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Anika Therapeutics, Inc. (NASDAQ:ANIK)

Q2 2012 Earnings Call

August 2, 2012 9:00 am ET

Executives

Kevin W. Quinlan – Chief Financial Officer, Treasurer & Secretary

Charles H. Sherwood, Ph. D. – President, Chief Executive Officer & Director

Analyst

Jim Gentrup – Discovery Investments

Greg Garner – Singular Research

Andre Thomas – Summer Street Research

Operator

Welcome to the second quarter 2012 Anika Therapeutics investor conference call. At this time all participants are in a listen only mode. We will conduct a question and answer session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Mr. Kevin Quinlan, Anika’s Chief Financial Officer.

Kevin W. Quinlan

If you have not received a copy of the Anika news release which was issued yesterday after the market closed or you would like to be added to our contact list, please contact Sharon Merrill Associates at 617-542-5300. The news release is posted in the investor relations section of our website at www.AnikaTherapeutics.com. In addition, the slide presentation is posted on the Anika website that illustrates some of the points that we’ll be covering during today’s call. The slides can be found on the investor relations section under the 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 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 last evening’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. Charles Sherwood.

Charles H. Sherwood, Ph. D.

Overall, Q2 was another good quarter for Anika. We generated all time record quarterly revenue and earnings while making solid progress towards some key strategic goals. Even with the success, not everything moved forward as rapidly as we had hoped and our business in Italy and other parts of Europe fell short of our expectation, a situation that we will address and improve as the year progresses.

Total revenue was up 22% from the second quarter last year driven primarily by strong sales of our bonded products and Orthovisc, both domestically and internationally. Domestic sales of Orthovisc increased both domestically and internationally. Domestic sales of Orthovisc increased 22% from Q2 of 2011 and Orthovisc sales to markets outside the US grew 16%. Our second quarter earnings reflect this overall top line growth.

Product gross margin improved to slightly over 57% and companywide R&D and SG&A expenses remained well managed and net income for the second quarter grew to $3.7 million or $0.26 per diluted share from $2.3 million or $0.17 in Q2 last year, an increase of 53%. From an operational perspective we successfully closed our Woburn facility and consolidated all of our manufacturing in Bedford by the end of the quarter on schedule.

We had a positive meeting with the FDA regarding our PMA application for Monovisc and we made further progress on our preparations for initiating clinical trials for Hyalograft C and Cingal in Europe. I’ll discuss these items in detail including some comments on the business outlook after Kevin’s financial review.

With that I’ll turn the call back to you Kevin.

Kevin W. Quinlan

Please turn to Slide Number Four in the presentation. Anika delivered record revenue and earnings per share in the second quarter of 2012. Total revenue increased 22% from the second quarter last year to $19.6 million. Product revenue was also up 22%. This growth reflected strong performance in our ophthalmic franchise as well as continued growth and demand for Orthovisc in our orthobiologics franchise.

Turning to orthobiologics on Slide Number Five, total franchise revenue for the second quarter grew 12% year-over-year to $10.9 million. As I said this growth was primarily driven by strong sales of Orthovisc in both the US and international markets. However, other than Orthovisc this was a challenging quarter internationally. Sales of Monovisc were lower than Q2 last year primarily due to order timing, a shift in distributors taking place in Turkey, and cautious ordering and inventory management by our European distributors in general related to the current macroeconomic conditions including Euro weakness versus the dollar.

International sales of our orthopedic products from S.r.l. were also lower as a result of several factors. Besides the impact of macroeconomic factors I just described, it is taking longer for our new Italian distributor to come up to speed in that market. Nonetheless we’re optimistic about the prospects in Europe for our products. We’re working to increase S.r.l.’s orthopedic sales in the coming quarters by expanding our distribution network for these products in markets outside of Italy which will be discussed later in the presentation.

Product revenue for Q2 in our other franchises are summarized on Slide Number Six. As I said this was a strong quarter for our Ophthalmic product franchise where product revenues increased 105% from the second quarter of 2011. This growth was driven by increased product shipments to Bausch & Lomb as part of our closing of the facility in Woburn.

Dermal franchise product revenue was down 81% from the second quarter last year primarily due to lower than expected shipments of our Hyalomatrix advanced wound care products in the US and Italian markets. We are taking steps to correct the situation and expect the situation to improve in the future.

Second quarter product revenue in our surgical franchise decreased slightly from the second quarter last year. As was the case in this year’s first quarter the decline was due to order timing for our ear, nose, and throat product line a situation we still expect to improve in future quarters. This offset continued growth in sales of our Hyalobarrier products in Europe and Korea, our bright spots of the franchise as a whole. This was a good quarter in our veterinary product franchise where product revenue was up 51% from the second quarter last year driven by solid demand for our core product Hyvisc.

I’ll turn now to our income statement highlights on Slide Number Seven. Net income for the second quarter of 2012 increased 64% to $3.7 million or $0.26 per diluted share from $2.3 million or $0.17 per diluted share in the second quarter of 2011. Gross margin for the second quarter of 2012 improved slightly to 57.2% from 56.8% in the second quarter of 2011 and was up 170 basis points for the first six months of 2012.

This increase was driven primarily by the higher production volume to meet our Q2 orders. With the closing of our former Woburn facility as of the end of June, starting in the third quarter we will now begin to realize an annual savings of approximately $1 million.

Q2 operating expenses were down 7% year-over-year driven by lower clinical spending and cost savings. We’re continuing to manage our R&D and SG&A expenses very carefully and both R&D and SG&A were down in the second quarter of last year. For the first six months 2012 total operating expenses excluding cost of product revenue were down 10% from the same period a year earlier.

Operating income for the second quarter and for the first six months of 2012 increased 67% and 117% respectively. Our improved profitability was driven by our revenue growth, higher gross margin and lower operating expenses as a result of last year’s cost savings initiatives. Our effective tax rate for the second quarter was 38.6% slightly higher than our tax rate of 37.2% in the second quarter of 2011 primarily due to lower tax credits anticipated in the current year including the federal R&D credit which expired with the 2011 tax year.

As shown on Slide Number Eight, our research and development expense for the second quarter of 2012 declined 17% to $1.3 million from $1.6 million in the second quarter last year. For the first six months of 2012 R&D expenses were down 9%. Although our clinical studies spending has been low for the past three quarters we’re expecting a higher level of pre-clinical and clinical activity and spending in the second half of 2012 primarily related to our Hyalograft C and Cingal products.

Turning to Slide Number Nine, selling general and administrative expenses for the second quarter of 2012 were $4.1 million down 3% from the second quarter of last year. For the first half of 2012 SG&A was down 10%. The reduction in SG&A for both was attributable to the classification of our unused Bedford manufacturing facility costs as G&A in 2011 and subsequently classifying it as manufacturing space this year based on the FDA’s approval received.

Our balance sheet is summarized on Slide Number 10. Anika closed the second quarter of 2012 with $37.9 million in cash and equivalents compared with $35.8 million on December 31, 2011. We’ve generated over $5 million in cash from operations during the quarter putting us at about $3.5 million cash from operations to date and well ahead of last year’s pace.

Looking ahead, we continue to be optimistic about the second half of 2012. Revenue in the second half of this year should continue to be strong and exceed last year’s second half numbers even with the record results we reported in Q3 and Q4 of 2011. Overall, we should have a very good year on the top and the bottom lines.

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

Charles H. Sherwood, Ph. D.

The topics I’ll be covering before we go to your questions are summarized on Slide Number 11, focusing first on our orthobiologics franchise. Orthobiologics continues to drive our top line growth fueled primarily by US sales of our flagship product Orthovisc. Our US distribution partner for Orthovisc DePuy Mitek, is continuing to expand physician awareness of Orthovisc with an outreach program focused on peer-to-peer physician education. Mitek is backing up this outreach with effective product distribution which has recently been expanded to include the pharmacy channel.

At the same time they’re successfully navigating the private payer landscape and gaining acceptance for Orthovisc as a preferred multi-injection product and getting on a larger number of formularies. They’re also being aggressive and innovative in generating patient awareness of Orthovisc as an alternative to knee replacement surgery, and connecting perspective patients with prescribing physicians.

This year along Mitek expects to host more than 100 evening seminars across the country where doctors meet with patients to educate them about osteoarthritis treatment options and the benefits of Orthovisc. In many cases these connections will stem from patient visits to the Orthovisc website www.Orthovisc.com which Mitek has designed to effectively leverage the baby boomer generation’s growing reliance on the Internet for medical education.

One final comment here on Mitek is that they continue to gain share in a growing market. The impeccable safety profile and the flexibility to use either a three or four injection regiment to treat patients with Orthovisc have been very strong selling points with clinicians. As I mentioned in my opening remarks Orthovisc sales for the second quarter were up 16% year-over-year in markets outside the US. We’re continuing to make progress internationally in expanding both physician and patient awareness and the increasing revenue numbers reflect this.

Shifting gears, this was a challenging quarter for Monovisc with sales declining 46% from Q2 last year. There are several reasons for this including the entry of new products into the market in some territories and the cost containment issues generated in weak economies. Nevertheless, we believe that Monovisc is the superior single injection product both from a safety and efficacy perspective. Our basic approach moving forward is to adopt worldwide the key success strategies employed so effectively by Mitek for Orthovisc in the United States.

Another key to unlocking significant sales potential for Monovisc internationally will be commercializing the product in the United States. As the second bullet on Slide Number 11 indicates we have news to report with regard to our PMA application with the FDA. On our call last quarter I mentioned that our request for an appeal meeting with the chief scientific officer of the FDA’s Center for Devices and Radiological Health had been granted.

The meeting took place on June 12th and we had what we believe was a productive dialog with the agency. Our focus was to address the FDA’s questions about the significance of our clinical trial data demonstrating the efficacy of Monovisc. The FDA asked us to do some additional analysis of the data and requested some supplemental follow up information from the clinicians and consultants who attended the meeting to provide third-party perspectives in support of our appeal. We recently fulfilled these requests and expect to hear back from the FDA by the end of the summer.

Elsewhere in orthobiologics, as stated previously, was also a challenging quarter for sales of our orthopedic products from Anika S.r.L. Our new distribution partner in S.r.l’s home market of Italy is still getting up to speed and addressing some unanticipated but resolvable hurdles and the economic competitive and reimbursement environment in Europe in general coupled with the strengthening dollar is creating greater pricing pressure. We do however expect an uptick in performance here in the second half of the year.

We made further progress during the second quarter in expanding distribution for our products in markets outside of Italy with the licensing and distribution agreement for Hyalofast with a new partner in Korea. This partnership focuses on Hyalofast in conjunction with BMAC, bone marrow aspirate concentrate for the management of osteochondral defects primarily those resulting from trauma.

Korean medical community has a well deserved reputation for pioneering innovations in tissue regeneration including stem cell therapies. Having Korean physicians functioning as product advocates for new innovations with Hyalofast will position us to strategically penetrate additional international markets with the product.

Turning now to the third bullet on Slide Number 11, our clinical development activity in the orthobiologics franchise continues to focus on two key pipeline products Hyalograft C and Cingal. Hyalograft C is the first cartilage generation product bioengineered for minimally invasive surgery. Cingal is a single injection [inaudible] supplementation treatment for osteoarthritis that includes a therapeutic agent.

During the second quarter we continued to make progress towards initiating a large randomized placebo controlled human clinical trial in the US and in Europe for Hyalograft C. These efforts focus on working out the logistics for supply investigational volumes of the product from our facility in Italy and the identification and qualification of clinical study centers. Our projected timeline is to start the US clinical trial for Hyalograft C in September pending FDA review and final approval of the protocol. Although we submitted our US and European application simultaneously the European review process takes longer so we expect to begin enrolling patients in Europe during the first quarter 2013.

With respect to Cingal, we said last quarter that our clinical strategy, particularly in the United States should solidify after we get a definitive response to our CE Mark application. During the second quarter we did in fact receive the positive response we were looking for meaning that Cingal will be considered a medical device in Europe and therefore qualify for CE Marking, a shorter approval pathway than what we expect in the United States. We need to provide clinical data in order to receive the CE Mark and we’re completing our presentations for a clinical trial and expect to begin patient enrollment after the first of the year. We anticipate that this trial will be one key piece of data to support US approval.

Finally, our commercial efforts in orthobiologics were supported with a number of scientific presentations during the quarter. These included a podium presentation on Hyalograft C and two presentations on Hyalofast at the SMA conference in Geneva, Switzerland, sports medicine. We also hosted a well attended lunch symposium on Hyalograft C and presented scientific papers on the product at the 10th World Congress of the International Cartilage Repair Society in Montreal.

The fourth bullet on Slide Number 11 references the other areas of our business. As in the first quarter, sales of S.r.l’s advanced wound care products and dermal franchise were down year-over-year primarily due to reduced shipments of our Hyalomatrix skin substitute through our US distribution partner Medtronics and to a lesser degree in Italy.

Elsewhere in the dermal franchise we’re working to expand the product portfolio and seeing significant distributor interest in our technology for aesthetic dermatology applications. We continue our development work on Elevess 2 which we believe will be a good supplement to our foundation product Elevess as we expand our portfolio in this area.

Product revenue in the surgical franchise also declined slightly in Q2 as in the first quarter and this was mainly due to order timing in our ENP product line. We anticipate shipping these orders in future quarters and expect modest growth in the surgical franchise for 2012 as a whole. The strongest single product in our surgical product portfolio continues to be Hyalobarrier, S.r.l’s anti adhesion product.

Korea, through our partnership with the Korean Green Cross and Taiwan continue to be the core markets for Hyalobarrier in Asia. For reasons that I mentioned previously with regards to Hyalofast, we believe that our success with Hyalobarrier in Korea and Taiwan can translate into penetration of other Asian markets.

Moving on, we do see mid double digit growth in the veterinary franchise during the second quarter, albeit from a relatively small base. This growth was driven in part by expanded distribution for the middle east. As I mentioned at the outset of my remarks, Q2 was a strong quarter for the Ophthalmic franchise. We resolved the ordering and supply chain issues that slowed our [inaudible] to Bausch & Lomb in the first quarter and ophthalmic product revenue more than doubled from Q2 last year.

This growth reflected operation at peak level to compete the additional lots in process out of our facility in Woburn before shutting the facility down. The second B&L contract extension that we signed at the end of last year should provide us with solid ongoing base business in the ophthalmic franchise through 2014. However, start in the third quarter shipments and revenue are likely to be at lower levels than we experienced with Bausch & Lomb historically and certainly lower than the levels we saw in this second quarter.

Turning to the fifth bullet on Slide Number 11, during the second quarter the DFA approval to manufacturing the B&L ophthalmic product portfolio at Bedford Massachusetts for sale in the United States was successfully completed. This was the last of the multiple approvals we needed and all of our manufacturing is now consolidated in Bedford. Our focus moving forward it to realize further savings by transferring the manufacturing of S.r.l.’s gel based aging products to Bedford as well.

We made good progress during the second quarter on the related pre-clinical activities, primarily the additional tested needed to complete the approval process for marketing these products in Europe and Asia. We expect to complete this process and be manufacturing S.r.l.’s gel based HA products in Bedford by the end of September and to begin seeing the positive financial impacts in the first quarter of 2013, once we’ve used up all of the inventory from our first supplier.

In summary, as shown in the sixth bullet on Slide Number 11, we’re starting the second half of 2012 with strong forward momentum. Completing the manufacturing consolidation allows us to strengthen our focus on our product pipeline and distribution network to drive top line growth. We have a number of other initiatives underway to improve performance elsewhere in the business and we look forward to reporting further operational progress and profitability improvement as we move through the second half of the year.

With that I’ll turn the call back over to the operator so we can take some of your questions.

Question-and-Answer Session

(Operator)

(Operator Instructions) Your first question comes from Jim Gentrup – Discovery Investments.

Jim Gentrup – Discovery Investments

I just wanted to pin you down more on the orthobiologics segment. I think first of all maybe clarify the growth in the US again year-over-year for this quarter?

Kevin W. Quinlan

The growth for this quarter in the US was about 24%.

Jim Gentrup – Discovery Investments

So really the kind of slow down, the 12% year-over-year and internationally was focused on Monovisc and international weakness, correct?

Kevin W. Quinlan

Monovisc and S.r.l. products.

Jim Gentrup – Discovery Investments

I think you said the second half some of this should rebound? That’s what I inferred, if you could maybe give us some more color on what you’re seeing so far this quarter and why it gives you confidence? Obviously, we’ve got some weakness overall in Europe but can you give us a little bit more color on what you’re seeing there right now?

Kevin W. Quinlan

Not really other than to say we’re working with our distributors to improve performance. As we mentioned we saw some cautiousness in order and inventory management in the second quarter so some of that will cause numbers to improve. But basically we’re just working with our distributors to improve performance.

Charles H. Sherwood, Ph. D.

I would say one other thing, and I mentioned it in my remarks so I’ll reiterate it. At the end of last year we changed our distribution and marketing partner in Italy. It took some time for them to get up to speed so to speak and we’re still working through that. So Italy is a reasonably sizeable market for us in orthopedics. That’s the biggest market for our tissue engineered products and so that has slowed some of our progress but we have been meeting regularly. The plans we have in place are solid, the efforts we’re putting forth are good, so we do anticipate that will improve a fair amount in the second half of the year.

Jim Gentrup – Discovery Investments

Then in the ophthalmic area I think you gave us some color already, the second half I’m assuming we might see a small decline or decrease in sales from last year?

Kevin W. Quinlan

As we said in our remarks, the expectation would be that the ophthalmic area would be lower in the second half of the year than the first half of the year.

Jim Gentrup – Discovery Investments

In dermal it’s down 53% for the first half of the year, can you play catch up there as well? I don’t remember what you said about that can you repeat that as well?

Kevin W. Quinlan

Just that we indicated that the Hyalomatrix product line which is the number one product in the advanced wound care area , the revenue is down mainly because of lower shipments to the US and in Italy. I think that’s a situation that’s going to take a little time to improve on.

Jim Gentrup – Discovery Investments

So maybe we expect continued weak results there until much later in the year or maybe in the next year?

Kevin W. Quinlan

Perhaps that’s a more likely scenario.

Jim Gentrup – Discovery Investments

Then finally, the vet business was surprisingly higher. Typically that’s a pretty steady type of contributor so I don’t know if there’s something – I know you mentioned middle east distribution, is that having that big of an impact or are there timing issues here as well?

Kevin W. Quinlan

I think it’s a little bit of both but I think the middle east is having an impact there for our distribution partner Boehringer Ingelheim Vetmedica.

Charles H. Sherwood, Ph. D.

There’s also a larger demand in the United States for Hyvisc I think the market is probably increasing a little bit and Hyvisc is a very solid product segment in which it competes so that’s part of it as well. Let’s go back to ophthalmics. The second quarter was just a huge quarter because we’re trying to get out of Woburn and we met a lot of orders but this will still be a strong year for ophthalmics for us overall. Second, one can never guarantee what’s going to happen moving forward but we do have a contract that guarantees us a certain level of business.

We’re not sure – there’s multiple suppliers for these products, we’re not sure what the other supplier is actually doing and why our volume was up so great this year. We’re also talking to Bausch & Lomb about some other expanded opportunities. These may or may not happen but the impression I want to leave you with is that this will be a pretty strong year for ophthalmics and there is the potential to continue on in the ophthalmics business in a reasonably strong way. Lots of things have to happen and we’ll see but about a year ago we kind of indicated that maybe this would fall off the radar screen but that’s not going to happen.

Jim Gentrup – Discovery Investments

But the second half though I think overall after being up 90% already year-to-date you’re going to show growth but the second will not be nearly that kind of growth, correct?

Kevin W. Quinlan

That’s correct. You almost had a reverse of last year where the second half of the year was very strong coming on the heels of a very good first half of the year and it’ll probably reverse the situation this year, a very strong first half and a good second half.

Jim Gentrup – Discovery Investments

But just to get closure on that business, you’re up 55% year-over-year, could that give you 20% growth for the full year? Is that something where you definitely are going to see or do you have that kind of visibility?

Kevin W. Quinlan

The visibility at the moment is that it’s going to be a very good year for the vet business.

Jim Gentrup – Discovery Investments

The gross margin 57.2% with the move now to Bedford, that was surprisingly high, a pleasant surprise. I think you’ve mentioned before goals, I think, close to 60% is that something that number one am I right on that number? Number two, could we inch towards that goal?

Kevin W. Quinlan

We have a stated goal, we started to say that last year and it was a time period three to five years out that got us into the 60s. We’ll see some improvement next year in our margin. I’m not expecting big improvements in the second half of this year.

Jim Gentrup – Discovery Investments

The ophthalmic revenue comes at a lower gross margin correct?

Kevin W. Quinlan

That’s correct.

Jim Gentrup – Discovery Investments

So really when you have less contribution there that should actually be bullish for the margin?

Kevin W. Quinlan

Correct. Although again, as both Chuck and I stated, the second half of the year is going to be good it’s not going to be a situation where it’s falling off the table.

Operator

Your next question comes from Greg Garner – Singular Research.

Greg Garner – Singular Research

The Orthovisc was a strong driver this quarter, is there any sense for how much the market is growing for Orthovisc?

Kevin W. Quinlan

It’s an interesting market, the Millennium Research Group has indicated that the market was going to grow about 13% this year. Our contacts at Mitek think that that number is a good number and maybe even a little bit better than that. It has been and continues to be a good growing market here in the US.

Greg Garner – Singular Research

That’d be 13% in the US, any sense for international or primarily Europe?

Kevin W. Quinlan

The Europe numbers, if you believe it, are lower. They’re more in the 5% range but that was also done outside of the current economic condition so it’s less clear what that might be.

Greg Garner – Singular Research

The Monovisc down in Europe, I mean that’s where it’s sold quite a bit, it sounds like there is too much in the channel? Is that it when you talk about the timing of orders? I understand where you’re trying to adopt the Mitek strategy to correct that situation but it just seems like it’s quite a drop there. Is there more competitive forces there? Is there something else happening in Europe? Can you give us some more color there?

Charles H. Sherwood, Ph. D.

We’re working very hard to penetrate additional territories in Europe and otherwise. A large percentage drop on a small number has not so much affect on the overall financial picture. So the Monovisc numbers are not where we’d like them to be and we think that in certain markets in Europe single injection products are not very popular and other markets we hope to establish they will be very, very popular.

Getting back to where we were I think there’s just a large caution about economic conditions by a lot of our distributors so the ordering patterns have gone way back, inventories have been cut way back. In some cases in the marketplace we’ve seen a little bit of a slowing for products in general. So we are pretty bullish about this product. We’re working on targeting certain markets where we think we can be very, very successful in Europe and in other places and it just takes a little more time to penetrate these markets and to find partners that can actually do the job for us effectively.

Greg Garner – Singular Research

Discussions on Monovisc with the FDA, it was mentioned about feedback from the FDA by the end of the summer. Does that mean by the end of this month, August?

Charles H. Sherwood, Ph. D.

Probably the last time we got a commitment from them the FDA didn’t meet it so you have to be realistic about this. We got our material in about a week and a half or so ago. We thought it might take one to two months to really get a response back from them.

Greg Garner – Singular Research

If their response is favorable how long does it take to ramp up and start marketing in the US? Will that be a few months or longer?

Charles H. Sherwood, Ph. D.

It depends on what the response is and when it comes but we’ve had a fair amount of discussion with our partner in the US Mitek so we’ve done much of the things that we could do but it will still take several months to I can’t really quantify that, three, four, five, I don’t know to really ramp up and get the product out there. I think we’ve done the basic things. We’ve talked about positioning but until we see the labeling, the final promotional things can’t really be put in place so it’s going to take a quarter or maybe a little longer to get going. I think when we ramped up Orthovisc after approval we got it out in the first quarter after approval but we didn’t really hit full stride until just about six months later after approval.

Greg Garner – Singular Research

Staying with a single injection product for a single product with the EU process that you mentioned that there’s one key point that would support the US approval. Are you talking about an endpoint for this, a short term study that would help for the application for the [inaudible] in the US? I just want to make sure I understand that properly.

Charles H. Sherwood, Ph. D.

What I’m talking about is the European situation is very clear, we understand the protocol, we’re finalizing it and getting ready to go. In the US we’re still talking to the FDA. So we know the study is going to be the main crux of our approval application but we’re saying it will be the key piece. We’re still negotiating whether it will be the only key piece or whether there will be additional pieces.

Greg Garner – Singular Research

So that would be earliest first half 2013?

Charles H. Sherwood, Ph. D.

The trial starting.

Greg Garner – Singular Research

The surgical markets in Asia, you mentioned how that could expand from Korea. Is that really more of a long term commentary or is this something you’re actively working on right now?

Charles H. Sherwood, Ph. D.

We’re actively working on it but it’s not a one quarter exercise.

Greg Garner – Singular Research

But is that something you might see some positive impact in 2013?

Charles H. Sherwood, Ph. D.

2013, yes.

Greg Garner – Singular Research

Just finally moving manufacturing to Bedford from Italy, what are the positive impacts moving the gel based production there? Are there some margin improvements or just better control over the process?

Charles H. Sherwood, Ph. D.

We currently have a contract manufacturer making the product in Italy. Moving the product to Bedford will allow us some margin improvements. It will allow us to do some actual product improvements and it will certainly allow us to have much greater control over product manufacturing and supply. It will provide us with some real logistical benefits.

Greg Garner – Singular Research

A forecasting question, this is about the R&D expense, it’s expected to increase here in the second half due to the clinical trials, with it being relatively low does that mean it should increase say 50% or would it perhaps even double?

Kevin W. Quinlan

I think when we hit full stride on the clinical trial which will be sometime next year we’ll see a ramp up in the R&D spending up to maybe 15% of revenue. We’re currently around 9%, I think it was for the first six months this year. We will see it increase significantly. Injections will start hopefully in September but by the time we really get going on this it will be sometime in the second quarter or so of next year, or midyear.

Greg Garner – Singular Research

We’re really talking about the Hyalograft C being the real driver initially but you’re thinking the Cingal will also start in 2013? That’s where you’re thinking the total of about 15% of revenue?

Kevin W. Quinlan

I think our modeling is showing that as a likely spot for the expenses.

Operator

Your next question comes from the line of Andre Thomas – Summer Street Research.

Andre Thomas – Summer Street Research

I have one quick question, can you shed some light on the impact of foreign currency on the quarter?

Kevin W. Quinlan

It’s not a major impact for us, it’s a good portion, about a third of the S.r.l. revenues is dollar denominated and the operations in S.r.l. are significantly smaller than the US operations. It’s not a big number.

Operator

I would now like to turn the call over to Dr. Sherwood for closing remarks.

GG

Thanks to everyone who was on the call who asked questions, we appreciate it. We look forward to speaking to you about our progress next quarter. Thank you and good bye.

Operator

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

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Source: Anika Therapeutics' CEO Discusses Q2 2012 Earnings Results - Earnings Call Transcript
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