Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Anika Therapeutics investors conference call. My name is Karma, and I will be your coordinator for today. (Operator Instructions)
I would now like to turn the call over to your host for today's conference, Mr. Kevin Quinlan, Anika Therapeutics' Chief Financial Officer. Please proceed, Kevin.
Thank you, Karma, and good morning, everyone. If you have not received a copy of the Anika news release which was issued yesterday after the market closed or would like to be added to our contact list, please contact Sharon Merrill Associates at 617-542-5300. The news release also is posted on the Anika Therapeutics website at anikatherapeutics.com.
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 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 upon 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, including those set forth in last evening's press release, the Company's SEC filings and other press releases. A copy of the press release has been included as an exhibit to an 8-K that was filed with the Securities and Exchange Commission and has been posted on the Anika website.
I would now like to turn the call over to Anika's President and Chief Executive Officer, Dr. Charles Sherwood.
Thank you, Kevin and thanks to everyone for joining us today. 2007 was a very successful year for Anika, both financially and operationally. It was capped by our fourth quarter that saw a 56% increase in product revenue, thanks primarily to strong sales worldwide of our flagship product ORTHOVISC. We also made significant progress on a number of initiatives that position our joint health products for growth in the future and expand our opportunities in the dermal filler market.
We're pleased to report that once again, we saw a strong growth in ORTHOVISC unit sales from our US partner Mitek. In fact, domestic unit sales more than doubled during both the quarter and the year, and we believe that Mitek now holds about an 8% market share with our ORTHOVISC product.
As we expected, this business has been able to capitalize on the unique reimbursement code we received from CMS for ORTHOVISC last year. Outside the US, the second half of the year saw strong performance in ORTHOVISC sales by a number of our partners. But perhaps, most importantly during the year, we made great strides in strengthening our global position in joint health therapies. Toward that end, we recently launched ORTHOVISC mini in Europe, our new HA based osteoarthritis treatment specifically targeted for smaller joints.
We also begin a key US clinical study of our single-injection osteoarthritis product, MONOVISC, for the relief of knee pain. We plan to introduce MONOVISC by mid-year in the European market through our existing distributors.
Now on the aesthetics front, we focused considerable attention on securing a distribution partner for ELEVESS, our HA-based soft-tissue filler for facial wrinkles and scar remediation that incorporates lidocaine. Interest is high among all potential partners we have spoken with, and we are fast-tracking our commercialization efforts to be ready to go once we have our partner on board. We are pursuing all aspects to this effort vigorously and we hope to generate ELEVESS revenues by mid-year.
And finally, on the operational front, we successfully completed Phase 1 of the move into our new facility in Bedford. Our R&D, regulatory, marketing and administrative staffs are now fully settled, and were making progress on the manufacturing side of the facility.
And with that, I will turn the call over to our CFO, Kevin Quinlan to review our financial results for the quarter and then I'll be back to review some of the operational highlights for the quarter and what we hope to achieve in 2008. Kevin?
Thanks Chuck. Total revenue in Q4 was $9.6 million compared with $5.9 million in the fourth quarter of 2006. For the year, total revenue was a record $30.8 million in 2007 compared with $26.8 million in 2006. The quarterly improvement was driven by a 112% increase in worldwide ORTHOVISC sales. I will provide more detail for each of our key product areas.
Domestic revenue from ORTHOVISC at $3.3 million grew a 101% in the fourth quarter compared with the same period of 2006. For the full year of 2007, domestic sales of ORTHOVISC were $10.1 million and grew more than 92% from 2006. Growth in domestic sales of ORTHOVISC continued to be fueled by the ongoing marketing investment by our distribution partner DePuy Mitek. The sales were also aided by the unique reimbursement code obtained for our product effective January 1, 2007.
International sales of ORTHOVISC at $1.4 million grew a 142% over the fourth quarter of 2006 and continued the favorable trend that started in the third quarter of 2007. We saw strong performances by our partners in Turkey, Germany, Italy and Greece. For the full year, international ORTHOVISC sales were $3.5 million, a 42% decline over 2006, primarily as a result of the 2006 reimbursement changes in Turkey. The details of which we have discussed in prior press releases and conference calls.
We're pleased with the level of business in the second half of 2007 that our Turkish distributor has achieved on a private pay basis. For both, the quarter and the year, our HYVISC business at $688,000 and $2.4 million respectively, increased significantly over 2006. This was a good rebound after a mediocre 2006. Our expectations for this product continue to be modest however.
Although, at a low level of only $200,000, our INCERT result for the year in only three countries were encouraging and we are looking at additional territories and resources. Finally, on the revenue front, our ophthalmic business increased 6% in the fourth quarter -- over fourth quarter, 2006, but at $10.5 million finished the year down 2% compared to full year 2006. Again, our expectations for ophthalmic growth are modest.
Moving down the income statement, product gross margin for the fourth quarter was 59% compared with 40% in 2006s fourth quarter. For the year, product gross margin was 56% compared with 54% for the same period in 2006. The improvements in gross margins for both, the quarter and the year, was due to strong domestic ORTHOVISC sales and favorable material prices.
Research and development expense for the fourth quarter was $1.4 million compared with R&D of $504,000 for the fourth quarter of 2006. For 2007, R&D expense was $4.4 million compared with R&D of $3.6 million for 2006. For the year, R&D spending has been primarily focused on the development of next generation osteoarthritis products in manufacturing scale of validation for ELEVESS. This includes US based clinical trials for MONOVISC and clinical studies of MONOVISC and ORTHOVISC mini in Europe. Functionally, the increase was primarily related to added people in development, engineering, regulatory and clinical affairs.
Selling, general and administrative expense was $2.9 million in the fourth quarter compared with $1.5 million in 2006s fourth quarter. For the full year 2007, SG&A was $8 million compared with $6.7 million for the same period in 2006. The increase in Q4 and for the year was primarily results of the preoccupancy costs at our Bedford facility, legal expenses associated with the reacquisition of the rights to ELEVESS, marketing expenses associated with the 2008 launch of our new products and increased headcounts in marketing.
As we mentioned previously, preoccupancy expense will be reported as G&A during the build out and validation stages prior to occupancy of the building. In 2008, the full year additional expense associated with the Bedford facility will be approximately $1.6 million.
Income from operation was $2.1 million for the fourth quarter compared with $871,000 for the corresponding period a year ago. Income from operation was approximately $6.6 million for the full year of 2007 compared with approximately $5.4 million in 2006.
Net income for the fourth quarter of 2007 was approximately $1.7 million or $0.15 per diluted share compared with $1 million or $0.09 per diluted share in the fourth quarter of 2006. For full year 2007, net income was $6 million or $0.53 per diluted share compared with $4.6 million or $0.41 per diluted share in 2006.
The improvement in net income in both the fourth quarter and the full year periods was due to increased product sales, milestone recognition, higher gross margins, and a lower effective tax rate. The lower tax rate reflects higher state investment tax credits as a result of Anika's ongoing investment in its facility, as well as increased domestic jobs creation deduction and tax credits related to R&D spending.
Our balance sheet remains strong with cash and short-term investments at December 31, 2007 of $39.4 million compared with $47.2 million at December 31, '06. The decrease in cash was primarily a result of new facility expenditure. Overall, we expect to invest approximately $30 million in our Bedford facility, which includes the $14 million RA expanded to-date and we plan to borrow up to $16 million of this total of $30 million.
We recently closed on a revolving credit agreement with Bank of America to provide the facility financing. We also repurchased the rights to ELEVESS from Galderma at a cost of $4.2 million of which $1 million was attributed to the ELEVESS brand name and that was capitalized. The remaining amount was offset against the milestone achievements received.
Before I turn the call back to Chuck, I want to say a few words about our 2008 financial expectations. As mentioned in last night's press release, we expect 2008 to be a year of good revenue growth for Anika. We also will make significant investments in R&D and marketing as well.
In R&D, we plan to add people and incur the costs associated with the pivotal clinical trail in the US for MONOVISC. The two European post-marketing clinical studies currently underway for MONOVISC and ORTHOVISC mini, most of which is going to be incurred in 2008 versus 2007 and potentially other clinical assessment of ELEVESS formulations for expanded indications.
This combined with our increased marketing costs for the three products launches planned for 2008 could result in approximately $6 million to $8 million increase in operating expenses for 2008 over 2007. At this investment level net income for 2008 could be as much as 20% lower than 2007.
With that, I'll turn the call back over the Chuck.
Thank you, Kevin. As I mentioned at the outset, the fourth quarter was a very positive quarter for us financially and operationally highlighted by the strong sales of our ORTHOVISC product. Domestically, we are very pleased with ORTHOVISC gains this quarter and for the full year. Unit sales trends from our US marketing and distribution partner Mitek continue to be very encouraging. Thanks to additional sales people at Mitek, their direct-to-consumer advertising program, and their favorable reimbursement code we received at the start of the year, we look forward to continued growth for 2008.
Internationally, our strategy in joint health continues to focus on targeting countries where we can be successful in driving ORTHOVISC sales using our integrated approach to marketing, distributor relationships and reimbursement. In the fourth quarter, we realized strong unit sales from our Turkish, Italian and Grecian partners and our new distributor partner in Germany is off to a great start as well, all with double-digit sales gains in the fourth quarter.
An important factor in this growth overseas during the second half of 2007 was the reformulation of ORTHOVISC to a new non-animal based form derived from bacterial fermentation. The use of non-animal based products is preferred in the European market and our new formulation has so far been well received.
In line with our international distributor strategy, we recently signed a new partner in China for ORTHOVISC, who has committed to undertaking local clinical trials for the product. This follows our announced in last quarter of the new distributor in India. These two markets have good potential and we look forward to update you on their progress as they work their way through their registration process.
We also look forward to providing you with updates on additional international partnerships. As we discussed in previous calls, the strategy for our joint health franchise is designed to leverage our HA technology in several ways. The first is to evaluate and commercialize our existing ORTHOVISC product in new indications. For example, for the past several months, we have been exploring the capabilities of ORTHOVISC as in many injections for smaller size joints in the body such as elbow, wrist, ankle and the hand, and just several weeks ago, we announced a launch of this new product ORTHOVISC mini in Europe.
We're also focused on commercializing new HA-based products with unique and differentiating features, MONOVISC, our first osteoarthritis product that can be administered as a single-injection utilizes our proprietary cross-linking technology and we see CE Mark approval in late 2007.
We recently began a US clinical study of MONOVISC for the relief of knee pain and we expect to launch this important new product in Europe with key product champions by the middle of 2008. The second single-injection osteoarthritis product in our joint help pipeline CINGAL contains an active therapeutic molecule to provide broader pain relief for a longer period of time. And we look forward to beginning the US pivotal clinical trial in 2008.
All in all, we've made enormous progress this year in developing our worldwide joint health franchise. The area that we believe will be the key driver of growth for Anika in the future. On aesthetics front, as you know, last quarter we terminated our distribution agreement for ELEVESS and reacquired worldwide rights for the future development and marketing of this breakthrough HA-based dermal filler product. We have focused considerable attention on securing a new distribution partner that can help us realize the potential for ELEVESS. We have had extensive discussions with the number of potential partners and interest in this progress is very high.
Several potential partners are moving towards due diligence. Working on this effort vigorously and it's important for us to find a partner that shares our vision for the product and is a good cultural and strategic set. Concurrent with this effort, we are also in the midst of a marketing program targeting key opinion leaders in the dermatology community with detailed information and training on ELEVESS.
We're pleased to report key interest on the part of doctors and patients. In initial usage to-date doctors have found ELEVESS easy to use and inject with favorable comments regarding other aspects of product performance. Additionally, patients are pleased, both with the results and with the comfort of the procedure as a result of the incorporated light that came in the product formulation. We're also parallel tracking other commercialization test, so that we're in a position to launch quickly, once we have a partner on board. Given the progress we've made to-date, we're looking forward to a commercial launch of this breakthrough product around mid-year.
Turning quickly to our equine osteoarthritis product, year-over-year sales of HYVISC, the goal standard for treating equine osteoarthritis exceeded our expectations and rebounded from the disappointing 2006 was a 30% increase in 2007. We're pleased with how this product has performed this year. However, just to remain in very competitive marketplace and we expect order patterns for HYVISC could continue to be on even.
Another product that we're very pleased with during the quarter was INCERT, which is designed to prevent post-surgical tissue adhesion and scarring. We are selling this product in three countries in Europe and while total revenues are still small, we are encouraged with its reception to-date. We're looking to add to our distribution capabilities and resources for this product with the potential to also expand indications and uses.
In ophthalmic business, revenue for 2007 was about 2% behind 2006, reflecting normal order patterns of a mature product. We've completed the first stage of the interior outfitting for our new facility in Bedford and our entire corporate marketing and R&D staff is now well settled.
On the manufacturing side of the building, there is still much to do to complete the interior fit-up, install our equipment, and get the facility validated under GNP standards. We anticipate a mid-2009 timeframe to begin with full manufacturing operations in this facility. Along with expending our facility to support the growth of the market, we have also made significant investments in human capital during the year. We've added to our senior scientific and technical staff, as well as increased our headcount in R&D area as well. We will continue to develop in 2008 the infrastructure and manpower to take advantage of the growing marketplace opportunity.
In summary, I believe that 2007 was a year of significant achievement for Anika and we set the stage for continued success in 2008. We have a robust pipeline of products and indications for out proprietary HA technology that we can begin to leverage worldwide. In 2008, our goals are to successfully introduce three new products to the market, continue to broaden our joint health franchise of new indications in differentiated features, realize the potential of our ELEVESS product line with the new partner and take full advantage of our personnel facilities to enhance our processes and maximize our efficiency.
And with that, I will ask the operator to open the call up for your questions. Karma, we are ready for questions.
(Operator Instructions). And the first question comes from the line of Amy Stevens from Susquehanna. Please proceed.
Amy Stevens - Susquehanna
Thank you very much. Good morning, guys, how are you doing?
Good morning, Amy.
Good morning, Amy.
Amy Stevens - Susquehanna
Thanks for taking the question. I wanted to go through this with you in terms of your partner in discussion. Obviously, they are fairly well along in several circumstances: Do you think you are having the conversation with everyone that might be a potential partner with you at this point and that now it's just a matter of holding it down and getting to where you want to be with whoever becomes the ultimate partner, or are there players out there that you should be talking to that you haven't yet?
Amy, this is Kevin. I think that we've identified all of the potential candidates in our process. We've gone through a pretty thorough examination of who would be a good candidate to market this product for the Company. So, yes, we think we've considered the right players out there.
Amy Stevens - Susquehanna
Okay. All right. And is there, just a quick housekeeping item, could you give me the depreciation in CapEx for Q4 and for the year?
Certainly. Let me grab that as we're talking.
Amy Stevens - Susquehanna
Then I can follow-up with another question while you're doing that. This relates to ORTHOVISC mini and what you're seeing in Europe. Perhaps it's too early, but I'd still be interested in any early feedback that you're hearing. What are the primary -- what's going to be the majority usage in your opinion? Is it trigger-finger or, you know, what are the indications? Or is it more osteoarthritis? Where are you seeing the greatest usage of the product at this point?
We've seen this as primarily a small joint product. The particular study that we've embarked on in Europe is looking at the thumb, the CMC joint. And that's certainly a good candidate for us. But ankle, elbow and -- Chuck may have some additional thoughts on that, but those are certainly good candidates for the product.
Amy Stevens - Susquehanna
Is it a same size injection for all those three joints?
Pretty much. I would add a little more color to what Kevin said. We had run some trials in the recent past in the ankle. We've run some in the PMJ as well. The usage in both of those areas is growing. So these look like very attractive opportunities in addition to applications in the hand.
Amy, coming back to your original question. The depreciation for the quarter was approximately $200,000 and for the year around $700,000. The increased run-rate for Q4, obviously, related to having moved into the Bedford facility in mid-November.
Amy Stevens - Susquehanna
Okay. And CapEx?
Well, the CapEx number is pretty large. As you know, we've spent approximately $17 million, of which 15 relates to the Bedford facility and some of that relates to the CTA -- excuse me -- the manufacturing suite that we have put in place for the facility that we have on the ELEVESS products.
Amy Stevens - Susquehanna
Okay. And then in terms of the potential to introduce MONOVISC in the U.S.; what are you hearing about competitive products and their adoption at this point? What do you think is the reception for going toward a single-injection versus multiple-injections in the orthopedics community?
This is Chuck. There will likely always be a market for a multiple-injection product. It's hard at this point to gauge exactly how it will shake out between a single-injection product and a multiple-injection product. Probably, the majority of the practitioners but not a vast majority, maybe 60 plus percent, will move toward a single-injection product. But, as I said, there will still be in our case a market for the current ORTHOVISC formulation.
To address the competitive issue: we're aware, as probably many others are, that there are certainly two competitive products that are trying to work their way through the clinical and regulatory maze. One of them is a Genzyme product, and another one is called DUROLANE, which is manufactured by a company called Q-MED, which I believe is the license property of Smith & Nephew.
Amy Stevens - Susquehanna
Yeah. Okay. All right. Well, thank you. I'll follow-up later. I appreciate it. Thanks.
And the next question comes from the line of Bill Gibson from Nollenberger. Please proceed.
Bill Gibson - Nollenberger
Yeah. Kevin, you gave some guidance on net for this year. Does that assume that ELEVESS is on the market in the second half?
Yes, it does.
Bill Gibson - Nollenberger
Okay. That was it. Thank you.
(Operator Instructions). And there are no further questions at this time.
Very good then.
Once again, we'd like to thank all of you for your interest in the Anika Therapeutics and for your support, and we look forward to giving you the next update in about six to eight weeks after the first quarter results. Thanks.
Thank you very much everyone.
My pleasure. This concludes the presentation for today. Ladies and gentlemen, you may now disconnect. Have a wonderful week.
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