Good evening, ladies and gentlemen, and welcome to Anika's Fourth Quarter and Year-End 2023 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. [Operator instructions] I will now turn the call over to Mark Namaroff, Vice President, Investor Relations, ESG, and Corp Communications. Please proceed.

Thank you. Good afternoon, everyone. Thank you for joining us for Anika's fourth quarter and yearend 2023 conference call and webcast. Our 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 our 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 number two. 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 risks and 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 our 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-GAP 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. 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 fourth quarter and yearend 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 refer to Slide 3. We are pleased to report strong fourth quarter results, which nicely rounded out the year for Anika. Over the course of the year, we achieved key milestones, we learned a lot about the business, and we are taking decisive action to further focus our strategy to optimize performance and drive even stronger results. We began 2024 with renewed energy and a clear, more accelerated path to profitability. Let me start with our key achievements. First, revenue growth and adjusted EBITDA exceeded expectations in the fourth quarter and full year. We had a record year in OA Pain Management, with revenues up 12% for the quarter and 11% for the year on strong growth of Monovisc globally and the sustained double-digit growth of Cingal outside the U.S. While we benefited from some favorable order timing of transfer shipments to J&J Mitek, the underlying business is strong, and we continue to grow our number one market position in the U.S. and anticipate that position strengthening. Cingal continues to do very well as the next generation non-opioid OA pain product of choice in over 35 countries, and we continue to explore more near-term opportunities for commercial partnerships in the U.S. and select Asian markets. We are continuing to interact with FDA and are doing all we can to obtain clarity on what they will require for non-clinical data, so that we can move ahead with those remaining tests with certainty. We remain excited to bring this tremendously effective product to the U.S. market and provide a meaningful non-opioid pain medicine to help alleviate the osteoarthritis knee pain of the 32.5 million U.S. citizens who continue to suffer on a daily basis. In fact, we expect Cingal's expansion into…

Thank you, Cheryl. Please turn to Slide four in the online slide presentation. I'm pleased to report total revenue for the fourth quarter grew to $43 million, exceeding our expectations, driven by better than expected growth in U.S. and international OA pain management, our largest product family, as well as continued growth in joint preservation and restoration. Revenue and OA pain management increased 12% in the fourth quarter to $25.1 million, as our international business finished another strong year, driven by double-digit growth in both Cingal and MONOVISC and our U.S. revenues from J&J MITEK grew 7%, with the quarterly growth reflecting some favourable order timing year-over-year. Our joint preservation and restoration revenue increased 7% in the fourth quarter to $15.3 million, driven by continued growing international sales, as well as by our recent product launches in the United States with X-Twist and RevoMotion, which were partially offset by lower sales of our more mature products. Lastly, our non-orthopedic revenue decreased 8% to $2.6 million on year-over-year order timing and high-disc veterinary sales. Moving to gross margin, our gross margin in the fourth quarter was 61%, and included the non-cash impact of $1.6 million of acquisition-related amortization expense from the acquisitions made in 2020. Our adjusted gross margin was 65% in the quarter, down slightly from the 66% last year, due primarily to revenue mix. Moving to operating expenses; in the fourth quarter, Anika recorded a non-cash impairment charge of $62.2 million on the intangible assets from the early 2020 acquisitions of Parcus Medical and Arthrosurface. As we previously mentioned, revenue growth of Sports Medicine and Arthrosurface in 2023 was lower than expected, as the ramp following the recent new product launches was not sufficient to offset lower sales of our more mature products. As a result, we lowered our…

Thanks, Mike. Please refer to Slide six. Before we open up the call for Q&A, I want to reiterate a few key points. 2023 was a very strong year for our business. We had a record year in OA pain management and exciting progress with our regenerative portfolio, which are both core to our future. Our products across the business continue to receive incredibly positive feedback, and we are encouraged about the opportunity ahead for our product portfolio. We also gained important clarity about the pace of growth in our joint preservation business and completed significant investments. Taking all of these elements together, we've determined to focus our strategy to optimize performance and drive even stronger results. We're confident that we are well on a path to deliver accelerated profitability this year and beyond. To our employees, past and present, I want to say thank you for your contributions and work at Anika and to our distributors and sales partners, we are absolutely continuing to invest in new products, training and those areas that have the most growth potential in 2024 and beyond. We appreciate your continued support and partnership in delivering our great products to surgeons and the patients they treat. Together, we are 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 Jim Sidoti from Sidoti & Company. Your line is now open.

Yes. Hello. This is Alex Hantman on for Jim. My first question is, what areas of the company will be impacted by the workforce reduction?

Hi, Alex, this is Cheryl. Thanks for joining us. Yes, the main areas that are being impacted are R&D and SG&A, primarily in marketing.

And from a spending standpoint, the $10 million in annualized savings is split pretty evenly between R&D and SG&A.

Got it. Thank you for the context. And I know we've discussed some of the changes to distributors for the joint preservation business. Are you happy with the results so far and do you expect any additional changes for 2024?

Yes. Great question. In terms of commercial execution, what I will tell you is that our top distributors continue to do very well. We obviously continue to move forward with ongoing optimization. We're really starting to feel from them and from the clinicians a real pull for Integrity and a significant acceleration from X-Twist, especially now that we've got biocomposite launched. RevoMotion is really starting to gain as we gain additional market access and continue on with great product feedback. So I think that we're really doubling down on our strength relative to what we see working with those strong distributors and continuing to optimize going forward.

Great. Thank you for the context. And last question from me. When do you expect the next meeting with the FDA regarding Cingal?

Yeah. We have ongoing dialogue with FDA. We had our type C meeting last year, as you know. The ongoing dialogue is productive, and we're doing all we can to obtain that clarity on what they're going to require for the nonclinical data, so we can move ahead with those remaining tests with certainty. So, I think the message there is rest assured that we're doing all we can, and the dialogue is ongoing.

Your next question comes from the line of George Sellers from Stephens Inc. Your line is now open.

Hey, good afternoon, and thanks for taking the question. Maybe to start, I'm just curious if you could give some additional color on what RevoMotion contributed in the quarter and then also how many surgeons have you trained thus far and how should we think about sort of the progression of surgeons trained throughout 2024?

Hi, George. Thanks for the question. In terms of training, we haven't broken out training specifically by product because we tend to train across products within a training session. So what we have talked about is we trained about 600 surgeons last year in face-to-face training activities. So we'll continue on with focused training around our new products as we've talked about and RevoMotion will be a part of that.

Okay, that's helpful. And then maybe shifting gears a little bit to the guidance, just curious if you could break out the contribution from some of the new devices that you've recently launched like RevoMotion, the HA rotator cuff patch system, as well as some of the items that you talked about at AAOS that are going to be launched this year with AIM and the ProPass. How should we think about growth from those versus your legacy devices?

Hi, George, it's Mike. In terms of the growth expectations for those new products, we are pleased with the growing momentum that we are seeing. In X-Twist, where it's been out for now a few quarters and now we have the biocomposite that's now a limited market release. So X-Twist is going to be a big contributor here for the growth in 2024. RevoMotion, we have just a few months with that launched in full market release at the end of the third quarter. That will also be contributing this coming year. So when you think about the growth that we've described in joint preservation, the new products, Integrity, X-Twist, and RevoMotion are the primary drivers of that growth. The growth in the more mature products is really not, there isn't a lot of growth in the more mature products and that is offsetting the exciting growth that we are seeing in these new products. So we're very pleased with the acceleration that we're seeing. We're learning a lot as we bring these to the market in terms of our ability to commercialize those with our distribution force and are taking a lot of action to continue to see that acceleration in 2024.

And I would add on Integrity, we mentioned that we're in a limited market release and we're really intentionally holding back on further availability of that product and at the same time are really feeling a pull of that product really because of everything we've talked about around it that we were very focused on delivering a regenerative patch that had greater regenerative capacity, that had very high strength even when wet and was manipulatable in a thinner version in the scope and that we took a real full system approach. And we're feeling that pull. We're excited to be able to get to that full market release and are on track to do that in the second half of the year where we see the opportunity to accelerate in that regenerative business with Integrity.

Okay, got it. That's really helpful. And then one last one maybe if I can squeeze it in here. On the impairment charge that you discussed related to a lowered longer-term outlook, I believe you said for Arthrosurface and then the Sports Med business, can you just give us some additional color on sort of what changed, maybe some specific products and devices that you're less constructive on as you think about the longer-term opportunity they present?

Sure, George, this is Mike. Yeah, we recorded the impairment charge based on a reassessment of the trajectory there coming out of the fourth quarter. As you know, the fourth quarter is always the biggest quarter in orthopedics. We had a number of new products. And so the key question that we wanted to see in 2023 is what's the acceleration of new products compared to how are the more mature products doing? And what we found is that the more mature products were more challenged than we had wanted them to be and hoped that they would be and so that drove a revisiting of the valuation of the assets. The assets were originally valued back when the acquisitions happened at the beginning of 2020, just before COVID. And so once we went through that revaluation process, that's what led to the impairment charge. So we are seeing nice growth of these new products, even early days, but not enough to offset the slower growth than expected in the more mature products. And so that's part of what Cheryl talked about in terms of driving focus and that's why we've taken spending down to focus on those areas where we have the greatest opportunity and that's why we're able to drive such significant growth in the bottom line here as we go into 2024.

Okay, got it. Great. Thank you all again for the time.

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

Hello, good evening. So Mike, I feel like you've answered this question about 85% of the way, and I'd love to get the other 15%. If you set aside the three new products that you guys have some hope for in JPR, will the rest of the business at the lower end of your guidance, does the rest of your business grow at all in 2024? Or do you assume sort of flat or worse performance in the legacy part of JPR?

Hi, Mike. Yeah, our guidance for 2024 is really driven by the new products. There is some contribution for the more mature products, but the key growth drivers that's reflected in our guidance are the new products. What's reflected in our range for 2024 is we have taken action to reduce spend and that can have an impact on sales and so we're just watching that because, as Cheryl said, we're prioritizing the bottom line over the faster growth in the top line and specifically there in joint preservation and around the more mature products and so, that's something we're going to watch and continue to balance.

I want to make sure that I understood what you just said. You said contribution. Are you saying there is a contribution to growth, meaning, more than flat from the legacy JPR in 2024?

Yeah, Mike, there is a contribution. One of the things that I'm balancing here is that when we talk about the contribution of the new products, the new products are principally launched in the United States. So there's an international component that I'm weighing just in how I answer the question, but the primary growth driver in the United States are the new products. There is some variability that you can get in the international business where we don't -- we aren't able to launch the products as quickly because of MDR requirements.

And Cheryl, I think I want to, and forgive me because I know you've tried to explain this, but I just want to make sure I understand. So Integrity, you sort of say, hey, we're getting interest. We continue to be really enthusiastic, but we're sort of holding back. Could you one more time sort of walk me through exactly what the -- is there an issue in terms of the way you're delivering this product? Can you just talk about what the holding, essentially the catalyst for the holding back is? Thanks.

Absolutely. We very purposely in each of our product launches in the years that I've been here have done limited market releases in order to get feedback from a limited group of surgeons. Some of them are the designing surgeons that we work with primarily around the instrumentation and delivery system, surgical technique, elements like that. With Integrity, we took a very specific approach around designing a surgical technique that had ease of use, arthroscopic instrumentation, and fixation. The regenerative patch itself is doing great. And again, from a patient perspective, we're hearing great things clinically. Also from the patch perspective around its manipulatability under arthroscope in wet conditions, its strength, its regenerative capacity in terms of the patient outcome, we always know when launching a new system that there are going to be tweaks that you want to make to the instrumentation and before we do a build that will allow us to go out to the full market, we want to make sure that those tweaks are complete and so that is what we're doing right now. We're absolutely on track for doing it. There were minor tweaks that we got feedback on. They're being implemented. And then we'll do a much larger build, inventory build around that so that we have the inventory with the finalized instrumentation ready to go about midway through the year. My commentary about intentionally limiting is because we are feeling such a pull from the market with the limited group of surgeons that have been doing this. The word is out. The surgeons that have seen this product in training and at meetings like the academy are chomping at the bit to get it in their hands. And so we just want to make sure that those tweaks are done on the instrumentation, and then the full inventory build that we do around that full market release incorporates those. So it is all on track. It is all as planned and it is sort of the normal way that we like to do a good, robust product launch here.

Just curious and I know any answer you give here would be anecdotal, but you had communicated on the third quarter call that you had hopes that Integrity at least had a chance to become a standard of care and I was just curious, have you gotten any physician feedback, surgeon feedback, that essentially would in any way sort of bolster your confidence or at least have it at roughly the same level that, hey, there really is a genuine shot that this could mean something?

Oh, I think there is genuine feedback from the surgeons that have used the system that this is a highly differentiated product. In all the aspects I mentioned, and I will not repeat, although I love repeating it because we spent so much time, I think, developing a really great system and, frankly, a really great set of technologies around the Integrity implant itself that we intend on leveraging for additional near-term regenerative pipeline activities. So, yeah, I think the answer is absolutely yes and I think that is evidenced by the fact that we have done well over 100 surgeries since late November, which is a ramp that is really nice, especially, actually, in a limited market release.

Last one, and I will jump off. But, Cheryl, could you just talk about, because it does not come up very often in these conference calls, just as you think about the longer-term opportunities for Hyalofast in the U.S., can you just talk about why you think, hey, this also could be sort of a needle mover for the company longer term and its place in the market and why it could matter as an option going forward? Thanks.

Yeah, absolutely. First and foremost, this is a product that has been for sale for over 15 years outside the United States. And, in fact, we will have 15-year data published on Hyalofast likely this year. There is a paper that is going through the review process right now. That is fairly unusual when you get to a product launch in the United States. We have got over 40 clinical publications on the product. We know how well it works. We have a lot of clinical data already. We also know what the United States market looks like and the market leader in the U.S. today is a product that is a two-stage procedure. It requires two separate surgeries. It is very costly. It is a product that requires the patient to go through two sets of rehab and sign up for a second surgery. Hyalofast is going to be a single stage. So off the shelf, one surgery, available when a surgeon is in process of doing a scope and sees a cartilage defect to be able to pull it off the shelf and use it in the surgery that they are in. There is also, we think, a significant unmet need that is not being met today because the current market leader really, the technology requires a second surgery and the expense of it is another factor and so there is a well-established market in the United States today, but we think there is a market expansion opportunity for a product that is available off the shelf that just does not exist today with the current product and the current market leader. So, yes, we are very bullish on Hyalofast for all of those reasons.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.