Anika Therapeutics' CEO Discusses Q4 2012 Results - Earnings Call Transcript

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 |  About: Anika Therapeutics Inc. (ANIK)
by: SA Transcripts

Anika Therapeutics, Inc. (NASDAQ:ANIK)

Q4 2012 Earnings Conference Call

February 28, 2013 09:00 ET

Executives

Dr. Charles Sherwood - President and Chief Executive Officer

Kevin Quinlan - Chief Financial Officer

Analysts

Mark Landy - Summer Street Research

Greg Garner - Singular Research

Bill Gibson - Legend Merchant

Joe Munda - Sidoti

Jim Gentrup - Discovery Investment Research

Operator

Good day, ladies and gentlemen and welcome to the Fourth Quarter 2012 Anika Therapeutics Investor Conference Call. My name is Jeff and I will be your coordinator for today. At this time, all participants are in a listen only mode. Later, we will facilitate a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Kevin Quinlan, Anika’s Chief Financial Officer. And you have the floor sir.

Kevin Quinlan - Chief Financial Officer

Thank you, Jeff, and good morning everyone. Thank you for joining us. If you have not received a copy of the Anika news release, which was issued yesterday after the market closed or you would like to be added to our contact list, please contact Sharon Merrill Associates at 617-542-5300. The news release is posted in the Investor Relations section of our website at www.anikatherapeutics.com.

In addition, a slide presentation is posted on the Anika website that illustrates some of the points that we’ll be covering during today’s call. The slides can be found on the Investor Relations section under the heading Events, Webcasts, and Presentations. We invite you to take a moment to open the file and follow the presentation along with us.

Please turn to slide number two. Before we begin, please remember that the statements made in this call which are not statements of historical fact are forward-looking statements as defined in the Securities and Exchange Act of 1934. Words such as will, believe, appear, plan, expect, anticipate, forward, seek, continue, target, goals, objectives, on track, intend, pursue, outlook, as well as other expressions, which are predictions or indications of future events or trends and which do not constitute historical matters identify forward-looking statements. These statements are based on the current beliefs and expectations of management and are subject to significant risks and uncertainties. The company’s actual results could differ materially from any anticipated future results, performance, or achievements described in the forward-looking statements as a result of a number of factors which include those set forth in last evening’s press release and the company’s SEC filings.

Please turn to slide number three as I turn the call back over to Dr. Charles Sherwood.

Dr. Charles Sherwood - President and Chief Executive Officer

Thank you, Kevin. Anika achieved record quarterly and full year revenue in 2012. We also delivered double-digit revenue and net income growth in the fourth quarter of 2012 concluding an excellent year from both financial and operational perspectives. Our total revenue grew 23% from Q4 last year and our net income was up 55%. The actual results for the quarter were in line with the preliminary results we released on January 22.

If you look at our five franchises, our top line performance this quarter and this past year continues to be driven by growing in Orthobiologics reflecting strong demand for our flagship product Orthovisc. U.S. Orthovisc revenue was up nearly 42% for the year. Through the strength of our partner, DePuy Mitek’s marketing activities over the past year Orthovisc closed 2012 as the market leader in the U.S. multi-injection segment and the number two U.S. brand in viscosupplementation overall.

Mitek continues to do an outstanding job in capitalizing on the domestic demand for Orthovisc. We are very pleased with the partnership with Mitek and I am delighted to report that during the fourth quarter we mutually agreed to extend our U.S. distribution agreement through December 2018. Although international sales of Orthovisc were down nearly 17% from 2011 considering the sluggish economy in Europe they held up pretty well. We are making continued progress in our efforts to accelerate our growth internationally by penetrating in new geographic markets for Orthovisc.

Our current focus is Latin America where we are working with Mitek to gain a number of new product approvals. We are also selectively realigning our existing distribution relationships where we see opportunities for faster growth. For example during the fourth quarter we negotiated a distribution and clinical trial reimbursement agreement for both Orthovisc and Monovisc with the new partner in France. We signed a new distribution agreement for Canada with a top pharmaceutical company in that country and we also signed a new contract with the large pharmaceutical company in Turkey to reactivate our sales in that region.

For the surgical franchise launching the improved version of Merogel Injectable was the top priority in 2012. Merogel Injectable is in ENT, ear, nose and throat surgical anti-adhesion product distributed by Medtronic. During 2012 we successfully completed the product development work and received the 510(NYSE:K) clearance in the fourth quarter. We have resumed shipment of Merogel Injectable to Medtronic of course launched the product in early February.

From quite sometime it’s been our practice to discuss activities on our five franchises irrespective of their contribution to our financial results in any given quarter. Going forward we will be more than happy to answer any franchise specific questions that you may have, but in our prepared remarks we will try to focus on the events and accomplishments that we feel are driving the business forward in a material way or those that have strategic value. In some quarters we will talk about everyone of our franchise and in others like this one we may not. Again if you are looking for additional information about the other franchises please feel free to join the Q&A session at the end of the call.

Please now turn to slide number four and look at Anika’s bottom line. Our operating income increased 58% for the fourth quarter and 41% for the full year. These successes are primarily driven by strong sales growth supported by improvements in our operating efficiency. The growth in income from our operations was achieved despite a one-time pre-tax charge approximately $2.5 million related to the termination of the Hyalograft C Autograft development program and the closure of our S.r.l tissue engineering facility in Abano Terme, Italy. Against a backdrop of solid growth in our base business capitalized by U.S. sales of Orthovisc, 2012 was a year of profit margin improvement driven in large part by the facilities consolidation in Bedford.

Since June of 2012 we no longer incur redundant costs associated with operating dual facilities in the Bedford and in Woburn, Massachusetts. In addition we have been able to improve our manufacturing efficiency and productivity in Bedford as our production volume has ramped up. We expect to generate additional leverage from our new capabilities in Bedford in 2013 as we begin manufacturing S.r.l’s gel based products in that facility.

During the third quarter, we received GMED approval, our notified body for the manufacturing of Anika’s S.r.l gel based product at the Bedford plant. The completion of gel based production transfer from Italy to our Bedford facility was an important planned achievement for financial and supply chain control purposes. Key S.r.l gel based products include Hyalobarrier, Hyaloglide and certain ENT products offer surgical anti-adhesion applications. Starting in 2013 we will see an improvement of product margins for these products.

Transferring our gel based product manufacturing from Italy to Massachusetts was part of our plan to improve profitability at S.r.l. During the fourth quarter of 2012 we made the decision to restructure S.r.l’s operations. As I mentioned this included closing S.r.l’s tissue engineering product line and terminating the development of Hyalograft C Autograft. The restructuring activities are targeted to strengthen our Italian business and refocus our R&D programs on higher return development projects. Last quarter I mentioned that we were in the process of assessing the regulatory environment for Hyalograft-C autograft and similar products in the EU and Italy awaiting more clarity at the end of the year. What we have heard from the regulators regarding the future development requirements for this class of products involving cell based technologies was significantly less favorable than we had hoped. On this basis we decided not to make any further investments in Hyalograft C Autograft, but the focus on our alternative regenerative product Hyalofast which I’ll cover in a little more detail later on the presentation.

For the S.r.l. business there are really three key products Hyalofast, Hyalobarrier, and Hyalomatrix. Hyalofast is the regenerative product for the repair of chondral and osteochondral defects. Hyalobarrier is a post surgical anti-adhesion product for use in abdominal and pelvic procedures. Hyalomatrix is a biodegradable dermal substitute with silicon backing layer for the treatment of highly complex wounds such as traumatic, chronic wounds and severe burns. During 2012 and in the fourth quarter we made progress on advancing these products. For Hyalofast we achieved approval in South Korea for use in conjunction with bone marrow concentrate and commenced sales there through out partner. Our Hyalobarrier, we are working with our agent distributors on line extension offerings to expand the product’s application to new surgical procedures. For Hyalomatrix as I mentioned in last quarter we are working with S.r.l’s former distributor in South America. We are generating sales and adding to the number of marketing approvals we received for Hyalomatrix in that region.

Turning now to slide number five and our product pipeline, in 2012 we have focused primarily on Cingal in on our cartilage regeneration technology. Cingal is a single injection viscosupplementation treatment for osteoarthritis that includes a therapeutic agent. Cingal will be considered a medical device in Europe and therefore qualified for CE marking resulting in a shorter approval pathway and what we expect in the United States. In order to receive a CE mark, we need to provide clinical data and by the end of the fourth quarter we had completed a significant portion of the preparations necessary to start a Cingal clinical trial in the first half of 2013. We are optimistic about prospects for Cingal in the domestic market as well. We expect our European clinical trial to provide the data we need to support FDA approval. During the fourth quarter we were also successful in obtaining a U.S. patent for Cingal.

In addition to focusing on Cingal we are redoubling our efforts in cartilage regeneration behind the Hyalofast product following the termination of the Hyalograft C Autograft. Hyalofast is a scalpel product typically used in conjunction with bone marrow aspirate for applications similar to those we targeted with Hyalograft C Autograft. It’s a non-cell based product and it also requires a single step surgical procedure.

In addition to Hyalofast a new product in our S.r.l. product pipeline is the anti-adhesion product Hyalospine. This product is designed to inhibit paradermal scarring adhesions after spinal surgery. We completed a small but promising Hyalospine clinical study and received a European patent for the product in Q4 of 2012. Based on these clinical results we have decided to seek CE mark approval. Again Hyalospine is in its early stage and at this point undergoing commercial and marketing evaluations, but we believe it will be a very promising product.

We have previously submitted 510(K) applications in the United States for three S.r.l products. These are submitted at a time of significant change and uncertainty within the FDA regarding the 510(K) approval process. We have now selected two of these products and defined the pathway to complete the approval. The remaining work involves generating additional data for the 510(K) applications. We expect submissions with new data towards the end of this year with approval at the beginning of 2014. As stated previously in the near-term our strategic goal is to drive revenue growth from a number of single line extension products. Looking further ahead our goal is to fully leverage the vast S.r.l. technology base to develop new products and fuel revenue growth.

I’ll conclude with an update on Monovisc before I turn the call back over to Kevin. As summarized on the slide number six, the business case for Monovisc remains very positive and the medical need is apparent. Genzyme’s patent infringement suite against Monovisc remains on hold, pending the court’s decision on Genzyme’s appeal of the ruling in the (indiscernible) case that rendered their patent that is Genzyme’s patent invalid. Our partner Mitek is ready and eager for U.S. launch, what we need is U.S. regulatory approval.

As we reported in early December, we have received a negative response from the FDA and which the agency upheld its non approvable decision on our PMA application for Monovisc. And as a result, we’re trying to schedule a meeting with the FDA as soon as possible to determine our next steps. We did have a discussion with the FDA in January which was quite encouraging. We follow-up on that discussion by submitting a new PMA amendment analyzing existing data not previously presented and the FDA is commenced it’s review of that amendment. The agency is also willing to sit down with us and discuss how we might go about collecting and submitting some additional data in support of the PMA. We are now in the process of scheduling that meeting. This represents a parallel path strategy, which may not be necessary should the FDA approve the product based on the amendment submitted. There is still a great deal of uncertainty and more work to be done, but the FDA is clearly leaving their door open for us.

Last month, we announced the appointment of Sylvia Cheung as the company’s new Chief Financial Officer effective April 1st and Sylvia is joining us on this call. Kevin Quinlan has been our CFO since 2005 and we appreciate his financial insight and hard work over his tenure here at Anika. We look forward to Kevin’s continuing contributions in the weeks ahead as he works with Sylvia and the other members of our management team, the board and me to ensure smooth transition as Sylvia ramps up in her new role and we certainly wish Kevin every success in his future endeavors.

And with that, I’ll turn the call back over to you, Kevin.

Kevin Quinlan - Chief Financial Officer

Thank you for those kind words Chuck. I’ll look back at my time with Anika with a great deal of pride in what we have accomplished. I am anticipating next month as a productive transition period for both the company and from me and let me echo Chuck in congratulating Sylvia on her new role, I hope she finds it as enjoyable and fulfilling as I did.

With that, please turn to slide number seven in the presentation. Slide seven covers our income statement highlights for the quarter and the year. As a reminder, please note that our Q4 and 2012 results reflect the closure of S.r.l.’s tissue engineering facility in Italy. Anika’s total revenue for the fourth quarter of 2012 increased 23% from the fourth quarter last year to a record $22.6 million. For full year 2012, we achieved total revenue of $71.4 million, an increase of 10% from 2011 and also a record. The increase in total revenue was primarily driven by the growth of our Orthobiologics franchise, which was up 25% for the full year.

Our fourth quarter gross profit margin increased by 630 basis points from last year to 66.1%, for the full year, product gross margin improved slightly to 57.4%. The increases for both periods were driven primarily by higher production volume and the more favorable product mix. Total operating expenses excluding cost of product revenue for the fourth quarter of 2012 increased to $7.5 million from $6.4 million in the fourth quarter last year. This included the previously mentioned $2.5 million restructuring charge. For full year 2012, operating expenses were down 6% to $22.7 million from $24 million in 2011.

Operating income for the fourth quarter of 2012 increased to $7.8 million from $4.9 million in Q4 of 2011. For 2012 as a whole, operating income was $19.7 million, a 41% increase year-over-year. This was driven by combination of increased revenue, higher product gross margin, lower R&D spending related to our clinical studies and the cost savings initiatives we implemented in 2012.

Net income for the fourth quarter of 2012 was up 55% to $4.5 million or $0.31 per diluted share from $2.9 million or $0.21 per diluted share in the fourth quarter of 2011. For the full year, net income rose to $11.8 million or $0.82 per diluted share from $8.5 million or $0.62 per diluted share in 2011. Net income for both periods includes the one-time pre-tax charge of $2.5 million; $1.3 million of that charge is related to the write-down of Hyalograft C Autograft which was a tissue engineering in-process R&D project included in our acquired intangible assets. The other $1.2 million is related to the closure of the company’s tissue engineering facility in Italy including work force termination costs.

Turning to slide number eight, we are continuing to generate strong cash flow from operations. We generated more than $4.9 million of cash from operations during the fourth quarter and $10.4 million for the year, an improvement from the $10.2 million of cash we generated in 2011, which included a $2.5 million milestone payment in December 2011 from the Monovisc contract with DePuy Mitek.

Turning to our balance sheet highlights on slide number nine, Anika closed 2012 with $44.1 million in cash and equivalents compared with $35.8 million on December 31, 2011. We are continuing to closely monitor working capital and reducing our long-term debt. In closing, 2012 was a very successful year for Anika both operationally and financially and 2013 looks to be another great year.

And with that, I will turn the call back over to Chuck.

Dr. Charles Sherwood - President and Chief Executive Officer

Thank you, Kevin. Continuing on some comments on the business outlook as summarized on slide number 10, we are beginning 2013 with positive momentum in our business. For 2013, we expect solid growth in our top and bottom lines. Our product and profit margins will reflect a net impact of the margin improvements we have previously discussed. We also expect a year-over-year significant increase in R&D expenses as a result of our clinical development plans.

In addition, please keep in mind that in terms of upcoming year-over-year comparisons that there were some uneven patterns in our quarterly results last year 2012 due to the shutdown of our Woburn facility in Q2 and scale up activities of our Bedford plan in Q3. Wrapping up, 2012 was a successful year for Anika and we are well-positioned for further success in 2013. Demand for Orthovisc is growing, we have streamlined our operations and improved our manufacturing capabilities and we are excited about our product pipeline.

Anika is evolving from an HA biomaterials company into a products company focused on promising therapeutic solutions and a company dedicated capturing more of the value we have created by enhancing our capabilities in commercialization. We look forward to reporting our progress as the rest of 2013 unfolds.

And with that, I’ll turn the call back over to you Jeff to take any questions there maybe.

Question-and-Answer Session

Operator

Alright, thank you very much. (Operator Instructions) Our first question comes from the line of Mark Landy with Summer Street Research. Please proceed.

Mark Landy - Summer Street Research

Good morning, folks and congratulations on the good quarter.

Dr. Charles Sherwood

Thank you, Mark.

Mark Landy - Summer Street Research

Kevin, just I suppose one quick question and then I think I just want to focus more broadly on strategy and vision can you give us some commentary on ophthalmics and how you see that lying out through 2013?

Kevin Quinlan

I’ll make an initial comment, and then Chuck may want to add to that, but the ophthalmic area is not a focus area of the company. As we have noted that in some of our previous conversations, we have been in transition on the Bausch & Lomb contract. We have actually generated more revenue over the last year or two than we had anticipated when originally they made their decision to add or go to another supplier. So, we do see some reduction in the expectations from Bausch & Lomb and therefore the ophthalmics area, but again it’s not a focus area.

Mark Landy - Summer Street Research

And as we model 2013, 2012 was pretty lumpy with all the moving parts of the ophthalmic Bausch & Lomb the closing our facility etcetera, how do we think about the quarterly progression of revenues in 2013? At this point in time, there is almost just not think the opportunities are compared?

Kevin Quinlan

Yeah, I would say that we are going to see a reduction in the ophthalmic revenue in 2013 versus ‘12 in how much you should haircut it is very difficult to estimate.

Mark Landy - Summer Street Research

And regarding the point where we consider is just a kind of steady quarterly run-rate at our bare minimum quality without surprises or is it still going to be very lumpy?

Dr. Charles Sherwood

This is Chuck. It’s difficult to tell. We thought that we would – we have a base level that we are planning on, which is in the single-digit millions. And we thought that we would get there this year 2012 – well in 2012, but apparently there was some issues or difficulties with approvals or supply from the other supplier or whatever. And so our volume was much higher this year than we had anticipated. Nevertheless, we believe that the supply to the Bausch & Lomb from the other partner that they have for this product have to reach a steady state at some point and then will be dropping down. But I want to reinforce, I know that you need some numbers to model. And so I think I have given you a little help in trying to figure that out, but I think we should be clear. And I want to reiterate what Kevin said that the ophthalmic business has its hits. Right now today, it is pretty much a cash cow business for us. It keeps the lights on and the factory pays the overhead and some other things, but it’s not an area of real focus or growth for this company.

Mark Landy - Summer Street Research

Yeah, I think Chuck we all realized that, but generally what happened the last year right, it’s just enough. I mean, it maybe trying to forecast. I think even on your end, a little bit of a lumpy endeavor, but I accept what you are saying. This is probably a good time you have given us an overview. You not had an opportunity to assess your pipeline to make some changes in that. And then Chuck if I kind of think of Anika in the 18 to 24 months and then though I think of it say five years out, what’s your vision, how should we be thinking of Anika, what’s the progression how do you – how should that be – how should we think about that or how are you guys thinking about that internally?

Dr. Charles Sherwood

We are right. Mark, I am going to ask you to be able to answer that question on the more appropriately on the next earnings call. But I can tell you where we are, we are in the middle of looking at some strategic alternatives that we have and formulating some very, very rough plans around some of those things and we haven’t really had a chance to formulate those plans and now we had a chance to discuss that with the Board of Directors.

So, specifically I am not going give you much more than that but philosophically I think that we see tremendous potential for the technology that we have purchased from the – in the S.r.l business and admittedly we’ve been little slow in developing some of that. We also see ourselves trying to move more into being a medical solutions company not just an HA biomaterials company. So, we looking forward we don’t see ourselves as just selling HA solutions or scalpels where the real value is provided to some other product in the surgical procedure and we’re trying to find way to expand beyond just being an HA company.

Mark Landy - Summer Street Research

Okay.

Dr. Charles Sherwood

So, stay tuned to that but philosophically that. And we are also trying to also understand how we might be able to realize more of the value we create. We didn’t believe that it was the best move to take a direct commercialization approach in the viscosupplementation area. But that does not mean that we are not still thinking about direct commercialization for some of our product categories if we can meet certain criteria that we have set forth for ourselves.

Mark Landy - Summer Street Research

Okay, I guess I have my first question for next quarters call. Chuck, I suppose this might be part of that but maybe a thought about the cash balance. Now you completed your facility, your debt is really I don’t think a burden you’re generating good cash, are you going put that cash to work just still want to continue to build that cash position for something in the future. Are you willing now maybe to be more aggressive with your FDA processes some of the products that you have mainly bigger type of clinical trials, how are you going tackle cash really that you guys are generating and starting to generate a lot more?

Sylvia Cheung

This is Sylvia Cheung, I will take this question. I think we are in a very good position with the good cash balance on our hand as you stated. Certainly in the shorter term, we are utilizing that capital to fund our clinical trials investments and Chuck had described a few of those earlier on this call. In the longer term we certainly have other more strategic site activities in mind that will require cash which we currently have on hand and we continued to generate. And in addition to those strategic activities, there is also other opportunities that we are evaluating in terms of return to the investors and so forth. So, we are focusing in this area, but at this point and there is nothing to definitive that we can share with you.

Mark Landy - Summer Street Research

Okay, got it guys. Thanks very much.

Operator

Our next question comes from the line of Greg Garner with Singular Research. Please proceed.

Greg Garner - Singular Research

Thank you and very nice quarter gentlemen. Couple of questions first of all I was pulled off line a little bit the very beginning Chuck so I didn’t hear all of your commentary about the market share for Orthovisc in the U.S. I guess that was. And so if you could just repeat some of the data and also I am trying get a sense for, why was it so strong in the fourth quarter just I mean it seems like is it just all the marketing programs coming to bear fruit here. There is some season up-tick it seems to be in the fourth quarter or perhaps or some competitive issues that you can talk about too there?

Dr. Charles Sherwood

There is whole bunch of points, you asked. So, let me comment about seasonality of our business first. If you go back this year 2012 was a little bit unusual, but if you go back and look at ‘11, ‘10 what you will see is fourth quarter is always very strong, first quarter is always the weakest and then second is usually fairly strong as well. So, two in Florida and then one is usually very weak and then three is stronger. So, that’s one. Two, in the United States in the viscosupplementation market, one thing you have to keep in mind and that is that I believe this is true that Orthovisc has been the product that has a solid upward growth trajectory, the single product.

The rest of the products in the space have going up, going down, a little bit, but Orthovisc had steadily increased and take it market share and we certainly give some credit to our sales for an excellent product and a lot of credit to DePuy Mitek for an excellent job in commercializing the product. So moving into the number one position in the multi-injection market and number two overall is a significant achievement. It reflects the kind in some of the other market shares for some of the other products and we fully expect that trend to continue, but may be not quite as robustly as in the past and we are certainly looking forward to the possibility of throwing Monovisc our single injection product into the mix. So, that’s been a real success story for us. So is that answered your question?

Greg Garner - Singular Research

Yeah, yes, it does, thank you very much. And it goes on some of the data points that I missed out, thanks, I appreciate that. Regarding the just operating expenses, the SG&A expense for this new level here as a result of the charge-off I suppose, is this a new level that’s sustainable given this revenue level. Is that how we should look at this operating expense?

Kevin Quinlan

Well, I think if you look at the – this is Kevin, if you look at the SG&A expenses as a percentage of revenue, we should track similar fashion in 2013 as a percentage of revenue.

Greg Garner - Singular Research

For the whole year or you are thinking more of the fourth quarter?

Kevin Quinlan

The whole year.

Greg Garner - Singular Research

Yeah, the whole year, okay and so the single trial, any sense for how much that will cost R&D to go up, I mean, R&D is at $5.5 million, $5.4 million for the year, it seems like it might be a couple of million additional expenses in R&D there is at right way to looking at that.

Sylvia Cheung

Yeah, that will be more than couple of million, the overall trial we spent over a couple of years with the total price tag above $5 million, $6 million or so. The good portion of that will hit this year as we ramp-up the enrollment this year and there is large portion upfront initiation cost.

Greg Garner - Singular Research

Okay. And so more than half of that $5 million to $6 overtime would be in 2013 as what I’m hearing is that?

Sylvia Cheung

Yes.

Greg Garner - Singular Research

Correct, okay.

Dr. Charles Sherwood

Once just so – I can’t put a number on this exactly, but we’re going to launching this some other clinical efforts in 2013 as well beyond, we need to before going to shift our emphasis and cartilage generation to our Hyalofast product we need some clinical support there as well and it’s likely that should we be – should the FDA decide that the amendment from Monovisc is necessary, but not sufficient and we need to add few some more patients into the mix then we’ll need to more clinical effort and spending there. So…

Greg Garner - Singular Research

Okay.

Dr. Charles Sherwood

We definitely intend to ramp-up our clinical spend in 2013.

Greg Garner - Singular Research

Okay. And what’s the total timeframe for the single trial is that two years, three years.

Sylvia Cheung

It’s a six month enrollment, six months follow-up and the overall regulatory clinical timeframe before approval it’s about two years in total.

Greg Garner - Singular Research

So two years from about now.

Sylvia Cheung

Correct.

Greg Garner - Singular Research

Okay, okay. In the EU trial for single – you was missing that this could most likely be used for U.S. approval. I don’t just remember hearing that from other companies before I guess the data is going to be I guess clean enough and.

Dr. Charles Sherwood

We are one of the few companies that I didn’t mean to cut you off there, Greg, but…

Greg Garner - Singular Research

Go ahead, that’s fine.

Dr. Charles Sherwood

If you look at what Genzyme did to get their products approve, they go offshore all the time.

Greg Garner - Singular Research

Okay.

Dr. Charles Sherwood

We are one of the few companies that ran U.S. trials. That the point is that is one is as run according to GCP, good clinical practices and the data have integrity and the investigators are run the trials properly, it really doesn’t matter where the trial was run.

Greg Garner - Singular Research

Okay. What’s the timeframe for European approval, would that be – was that the one was another (hike) for early 2014?

Dr. Charles Sherwood

That’s what Sylvia was talking about and well, it’s considered the device there is a drop component to it as well so, it’s definitely needs to go through the European Medicines Association approval so, it’s going to take a little longer.

Greg Garner - Singular Research

Okay. And what might the margin impact be for moving the gel-based to Bedford.

Dr. Charles Sherwood

We’re going to see a significant impact in our – the ACP products themselves are not a huge portion of our total revenue, but by themselves, we’ll see at least the 5% or more increase in the gross margin percentage on those project.

Greg Garner - Singular Research

Okay. And just one question on the Monovisc, I’m glad to hear you have an ongoing discussion with the FDA about business, seems if they really are more supportive than what it appear to be a few months ago, but I guess your insight there is seems to be indicating that there is – there may be some more data – may be the enough – there is enough data right now. So, this could possibly be approved this year or are you expecting that they would comeback for more data that might require little bit more trailing.

Dr. Charles Sherwood

It’s, well, let me step back even. In our conversations which were very productive and we went up to the office of the head of CDRA. So, we went pretty high up in the FDA with our appeal. And then CSO in that office is very reasonable person, very professional, we are very impressive, pretty straight talker so, that the agreement we reach was we had some – you suggested we look at our data in the slightly different way. We had some other data that we have not submitted so, we put that into the amendment. They agree to review that amendment since they were very familiar with the product and al the data we had submitted previously in a expedited fashion, what that means I’m not sure. We suggested that we – time was very critical so that we would like to pursue a parallel path where we talked about any additional data that may be required and we’d like to do that at the same time in case, the FDA can back and said well that the additional data that you’ve already submitted is not sufficient. Typically they don’t like to do that, they like to do things in the serial fashion so, we’ll see where that goes. It’s very I thought the package we put together was pretty compelling, but again it’s very difficult to predict and I’m not the judge. So, we’ll see how it goes, but we should have some feedback in the couple of three months here. So, certainly when we get that, we will as is our tradition on this product report what’s happened.

Greg Garner - Singular Research

Okay.

Dr. Charles Sherwood

In the meantime, I think it’s prudent to make some plans at least to design some studies and put them on the table such that if we have to go that route who are ready to implement immediately.

Greg Garner - Singular Research

Okay. They haven’t give me indications very specifically one that you are just more of a contingency plan on your side?

Dr. Charles Sherwood

But I just think it after so long it makes sense to pursue all options that might potentially come to the fore all at the same time. And it’s not a bad thing to spend a little money planning and then say well, I don’t need this.

Greg Garner - Singular Research

Yeah, it sounds like a very good plan. Alright, thank you much.

Operator

Our next question comes from the line of Bill Gibson with Legend Merchant. Please proceed.

Bill Gibson - Legend Merchant

Hi. I would like to follow-up a little bit on the Monovisc looking now to past approval. How should we view this you mentioned adding to the mix, is this going to be all out of the board, does that cannibalize Orthovisc sales or how do you that effect on the market?

Dr. Charles Sherwood

The market is actually somewhat dynamic. So, the market in the states is growing I don’t know 8% to 10% and I think. We believe that if Monovisc will be approved or to be approved, we believe that the current market leader in the single injection space would probably be the target for Monovisc initially. In the long-term there may be some cannibalization of the Orthovisc product, but not a real significant cannibalization.

Bill Gibson - Legend Merchant

Good, thank you.

Dr. Charles Sherwood

You’re welcome.

Operator

Our next question comes from the line of Joe Munda with Sidoti. Please proceed.

Joe Munda - Sidoti

Good morning guys, thanks for taking my questions here.

Dr. Charles Sherwood

Hi, Joe.

Joe Munda - Sidoti

Chuck I am just a little bit more curious around the whole situation with the FDA. Can you give us some color on the interaction before – well after I guess the denial on their part and what led you commence the table interaction? We get the sense that maybe the person you were dealing with before hand, you guys were not seeing eye-to-eye and what led you to this new person?

Dr. Charles Sherwood

I have to be little bit careful about talking about this because I certainly don’t want to say anything that will put the FDA in a bad light or less in our chances of having a successful interaction with them. But what we ended up doing was we ended up on, we didn’t believe that the first decision from the review group was appropriate. So, we made an appeal and we went up to the next level. At that level we didn’t feel up, didn’t agree with the decision either. So, we have raised it up to the next level and that level was the office of CDRH and that’s where we started the deal with the CSO and he was comprehensive and took in all data. At the same time, we had an opportunity to have a meeting, so we brought in some clinicians and some consultants and we were able to make a fairly comprehensive argument for the product. And at that point I started to look at things in a little bit different way, which opened up the door to discuss some additional analyses and a slightly different approach maybe for submitting some data and making some slightly different arguments. And then we would and proceeded along that pathway. So, the real benefit was having the meeting and bringing in and having a real open discussion about the values of the product, which went to the clinical data but also went beyond the clinical data that we were submitting.

Joe Munda - Sidoti

Okay. Thank you for that color. Couple more Hyalograft what – I know you guys had, you mentioned in the slide that you are moving see the next I guess next level on that product. What is going to happen to it I mean is that IT that you can look license out, what is going to happen there?

Dr. Charles Sherwood

I am going start answering that and then Sylvia is going to jump in because she ran that project for a while. She was the General Manager of Italian operation for a while. So, the bottom line is Hyalograft C is – was a very successful product in the field, in that it worked very well. That was very expensive. And sales were difficult because of the cost containment initiatives in a lot of countries so there was a very – it was a very niche product. Hyalograft C was self seeded. In other words it was a two step process in which case you took cells from the patient seeded them on the matrix and gave that construct back to position to implant a month or five weeks later. We ran into some regulatory challenges in Europe, which still we will comment on. And we just decided that we should shift our emphasis to this Hyalofast product, which was a scalpel product used with bone marrow aspirate or stem cells or some other things. And that product could be used in a single step surgical procedure. So, for lack of a better word, it’s a more modern product. So, we terminated the Hyalograft C effort and shutdown the cell production laboratory in Italy. So, Sylvia, you want to add some other things in there?

Sylvia Cheung

And I think that summarizing that I think the key point here with Hyalograft C Autograft and the tissue engineering facility is that they were the main causes for loss position for our S.r.l organization and the decision to terminate the project as a result of the regulatory environment, that just described, and as a result of the cost containment healthcare environment in Italy and Europe bundled with the commercial prospects. All those factors led to that the decision, which basically sets the S.r.l organization up for improved profitability going forward. To answer your question is to what we are currently doing with that cell seeding technology we are not actively seeking to license it out or sell it, but that certainly is something that potentially can be done. In the long – in the near term what we are focusing on as Chuck said is the alternative solution, a more cost effective solution which is Hyalofast. So, I hope that answered your question.

Dr. Charles Sherwood

One more comment there, a lot of this some the cell seeded technology works really well. It’s very effective. It’s very expensive. And what’s happening at least from what we see is that a lot of this is now being done in hospital labs and not by companies. And so that’s where we feel a lot of it will be going in the future and they don’t have the same regulatory hurdles that a private company would have. And it’s just they can control their cost a little bit better than a private company could. So, that’s probably where the technology that cell seeded technology is going to wind up. As a consequence, there is not a real capability to really get any revenue from licensing or anything else.

Joe Munda - Sidoti

Okay. And then on Hyalospine, interesting what is your timeframe on, I mean, what’s uncertain, but on CE Mark and can you give us a little color on the sizing market?

Sylvia Cheung

As Chuck mentioned earlier in the scripted portion, we are currently evaluating the commercial aspect of this particular program. So, at this point, we don’t have any concrete numbers that we can share with you.

Joe Munda - Sidoti

You mean ballpark numbers or?

Dr. Charles Sherwood

This product we have to look a little different, because this product is has some characteristics that are different from all of the other products that are currently out in the marketplace for these applications. And we think they are positive. This is in area where you are going to some degree it will – the market will develop further by the way that you positioned your product and you are going to have to build the market, but there is a market there.

Joe Munda - Sidoti

Okay. And then my final question regarding Orthovisc and Monovisc I am just curious what’s the reimbursement environment for a doctor on the single injection versus multi-injection?

Dr. Charles Sherwood

In terms of the search – in terms of the injection portion?

Joe Munda - Sidoti

Yeah, because the number just I spoke to a number of doctors and they don’t get paid on the Orthovisc itself, they get paid on the injections. I am wondering is the reimbursement higher for the single injection or when that comes about because a number of guys have spoke to focus so we really don’t get reimbursement on the drug – not the drug but the Orthovisc itself, but more on the injection, the actual injecting?

Dr. Charles Sherwood

Yeah, they get – that’s true and so if you do three injections you get three times the money. But I don’t think that’s the real driver for a lot of these guys, some it is, okay, some it is that’s why the multi-injection might still be a viable category. The injection reimbursement fee is a much, so for a small time office maybe it’s significant for a big office its not. Some offices have physician assistants doing this because they – the surgeons want to do surgery. The doctor I go to and I have been injected many times unfortunately, but nevertheless my doctor likes the multi-injection treatment because he say I inject my patients I want to see him back see how well they are doing.

Joe Munda - Sidoti

Yeah I’m sorry so that’s also the response I’m getting from these guys and some times they want – the patient wants them to actually inject them more than three times. So, I am just trying to figure out is the same issue going to occur with Monovisc when they get the single injection and they are going to want the second injection what’s going to happen there when it comes to Monovisc and the efficacy of the actual or longevity of the drug itself?

Dr. Charles Sherwood

Well, I think what’s going to happen is there will always be a dual market. So, a lot of patients that show within the mix here, I don’t want to go back three times if I can go once. So, I met out with my doctor wants to see me second time because why do I want to spend the time going into see him again, I’m busy. So, patients I think are going to offer for a single visit if they can be convinced that a single visit will produce the same value with three visits why would you want to go back three times it’s get only I have to go back ones.

Kevin Quinlan

And Chuck has personal knowledge that the product works and so he has confidence that the single injection will work for.

Dr. Charles Sherwood

As far as getting two injections of Monovisc back to back I’m thinking that’s a bit over to have.

Joe Munda - Sidoti

No, Chuck I mean I agree with you but you’re saying that the patient is going to be educated on Monovisc they are going to request a single injection versus three. Is there something you guys are going to do as far as marketing the way the drug companies do it marketing the single injection and the benefits to the patient?

Dr. Charles Sherwood

Yeah I can tell you that I believe I don’t want to cope myself. But I believe I said Mitek is ready and eager to go with the launch of Monovisc. They’ve got that the market segmentation strategy already in place. I mean there is going to be some patients who really, really eat up the single and there is others who will stay with what they know works and doctors will be following along the same line. So, they are pretty – they’ve done a lot of thinking about how to segment the market, how to position the two products in concert with each other so that they don’t – so they would maximize their revenue that they are able to generate. And as far as we are concerned, maybe we make a tiny bit better margin on the Monovisc, but we don’t care. We are interested in treatment so we want to increase the number of treatments whether we get it from Orthovisc or Monovisc doesn’t really matter that much.

Joe Munda - Sidoti

Okay. Thanks guys. Thanks for the clarity.

Operator

Our next question comes from the line of Jim Gentrup with Discovery Investment Research. Please proceed.

Jim Gentrup - Discovery Investment Research

Good morning.

Dr. Charles Sherwood

Good morning, Jim.

Sylvia Cheung

Good morning.

Jim Gentrup - Discovery Investment Research

Perhaps you guys have talked about this already I apologize. But I’m assuming the 66% gross margin that you have accomplished in Q4 is kind of not sustainable. Can you guys give us a little more color on what a more normalized rate would be?

Dr. Charles Sherwood

Sure I think the – you’re correct in that statement the very high volume for the fourth quarter was one of the main drivers that in the product mix was one of the main drivers in achieving the 66%. But going forward we do expect our margins to be improving, we’ve been saying this for a number of years now that we have the consolidation of our facility – manufacturing facilities behind us and now that we’ve got all the things were done in terms of making the ACP products. We’ll see some improvements there and we expect to get into the low 60s and not to distant future including 2013.

Jim Gentrup - Discovery Investment Research

And just as far as your – we are not too far away – too far removed from the problem in Q3 so, I’m assuming all of that’s been overcome and no more surprises hopefully.

Dr. Charles Sherwood

Yeah, well, certainly we’d agree with that, we are operating at a very efficient and very good level that I think overall, we are pleased with you do bring up the good point, there were some benefit in the fourth quarter to the issue in the third quarter that helped the revenue in the fourth quarter.

Kevin Quinlan

I would make another point, Jim, which is wouldn’t be obviously anybody, but actually did happen, is that we had some ramp-up plans for the facility for 2012. And when we hit this nag in Q3, we had to really go back and take a look at lot of our processes, we did a lot of thinking, we did a lot of experimentation, and we ended up the year with processes that were more productive than we actually planned when we started the year. So, in a kind of strange way, the hiccup in Q3 costs us to reevaluate and we ended up in a better place when we closed the year.

Jim Gentrup - Discovery Investment Research

So, the low 60s gross margin type of target, I imagine that obviously we’ll be somewhat sensitive to volumes, but could you potentially hit that type of 60% or even in Q1 this year.

Kevin Quinlan

Well, as you know, Jim, historically Q1 and Chuck mentioned is also earlier, Q1 is our generally has been our weakest quarter so, we usually startup the year at what lower level and then workup during the year particularly with Q2 and Q4 being the stronger one. So, yeah, that the volume we’ll play a very big part of determining the overall margin. So, that comment about low 60s was for the entire year.

Jim Gentrup - Discovery Investment Research

Okay, fair enough. Then you haven’t discuss too much on this call anyway, some of your other contributions from your minor, I call it minor product lines, in dermal obviously is down substantially over the past from – even from last year and I know that’s not a huge focus of the company, but I thought surgical might grow a little bit more than it did year-over-year. So, I just wanted and of course in area that wasn’t the Hyvisc product obviously didn’t contribute at all, I guess in Q4. So, I thought may be you guys should talk a little bit about those three areas I’m just tell us little bit about the growth expectations in each one I appreciated.

Sylvia Cheung

This is Sylvia. I’ll start answering the answer and Kevin and Chuck will fill later on. With regard to highlight the veterinary product, we as you can see in our press release did not ship any units in the fourth quarter. For 2013, we expect the level to be consistent with historic levels. The parent that we saw in Q4 is truly driven by the timing of our distributors and ordering practice. Going back to the dermal family which has our steady products and also advanced wound care product from our S.r.l organization. See I guess the lack of growth that you mentioned earlier is primarily driven by the underperformance in our U.S. market with our existing distributor and we are actively working to reactivate the sales, I mean, that region. We are planning on some line extension activities in that family and that would be part of the R&D increase as I mentioned earlier for this upcoming year. In the surgical area, we do believe that we will see good product in 2013 particularly in the international markets in Asia as we – as Chuck mentioned earlier we have been working with our distributors on line extension products which will come on line towards the end of the year. And it used to be healthy demands in those regions Asia in particular. So, those are just some highlights and I don’t know if Kevin, Chuck if you guys want to add more color?

Kevin Quinlan

Yeah I would just add a comment on the surgical for you Jim. We saw these two primary products in that area the Hyalobarrier product and that grew very well. We had strong sales there in 2012 particularly with the Far East and we were happy with the growth in that area. And the other area which is the ear, nose and throat products, the revenue was down but this appears to be more of an inventory management situation with the distributor Medtronic because when we look at their underlying sales, their sales were up a bit in 2012 versus ’11. So, some of the decrease in that franchise was just because of inventory management on their part.

Jim Gentrup - Discovery Investment Research

Alright, the Medtronic’s products will be – there was a product that was taken off for a while is that back on the market now?

Dr. Charles Sherwood

Yeah, it came on in December. We had our first shipment, this is a small shipment but it did start backup and they’re launching the product around this time and we are hopeful that we will see something out of it.

Jim Gentrup - Discovery Investment Research

Okay. And just a follow up on that product on the Hyvisc it did actually show really good growth through the first three quarters. So, the $2.8 million is that like a new normal or we’re expecting the new sales historical levels we’re going to drop back down in the 2.5 type of areas, is that a fair question?

Sylvia Cheung

Yep, it is. And you can use that as a normalized rate for 2013.

Jim Gentrup - Discovery Investment Research

2.9?

Dr. Charles Sherwood

New normal, yes.

Jim Gentrup - Discovery Investment Research

Okay, new normal, okay. And then based on what you’ve said on the dermal it sounds like most of that revenue then would be – any incremental would be a little bit push back because it sounds like the new line extensions and it won’t be ready to be commercialized until maybe later on this year possibly at the early as in?

Kevin Quinlan

Couple of things going on there also we’ve got crushed in Italy which was a big market for this Hyalomatrix product. So, our answer to that is pushing hard and we’re looking to expand in South America and there are some approvals coming on line we hope in 2013 mid-year or so. So, we’re looking to expand outside of the markets that we participated in the past.

Jim Gentrup - Discovery Investment Research

Okay. So, Italy was probably the biggest reason why Europe, the Europe revenue was down so badly is that safe to say?

Kevin Quinlan

Yeah, for Hyalomatrix.

Sylvia Cheung

Well, Italy and U.S…

Dr. Charles Sherwood

In U.S…

Sylvia Cheung

As I am saying are under performance by our distributor in the U.S.

Jim Gentrup - Discovery Investment Research

It’s probably you will come out regarding just to the dermal area?

Dr. Charles Sherwood

Yes.

Sylvia Cheung

Correct.

Jim Gentrup - Discovery Investment Research

Okay, alright. I was just – I was kind of speaking to just Europe in general I have been noted that was just mainly in the Europe, Turkey was poor as well but…?

Dr. Charles Sherwood

Well, we – the S.r.l. business and a lot of their products were Italy centric, Europe next, rest of world third. And as you know we been talking for a long time about trying to change that and we have changed that a fair amount and we look to Asia lot more than we have two years ago. But there is still for certain products like some of the dermal products, so the big contribution to the total coming out of Italy and Italy just the economy just they crush in the products that products sales they are just gone down.

Jim Gentrup - Discovery Investment Research

Okay good and thank – okay I appreciate that. One final question I would have is that I have been focused on Cingal very much. How was the Cingal different than Monovisc and can you just talk about that a little bit and just do you see it being easier to get approval in the Monovisc has gone through so. I appreciate it.

Dr. Charles Sherwood

I guess now that we have the U.S. patent, you can go and look up the patent right. So, the – this got a drug and let’s say anti-inflammatory as a matter of fact it’s a steroid. And so it’s going to be – we believe that in certain applications it’s going to be a pretty effective profit, it knocked down the information and give you some fast acting relief to your osteoarthritis plain and still carry the long-term benefits of hyaluronic acid. So, we got approved that in the clinic, but that’s essentially what it is. And so it’s the next generation of viscosupplementation product if you want to look at it like that.

Jim Gentrup - Discovery Investment Research

Just for the knee by the way again?

Dr. Charles Sherwood

Well, we think it might have some even more powerful applications in some other joints, but we are looking at the knee right now for that product.

Jim Gentrup - Discovery Investment Research

Right, thanks guys. I appreciate it. And Kevin, all the best to you.

Kevin Quinlan

Thanks Jim. We should touch base offline.

Jim Gentrup - Discovery Investment Research

Love to.

Operator

And it looks like our final question comes from the line of Joe Munda with Sidoti. Please proceed.

Joe Munda - Sidoti

Hi guys. Just a quick follow-up on the use of cash I believe an earlier color I talked about it, and Charles, you had commented that you are looking to take the company from an HA-based company to a med solution company. So, and even I talked about strategic activities and we take that the main acquisitions in particularly spaces that you are not currently in?

Dr. Charles Sherwood

Well, Joe, first of all you got to pay extra for a second question.

Joe Munda - Sidoti

Sorry about that?

Dr. Charles Sherwood

A good comedian let’s the laughter die down before you speak the second. Certainly, having cash in the bank, earnings the rates that were required to keep our cash at AAA ratings yields almost nothing. So, it’s not doing us any good. So, we really do need to invest that to grow the business. And we believe we have some internal development ideas, but we would also believe that we would be irresponsible, if we didn’t look outside for some potential acquisition to see if we could bold something on to what we already have possibly hit with the commercialization capability or some additional and complementary products that would put us in a much better position. So, I guess, that’s a long way to answer to yes, we are doing acquisition.

Joe Munda - Sidoti

I’m sorry Charles is that the shareholder, increasing shareholder value there or using cash for like a buyback or dividend?

Dr. Charles Sherwood

Sylvia rate that. I mean, we are looking at all kinds of things. Dividend, I am not sure that’s the best way to use our cash. A buyback, fine, we are a thinly traded stock already, that’s certainly not going to make that any better, but it’s certainly a topic of discussion at the board, possibly investing in the growth of the business would be a better alternative.

Joe Munda - Sidoti

Okay, thanks guys.

Operator

Ladies and gentlemen, that will conclude the time we have for questions. I’d now like to turn the presentation back over to Dr. Sherwood for closing remarks.

Dr. Charles Sherwood - President and Chief Executive Officer

Well, thanks everyone for joining us today. I think we finished the year 2012 very strong. We certainly look forward to continuing that trend. Then I guess we’ll be talking to you in about a couple of months about our first quarter results. So, thanks again for your interest in Anika.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a wonderful day.

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