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Anika Therapeutics Inc. (NASDAQ:ANIK)

Q4 2011 Earnings Call

March 01, 2012 01:00 PM ET

Executives

Kevin Quinlan – CFO

Chuck Sherwood – President & CEO

Analysts

Mark Landy

Jim Gentrup – Discovery Investment Research

John Parsons – Private Investor

Neil Gore

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2011 Anika Therapeutics Incorporated Earnings Conference Call. My name is Shenele and I’ll be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to Mr. Kevin Quinlan, Chief Financial Officer. Please proceed.

Kevin Quinlan

Thank you, Shenele, and good afternoon everyone. If you’ve not received a copy of the Anika news release, which was issued after the market closed last evening or you would like to be added to our contact list, please contact Sharon Merrill Associates at 617-542-5300. The news release is also posted in the Investor Relations section of our website at anikatherapeutics.com.

Also, I want to mention that we have slides posted on the Anika website that illustrates some of the points we’ll be covering during today’s call. These slides can be found on the Investor Relations section under the Events, Webcasts & 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 statements made in this call, which are not statements of historical fact, are forward-looking statements as defined in the Securities 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 today’s press release and the company’s SEC filings.

Please turn to slide number three, as I turn the call over to Anika’s President and Chief Executive Officer, Dr. Chuck Sherwood.

Chuck Sherwood

Thanks, Kevin, and thank you to everyone for joining us today. The fourth quarter was a strong conclusion to an excellent year for Anika. Total revenue increased 25% from Q4 last year. This growth continued to be driven primarily by strong sales of Orthovisc in our Orthobiologics franchise.

We’re continuing to see solid underlying demand for Orthovisc both domestically and internationally. Compared with the fourth quarter of last year, Orthovisc sales in the U.S. market grew 34% and sales outside the U.S. increased 41%. Increased international demand for Monovisc and our orthopedic and advanced wound care products from Anika S.r.l. also contributed to our revenue growth this quarter.

This was a strong quarter on the bottom line as well. Compared with Q4 of 2010, our net income and earnings more than doubled with an EPS of $0.21 per share. Our product gross margin improved to 60% and R&D and SG&A expenses remained effectively managed company-wide. We also reached our break even goal of Anika S.r.l. as they achieved their first profit since the acquisition in the fourth quarter of 2011.

We also made solid operational progress this quarter. We recently received approval from the FDA to manufacture Orthovisc and Hyvisc at our Bedford facility for sale in the United States. This is one of the final steps towards the consolidation of all of our manufacturing in Bedford, a process that we expect to complete in the first half of 2012.

As I’ll discuss in a few minutes, we further expanded our product distribution network and we continue to work through the process with the FDA in their ongoing review of our Monovisc PMA. I’ll review the recent activity in each of our product franchises and conclude with some comments on the business outlook after Kevin’s financial review.

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

Kevin Quinlan

Thanks, Chuck. Please turn to slide number four in the presentation. I wrapped up my comments last quarter by saying that we were looking forward to solid results for the fourth quarter and the full year of 2011, and Anika delivered on those expectations.

Total revenue for the fourth quarter of 2011 increased 25% from the fourth quarter last year to $18.4 million and product revenue was up 25% year-over-year as well. For the full year, total revenue and product revenue both increased 17%.

Looking at our product franchises, product revenue for the fourth quarter in the Ophthalmic franchise was down 9%, reflecting primarily the lower level of shipments under our extended contract with Bausch & Lomb.

For full year 2011, Ophthalmic product revenue was down 8% for the same reason. Dermal franchise product revenue for the fourth quarter was up 16% from the fourth quarter of last year, primarily driven by sales of Anika S.r.l’s Hyalomatrix advanced wound care product. For the full-year, dermal product revenue was up 3%.

Despite a temporary postponement of sales of one of our leading products in the ear, nose and throat category, fourth quarter product revenue in our surgical franchise grew 35% from the fourth quarter last year, driven by continued growth and shipments of Hyalobarrier to customers in Europe, Taiwan, and Korea. For 2011 as a whole, surgical product revenue was up 17%.

Focusing specifically on the Orthobiologics franchise in slide number five, total franchise revenue for the fourth quarter grew 39% year-over-year to $11.7 million. For the full year 2011, Orthobiologics total revenue was up 30%. Once again, the majority of this growth was attributable to strong sales of Orthovisc, Monovisc and Anika S.r.l’s orthopedic products.

International sales of Monovisc grew 76% for the fourth quarter and 38% for the year. Despite continued weakness in demand for our tissue engineering products in Italy, sales of S.r.l. orthopedic products were up 48% for the quarter and 40% for the year. So breaking it down geographically, Orthobiologics product revenue in the U.S. domestic market increased 34% for the fourth quarter and 30% for the full year compared to the same period in 2010.

International Orthobiologics sales including Anika S.r.l. grew 50% in the fourth quarter and 29% for the full year. Clearly, we’re seeing excellent growth both domestically and internationally. However, we are seeing some price pressure in some markets such as Turkey.

Slide number six covers our income statement highlights for the quarter and the year. Our fourth quarter product gross margin increased by 700 basis points from Q4 last year to 60%. For the full year, product gross margin improved by 200 basis points to 57%. The increases for both periods were driven primarily by a more profitable product mix.

Operating income for the fourth quarter of 2011 nearly doubled to $4.9 million from $2.5 million in the fourth quarter of 2010. For 2011 as a whole, operating income was $14 million, an 85% increase year-over-year.

This improved profitability was driven mainly by our revenue growth, higher gross margin and realization of cost saving initiatives. Anika S.r.l.’s profit in the fourth quarter contributed to the overall accomplishment.

Net income for the fourth quarter of 2011 was up 113% to $2.9 million or $0.21 per diluted share from $1.4 million or $0.10 per diluted share in the fourth quarter of 2010. For the full year, net income nearly doubled to $8.5 million or $0.62 per diluted share from $4.3 million or $0.32 per diluted share in 2010.

Lower effective tax rates contributed significantly to our improved profitability this year. Our tax rate for the year 2011 decreased to 38.6% from 41.2% last year, primarily as a result of the effect of S.r.l.’s improved performance on our global tax rate.

Turning to slide number seven, our research and development expense for the fourth quarter of 2011 was flat with the sequential third quarter and up by $143,000 from the fourth quarter of 2010.

For the full year, R&D spending was down 10% from 2010, reflecting a combination of lower clinical spending and operational streamlining initiatives in this part of our business.

As I mentioned in previous quarters, we’re planning to ramp up some of our clinical and pipeline development activities in 2012, with the majority of the increased spending taking place in the second half of the year.

As shown on slide eight; selling, general and administrative expenses for the fourth quarter of 2011 were $4.9 million, up 17% from the fourth quarter of 2010.

As mentioned during the third quarter call, the strengthening dollar trend that we saw in the third quarter continued into the fourth quarter and most of the SG&A increase in Q4 was attributable once again to translation of some euro-based assets into dollars during the fourth quarter.

We continue to benefit from lower SG&A costs at Anika S.r.l., but these savings were offset by additional head count in the U.S. and higher professional and legal fees.

Turning to our balance sheet highlights on slide number nine, Anika closed 2011 with $35.8 million in cash and equivalents compared with $28.2 million on December 31, 2010. As in Q3, the increase in cash was mainly as a result of increased collections driven by a combination of higher third quarter sales as well as receipt of the $2.5 million upfront fee in the new Mitek deal for licensing Monovisc in the U.S.

This upfront fee was recorded as deferred revenue on the balance sheet and will be recognized ratably over the 15 year term of the agreement. We generated more than $10 million of positive cash from operations in 2011 compared with $7.9 million in 2010, even as we reduced payables by $5 million and paid down debt by $1.6 million.

For 2012, our goals are to grow revenue and earnings per share by greater than 20% with a better start to the year compared to the first quarter of 2011. We expect Anika S.r.l to show a profit for the year, but to have their historical first quarter seasonal weakness.

In closing, 2011 was a successful year for Anika both operationally and financially and we’re looking forward to reporting continued progress in 2012.

And with that, I’ll turn the call back to Chuck.

Chuck Sherwood

Thank you, Kevin. The topics I’ll be covering in this business review are summarized on slide number 10. As Kevin discussed, growth in our Orthobiologics franchise continued to drive Anika’s top line performance in the fourth quarter and for the year as a whole, with the majority of our growth coming from domestic and international sales of Orthovisc.

In the U.S. market, our distribution partner, DePuy Mitek, is continuing to expand physician awareness and making strategic investments in and managing the channel very effectively. Orthovisc grew to an estimated 12% of the U.S. market in 2010, and in 2011 market share was 14%.

Outside the U.S., we’re continuing to expand our distribution network and seeing continued growth in product demand as a result. Overall, global sales of Orthovisc have grown at an average rate of better than 20% for the past six years.

As we expected, international sales of Monovisc rebounded in Q4 as shipment timing issues in Q3 pushed the related product revenue into the quarter resulting in 76% year-over-year growth. For 2011 as a whole, international Monovisc sales were up 38% from the prior year.

S.r.l.’s orthopedic products also contributed to our growth in Orthobiologics for the fourth quarter increasing 48% from Q4 of 2010. For the full year, sales of orthopedic products from S.r.l. were up 40% despite continued weakness in our home market of Italy. This growth rate reflects the success of our efforts to expand our distribution channels in markets outside of Italy.

These efforts are focused on S.r.l.’s cartilage regeneration products, Hyalofast and Hyalograft C autograft. Hyalograft C autograft is the first product in this category bioengineered for minimally invasive surgery. It has strong long-term clinical follow-up data for up to seven years.

We’re currently implementing regulatory and clinical plans to initiate a randomized, controlled, human clinical trial with the goal to expand sales in Europe and into the United States. This is one of the building blocks to realize Anika’s vision to offer a portfolio of orthobiologic products that run the gamut from palliative to regenerative treatments.

Moving down the bullets on slide number 10, I’ll comment briefly on Monovisc, starting with the U.S. distribution agreement with DePuy Mitek that we announced in December. This is a multi-year agreement structured much like the Orthovisc relationship that’s been working so well for both companies.

In connection with the agreement, Anika received in December an initial payment from DePuy Mitek of $2.5 million. Additional payments will follow the mutual decision to launch the product and be based on future regulatory, clinical and sales (ph) milestones.

Our collaboration with DePuy Mitek for Orthovisc is providing great benefits to both organizations and we’re very pleased to strengthen this strong and productive alliance with the addition of the Monovisc product.

Now, in terms of our PMA submission for Monovisc, the FDA has denied our request for an Orthopedic Advisory Panel review of the product. Based on the strength of the clinical data, we continue to believe that Monovisc should be approved. Our partnership with J&J DePuy Mitek will provide us with valuable insight and guidance as we move to the next level in the appeal process at the FDA and actively seek an objective review of the scientific and clinical data.

As you know, the FDA is currently having difficulty meeting approval timelines and resolving disputes and we have been significantly increasing activity through the agency’s appeal process. As a result, while we continue to believe in the product and the strength of our data, the timing for Monovisc approval remains unclear at this point.

Wrapping up the report on Orthobiologics, we also made progress during the fourth quarter in developing Cingal, a single-injection viscosupplementation product that combines hyaluronic acid with a therapeutic agent. Cingal was designated as a combination product through our notified body in Europe during the third quarter and as planned we submitted our dossier for CE Mark approval in Q4.

This is a slightly longer process than a medical device-only CE Marked dossier. We believe there is significant near-term sales potential for Cingal in Europe as an additional single-injection therapy for osteoarthritis and we expect to make further progress towards commercializing the product in the year ahead, including the initiation of a new clinical trial.

Moving on to the fifth bullet on slide number 10, the S.r.l. products in our dermal and surgical franchises continued to gain traction during the fourth quarter, generating increased shipments and revenue in Europe, the U.S. and Asia.

Revenue from our surgical franchise was up 35% and 28% for Q4 and 2011 respectively year-over-year, led by strong sales of S.r.l.’s anti-adhesion product Hyalobarrier. Our European distribution channel for Hyalobarrier performed well during the year, resulting in continued growth in sales in that market. During 2011, we also expanded into the Korean market with shipments of Hyalobarrier to our new distribution partner, the Korean Green Cross. We expect to see growth in this market in 2010.

Turning to the sixth bullet on slide number 10, Anika S.r.l. achieved break even operations in the fourth quarter of 2011. In addition to the revenue growth that I’ve just outlined, this reflects the success of our effort to leverage resource and product line synergies and operating expenses since acquiring the S.r.l. business two years ago. S.r.l.’s operating loss for full year 2011 declined 56% from 2010. Although there is likely to be some continued volatility from quarter-to-quarter, we expect the business to be profitable for full year 2012.

Turning to our Ophthalmic franchise, as expected, fourth quarter revenue was down 9% from the same period last year. For 2011 as a whole, Ophthalmic revenue declined 8% from 2010. This reflects the slowdown in product shipments under our first extension contract with Bausch & Lomb. We have recently signed a second contract extension, which will generate ongoing shipments in revenue albeit at a somewhat lower level through 2014.

Turning to our last bullet on slide number 10, we are pleased to report further progress toward our goal of fully transferring Anika’s product manufacturing from Woburn, Massachusetts to Bedford. We’re continuing to operate on a limited basis in Woburn to meet the needs of Bausch & Lomb in manufacturing AMVISC and AMVISC Plus.

As I mentioned earlier, during the first quarter, we received approval from the FDA to manufacture Orthovisc and Hyvisc at our Bedford facility for sale in the United States. We’re now approved to manufacture all of our products at the Bedford facility for U.S. sale with the exception of our ophthalmic products.

The FDA is continuing to review these products and we expect to receive approval by the end of March. The Bedford facility is approved under EU regulations to manufacture all of the Anika’s products. As a result, we expect to fully complete the consolidation of our manufacturing operations in Bedford by mid-year.

Wrapping up, 2011 was a very successful year for Anika and we’re well positioned for further success in 2012. Demand for Orthovisc, Monovisc and our S.r.l orthopedic products continues to grow as does the scope of our international orthobiologics distribution network. We remain optimistic about the prospects for U.S. approval of Monovisc.

S.r.l is operating in the black and seeing solid growth in its demand for orthopedic, advanced wound care, and anti-adhesion surgical products. We’re pursuing new opportunities in our Ophthalmic franchise and nearing full completion of our manufacturing consolidation. As a consequence, we look forward to reporting our progress to you as the rest of 2012 unfolds.

With that, I’ll turn the call back to over to you Shenele so that we can take some questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). The first question comes from the line of Mark Landy.

Mark Landy

You’re making me look bad here with your outperformance, but that’s okay. Anyhow, just a quick couple of questions, could you please give us some more insights, if you will, into the extension of the B&L contracts? And on the last call you had mentioned that you were working on some things. Is there anymore more greater detail you can give into specifically I would think kind of the volume and the revenue commitments relative to the historical contracts, it helps us from a modeling perspective.

Kevin Quinlan

Mark, this is Kevin, As Chuck said, we have entered into a three-year second extension. We are anticipating that we’ll see a gradual decline in the revenue from that contract, but we said that in 2010 and so it’s hard to say what will actually come to play. But the levels beyond 2012 in all likelihood will be lower.

Mark Landy

Kevin, just to push you a little bit on that, I think you had mentioned on the previous call that you would only re-sign a deal with them if it makes sense for you do so because you did really want to move everything over to the new facility and I understand that it’s a transition down and out, but is that a 50% lower revenue on an annual basis, is it a 30% lower revenue, just if you can help us with some ballpark?

Kevin Quinlan

Yes, we really can’t say at this point, Mark, but the manufacturing under that contract will be in the Bedford facility. I’m not sure if there were some confusion on that point.

Chuck Sherwood

Yes, we are vacating Woburn in June, for sure. So we’re working on getting approvals over here in Bedford to manufacture the Bausch & Lomb products after that time.

Mark Landy

All right. Thanks for that, guys. And then Kevin, I might have missed what you had mentioned, but did you mention that there was some regulatory issue to a product, I think unfortunate during the call, just as you starting to talk about that.

Kevin Quinlan

I don’t recall saying anything about a regulatory issue with a product. We have the ophthalmic products yet to go in terms of gaining approval there to manufacture in this facility, but that’s something that we are very comfortable will take place in the timeframe that Chuck had mentioned, March.

Mark Landy

Helpful. All right, that’s what happens when you’re trying to juggle two calls at once. And then just lastly two quick questions relating to the tax rate, do you see a further reduction in 2012 or it’s just going to be a stable tax rate that we can anticipate for the next couple of years?

Kevin Quinlan

I think we’ll see a little bit more improvement. So, if S.r.l. achieves a profitable year as we said is our goal that will help bring the rate down a little bit on the combined basis for the company because overall the statutory rates in Italy are lower than the U.S. rates.

Mark Landy

Okay. Have you guys given any thought to how you’re going to handle the med-tech tax next year?

Kevin Quinlan

No, I mean it’s something that we’re certainly keenly aware of and evaluating the best strategy.

Mark Landy

Okay. And then lastly with respect to Monovisc, if you’re an optimist, the glass definitely is half full, the rejection on the request for a panel. Could one read into that negatively or it’s just that you had used that strategy to try and get into move off the space. How do you guys look at that, obviously, you can comment if that’s glass half full, glass half empty?

Chuck Sherwood

Well, we still believe that we met our endpoint. We still also believe that there is some, there is obviously some disagreement with the reviewer and others at the FDA. We believe there is some misunderstanding also. We’ve attempted to rectify that and unfortunately the avenues that are open to us are to go up the chain in the appeal process.

Unfortunately, and I do mean unfortunately, this is becoming not uncommon with the Food and Drug Administration these days. I said something to the effect of we are appreciative of some of the advising guidance we might be able to secure from our partners in Johnson & Johnson and certainly I said that because they have some experience in that organization in working with the appeals process and moving up the line in dispute resolution. So I think we’ll benefit a lot from having them as our partners moving forward to try to get Monovisc into the marketplace.

Mark Landy

Sorry, Chuck, just to not make any assumptions, since we last spoke, let’s call publicly on the last quarterly call, you have had some additional discussions with the Agency regarding Monovisc, is that right?

Chuck Sherwood

We received a letter. We haven’t had any additional discussions.

Mark Landy

When in your best estimate do you think you’ll be able to sit down face to face with them to have some discussions?

Chuck Sherwood

I would think that we are working through the ombudsman’s office and we need to put together our position and then I would suspect that get that in, I would suspect that we’re going to reach on some resolution or have some sort of response from them in the next three or four months. I should throw in the caveat that after we had our last meeting, we were promised a response in 60 days and it took nine months.

Mark Landy

Okay, fair enough. And then lastly guys, any new color for us on the Genzyme lawsuit, and that will be it from me then.

Chuck Sherwood

All I would say on the Genzyme lawsuit is that things are suit with Genzyme are much less or active than the affairs that are going on between Genzyme and Zimmer and Seikagaku, which got to the court first. The second point I would say is that since we’re partnered on the Monovisc, we’re certainly getting support from Johnson & Johnson on the IP issue as well.

Mark Landy

Okay. So it sounds like just Johnson & Johnson is being much more than just a distribution partner, they have actually become quite active in assisting you with Monovisc all-round?

Chuck Sherwood

Well, we are two partners, really.

Operator

Your next question comes from the line of Jim Gentrup, Discovery Investment Research.

Jim Gentrup – Discovery Investment Research

Listen, a very nice quarter, a good year and you said that you’re going into 2012 with pretty good momentum, and I think you gave 20% kind of a goal for revenue and profits, is that what you said, Kevin?

Kevin Quinlan

Yes, as our goals. Yes.

Jim Gentrup – Discovery Investment Research

Now, on the Orthobiologics side, just as far as how the market is shaping up, I know it’s growing double-digits in the States and I saw the report from Millennium, are there any other factors that you really haven’t talked about that any other efficacy type factors from some of the other drugs in the market that are helping you in anyway?

Chuck Sherwood

Not off the top of my head, Jim. I think the overall driving factor here is, as you said the new Millennium report indicates that the market may be growing at an even faster rate in the U.S. than their previous report.

Jim Gentrup – Discovery Investment Research

Could it be just more economical for patients, just because of the economic conditions, or is it just that you don’t have any more color or clarity into that?

Chuck Sherwood

Let me give you some thoughts, Jim. This is Chuck. I don’t think this is a factor, okay? So let me tell you first of all, let me start with the positive. The positive is, I truly believe that Mitek has really figured this out. And I think they understand the target, I think they understand how to market. I think they really get it and they have gotten into the space very, very effectively. So I think the majority of the success we’re seeing is due to that.

Now, what I was going to start with was, unfortunately there has been a lot of negative press lately about hip implant problems, and maybe some of that spills all over where people just are really concerned about getting knee replacements too, I don’t know, I’m only speculating. Certainly, there is a trend for lower cost healthcare, so if someone can get a shot they’ll put off the surgery for sure and I think there is just a trend to trying to move away from surgery in general.

Jim Gentrup – Discovery Investment Research

Okay, fair enough. Can you also talk about, once Monovisc is approved, which we’re assuming that you’ll get approval ultimately, how soon will that be, how soon will you ramp up the sales with DePuy?

Chuck Sherwood

The beauty of having them as our partner is they’ve already given serious thought to the strategy for having a multi-injection in a single injection market and a product in the same market, right. Also, their sales people are trained because of the addition of Monovisc; we’ve been spending a lot more time together. So I think we can get to market very quickly.

Kevin Quinlan

And certainly it helps that we have international sales of the products, so we’re making it. We’re already making it on a regular basis. So ramping up manufacturing would also move along pretty quickly.

Jim Gentrup – Discovery Investment Research

I think we’ve already established that this is mainly going to incremental opportunity, you’re not going to have too much I guess cannibalism going on from the multi-injection to the single. Is that safe to assume?

Chuck Sherwood

There will be some and it will be market dictated, really. It’s DePuy Mitek’s desire to maximize revenue period. So they will keep Orthovisc in accounts where they’re just fine with Orthovisc and then will try to convert or penetrate new accounts as appropriate with the single injection.

Jim Gentrup – Discovery Investment Research

Okay, all right. Fair enough. And if we take a look at the other categories, other product categories, dermal and surgical mainly, of those two I would think that it sounds like surgical is the one that’s kind of, I guess, emerging as your, probably your stronger growth category. Is that something we should assume going forward as well?

Kevin Quinlan

Yes, we would agree with that.

Jim Gentrup – Discovery Investment Research

And can you repeat again, I think you had a distribution agreement that those results were even without the ENT product, that’s the one distributed by Medtronics, correct?

Kevin Quinlan

Yes, there is six products that fall into ENT category that Medtronic distributes, but there was one product in particular that as we’ve said in the past was taken off the market, MeroGel injectable and there were no sales of that in 2011. So we’re hopeful that that is something once we’ve transferred the gel product manufacturing from Italy to the United States that we can bring that product back on stream.

Chuck Sherwood

Yes, let me add just a little bit more exactness to that, we’re working very hard to try to bring that product back into the market in the second half of this year.

Jim Gentrup – Discovery Investment Research

So that’ll be another potential catalyst in the surgical area in the second half then?

Chuck Sherwood

Yes, well certainly that was a pretty good product before it left the market. So yes, we would expect an up-tick if we’re successful depending on how quickly we can get it through.

Jim Gentrup – Discovery Investment Research

And then on the dermal side, I think you’ve had a new agreement with Misonix, any update there, is there anymore orders from Misonix or have you heard about the sell through, how that’s working?

Chuck Sherwood

So far from what we know it’s fine. I think we’ve got a meeting coming up here in a week or so to get an update. They might be interested in expanding with more products, so a lot of things going on there, but I would say that so far I think the product is pretty much in line with our expectations.

Jim Gentrup – Discovery Investment Research

Okay. But those two categories, mainly dermal and surgical, you would probably be safe for both those categories to grow more than your 20% I guess stated goal I would think given the small amount that they’re coming from?

Kevin Quinlan

Yes. I think it would be fair to say the target is in excess of the average that we’ve stated, but as you point out it’s from a much smaller base, so has less of an impact in growth in the Orthovisc category for example.

Jim Gentrup – Discovery Investment Research

Okay. And just turning gross margins for a minute, I mean that was another impressive quarter there and I just was curious, we talked a little bit about this before, but what do you think you can get, how much more expansion can we expect there or should we?

Kevin Quinlan

Well, I think we’ll see some small improvement I think in 2012. The next important milestone will be the completion of the manufacturing transfer of the gel products from Italy and that’s targeted for the middle of the year, third quarter to start doing that. There will be inventory to unwind at the old pricing that was manufactured by the previous supplier, so that has to work its way through the system. So the real impact on margins for that will be more in 2013 than 2012.

Jim Gentrup – Discovery Investment Research

Okay. But we’re still seeing a positive bias; we could still another, some more uptick there as we move throughout the year?

Kevin Quinlan

Small improvement.

Jim Gentrup – Discovery Investment Research

Okay. Especially given kind of decent seasonality I guess towards the back half?

Kevin Quinlan

Towards the back half, yes.

Jim Gentrup – Discovery Investment Research

Back half being stronger I should say?

Kevin Quinlan

Yes

Chuck Sherwood

Correct.

Kevin Quinlan

That’s correct, yes.

Jim Gentrup – Discovery Investment Research

And then I’m also assuming that since you’re able to wind down the Woburn plant fairly soon here I guess by the end of March do we say?

Chuck Sherwood

No, no, mid-year.

Jim Gentrup – Discovery Investment Research

Mid-year, mid-year, end of May then. So then that would also lower your overhead and as far as other operating expenses as well, so that’s safe?

Kevin Quinlan

Yes, the way that’s going to work is we will see a small operating expense improvement, but we’re trading, we’ll be bringing the new facility online manufacturing wise and so we’ve got a fair amount of depreciation that we’ll start to record. So what we’re going to see is a reduction in cash expenses from the closing of Woburn and we’ll see an increase in deprecation albeit at a lower level, then the cash expenses slightly lower level. So you’ll see an improvement in the operating margin, but you’ll see an even bigger improvement in EBITDA.

Jim Gentrup – Discovery Investment Research

Okay, fair enough. And then one last question and I’ll let somebody else jump on guys. The CFO of $10 million in 2011, the $2.5 million, you received a $2.5 million of cash, does that flow through cash flow from operations right away or is that not impacted?

Kevin Quinlan

That would flow through cash from operations.

Kevin Quinlan

And as you know, it doesn’t flow through revenue this year.

Operator

(Operator Instructions). Your next question comes from (inaudible).

John Parsons – Private Investor

Yes, this is John Parsons and I’m a private investor. I just wondered, I think in one of the last conferences two quarters ago I think you talked about building your own sales force for the launch of Monovisc and I just wondered what the status of that was at this point.

Chuck Sherwood

Yes, what happened was we had said at that time that we were still considering all alternatives and as we announced this past December, we made a decision to partner that product, the Monovisc product with DePuy Mitek and therefore, we did not move forward with a direct sales force.

John Parsons – Private Investor

Okay. So there isn’t any, there wouldn’t be any plans at this point to move forward with our own sales force?

Chuck Sherwood

No, there are no...

Kevin Quinlan

Not for Monovisc in the U.S.

John Parsons – Private Investor

What about ex-U.S., is there any plans to do that?

Chuck Sherwood

Not at the current time.

Operator

Your next question comes from Neal Gore.

Neil Gore

First, in your presentation, I heard something about price competition in Turkey; can you expand on that a little bit?

Chuck Sherwood

Not a whole lot, but just we’re hearing in that distributor in particular, we’ve heard comments about competitive products and pricing pressure.

Neil Gore

Was that political?

Chuck Sherwood

Pardon me?

Neil Gore

What product is that for, Orthovisc?

Chuck Sherwood

Primarily Orthovisc.

Neil Gore

Okay. And can you expand a lot more on the cartridge product that S.r.l has been selling in Europe?

Chuck Sherwood

Yes, Hyalograft C autograft, there’s really not a lot more to say on that topic at the moment. We’ve spent a lot of time analyzing it and it looks to us like something that we want to move forward with in terms of clinical work. And in the meantime, we’ve been trying to expand our sales outside of Italy because primarily it’s been sold in the Italian market.

Neil Gore

As far as the U.S. market goes, would you look to partner with somebody before you go forward with testing here or might you begin the testing yourselves?

Kevin Quinlan

The current strategy is to begin to testing ourselves.

Operator

And there are no further questions in the queue. I’d now like to turn the call back over to Dr. Chuck Sherwood for closing remarks.

Chuck Sherwood

Thanks, Shenele, and thanks to all of you who listened in on the call today. We appreciate your support and we look forward to speaking with you about our first quarter results. Thanks.

Operator

Ladies and gentlemen, that concludes the presentation. Thank you for your participation. You may now disconnect. Have a great day.

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