strengthening our already robust portfolio across sports medicine and minimally-invasive joint solutions. And we've been able to self-fund this portfolio development and continue to maintain a healthy balance sheet with a solid cash position and no debt. I'd like to take a moment to thank all our employees for their continued hard work and dedication to supporting our efforts. Together, we are building real 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]. And our first question comes from George Sellers. Go ahead, George.

Good afternoon, and thanks for taking the question. I apologize if I missed this detail earlier. We've been jumping a little bit from call to call this afternoon. But on Cingal, I was just curious if you could give us some additional color on what a commercial partnership might look like in the U.S. if that'd be similar to the Orthovisc and Monovisc partnership with Mitek? Or what that sort of commercialization process and rollout could potentially look like?

Yes. Thanks, George. We appreciate the question about Cingal. It's obviously a product that we remain very excited about. I think, considering the fact that we really have what I see is just unparalleled data around osteoarthritis pain reduction with Cingal as a next-generation OA pain product. We're going to run a fulsome process around understanding our best partnership opportunities in the United States for optimizing shareholder value. Our shareholders have obviously made significant investments in the development of that product. So we're focused on really driving the right outcome there, relative to our shareholders. I'm obviously not going to get into details around discussions or potential structures, but there is significant interest in the U.S., and we've also talked about the fact that we're engaging with parties in select Asian markets, and we're seeing a lot of interest there also. So more to come on that. I wouldn't want to speculate or provide any details that would get in the way of a fulsome process. But we remain really excited about the product and also on our continuing dialogue to get Cingal in the U.S. around our conversations with FDA.

Okay. That's really helpful color. Switching to Joint Preservation and Restoration. That was a really strong first quarter, and then it took a little bit of a step back this quarter relative to our expectations at least. I'm just curious what some of the drivers there were? And why that outlook is a little bit lighter than where it was exiting last quarter?

Yes. Great question. On our Joint Preservation business, first of all, we've built out a number of really strong products. We continue to get very strong clinical feedback on them with X-Twist and RevoMotion. We are really in the first -- kind of finished the first full quarter in full market release of X-Twist, and we are in a limited market release of RevoMotion. So I don't want to get ahead of ourselves relative to where we're at with those product launches. Another thing to consider around the fact that we've got this valuable portfolio that we've built that we're just entering these larger markets, but we are learning about where our hybrid sales force has strengths in areas that we need to strengthen. We're really actively focusing on determining where the strengths and weaknesses are, and taking action to make sure we meet those growth objectives. I will tell you that our approach around selling these products, we try to be very thoughtful about our spend. That's why we've gone with that hybrid sales force so that we don't have the full burden of the full fixed cost of a fully-owned sales force. And there are ways that we are continuing to drive focus amongst those distributors. I'll tell you that the distributors that are really focused on us are growing and growing nicely. And what we are seeing as we launch additional products and products that are exciting to them, that's really the way that we're going to be continuing to drive focus and command attention from those distributors in that hybrid sales force. And I'll give you an example, Integrity. Integrity is an exciting product. Our distributors are kind of chomping at the bit to get it. And we're really being thoughtful about how we decide how we're going to sell Integrity so that we can really optimize the growth potential for that product. The other thing I've mentioned in this past quarter is, we really are seeing with some of our distributors -- some of our distributors sell Hip and Knee products. And that Large Joint businesses, you've seen the report out of some of the other competitors that are in that space, which we are not. Many of our distributors were focused on the large growth opportunities there in the last quarter. And so, getting kind of anniversarying through the bolus of patients that are coming through the system post-COVID with large joint, I think, gets us to a better day and gets us refocused with those distributors on the Joint Preservation business that Anika's got with all the great new product launches that we're driving.

Okay. That's really, really helpful. I appreciate all that detail. And maybe if I could squeeze one more. And you touched on a little bit, mentioning Integrity. I'm just curious if you could give a little bit more detail on the 510(k) clearances you've already received for that and what's left to go? And is there a potential that, that could actually be launched at the end of this year?

Yes. Great question. Integrity is a product that we are very excited about. It really continues to build our regenerative portfolio and really allows us to continue to focus on that shoulder pathology that we've continued to be focused on with a number of our other product launches. So the Integrity rotator cuff patch system is a full system that has the regenerative patch component based on hyaluronic acid and fixation and instrumentation for ease of delivery and for ease of surgery for the surgeons. The fixation elements include a staple that allows fixation to bone and darts that allow fixation to the cuff. And so the two 510(k) clearances that we received are for those fixation elements. And so, we're now just waiting on our final process with the final 510(k) around the patch. But we've made significant progress there. The surgeon team that we've worked with to develop that is incredibly excited about this. We see incredible regenerative capacity with this product relative to the first-generation collagen technologies out there in a head-to-head study that we've done, and we really look forward to providing more information on this launch. Relative to the timing, we will definitely be looking to launch in 2024. And if we have good news, we'll certainly let you know.

Okay. Great. Well, thank you again for the time. And I appreciate. Getting to squeeze one more there at the end.

Absolutely, George. Thanks.

And our next question comes from Jim Sidoti. Go ahead, Jim.

Hi, good afternoon. And thanks for taking the questions. Can you talk a little bit more about some of the options for Cingal after your meeting with the FDA? Can you disclose if you think another trial would be necessary?

Yes. Thanks Jim. So the discussions with the FDA in that Type C meeting were really focused around a number of conversations that we've had about making sure that we address the NDA requirements. And while we don't expect to fund another kind of full-factorial clinical trial, there are other questions around like the 505(b)(2) aspects of the steroid and around the fact that FDA is now regulating the HA-Monovisc in Cingal as a drug. So they were really -- the discussion was really focused around that, and we are actually waiting to hear back from FDA on a couple of things that we submitted to them around proposals to address some additional topics that we're waiting to hear back from them on. And I wouldn't really want to speculate on when or what we hear back, but we'll certainly update you as we learn more.

And could a potential distribution partner for Cingal fund, whatever requirements are needed to get through the FDA?

So again, good question. And we obviously have multiple work streams ongoing around partnerships in the U.S. and select Asian countries. And the types of structures that those deals typically have involve some sort of an upfront, which I would expect. So there is the potential for a cash infusion to help fund some or whatever that additional work would be necessary. But again, there's not an intention that Anika is funding a large full-factorial clinical trial from hereon out.

Okay. And then switching to Hyalofast enrollment is completed. And can you just remind me what's the follow-up for that trial? The follow-up through fixation?

Yes. So -- the follow-up is two years. So the last patient out will be in 2025. So we'll start filing our modular PMA in 2024. And then the final module that we file will be the clinical module in 2025.

And will you be able to release any data in 2024 to give us an idea of how the product performed on the first round?

Well, I'll tell you one thing about Hyalofast that I'm not sure people in the U.S. are as familiar with is we've been selling that product for many, many years outside the U.S. There are actually 40-plus clinical publications already out there about Hyalofast. So we already know how it performs, and that's based on a number of independent studies that were done OUS. In terms of when we will be disclosing data from the FDA pivotal trial, it will not be until after we've unblinded the study, which will be following the last patient out in 2025.

All right. And then switching over to the second quarter. The joint pain revenue, I mean, up 22%, just out of this world. Based on your guidance, you're looking for that to come down to average around $23.5 million, $24 million a quarter from the back half of the year. So is that strong June quarter? Is that primarily timing of orders to Mitek? Or is it strong Cingal? Or -- and why don't you think it continues at this pace?

Hi, Jim, this is Mike. I'll take that question. As you know, and you've been following Anika for quite some time, you got a lumpy revenue stream uneven ordering patterns that just happens, largely when you're dealing with a large company like J&J that can happen from quarter-to-quarter. And the majority of our revenues are transfer sales. There is a component that's royalties, which is related to end user sales. We had just a lot of favorable timing in the second quarter, and that was definitely why it's so much higher than what our normal run rate would be. And credit to our operations team for the amount of product that they got through, it was a tremendous effort. But the reason we raised our guidance for OA Pain Management for the year is really because of the underlying momentum in the business. So we saw a strong Q2, and Mitek did for Monovisc, principally, and outside the U.S., we saw it for Cingal, and that's been a continuing trend. And both of which were very encouraging, and that's why we were able to raise our guidance. So yes, the second half, the transfer units will be lower than in the first half, and that's what was reflected in the guide. And I tried to say it's probably going to be even between Q3 and Q4 as far as we can tell from the ordering patterns at that lower level. But the underlying end-user sales continue the strong momentum, and that's the basis for the raise and for the strength in that business.

Okay. I don't recall a $30 million quarter ever before. Is this the highest quarter you've ever had for joint pain products?

I have to look back to see, but this was a tremendous quarter, and we're very excited about that, both operationally execution that occurred and to see that strong and growing demand is really encouraging. So yes, I was very pleased with the quarter.

All right. And then just one more follow-up. On the other side of the business, the Joint Preservation down $1 million in the first quarter, which I don't think you expected. You mentioned that there might be a backlog of patients in the Large Joint category that needed surgeries and maybe you didn't have as much access to it as before. I mean is there any other reason why you think you were down $1 million from the first quarter?

Yes, I certainly think that the industry dynamics of the Hip and Knee business really just seeing a very large bolus of patients coming through the system. And a number of our distributors in our hybrid sales force also sell Hips and Knees. And so, I think from a focus perspective, there was definitely from an Anika -- in Anika view, there was probably a distraction there for those distributors being very focused on the Hip and Knee side of the business. I will say, though, that the distributors that are very focused on Anika are growing our business and growing it nicely. So one of the things that we're really doing is understanding how to continue to optimize that hybrid sales force, and at the same time, be thoughtful about how we go about that relative to the investment that we're making. We still see a tremendous opportunity for growth in the JPR business, especially with our new product launches, and we're still very bullish on the business. But we understand based on the dynamic that happened with the Hip and Knee business that there's additional work to do there, and we're very focused on it.

And Jim, this is Mike. Just one other comment I would make. If you recall in the first quarter, one of the things we called out was that there was favorable timing internationally. And so, in the U.S., where we're launching these new products and whatnot, there wasn't a decrease in come the first or the second quarter, as that really was the timing in the international business. And we called that out in the first quarter, we said it was probably going to be a headwind in the second quarter, and that's exactly what we saw.

Okay. So is there any reason to not think that this business will be a double-digit grower over the next few quarters?

Yes. No, Jim, I mean if I look at the guidance, the guidance that we have is 7% to 10%. We're 8% through the first half of the year, we accelerated in the second half of last year. We expect to accelerate in the second half of this year. And one of the things that we're excited about as we go into 2024 is the RevoMotion. And seeing that, have it move into full market release at the end of the third quarter. It's not as much of a big mover for this year just because people tend to buy it, try it out and then follow on at a later point, as they see how it works. But really it's encouraging as we look at 2024. So yes, we do see an acceleration in the second half of this year. One thing I did mention, though, is we do expect normal seasonality. And so, that really implies a strong Q4, and that's what we expect this year just based on -- things seem to have returned to normal, which is encouraging.

Yes. And then that's what I meant with my question when I said double digit grower. I didn't mean for the remainder of '23, I was talking about '24 and beyond.

Yes. We view that as a double-digit growth business, yes.

Okay. All right. Thank you.

And ladies and gentlemen, we have no more questions in the queue. This concludes today's conference. Thank you for participating. You may now disconnect.