Anika Therapeutics' CEO Discusses Q1 2013 Results - Earnings Call Transcript

| About: Anika Therapeutics (ANIK)

Anika Therapeutics, Inc. (NASDAQ:ANIK)

Q1 2013 Earnings Conference Call

May 2, 2013 09:00 ET

Executives

Dr. Charles Sherwood - President and Chief Executive Officer

Sylvia Cheung - Chief Financial Officer

Analysts

Mark Landy - Summer Street Research

Greg Garner - Singular Research

Joe Munda - Sidoti & Company

Jim Gentrup - Discovery Investment Research

Lawrence Anderson - Raymond James

Operator

Good day, ladies and gentlemen and welcome to the First Quarter 2013 Anika Therapeutics Investor Conference Call. My name is Kathy and I will be your coordinator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of this conference call.

I will now turn the call over to Ms. Sylvia Cheung, Anika’s Chief Financial Officer. Please proceed Ms. Cheung.

Sylvia Cheung - Chief Financial Officer

Thank you, Kathy. Good morning everyone, and 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 call Sharon Merrill Associates at 617-542-5300. The news release is also posted in the Investor Relations section of our website at www.anikatherapeutics.com.

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

Please turn to slide number two. Before we begin, please remember that the statements made in this call which are not statements of historical facts are forward-looking statements as defined in the Securities and Exchange Act of 1934. Words such as will, deliver, 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 the 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 expressed in last evening’s press release and the company’s SEC filings.

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

Dr. Charles Sherwood - President and Chief Executive Officer

Thank you, Sylvia. Well, starting from the top, Anika is off to a good start in 2013 with a solid first quarter, driven primarily by the Orthobiologics franchise, our total revenue grew 6% from the first quarter last year and product gross margin was up substantially. Our improved gross margin more than offset increases in operating expenses and this enabled us to achieve a 60% growth in net income year-over-year.

I will now turn to the highlights at the franchise level as illustrated on slide number four. We will start with the Orthobiologics franchise. Our growth in Orthobiologics continues to be driven by the U.S. demand for our flagship product Orthovisc. First quarter revenue from U.S. sales of Orthovisc were up 12% from the same period last year. As I mentioned on our call last quarter, we closed 2012 with Orthovisc positions as the market leader in the U.S. multi-injection segment, and the number two U.S. brand in viscosupplementation overall. This growth reflects the marketing and sales investments that our partner, DePuy Mitek continues to make in an effort to broaden awareness and expand penetration of Orthovisc in both the physician and patient communities across the country. Outside of the U.S., the best way to think about our international Orthobiologics business is as a viscosupplementation franchise including both Orthovisc and Monovisc and the S.r.l. orthopedic products including Hyalofast and Hyalonect.

First quarter revenue from our international Orthobiologics business was up 9% from the same period last year. Revenue from the S.r.l. Orthobiologic products alone increased 66% from the same period last year. This growth was driven by greater revenue from existing distributors and the addition of distributors in new territories. International sales of our viscosupplementation products remained soft due to reimbursement and country-specific issues that have risen. Despite these challenges we have built strong positions in several countries such as Austria, Egypt, Turkey and Saudi Arabia. And we are modeling those successes as we expand in to other territories. Related mass on this quarter was the assignment of Orthovisc and Monovisc distribution rights for Canada to PharmaSite. PharmaSite is a major pharmaceutical company in Candida with significant market reach. And this new relationship gives us the potential for additional growth in that market.

Let’s now turn to the dermal franchise. Outside of the U.S. our primary focus is to expand the Hyalomatrix distribution network in Latin America. We have received product approval for Hyalomatrix in Mexico in the first quarter and expect to begin the product shipments to Mexico by mid-year. We continued to anticipate additional Latin America approvals for advanced wound care products later this year and next year. During the first quarter we terminated our U.S. distribution relationships with Misonix for Hyalomatrix. And we are actively seeking new partner for Hyalomatrix in the United States.

In the surgical franchise our ear, nose and throat or ENT product sales almost doubled from the first quarter of last year. This was primarily a result of our resuming shipment or Merogel Injectable to Medtronic. As I mentioned on our last call last quarter Medtronic launched the improved version of Merogel Injectable in the United States in February. The growth in ENT revenue was partially offset by a 34% decline in sales of our surgical anti-adhesion product by Hyalobarrier. This was the result of some short-term ordering parents and we expect Hyalobarrier sales to be up year-over-year in 2013.

Now please turn to slide number five titled profitability overview. Our operating income for the first quarter increased 64% from the same period last year. This was driven by our continued product revenue growth together with a significant improvement in our product gross margin. We increased product gross margin to 67% for the quarter a level slightly higher than our targeted range discussed in previous company presentations.

The year-over-year increase in product gross margin reflected three key factors. First, the elimination of the dual facility costs we incurred last year as a result of closing our Woburn, Massachusetts facility. Second, savings we have we released from manufacturing process improvements and scale efficiencies in Bedford since that new facility came fully online in mid-2012. The transfer of S.r.l. gel-based product manufacturing from Italy to Bedford also contributed to the efficiency savings. As I have mentioned previously our key S.r.l. gel-based products include Hyalobarrier, Hyaloglide and certain ENT products.

Finally, in addition the impact of these operational improvements, another factor is unfavorable gross margin as a result of product mix. This was due to the higher proportions of Orthovisc and Hyalofast as a percentage of total sales in the quarter and lower ophthalmic product sales. Overall, we are continuing to make good progress towards improving the operating leverage in our business.

Turning now to slide number six and our product pipeline, our primary near term focus continues to be Cingal, achieving expanded approvals for S.r.l. products and growing our cartilage regeneration product reach. Cingal as we have discussed before is a single injection viscosupplementation treatment for Osteoarthritis that includes a therapeutic agent. Cingal qualifies as the medical device for CE marking in Europe and as we’ve also discussed before in order to receive the CE Mark we need to provide clinical data. We are substantially completed with the planning activities for our more multi-national clinical trial and currently on track to commence patient enrollment in the second quarter of this year. Looking ahead near-term, our strategic goal is to drive revenue growth from a number of line extension products. Mid to longer term, our goal is to fully leverage the extensive S.r.l. technology base to develop new products and fuel Anika’s future revenue growth.

I will conclude with an update on Monovisc as summarized on slight number seven before I turn the call back over to Sylvia. At the time of our year end earnings call, we were in the process of scheduling a meeting with the FDA to discuss the parameters for collecting and submitting additional data in support of our new PMA amendment should additional data be required for approval. That meeting did subsequently take place telephonically in the first quarter. As a result of the productive discussion we had on the call, we submitted our ideas to the FDA in writing and we expect to receive FDA’s feedback within the next few months. Providing additional data represents a parallel path strategy. This may not be necessary if the FDA approves the product based on the amendment we submitted. As previously discussed, there is still a great deal of uncertainty and potentially more clinical evaluations to be done, but the FDA is clearly working with us in a constructive fashion now.

We remain optimistic about the business case for Monovisc. The medical need is apparent. Genzyme’s U.S. patent infringement suit against Monovisc remains on hold, pending the outcome of Genzyme’s appeal of the (indiscernible) defeat. And our partner, Mitek is well prepared for launching the product into the U.S. market.

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

Sylvia Cheung - Chief Financial Officer

Thank you, Chuck. Please now turn to slide number eight in the presentation. Slide eight covers our income statement highlights for the quarter. Anika’s total revenue for the first quarter of 2013 increased 6% from the first quarter last year to $15.2 million. This increase in total revenue was primarily driven by the growth of our Orthobiologics franchise, specifically domestic Orthovisc sales were up 12% for the quarter. This increase together with the increase of Hyvisc sales was partly offset by the expected decline in ophthalmic revenue.

Our first quarter product gross margin increased by 1,370 basis points from Q1 of last year to 67%. This improvement reflected the three factors that were outlined earlier. First, the elimination of redundant facility cost, second, the manufacturing efficiency gains in our Bedford facility, and third, favorable product mix in the quarter. Although we expect to continue to benefit from these positive factors, Q1’s product gross margin may not be indicative of future quarters due to revenue mix.

The total operating expenses, excluding cost of product revenue for the first quarter of 2013 increased to $5.4 million from $4.9 million in the first quarter last year. This increase reflected slightly higher R&D expense primarily related to Cingal clinical trial preparation activities as well as higher SG&A expense. The modest increase in R&D spending for the first quarter was due to non-recurring development expenses in the same period last year for Hyalograft C Autograft and Hyalospine. We expect the Cingal clinical trial to pickup significantly during the rest of the year once patient enrollment commences.

The increase in SG&A expense in the quarter was primarily due to personnel and external professional spending. Operating income for the first quarter of 2013 increased to $5 million from $3.1 million in Q1 of 2012. Net income for the first quarter of 2013 was up 60% to $3.1 million or $0.21 per diluted share from $1.9 million or $0.14 per diluted share in Q1 of 2012. The significant improvement in our product gross profit is the key contributor to operating and net income growth.

Turning now to slide number nine, Anika generated approximately $7 million of cash, in part due to our highly successful receivables management efforts during the first quarter. We are continuing to closely monitor our working capital with an eye towards reducing our long-term debt and reinvesting in the growth of our business.

With that I will turn the call back to Chuck.

Dr. Charles Sherwood - President and Chief Executive Officer

Thank you, Sylvia. In terms of the outlook for 2013, as outlined on slide number 10, we are off to a strong start to the year from both the product sales and profit margin perspectives. We expect the upside from these factors to be tempered somewhat by the increase we’ve planned in R&D expenses related to our clinical development plans. However, we continued to expect solid growth on both our top and bottom lines. As I said on our call last quarter, there maybe some uneven patterns in our quarterly results for 2013. These may complicate our quarterly comparisons with respect to 2012.

Looking at the second quarter specifically in 2012, keep in mind the record product volume we pushed through the Woburn plant in Q2 as we prepared to exit that facility. In summary, we are encouraged by Anika’s prospects for continued growth and profitability improvement in 2013. Demand for Orthovisc is solid. We are continuing to improve the operating leverage in our business by driving efficiencies and capitalizing on our larger scale and manufacturing and our product pipeline development initiatives remain on track.

We are nearing the conclusion of our planning process to define the long-term strategy for Anika. And this strategy is built around two key (tenants), first to transform Anika from an HA biomaterials company into a product company focused on promising new medical solutions. And second to increase the value of the company by expanding our product portfolio through internal development and or external acquisition and enhancing our capabilities in the commercialization of these products. We look forward to sharing with you the outcome of our planning activities later in the year.

And with that I will turn it back over to you Cathy, so that we can take questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from the line of Mark Landy - Summer Street Research. Please go ahead.

Mark Landy - Summer Street Research

Good morning folks, can you hear me okay.

Dr. Charles Sherwood

Yes.

Sylvia Cheung

Yes, good morning Mark.

Mark Landy - Summer Street Research

Good morning guys. Chuck, just to start out with I suppose a high level question, so I am sure you can’t give us the integrity, but when you say you have submitted proposal for additional data collection on Monovisc, is that further follow-up on the already enrolled patients and I suppose then we go into, it’s been a while since that trail was conducted or would it be a new clinical data that you would have to generate.

Dr. Charles Sherwood

Okay, I will back up a little. So, we submitted PMA amendment. And we believe that the amendment is strong and worthy of approval. I and the staff here push the FDA to say okay what do we do next if in fact we still fall a little short. And they said well let’s work through the amendment first. And I said can we please develop a parallel path strategy recognizing that those efforts may not be useful, but certainly if we do some of that it hastens the timeframe to approval, right. So, it’s really backup strategy that we are discussing now. And that backup strategy would include collecting more clinical data and certainly the proposal would be to add to the data base rather than start fresh.

Mark Landy - Summer Street Research

So, just that I understand that the main strategy is to continue to push for resolution or positive resolution based on the amended PMA that you filed, but just in case that does not work out you are taking the steps of gathering additional clinical data so that you don’t wont to get to the end of the process where they say no bring us more data, you want to be in that position if they say no bring us more data you will say well here is data?

Dr. Charles Sherwood

Correct, but normally this would proceed sequentially. We are trying it to do parallel path wise and we have already made a proposal to say okay if we needed additional data, this is what we think the additional data would look like, please comment.

Mark Landy - Summer Street Research

Okay, in terms of that data would that just be the data with Monovisc as the active ingredient or would you be collecting additional control data?

Dr. Charles Sherwood

Well, you would always have to compare to something. So, but I would rather not go into the specifics of the actual design right now. But it would – there would be a comparison to something, it doesn’t have to be a placebo however.

Mark Landy - Summer Street Research

Okay that was the question that I had I think you know I our understandings from just the discussion with regulatory experts and people that have knowledge of the workings at the FDA within this division or with this product category have constantly alluded to either concerned with sailing being a control. And I guess the comment that we gave you is that they don’t quite know what is a good control and some of this has been hiccup at the FDA that have prevented products were being approved in the past. Have they come to an understanding with you or do you feel that the FDA internally has come to an understanding of what is an appropriate control group for this segment of products or this product segment?

Dr. Charles Sherwood

I will answer your question but I am going to take you in a slightly different direction. And I am not going to elaborate further beyond what I say here. We have come to an understanding with the FDA adds to what would be an appropriate competitor. Whether the FDA has taken a position on all of this go from supplementation products and how they are going to look at them in the future I really can’t comment, but I can say that we have agreement with them about what we are doing.

Mark Landy - Summer Street Research

Okay and fair enough and I appreciate that insight. Slowly, again probably just think another high level question. If I have a look at gross margin relative to product mix going back to the first quarter of 2012 granted you were still in Woburn, Orthobiologics being 74% of the sales mix gross margin there was 53%. The fourth quarter of 2012 we had a 66% gross margin with both Orthobiologics being 92% of the sales mix and if I am not mistaken it was 78% of the product mix this quarter and a 67% rounded up gross margin. Relative to your comments with gross margin being positively impacted by our product mix, given those numbers that are thrown out how can we reconcile all the moving pieces with respect to the contribution from moving from Woburn the product mix is a something else that’s gone into the gross margin this quarter given that you are at the same gross margin that you were in last quarter, but the mix was much highly – but much more highly skewed to Orthobiologics, how can – is there anything that we can glean from the similar product mixes with difference gross margins?

Sylvia Cheung

Right. So, gross margin as you stated there are a number of factors that are impacting it from a product mix standpoint, volume standpoint and we also had that last year dual facility situation. I guess at a high level what I would say is for the full year we are confirming our previous expectations of having a gross margin in the low to mid-60 range which is at this point given our Q1 experience, we believe it will be more toward the mid 50% range for the full year.

Dr. Charles Sherwood

So, I would add a little color for you, Mark, I understand the difficulty you are having trying to model the company. And I appreciate that. And then we would certainly like to provide more clarity, so people could understand this better. I think as we move through this year, we can clear out any benefits that we got Woburn and Bedford versus Bedford, but we have also made some improvements back here in the manufacturing wing in Bedford that are part of the mix. And we also have products that some S.r.l. products that have margins that may vary from 15% up to 95%. So, product mix has a big impact on our thing, on our margin. However, we still believe that we are at a good level and we will try to maintain or even improve from there despite the product mix. But I understand the difficulty you have in trying to figure this out from a model perspective given that it’s a little more complicated now due to S.r.l. products. And also one thing I will say is that certainly Orthovisc is a higher margin product for us than the ophthalmic products. That’s given. So, as we sell more Orthovisc, our margins are going go up, if we were to increase our ophthalmic sales that would have slightly downward pressure on the margins unless we got something else to come into the mix. I don’t know if that helps you at all.

Mark Landy - Summer Street Research

I think I was faring more to the biologic mix, which kind of takes us somebody else, but let’s talk I will take that offline.

Dr. Charles Sherwood

Okay.

Mark Landy - Summer Street Research

Yeah, I have two other questions. One, again higher level, it seems that over the last two years, the fourth quarter has become relative to the rest of your much higher quarter. If you go back historically, your sales were fairly evenly distributed between the four quarters. So, I am wondering over the last year as if you can help us understand maybe watch that fourth quarter, because it seems that with the corresponding fourth quarter ramp, you actually start to see a kind of a trickle down into the first quarter? And then the last question that I have is any color on the potential commentary from the agency on the value of viscosupplementation versus placebo? And those are the last two questions. So, I will jump back in the queue after those answers. Thanks.

Dr. Charles Sherwood

Yeah, you take the fourth quarter one.

Sylvia Cheung

So, the first question about quarterly trend, excuse me. I think keep in mind in 2012 in the third quarter, we had some ramp up activities at our new manufacturing plant, and as result a significant portion of the volume was pushed into the fourth quarter. And as a result, the fourth quarter revenue was much higher than historic trends. But if you go back in history, I think it is fair to state that typically our business in the fourth quarter has higher revenue if you look at go back multiple years. And that is due to a number of factors and one of them being our distributors ordering pattern and how their sales activities and related compensation and so forth and market incentives and so forth are working together. And the Q4 ramp up is not an usual pattern based on our history and the model of our business. So, does that help understand the situation?

Mark Landy - Summer Street Research

No, if you say go back in history, I can go back 2009, fourth quarter was 10.6 your average debt around high 9 in 2010 sort of – 2011 kind of the little bit of a ramp up first quarter being down. I understand 2012 was kind of a carryover, but you had we are training it around 14 and 19 and 14, I think if you this 20 there, so it’s a big ramp up. This year, I think that if we have a look at the guidance that we might see another ramp up in the fourth quarter, just that fourth quarter ramp is becoming more pronounced. And I was just wondering if that was starting to have any impact on first quarter? So, as the fourth quarter ramp becomes more pronounced, should we continue in the future, think about maybe first quarter being relatively weaker depending on the fourth quarter results? That’s the comment, but we can deal with that offline.

Dr. Charles Sherwood

It’s probably better, because we could draw you some pictures to look at history and it depends on two things, because our revenue comes from orders which are forward-looking and royalties which are in the actual quarter or sales. And so it’s a composite picture which makes it a little more complicated. As to your second question, I am not sure what you were asking?

Mark Landy - Summer Street Research

There was discussion that I believe the Academy of Orthopedic Surgeons would come out with a statement that they do not believe, but I think it was based on some clinical trial evidence that was presented, that perhaps it wasn’t a benefit of viscosupplementation over and placebo?

Dr. Charles Sherwood

Okay. Yeah, the…

Mark Landy - Summer Street Research

Any color around that, if you have heard anything Chuck, I think directly are you asking something next month just…

Dr. Charles Sherwood

I am not up-to-date latest day-to-day, but I know that at the academy there was a meeting where some of the industry participants presented their views and data to the committee of the double AOS, I was looking into this recommendation. I think it was fairly apparent that this committee did not take all of the data available into consideration. They had some selective studies that they were looking at. And I believe that the conclusion at least from some people who attended that meeting was that potentially the subcommittee of the double AOS was not fully informed and aware of a lot of things. What will happen now as they reconsider the material presented to them by this industry group, I don’t know what the latest happenings are there. So, I am not in a – I believe it’s still in the state of flux, we will have to see.

Mark Landy - Summer Street Research

Thanks. Thanks for answering my questions.

Operator

Thank you. The next question comes from the line of Greg Garner, Singular Research. Please proceed sir.

Greg Garner - Singular Research

Thank you. First of all, very nice quarter, Chuck and Sylvia. Couple follow-up item on the gross margin just to summarize, it seems as if the variability from here just would have primarily have to do with what volumes are in ophthalmic products, which seems to be an uncertainty with way things have worked out in the past? Is that the right way of looking at that?

Sylvia Cheung

Right, that is a right way of looking at it.

Greg Garner - Singular Research

Okay. And are all S.r.l. products, have they all moved to the gel products move to Bedford now?

Sylvia Cheung

The gel products have moved, but the solid HA products have not yet.

Greg Garner - Singular Research

Okay. And what would be the timeframe be for that?

Sylvia Cheung

We are currently working on the plans right now and evaluating the option, I would say in the next year or two we should be complete with that project.

Greg Garner - Singular Research

Would that have any impact on gross margin then?

Sylvia Cheung

Alright.

Dr. Charles Sherwood

We are hoping.

Sylvia Cheung

Alright, the patient is to improve the gross margins.

Greg Garner - Singular Research

Yeah. Well, it seems like if it’s not that large of contributor of revenues, it may not have that much of an effect, but perhaps it will be changing over the next year or two also?

Dr. Charles Sherwood

Well, we are hoping that there is two technologies we purchased from that when we purchased the company over there. One was the gel technology and the other was the solid technology, and we truly believe that the solid based technology is unique, it’s got very strong IP and it’s probably the one that we’re hoping to exploit more fully in the future. So being able to make any products – this technology and make them cost effectively will increase in importance as we go forward.

Greg Garner - Singular Research

Okay. So, this is sort of beyond the pipeline items, then that was mentioned…

Dr. Charles Sherwood

Well, it’s part of the pipeline.

Sylvia Cheung

Part of the pipeline but has a lot more future potential to it.

Greg Garner - Singular Research

Okay. Would this have to do with the cartilage regeneration products?

Dr. Charles Sherwood

That’s certainly one area.

Greg Garner - Singular Research

Okay.

Dr. Charles Sherwood

And the major area right now, yeah.

Greg Garner - Singular Research

Okay.

Dr. Charles Sherwood

But also wound care.

Greg Garner - Singular Research

Okay. And on the Cingal, so if enrollments going to start in the second quarter is there any sense for the number of enrollees in the timeframe for getting to full enrollment and endpoint time for understanding the efficacy?

Dr. Charles Sherwood

Didn’t we talk about this before?

Greg Garner - Singular Research

I think we just mentioned at the overall – couple of years

Dr. Charles Sherwood

I’ll answer your question. It’s the trails in the multiple 100s I’m not sure exact number, but 250 to 350 somewhere in the air?

Greg Garner - Singular Research

Okay.

Dr. Charles Sherwood

We’re hoping to complete enrollment by the first quarter. We’re probably the primary follow up will probably be three months. We’ll collect out the six months data and submit that and we may go longer. It depends on the trial, but most like it will be a standard viscosupplementation trial of six months. We’ve got multiple countries and multiple investigators outside of the United States but worldwide so that we can accomplish our pretty aggressive patient enrollment goal.

Greg Garner - Singular Research

Okay, alright thanks. And just a clarity item on the S.r.l. expansion in Europe I had a pull away just for a minute there when you were talking about that. Is my understanding the large increase that 66% increase that’s all our product is primarily do a distribution expansion in Europe and I heard Saudi Arabia and repeating the….

Dr. Charles Sherwood

With regards to the 66% it’s related to the orthopedics S.r.l. products and keep in mind that represent a small components of the overall total revenue less than 5% the primary driver for the growth of S.r.l. orthopedics products is related to existing distributors generating more revenue and some territorial expansion primarily in Europe and some Middle Eastern countries.

Greg Garner - Singular Research

Okay good to hear that’s improving as seem to have been an issue in the past year, yeah.

Dr. Charles Sherwood

We’re pushing hard on this and don’t forget last year we there weren’t outstanding but we had sales from our Hyalograft C product is well in the mix which we terminated at the end of the year. So we had to make up we took the product of the market we had to make up those sales in addition so it’s a small part but it’s a pretty good outcome for this quarter.

Greg Garner - Singular Research

And a clarity on the Hyalofast C that’s not prior to focus but you’re focused on the Hyalofast I’m just trying to understand how that fixing with the cartilage regeneration products or because Hyalofast is there today. But you’re talking about the cartilage regeneration products these are other items is that correct?

Dr. Charles Sherwood

Well, I guess you can think about at this way the Hyalograft C was a product that had on our cartilage cells incorporated into it and it was made in the factory that we had this cell factory in Abano Terme which we shut down and we took that product up to the market. We replaced it with the Hyalofast product which is essentially bioactive, biocompatible matrix, but doesn’t contain cells. So, it’s used in a different way for the same application it’s the single step procedure rather than different from Hyalograft C which is the two step procedure. So, it’s a – I hesitate to say more modern, but it’s more compatible with what the way surgery is going to be done in the future. So, we are putting our cartilage regeneration dollars into that product.

Greg Garner - Singular Research

Okay.

Dr. Charles Sherwood

And that’s the product we are selling and that’s the product that we are growing.

Greg Garner - Singular Research

That’s approved in Europe, is there – can you remind me what the timeframe might be for U.S. approval on that or is that as go to trial or?

Dr. Charles Sherwood

Yeah, we certainly after go through a placebo controlled clinical trial which and we’ll take the follow-up is longer.

Greg Garner - Singular Research

Yeah.

Dr. Charles Sherwood

It’s multiyear follow-up. So, we are in the process of looking at how we can collect some more clinical data and what our plans are going to be in the United States right now.

Greg Garner - Singular Research

Okay, alright, thank you, very nice quarter, thanks.

Dr. Charles Sherwood

Thanks.

Sylvia Cheung

Thank you.

Operator

Thank you. The next question comes from the line of Joe Munda, Sidoti & Company.

Joe Munda - Sidoti & Company

Good morning, Chuck and Sylvia. Thanks for taking the question.

Dr. Charles Sherwood

Good morning.

Sylvia Cheung

Good morning, Joe.

Joe Munda - Sidoti & Company

Real quick Chuck, I think you spoke a little bit about Canada in terms of Orthovisc, am I correct? I thought I caught you saying that?

Dr. Charles Sherwood

Yeah.

Joe Munda - Sidoti & Company

I am just wondering what the potential market size is there for you for that product and what the overall I guess situation is there when it comes to ortho, can you pronounce it Orthovisc supplement, the overall market there?

Dr. Charles Sherwood

Yeah, typically Canadian market that tends to the United States generally. We have Orthovisc and Monovisc up there and we are looking to increase our market penetration. And I think that they are – what happened is the business essentially Helix pharmaceutical sold the Rivex component of the business to Pharma Sciences. And the Rivex organization went over to Pharma Sciences, but in addition there is considerably more resources within Pharma Science. So, we are not dissatisfied with the work that was done by Rivex at all, but we think there is just going to be more money and effort thrown at this product category, which should translate into growth within the market in Canada.

Sylvia Cheung

Okay. And they potentially are interested in picking up additional products, so.

Dr. Charles Sherwood

Additional Anika products, yeah.

Sylvia Cheung

In addition to the…

Dr. Charles Sherwood

Outside of viscosupplementation.

Joe Munda - Sidoti & Company

Okay. And then in terms of Mexico and South America, you got the approval in Mexico, I mean you talked about new markets there and you also terminated distribution agreement with Misonix. I’m just curious as to what went on with that distribution agreement and what you market that you are looking at South America.

Sylvia Cheung

So, in South America actually in addition to Mexico which we’ve got approval this past quarter we already had approvals in Argentina and Chile and we are looking to receive additional approvals as Chuck said earlier, later this year and also next year for six other countries including Brazil, Venezuela and then others. So, for our dermal product franchise, most of our growth in that product category would become – coming from South America for this year.

Joe Munda - Sidoti & Company

Okay and then on the distribution agreement with Misonix?

Dr. Charles Sherwood

Well, it just was a situation where the product didn’t seem to fit into the mainstream of their business, neither of us was happy with the sales performance and so we just terminate the agreement.

Joe Munda - Sidoti & Company

Are you looking for another distributor, are you looking to go…

Dr. Charles Sherwood

Absolutely, absolutely.

Joe Munda - Sidoti & Company

Yeah, I know we have a very nice distribution network with some of those BRIC or emerging market countries, so I was just wondering. And then as far as the ophthalmics business I know you commented a little bit, it seems I guess I thought that ophthalmic would have been down a little bit with the Bausch & Lomb situation, can you give us I guess a little bit more color on what’s going on there?

Dr. Charles Sherwood

If I could, I would. There are two suppliers of these products, our products, the ones we invented were one of the suppliers. And there is a company called Landec that purchased Lifecore Biomedical and there is a second (indiscernible). Baush & lomb has contracts with each of us. We got some significant volume bump ups in 2012 and also in 2011 because there were some supply issues with Lifecore Biomedical and Landec, and that’s all we know. We presume and predict that Bausch & Lomb will order products from us at their contract minimums. We do not know whether all of their product issues with Landec or Lifecore Biomedical have been solved. We are not really clear what will happen when the Landec contract expires or its time to renew our contract. All I can really tell you is that, we have an excellent relationship with Bausch & Lomb that goes back to predecessors for 20 years. And we are more than happy to discuss new product developments and ongoing sales and continue that relationship. It’s just we know what we can count on, it’s not clear what the upside maybe at this point. And as you know B&L is going through a business transformation right now. So, it’s – that adds to the lack of clarity in my opinion.

Joe Munda - Sidoti & Company

Okay.

Dr. Charles Sherwood

That will count on that business, it’s – it will be down from the high levels due to the factors that I stated, it’s still an ongoing business, we have been making this product for 20 years. We do it well, we don’t have any problems. So, we will see what happens.

Joe Munda - Sidoti & Company

Okay. And then Chuck one last question in regards to – well actually I have two questions here. In regards to Cingal, I guess the way to look at it, is it basically Monovisc with the therapy – therapeutic benefits. And what is that going to do Orthovisc and potentially Monovisc sales if there is this therapeutic benefit there. Do you think there will be cannibalization?

Dr. Charles Sherwood

That’s hard to tell exactly. I think that there will always be a market for the multi-injection market which is products which is Orthovisc. I think that there will still be a market for Monovisc, because Monovisc is essentially an excellent product. And there may be some cannibalization of Monovisc by Cingal, but it depends on how it’s promoted and how it’s positioned. And also it’s going to be a while for Cingal hits the marketplace. I mean we are just into the clinical trial now.

Joe Munda - Sidoti & Company

Okay.

Dr. Charles Sherwood

I will tell you that I have been injected with Monovisc I am data set of one, I have been injected with not Cingal, but a product that’s or a combination that is very, very close to what Cingal may be. I think that for me this Cingal product is incredibly effective. So, I am terribly excited, but as I said we are just now entering into the trial, so it’s going to be a couple of years

Joe Munda - Sidoti & Company

Okay. And then the Monovisc proposal and you are waiting response, you said the next few months we are already halfway, almost halfway into second quarter of the year, I mean are you expecting a response by the end of the quarter or any word from them by the end of the quarter, even if it’s been e-mail or a phone call or something on those lines, what are you thoughts there?

Dr. Charles Sherwood

We talk on a fairly regular basis with them. I think that I don’t know what to expect, but I hope that if we crossover the barrier and they find that the amendment is acceptable for improvement – approval that we can get that done by sometime in the third quarter. That’s my hope. If we need to collect more data then of course that would start then at the same time. So, I am looking for signals they did promise that they would try to expedite the process of the review of the amendments since they were knowledgeable about our product. So, we need to give them a little time, but we check in on a periodic basis every couple of three weeks to see where they stand. And they don’t – understandably so they do not give you a – we are 60% of the way through, now we are 70% of the way through the answer you get is we are still working on it and on. So, we keep inquiring. The one thing I will tell you as I said in the prepared remarks is that I do believe that they are working constructively with us now and the dialogue is good, so I am optimistic.

Joe Munda - Sidoti & Company

Yeah, Chuck that was going to be my next question I mean are you getting the same response this time around like you did the last time around like you are saying they are working on it was that the theme…?

Dr. Charles Sherwood

We are getting what appears to be massively more cooperation this time than the way that they treated out original application.

Joe Munda - Sidoti & Company

Okay, it’s good to hear. Thank you.

Operator

Thank you. The next question comes from the line of Jim Gentrup, Discovery Investment Research. Please proceed.

Jim Gentrup - Discovery Investment Research

Good morning guys, how are you?

Sylvia Cheung

Good Jim.

Jim Gentrup - Discovery Investment Research

Most of my questions have been taken, but just kind of a follow-up from what you were just talking about more along the lines of the Monovisc and the lack of not having a single injection alternative out there. How do you think this is affecting you in the short-term and obviously potentially in the long-term against Synvisc and Synvisc-One, I should say and I believe it is the Zimmer (indiscernible) products, that’s shared by Zimmer, but can you comment a little bit on that?

Dr. Charles Sherwood

Well, the data show that we are still growing or Mitek still growing sales of Orthovisc, so I don’t think it’s having a big effect on the multi-injection segment. The Synvisc-One product had issues and seems like the market share is steady or maybe declining but certainly not growing. Zimmer is saying (indiscernible) product hasn’t been out very long, so see what it does, but right now I don’t believe that the single injection segment is hurting our Orthovisc product. It sure would be a big benefit to us with the Mitek machine to give them another bullet in their gun which is Monovisc, because I think the Monovisc product would do extraordinarily well in the single injection market in the United States. So, there is some center to see on our part just approval process along, so that they can get out there and be even more competitive than they are now.

Jim Gentrup - Discovery Investment Research

Yeah, I mean that’s a great comment I certainly understand that you guys are gaining in the multi-injection category, that’s evident, and kudos to you for having a superior product I just was concerned that there might be some crossed over either short-term or eventually because of just a convince factor, but…

Dr. Charles Sherwood

We have to wait and see, I certainly think that no offence to our colleagues over our competitors over Sanofi, but they haven’t grown the segment. Whether or not the segment get gross via Zimmer or whether Zimmer just heat into the Sanofi share remains to be same. I know that few might had folks softer they could maintain a fairly strong multi-injection segment product even with the addition of Monovisc.

Jim Gentrup - Discovery Investment Research

Okay, fair enough, good, good, okay. And then did you have any impact and revenue from the new Canadian distribution agreement in the first quarter.

Sylvia Cheung

We had, yes, we have a small increase in our product revenue as a result of the transfer or assignment of the Monovisc, Orthovisc rights to pharma science in the first quarter.

Jim Gentrup - Discovery Investment Research

Okay, that is – that just was kind of initial buy entire thing or…

Sylvia Cheung

Yeah, its initial activity, but we do expect overall the revenue from Canada for viscosupplementation will grow this year versus last.

Jim Gentrup - Discovery Investment Research

Okay, excellent, okay that’s kind of what I was getting at so, and then the Medtronic business in 2010 was 10% to your overall product revenue. I was just kind of curious if you give us little bit of an outlook on what that they return to with this – with the Merogel back in the market then.

Sylvia Cheung

Yeah, I don’t believe in Medtronic business is 10% of the overall business, it certainly is a significant component of S.r.l.’s business. We do expect from a growth standpoint the ENT product family to grow significantly from last year as a result of reintroducing the improved Merogel injectable back to the U.S. market.

Jim Gentrup - Discovery Investment Research

So, but you, yeah, go ahead.

Dr. Charles Sherwood

Well, I just can say that I don’t recall the exact Medtronic numbers, but they were significant for S.r.l. not that significant for Inc, Anika Inc. and so we expect good improvement in that area, which will have a good effect on the S.r.l. profitability, but it may not move the needle all that margin that consolidated business that is Anika Inc.

Sylvia Cheung

Great.

Jim Gentrup - Discovery Investment Research

Okay, fair enough. And then we should expect some seasonality lift in Q2 from Q1 certainly isn’t that what we typically seen excluding of course probably the expected drop in ophthalmic?

Dr. Charles Sherwood

There is usually seasonality with certain products in Q2 versus Q1 and then again in Q4 versus Q3.

Jim Gentrup - Discovery Investment Research

In other words nothing was drawn in the Q1 I’ll make it Q1 abnormal.

Sylvia Cheung

No.

Jim Gentrup - Discovery Investment Research

Okay. And then finally just on the expense side guys, I’m assuming the R&D expenses will kind of claim fairly dramatically from here for your last conference all. But on the SG&A side, should we expect us to kind of be a new normal or was there additional one-time expense in this quarter or not?

Sylvia Cheung

For R&D, you’re correct, we maintain the expectation from last time and it will grow significantly as a result of the patient enrollment driving in later in this quarter so, you see that ramp-up for the rest of the year. For SG&A, I think measuring to as a percentage of total revenue similar to last year’s level is our expectation at this point.

Jim Gentrup - Discovery Investment Research

I’m sorry similar to as a percentage of revenue launch.

Sylvia Cheung

As a percentage of total revenue at a similar level.

Jim Gentrup - Discovery Investment Research

Okay, alright.

Dr. Charles Sherwood

We are working hard to bring that down.

Jim Gentrup - Discovery Investment Research

Good.

Dr. Charles Sherwood

I think just to make one final comment though, yes, we are ramping up R&D, but as we ramp up revenue and get some more gains in here and there. We are still expecting good bottom line growth.

Jim Gentrup - Discovery Investment Research

Well, you are off to a good start, so?

Dr. Charles Sherwood

Well, thank you.

Jim Gentrup - Discovery Investment Research

And just one last potential outcome and maybe it’s really quick question but I think you may or may not already addressed this I apologize. But one of the potential outcomes of your newly revised PMA with the FDA is they could go ahead and approve with what they have on the table, right that could be an outcome?

Dr. Charles Sherwood

That’s most desirable outcome, that’s the one that we’re pushing hard for, yes. And but I don’t want to waste time and so I’m asking them to also evaluate a strategy that would more guarantee approval and they – this might be wasted effort on their part too. So, it took an agreement from then and they also further agreed that they would not force us to do additional work if they believe that just because we offered if the original amendment was approvable as its, so I think this is a demonstration of some willingness to work with us on the part of the FDA because they go ahead and approve the original one all of the effort they put into evaluating what additional data we should collect, but of course be wasted.

Jim Gentrup - Discovery Investment Research

Okay.

Dr. Charles Sherwood

Unnecessary.

Jim Gentrup - Discovery Investment Research

Alright. Well, great comments I appreciate good quarter and good luck.

Sylvia Cheung

Thank you.

Dr. Charles Sherwood

Thank you.

Operator

Thank you for your question. The next question comes from the line of Lawrence Anderson of Raymond James.

Lawrence Anderson - Raymond James

Good morning, nice quarter.

Dr. Charles Sherwood

Thank you.

Sylvia Cheung

Good morning.

Lawrence Anderson - Raymond James

Could you comment on any efforts by Mitek to have product approval for treatment of osteoarthritis of the shoulder and I realize that it’s a much smaller market, but correct me if I am wrong, but I don’t think there is an FDA approved product out there for that right?

Dr. Charles Sherwood

That’s correct. So, I’m in a position actually to make a comment on that now.

Lawrence Anderson - Raymond James

Great.

Dr. Charles Sherwood

We’ve seen all the data. There were some issues with the – in the execution of the trial. We have a strong base of data which is likely to not be sufficient to gain approval. We need to go down and have a discussion with the Food and Drug Administration to determine what we can do from this point forward. And we have been waiting a little bit on having that discussion but not too much to get the Monovisc relationship on track and because it’s the same people.

Lawrence Anderson - Raymond James

Understood, understood.

Dr. Charles Sherwood

Since that’s now moving very positively, I think we’re in a position to really go down and have a planning session with the FDA and say what do we need to do from here. It’s pretty likely that before going to move ahead in the shoulder indication, we are going to have to collect or add to the database that already exists.

Lawrence Anderson - Raymond James

Okay.

Dr. Charles Sherwood

It’s also likely that we may – we’ll manage the trial in a much more positive way and hopefully by Anika.

Lawrence Anderson - Raymond James

Alright.

Dr. Charles Sherwood

Not an outside contract.

Lawrence Anderson - Raymond James

Okay. Thank you.

Operator

Thank you for your question. I would now like to turn the call over to Dr. Sherwood for closing remarks.

Dr. Charles Sherwood - President and Chief Executive Officer

Thank you, Kathy. Thanks for everyone joining us today. I think the questions were excellent. We appreciate the feedback on a good quarter. I think we’re moving in a very positive direction with the company not only to manage the business that we have in front of us, but also to look at some step up in growth plans for the future. And we look forward to delivering equally good quarterly reports and in the next six months at least a vision of where we hope to take this company. So, thanks again for your support and interest in Anika.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Good day.

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