Anika Therapeutics - Q2 2023

Transcript

Operator (participant)

Good evening, ladies and gentlemen. Welcome to Anika's second quarter 2023 earnings conference call. If you have a question during the question-and-answer session, please press star one. I will now turn the call over to Mark Namaroff, Vice President, Investor Relations, ESG, and Corporate Communications. Please go ahead.

Mark Namaroff (VP of Investor Relations, ESG, and Corporate Communications)

Thank you. Good afternoon, everyone, and thank you for joining us for Anika's second quarter conference call and webcast. Our Q2 earnings press release was issued after the close of the market today and is available on our investor relations website, located at www.anika.com, as are our supplementary PowerPoint slides that will be used for the discussion today. With me on the call today are Dr. Cheryl Blanchard, President and Chief Executive Officer, and Mike Leavitt, Executive Vice President, Chief Financial Officer, and Treasurer. Please take a moment and open the slide presentation and refer to slide number 2. Before we begin, please understand that certain statements made during the call today constitute forward-looking statements as defined in the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties.

The company's actual results could differ materially from any anticipated future results, performance, or achievements. We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today. Please also see our most recent SEC filings for more information about risk factors that could affect our performance. In addition, during the call, we may refer to several adjusted or non-GAAP financial measures, which includes adjusted gross margin, adjusted EBITDA, adjusted net income, and adjusted earnings per share, which are used in addition to results presented in accordance with GAAP financial measures. We believe that non-GAAP measures provide an additional way of viewing aspects of our operation and performance. When considered with GAAP, considered with GAAP measures, and the reconciliation of GAAP measures, they provide an even more complete understanding of our business.

The reconciliation of these adjusted non-GAAP financial results to the most comparable GAAP measurements are available at the end of the presentation slide deck, and our second quarter 2023 press release. Now, I'd like to turn the call over to our President and CEO, Dr. Cheryl Blanchard. Cheryl?

Cheryl R. Blanchard (President and CEO)

Thanks, Mark. Good afternoon, everyone, thanks for joining us. Please turn to slide 3. I'm very pleased to say that Anika delivered strong second quarter results with 12% overall revenue growth, driven by our OA pain management business, with strong gross margins and improved bottom-line performance. Looking at the core parts of the business, which excludes non-orthopedic, we grew 16%, which is an outstanding result as our products continue to gain traction in the markets we serve. Our OA pain management business was stronger than anticipated, with 22% revenue growth, led by accelerating Monovisc growth globally, strong Cingal growth outside the U.S., and favorable product order timing from J&J Mitek in the U.S.. Halfway through the year, based on the very good results to date, we're raising our outlook for this product family for 2023, as Mike will describe shortly.

Our OA pain management products have the best clinical performance of any on the market. We're pleased to see J&J's robust results as they continue to further expand our number one market share position in the U.S. OA pain management market, and the strong performance of our international team with Cingal, together with Monovisc and Orthovisc, posting double-digit growth in the quarter. Cingal is truly becoming the next generation non-opioid OA pain product of choice in over 35 markets outside the U.S., and we're looking forward to U.S. market approval. On that topic, our interactions with the FDA regarding bringing Cingal to the U.S. have been progressing since last fall, when we successfully met the primary endpoint of our latest Phase III pivotal trial. We are pleased to have had a Type C meeting with the FDA in the second quarter as we actively engage with them toward U.S. approval.

With respect to our ongoing processes to source and secure development and commercial partners for Cingal in the U.S. and select Asian markets, I'm pleased with the initial interest as we engage with multiple parties. The substantial clinical and commercial de-risking has been well-received and will update you as we have developments to share. Our Joint Preservation and Restoration portfolio continues to strengthen, and our newest products drove continued growth in the second quarter, though slower than we originally expected, as some of our distributors experienced the recent industry dynamic of pent-up demand, causing a greater focus on large joints. We are actively determining where the strengths and opportunities are within our U..S hybrid channel and taking action accordingly to meet our growth objectives.

I'm pleased to report that our newest joint preservation product, the RevoMotion Reverse Shoulder Arthroplasty System, which has been in limited release since earlier this year, is seeing growing momentum as we continue to receive very positive clinical feedback. In fact, relative to our original plan, we've increased the number of surgeons in the limited launch and are accelerating the full market launch of RevoMotion to September, in conjunction with the Orthopedic Summit for Evolving Technologies, or OSET, annual meeting in Boston. We've initiated a full slate of training opportunities, both for our sales force and surgeons, and the full release of RevoMotion will contribute to the acceleration of our joint preservation business in the second half of this year.

I'm also happy to report that we signed an agreement with Materialise, the market leader in 3D planning solutions, to offer a customized software solution called AIM, or Anika Implant Management, that will be used for both our total and reverse shoulder systems. AIM will be available by the end of the year, and we're excited to provide this new capability to our customers, enabling them to better treat their patients with our innovative products. On the regenerative front, in cartilage repair, as we announced in May, we are thrilled to have now completed enrollment of the Hyalofast phase III clinical trial, putting us in a position to begin a modular PMA submission next year and concluding in 2025. The modular submission process the FDA has granted us for Hyalofast allows us to accelerate the PMA filing process by engaging the FDA as they review each module.

Lastly, we're very pleased with our progress in developing our HA-based regenerative rotator cuff patch system, which we have named Integrity. We call it Integrity because of the inherent structural integrity of our HA-based scaffold compared to the current first-generation collagen patches on the market. Additionally, the hyaluronic acid scaffold supports healing through improved cell infiltration, tissue remodeling, and tendon thickening. As critical as the implant is, the instrumentation, fixation, and delivery of the Integrity patch are just as important, and we believe we've nailed the designs in conjunction with our surgeon developer team. The instrumentation, delivery system, and fixation methods will all contribute to a seamless, efficient, and elegant rotator cuff augmentation system. Integrity is a key value driver for Anika, allowing us to serve the fast-growing regenerative rotator cuff repair market with an innovative solution tailored for ease of use by surgeons.

Let me now move into the pipeline and clinical updates. If you'd please turn to slide 4. Over the past three years, we've been investing with purpose to establish Anika as a global leader, addressing unmet needs in early intervention orthopedics, leveraging our core expertise in hyaluronic acid and portfolio across OA pain management, regenerative, sports medicine, and Arthrosurface joint solutions. Our pipeline is expanding Anika's near to medium-term market opportunity by over $3 billion, with a cadence of exciting, differentiated product launches in high-opportunity spaces. We've updated a number of key items on this pipeline slide, now reflecting more substantial opportunities in the OA pain management and regenerative spaces. First, the previous longer-term opportunities with Cingal and Hyalofast have advanced to become more short to medium-term, now with line of sight to U.S. regulatory filings for both products.

We expect the next generation OA pain market, served by Cingal, adds an additional $1 billion to our already $1 billion market opportunity served by Monovisc and Orthovisc. Cingal is perfectly positioned to win. We're also very excited about our off-the-shelf cartilage repair product, Hyalofast, and we now estimate this U.S. addressable market to be over $1 billion. Hyalofast is a key value driver for Anika that now has a well-defined pathway to the U.S. market by 2026. With the pivotal Phase III study fully enrolled, the FDA designating Hyalofast as a breakthrough device, and with a modular PMA filing approach. As excited as we are about Cingal and Hyalofast, we also believe our new Integrity HA Patch system is a game changer, allowing surgeons to use an HA-based woven matrix to support healing for rotator cuff tears in this over $150 million market.

Given the attractive market for regenerative patches, with valuations averaging $250 million for recent M&A transactions for first-generation collagen technologies, we believe this arthroscopic system has expansion opportunities beyond the shoulder and will also be a key driver for growth. With all the necessary 510(k)s now filed and two of the three already cleared, we expect to have the product ready for launch in 2024. The histology data we are seeing through 26 weeks is quite compelling compared to the market-leading collagen patch, and I can't wait to share more about this upcoming product and launch. On Tactoset, we filed our final 510(k) on a higher contrast version, which will enhance visualization under fluoroscopy, an important characteristic for some surgeons in certain applications. We have an exciting update that will support our build of the augmentation market.

The first clinical study on using Tactoset to augment suture anchors was presented at the AOSSM meeting last month by Dr. Misty Suri, who is with Ochsner Health in New Orleans. Dr. Suri reported two key findings in a study that followed 240 patients over 12 months. First, the use of Tactoset to augment suture anchors in rotator cuff repair procedures resulted in a statistically significant decrease in the incidence of suture anchor pullout compared to the same surgeries performed without Tactoset. Second, the study demonstrated a statistically significant reduction in pain scores in the series using Tactoset. These data, to be published in a peer-reviewed journal, represent clear evidence of the benefits of Tactoset augmenting suture anchors in rotator cuff repairs and highlight the significant market potential for Tactoset.

As the clinical evidence for augmentation in rotator cuff repairs continues to build, we expect the momentum and adoption to increase as well, which is a clear win for both surgeons and their patients. Our new X-Twist suture anchor system in sports medicine is gaining early traction in the market following our Q1 full market release of the PEEK version with ongoing, very positive surgeon feedback. As we continue to expand our commercial presence and reach with this key product, we are also developing follow-on products, including a biocomposite version that we expect to launch next year. Lastly, our new RevoMotion Reverse Shoulder Arthroplasty System, competing in the fast-growing, now $1 billion U.S. reverse shoulder market, has had a successful limited market release, and we've expanded the surgeon base beyond what we originally planned.

As I noted earlier, based on these strong results in the limited release, we are accelerating our full market release to occur in September. Together, from Cingal to RevoMotion, we have assembled a tremendous portfolio that opens up a $3 billion market opportunity with solutions that truly solve unmet needs across early intervention orthopedics, all in line with our mission of restoring active living around the world. This progress positions Anika better than ever to deliver meaningful value for our stakeholders. Now I'd like to turn the call over to Mike to review the second quarter results and guidance for the remainder of the year. Mike?

Michael Levitz (CFO)

Thank you, Cheryl. Please turn to slide 5. I will now walk you through our financial results for the second quarter of 2023. I'm pleased to report total revenue for the quarter grew to $44.3 million, an increase of 12% over the prior year, on growth in OA Pain Management and Joint Preservation and Restoration, partially offset by lower non-orthopedic revenues. The lower non-orthopedic revenues reduced total company growth in the quarter by approximately four percentage points. Revenue in our largest product family, OA Pain Management, increased 22% to $29.3 million, due to sales growth on increasing global customer demand, led by Monovisc and Cingal, and favorable ordering patterns from both J&J Mitek in the U.S. and from our international distributors.

As a reminder, revenues can vary significantly on a quarterly basis based on ordering patterns by our partners in the U.S. and internationally. However, that volatility generally stabilizes on an annual basis. Our Joint Preservation and Restoration revenue in the quarter increased 5% to $12.7 million on early growth from our recent product launches, such as X-Twist and RevoMotion, the latter of which remained in limited release in the second quarter, but moves to full market release in September, as Cheryl highlighted. Our non-orthopedic revenue declined 33% to $2.3 million, primarily reflecting unfavorable year-over-year order timing by our veterinary distributor, as well as the continued impact from our exit from legacy product lines that do not support our growth and profitability objectives, which saw higher revenues last year from last-time buys.

Our gross margin in the second quarter increased to 65% and includes the non-cash impact of $1.6 million of acquisition-related amortization expense from the 2020 acquisitions of Arthrosurface and Parcus Medical. Our adjusted gross margin, which excludes the acquisition-related amortization, increased to 69% in the quarter, up from 67% last year due to business growth, favorable product mix, and manufacturing efficiencies. From a spending standpoint, our operating expenses totaled $32.6 million in the second quarter, up from $28.2 million in the same period of last year, largely due to $2.7 million of non-recurring corporate costs, of which $2.2 million related to shareholder activism that was resolved in April.

The increase in operating expenses also included higher spending this year to support compliance with expanded global regulations, namely MDR in Europe, mostly for our legacy OA Pain Management products, as well as development and launch readiness costs for key upcoming new products, such as our Integrity HA-Based Rotator Cuff Patch System. Our net loss for the quarter was $2.7 million, or $0.19 per share. That's down from our net loss of $2.8 million, or $0.20 per share in the second quarter of last year. We generated adjusted net income of $800,000 this quarter, or $0.06 per diluted share. That's up from an adjusted net loss of $1.6 million, or $0.12 per share in the prior year.

Our adjusted EBITDA generated in the quarter was $6.3 million, up from $4.4 million in the second quarter of last year. The increase was primarily due to revenue growth and improved gross margins, offset in part by $500,000 of certain non-recurring corporate costs, largely associated with the Parcus Medical arbitration that was settled during the second quarter. Lastly, with regards to our cash flow and capital structure, we had net operating cash outflows of $8.3 million during the second quarter, primarily reflecting $8.3 million paid in the quarter for non-recurring costs incurred in both the first and second quarters of 2023 for the settlement of the Parcus Medical arbitration and shareholder activism, as well as other non-recurring corporate costs.

Our capital expenditures in the quarter totaled $1.5 million, down slightly from last year, related to continued investments in manufacturing capabilities, supporting growth in our OA Pain Management product lines, as well as instruments associated with our key new product launches, such as RevoMotion. Additionally, we spent $5 million in the second quarter to repurchase stock under an accelerated stock repurchase program initiated in May and concluded in July. This was the first activity under the new stock repurchase program authorized by Anika's board of directors in the second quarter, under which $10 million would be split between an accelerated stock repurchase and an open market program, a second $10 million, which is subject to positive cash flows, that would be through an open market program.

We ended the second quarter with $65.1 million in cash and no outstanding debt. As Anika maintains a healthy balance sheet and is well positioned to continue to self-fund our growth initiatives to drive shareholder value. Please turn to slide 6. Now I would like to review our full year financial outlook for fiscal year 2023. Based on our positive progress to date, we are raising the low end of our previously announced revenue range with an updated outlook for fiscal year 2023 revenue of $159.5 million-$163 million, representing growth of 2%-4% over last year. As we expect greater above-market growth in OA Pain Management and accelerated growth in Joint Preservation and Restoration to be offset by lower ancillary non-orthopedic revenues.

The lower non-orthopedic revenues reduce total company growth this year by approximately four percentage points. In OA Pain Management, we now expect revenue of $96 million-$97.5 million. That's up 4%-6% over last year, as our market-leading products continue to gain adoption globally. This outlook is up compared to our previous range of $93.5 million-$96 million on the strong progress year to date and positive momentum in the market. As we look at the second half of the year, while timing can vary on a quarterly basis due to distributor ordering patterns, we expect OA Pain Management revenues between the third and fourth quarters to be relatively level to one another. In Joint Preservation and Restoration, we now expect revenue of $54 million-$55.5 million.

That's up 7%-10% over last year, an acceleration over last year, due primarily to our new products such as X-Twist and RevoMotion. Our previous range was $55.5 million-$58 million, and our revised growth outlook reflects a slower than expected sales ramp this year through our hybrid channel, as Cheryl mentioned. In the second half, our guidance assumes normal seasonality. We now expect non-orthopedic revenue of $9.5 million-$10 million, a decrease of approximately 30% from last year, primarily due to last year's last time buys of legacy products and veterinary order timing. This updated outlook is a bit higher than our previous outlook of approximately $9 million.

We have no changes to the rest of our PNL outlook and continue to expect adjusted gross margin for the year to be roughly in line with last year, and adjusted EBITDA margin to be positive for the year in the low single digits as compared to 8% last year, reflecting the cost to demonstrate compliance with expanded global regulations, primarily for our legacy OA pain management products, enhanced operational capabilities to support sustainable growth, as well as the development and launch of key joint preservation products. While spending was higher in the first half of the year due to non-recurring costs, primarily associated with the Parcus Medical arbitration and shareholder activism, now that both have settled in the second quarter, we expect operating expenses to decrease in the second half of 2023 compared to the first half.

In summary, now over halfway through the year, we are pleased to raise the low end of our revenue outlook for 2023 and be on track for our margin targets as we drive both operational execution and the development and launch of key new products. I will now turn the call back over to Cheryl.

Cheryl R. Blanchard (President and CEO)

Thanks, Mike. Please turn to slide 7. Before we open the call up for Q&A, I want to reiterate our excitement as the progress we've made in building on Anika's historic strength in hyaluronic acid, addressing OA pain, to now assembling best-in-class solutions across early intervention orthopedics. We're pleased to see the acceleration in growth of our already market-leading viscosupplement for OA pain management, the tremendous opportunities afforded by our next generation non-opioid OA pain management product, Cingal, the growing strength of our HA-based regenerative portfolio, including meaningful, differentiated regenerative solutions for cartilage and rotator cuff repair, and the progress we've made in further strengthening our already robust portfolio across sports medicine and minimally invasive joint solutions. We've been able to self-fund this portfolio development and continue to maintain a healthy balance sheet with a solid cash position and no debt.

I'd like to take a moment to thank all our employees for their continued hard work and dedication to supporting our efforts. Together, we are building real momentum as we work to achieve our mission of restoring active living for people around the world. With that, we'll open up the line for questions.

Operator (participant)

Thank you, ladies and gentlemen. We will now begin the question and answer session. If you have a question, please press star, then one on your touchtone phone. If you would like to cancel your request, please press star two. Please ensure that you lift up the handset first if you are using a speakerphone. Our first question comes from George Sellers. Go ahead, George.

George Sellers (Equity Research Analyst in Medical Devices & Hospital Supply)

Hey, good afternoon, and thanks for taking the question. I apologize if I, if I missed this detail earlier. We've been jumping a little bit from call to call this afternoon. On, on Cingal, I'm just curious if you could give us some additional color on, you know, what, what a commercial partnership might look like in the U.S., if that'd be similar to the, the Orthovisc and Monovisc partnership with Mitek, or what that sort of commercialization process and, and rollout could potentially look like?

Cheryl R. Blanchard (President and CEO)

Yeah, thanks, George. We appreciate the question about Cingal. It's a, it's obviously a product that we remain very excited about. You know, I think considering the fact that we really have what, what I see as just unparalleled data around osteoarthritis pain reduction with Cingal as a next generation, OA pain product, you know, we're gonna run a fulsome process around understanding our best partnership opportunities in the United States for optimizing shareholder value. Our shareholders have obviously made significant investments in the development of that product. We're focused on really driving the right outcome there relative to our shareholders.

I'm obviously not gonna get into details around discussions or potential structures. There, there is significant interest in the U.S.. We've also talked about the fact that we're engaging with parties in select Asian markets. We're, we're seeing a lot of interest there also. More to come on that. I wouldn't wanna speculate or provide any details that would get in the way of a fulsome process. We remain really excited about the product and also on our, our continuing dialogue to get Cingal in the U.S. around our conversations with FDA.

George Sellers (Equity Research Analyst in Medical Devices & Hospital Supply)

Okay, that, that's really helpful color. Switching to Joint Preservation and Restoration, that was a really strong first quarter, and then took a little bit of a, of a step back this quarter, relative to our expectations, at least. I'm, I'm just curious what some of the drivers there were and, and why that outlook is a little bit lighter than where it was exiting last quarter.

Cheryl R. Blanchard (President and CEO)

Yep, great question. You know, on our joint preservation business, first of all, we've built out a, a number of really strong products. We continue to get very strong clinical feedback on them with X-Twist and RevoMotion. We are really in the kind of finished the first full quarter in full market release of X-Twist, and we are in a limited market release of RevoMotion. I don't, I don't wanna get ahead of ourselves relative to where we're at with those product launches. Another thing to, to consider around the fact that we've got this valuable portfolio that we've built, that we're just entering these larger markets, but we are learning about where our hybrid sales force has strengths and areas that we need to strengthen.

We, you know, we're really actively focusing on determining where the strengths and weaknesses are, and, and taking action to make sure we meet those growth objectives. I will tell you that our approach around selling these products, we've tried to be very thoughtful about our spend. That's why we've gone with that hybrid sales force, so that we don't have the, the full burden of the full fixed cost of a, a fully owned sales force. That there are ways that we are continuing to drive focus amongst those distributors. I'll tell you that the distributors that are really focused on us are growing and growing nicely.

What we are seeing as we, as we launch additional products and products that are exciting to them, that's really the way that we're gonna be continuing to drive focus and command attention from those distributors in that hybrid sales force. I'll give you an example, Integrity. Integrity is an exciting product. Our distributors are kind of chomping at the bit to get it, and we're really being thoughtful about, how, how we decide how we're gonna sell Integrity, so that we can really optimize the, the growth potential for that product.

The other thing I'll mention in this past quarter is we really are seeing with some of our distributors, some of our distributors sell hip and knee products, and that large joint business, if you've seen the report outs of some of the other competitors that are in that space, which we are not, many of our distributors were focused on the large growth opportunities there in the last quarter. So getting kind of anniversarying through the bolus of patients that are coming through the system post-COVID with large joints, I think, gets us to a better day and gets us refocused with those distributors on the joint preservation business that Anika's got, with all the great new product launches that we're driving.

George Sellers (Equity Research Analyst in Medical Devices & Hospital Supply)

Okay. That's really, really helpful. I appreciate all that detail. Maybe if I could squeeze one more, and you touched on...

Cheryl R. Blanchard (President and CEO)

Sure.

George Sellers (Equity Research Analyst in Medical Devices & Hospital Supply)

-it a little bit, mentioning Integrity. I'm just curious if you could give a little bit more detail on the, the 510 clearances you've already received for that and what's left to go, and is there potential that that could actually be launched, at the end of this year?

Cheryl R. Blanchard (President and CEO)

Yeah, great question. Integrity is, is a product that we are very excited about. It really continues to build our regenerative portfolio and really allows us to continue to focus on that shoulder pathology that we've continued to be focused on with a number of our other product launches. The, the Integrity Rotator Cuff Patch System is a full system that has the regenerative patch component based on hyaluronic acid and fixation and instrumentation for ease of delivery and for ease of surgery for the surgeons. The fixation elements include a staple that allows fixation to bone and darts that allow fixation to the cuff. The two 510(k)s that we received are for those fixation elements. We're, we're now just waiting on our, our final process with the final 510(k) around the patch. We've made significant progress there.

The surgeon team that we've worked with to develop that is incredibly excited about this. We see incredible regenerative capacity with this product relative to the first generation collagen technologies out there in a head-to-head study that we've done, and, and we really look forward to providing more information on this launch. Relative to the timing, we'll definitely be looking to launch in 2024, and if we have good news, we'll certainly let you know.

George Sellers (Equity Research Analyst in Medical Devices & Hospital Supply)

Okay, great. Well, thank you again for the time, and I appreciate getting to squeeze one more there at the end.

Cheryl R. Blanchard (President and CEO)

Absolutely, George. Thanks.

Operator (participant)

Our next question comes from Jim Sidoti. Go ahead, Jim.

Jim Sidoti (Equity ResearchAnalyst)

Hi, good afternoon, and thanks for taking the question. Can you, can you talk a little bit more, more about some of the options for Cingal after your meeting with the FDA? Can you disclose, you know, if you think another trial will be necessary?

Cheryl R. Blanchard (President and CEO)

Yeah, thanks, Jim. The discussions with the FDA in that Type C meeting were really focused around a number of conversations that we've had about making sure that we address the NDA requirements. While we don't expect to fund another kinda full factorial clinical trial, there are other questions around, like, the 505(b)(2) aspects of the steroid and around the fact that FDA is now regulating the HA Monovisc in Cingal as a drug. The discussion was really focused around that, and we are actually waiting to hear back from FDA on a couple of things that we submitted to them around proposals to address some additional topics that we're waiting to hear back from them on.

I wouldn't really want to speculate on when or what we hear back, but we'll certainly update you as we learn more.

Jim Sidoti (Equity ResearchAnalyst)

Could a potential distribution partner for Cingal fund whatever requirements are needed to get through the FDA?

Cheryl R. Blanchard (President and CEO)

Again, good question, and we, we obviously have multiple work streams ongoing around partnerships in the U.S. and select Asian countries. The types of structures that those deals typically have involve some sort of an upfront, which I would expect. There is the potential for a cash infusion to help fund some or whatever of that additional work would be necessary. Again, there's not an intention that Anika is funding a large full factorial clinical trial from here on out.

Jim Sidoti (Equity ResearchAnalyst)

Okay, and then switching to Hyalofast. Enrollment's completed, and can you just remind me, what's the follow-up for that trial?

Cheryl R. Blanchard (President and CEO)

Yeah.

Jim Sidoti (Equity ResearchAnalyst)

The patient.

Cheryl R. Blanchard (President and CEO)

The follow-up is two years, so the last patient out will be in 2025. We'll start filing our modular PMA in 2024, and then the final module that we file will be the clinical module in 2025.

Jim Sidoti (Equity ResearchAnalyst)

Will you be able to release any data in 2024 to give .an idea of how the product performed on the first round?

Cheryl R. Blanchard (President and CEO)

Well, I'll tell you one, one thing about Hyalofast that I, I'm not sure people in the U.S are as familiar with, is we've been selling that product for many, many years outside the U.S.. There are actually 40-plus clinical publications already out there about Hyalofast. We already know how it performs, and that's based on a number of independent studies that were done OUS. In terms of when we will be disclosing data from the FDA pivotal trial, it will not be until after we've unblinded the study, which will be following the last patient out in 2025.

Jim Sidoti (Equity ResearchAnalyst)

Right. Then, switching over to the, to the, second quarter. You know, the, the, the joint pain revenue, I mean, up 22%, just, you know, out of this world. Yeah, based on your guidance, you're looking for that to come down to average, you know, around $23.5 million-$24 million a quarter for the back half of the year. Is that strong June quarter, is that primarily timing of orders to Mitek, or, or is it strong Cingal, or, you know, and, and why don't you think it continues at this pace?

Michael Levitz (CFO)

Hi, Jim, this is Mike. I'll, I'll take that question. As you know, and you've been following Anika for quite some time, you, you got a lumpy revenue stream, uneven ordering patterns that just happens largely when you're dealing with a large company like J&J, that, that can happen from quarter to quarter. The majority of our revenues are, are transfer sales. There is a component that's royalties, which is related to end user sales. We had just a lot of, a lot of favorable timing in the second quarter, and that was definitely why, you know, it's so much higher than what our normal run rate would be. Credit to our, our operations team for the amount of product that they got through. It was, it was a tremendous effort.

The reason we raised our guidance for OA pain management for the year is really because of the underlying momentum in the business. We saw a strong Q2, Mitek did, for Monovisc, principally, and outside the U.S., we saw it for Cingal, and that's been a continuing trend. Both of which were very encouraging, and that's why we were able to, to raise our guidance. Yes, the, the second half, the transfer units will be lower, than, than in the first half, and that's what was reflected in the guide. I tried to say it's probably going to be even between Q3 and Q4 as far as we can tell from the ordering patterns, at that, at that lower level.

The underlying end-user sales continue the strong momentum, and, and, that's the basis for the raise and, and for the strength in that business.

Jim Sidoti (Equity ResearchAnalyst)

Okay. You know, I, I don't recall a, a $30 million quarter ever before. Is this the highest quarter you've ever had for, for joint pain products?

Michael Levitz (CFO)

You know, I'd have to look back, to see, but, this was a tremendous quarter, and we're very excited, about that, both operationally, the execution that occurred and to see that strong and growing demand is really encouraging. So yeah, I was very pleased with the quarter.

Jim Sidoti (Equity ResearchAnalyst)

All right, just one last follow-up. On the other side of business, the Joint Preservation, down $1 million in the first quarter, which I, I don't think you expected. You mentioned that there might be a backlog of patients in the large joint category that needed surgeries, and, and, and maybe, maybe you didn't have as much access as you thought. I mean, is there any other reason why you think you were down $1 million from the first quarter?

Cheryl R. Blanchard (President and CEO)

Yeah, I certainly think that the industry dynamics of the hip and knee business really, just seeing a very large bolus of patients coming through the system. A number of our distributors in our hybrid sales force also sell hips and knees. I think from a focus perspective, there was definitely, from an Anika, an Anika view, there, there was probably a distraction there for those distributors being very focused on the hip and knee side of the business. I will say, though, that the distributors that are very focused on Anika are growing our business and growing it nicely. One of the things that we're really doing is understanding how to continue to optimize that hybrid sales force and at the same time, be thoughtful about how we go about that relative to the investment that we're making.

We still see a tremendous opportunity for growth in the JPR business, especially with our new product launches, and we're still very bullish on the business. We understand based on the dynamic that happened with the hip and knee business, that there's additional work to do there, and we're very focused on it.

Michael Levitz (CFO)

Jim, this is Mike. Just one other comment I would make. If you recall, in the first quarter, one of the things we called out was that there was favorable timing internationally. In the U.S., where we're launching these new products and whatnot, there wasn't a decrease in the, from the first to the second quarter. That really was timing, in the international business, and we called out on the first quarter, and we said it was probably going to be a headwind in the second quarter, and that's exactly what we saw.

Jim Sidoti (Equity ResearchAnalyst)

I mean, is there any reason to not think that this business will be, you know, double-digit grower over the next few quarters?

Michael Levitz (CFO)

Yeah. No, Jim, I mean, I look at the guidance, the guidance that we have is 7-2, 7%-10%. We're 8% through the first half of the year. We accelerated in the second half of last year. We expect to accelerate in the second half of this year. you know, one of the things that we're excited about as we go into 2024 is the RevoMotion and seeing that, you know, have it move into full market release at the end of the third quarter. It's not as much of a big mover for, for this year, just because people tend to buy it, try it out, and then, and then follow on at a later point after they see how it works.

Really, it's encouraging as we look at 2024. Yeah, we do see an acceleration in the second half of this year. One thing I didn't mention, though, is, we do expect normal seasonality, you know, that really implies a strong Q4. That's what we expect this year, just based on things seem to have returned to normal, which is, which is encouraging.

Jim Sidoti (Equity ResearchAnalyst)

Yeah, that, and that's what I meant with my question when I said double-digit grower. I didn't mean for the remainder of 2023. I was talking about 2024 and beyond.

Michael Levitz (CFO)

Yeah, we, we view that as a double-digit growth business, yes.

Jim Sidoti (Equity ResearchAnalyst)

Okay. All right. Thank you.

Cheryl R. Blanchard (President and CEO)

Thanks, Jim.

George Sellers (Equity Research Analyst in Medical Devices & Hospital Supply)

Thank you.

Operator (participant)

Ladies and gentlemen, we have no more questions in the queue. This concludes today's conference. Thank you for participating. You may now disconnect.