Anika Therapeutics, Inc.
Q3 2013 Earnings Call Transcript

Published: 31 Oct 2013

[Operator:]

Good day, ladies and gentlemen. And welcome to the Third Quarter 2013 Anika Therapeutics Earnings Conference Call. My name is Chantalle, and I will be your facilitator for today’s call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Ms. Sylvia Cheung, Chief Financial Officer. Please proceed, ma’am.

[Sylvia Cheung:]

Thank you, Chantalle. Good morning, everyone, and thank you for joining us. If you have not received a copy of the Anika news release, which was issued yesterday after the market closed or you would like to be added to our contact list, please call Sharon Merrill Associates at 617-542-5300. The news release is also posted in the Investor Relations section of our website at anikatherapeutics.com. In addition, a slide presentation is posted on the Anika website. It illustrates many of the key points 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. Now please turn to slide #2. 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 and Exchange Act of 1934. These statements are based on 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. Please see our SEC filings for more information about factors that could affect our results. Please now turn to slide #3 as I turn the call over to Dr. Charles Sherwood.

[Dr. Charles Sherwood:]

Thank you, Sylvia. And I would like to begin by saying congratulations to Red Sox Nation. It was a wicked awesome season. Now back to Anika business. This was another strong quarter for Anika with record third quarter net income and earnings. Total revenue was up 20% from the third quarter last year to $17.8 million. Net income grew from $1.6 million in the third quarter last year to $5 million and earnings increased from $0.11 a year ago to 33% --$0.33 per share for the current quarter. These results were driven by strong growth in our Orthobiologics franchise, as well as ongoing initiatives to improve performance across the entire business. They also measure against a weak set of revenue and profitability comparatives in the third quarter of 2012, as we have discussed in previous earnings calls. Our results were backed year earlier period reflected the temporary decline in product shipments due to temporary scale up issues which were ratified Q4 of 2012 at our Bedford manufacturing facility. I'll turn now to the business highlights starting with the Orthobiologics franchise on slide #4. U.S. demand for our flagship product Orthovisc continues to be the primary growth driver. Reflecting its many years of demonstrated and differentiated clinical benefits, Orthovisc is positioned as the market leader in the U.S. multi-injection segment. It’s also the number two U.S. brand in viscosupplementation overall. Orthovisc continues to grow at a rate more than double the U.S. domestic marketplace growth rate. Third quarter revenue from domestic sales of Orthovisc grew 26% from the same period last year. Our U.S. distribution partner, DePuy Mitek is leveraging the benefits of Orthovisc and promoting the product as a preferred option for treating osteoarthritis on the noninvasive and lower cost basis than surgery. This makes it well-suited to the current environment in healthcare. Mitek is continuing its strategic investments in patient education and access support, clinical education of practitioners and distribution channel support. Mitek’s sales team resources are focused on pursuing formulary positions and supporting the brand when not included. The goal of their successful marketing efforts is to expand the Orthovisc franchise and drive sales in what we continue to believe is a highly attractive market. In parallel life with Mitek’s marketing initiatives, our internal promotional and business development team was active this quarter in efforts to strengthen our Orthobiologics distribution network internationally. In markets outside the U.S., our viscosupplementation’s products portfolio includes Orthovisc and our single injection product Monovisc. International viscosupplementation revenue this quarter was up nearly five-fold from Q3 of 2012. Year-to-date revenue from our international viscosupplementation products grew 83% compared with the first nine months of 2012. This growth mainly reflects stronger sales in Canada and certain European countries. Late, last year we signed a new distribution agreement for Orthovisc and Monovisc in Canada with the top 10 pharmaceutical company in that country. We also signed a new contract with a large pharmaceutical company in Turkey to reactivate our cells in that region. We’ve been seeing the results of these efforts all year. This has been particularly true in Canada, where our new partner’s greater distribution capacity is expanding our viscosupplementation products reach in that territory. As we reported previously, we’ve been working to strengthen our international distribution channel for all of our Orthobiologics products, including Orthovisc, Monovisc as well as our cartilage regeneration product, Hyalofast. Our key focus globally is product positioning in supporting our distributors with the knowledge and tools they need to expand physician and patient awareness of our products, therapeutic advantages as they apply to their individual markets. As part of this initiative in the third quarter, we hosted an Orthobiologics global distributors meeting here at our facility in Bedford. This is a great opportunity for our distributors to share the success stories among their peers and trust, refresh and enhance our global marketing efforts. We filed this up a month later by hosting a viscosupplementation product training session for our newer Middle East distributors that was also very well received. In connection with the International Cartilage Repair Society annual Congress in Turkey, we hosted a well-received symposium on Hyalofast. During the same conference, we also held a meeting for our regenerative product development advisory panel. This is a group of five of the most world renowned physicians in the orthopedic field. A few of the panel members are former international cartilage repair society chairman with extensive experience in cartilage regeneration. As these activities demonstrate, we’re working closely with top leaders in the field to develop strategies to promote Hyalofast and other pipeline products. Interest in our Hyalofast product is high and we plan to conduct a follow-up meeting during the fourth quarter to continue this momentum and move forward with the product development concepts and plans, including human clinical trials. Although Hyalofast is currently targeted for use in trauma settings, we hope to develop this promising product as a treatment for wider range of orthopedic applications. Concurrently, we’re putting a great deal of effort into developing our distribution channel for both Monovisc and Hyalofast Internationally. Some of this effort is very prudent but there is still a good size segment that has yet to bear fruit given the regulatory timelines involved. Let’s now turn to Slide #5 in our product pipeline. As we announced earlier this month, Dr. John Sheets, Jr. has joined us as our new Chief Scientific Officer. John’s primary role is to oversee our technology and pipeline development allowing us to put all of the key development functions and activities under one highly skilled experience executive. We’re excited about John’s joining Anika as we advance our strategic initiatives and prepare the company for the next level of growth. In the R&D area, one of our key pipeline development activities for the near-term is the product Cingal. As we’ve discussed before, Cingal’s single injection viscosupplementation treatment for osteoarthritis that includes a therapeutic anti-inflammatory agent. It’s designed to provide patients and clinicians with an innovative treatment that promises potentially significant benefits over currently available therapies. During the second quarter, we commenced a multinational Phase III clinical study in support of our CE Mark application for Cingal and other global regulatory applications. Our current phase focus is patient enrollment. Since our call last quarter, we have expanded and initiated backup sites to accelerate enrollment. The trial is not proceeding as we had planned with targeted patient enrollment to be completed by the end of the first quarter 2014. Launching this trial is an important step in our strategy and we look forward to bring Cingal into the marketplace. We also made progress this quarter on our anti-adhesion product, Hyalospine. Hyalospine is designed to prevent scarring adhesions after spinal surgery. We completed a small but promising Hyalospine clinical study and received the European patent for the product in Q4 of 2012. Based on these clinical results, we decided to seek CE Mark approval. Our CE Mark dossier was submitted late in the third quarter and we expected to be approved before the end of the first quarter of 2014. Hyalospine is in its early stages and we are working on finalizing a commercialization strategy, but we are encouraged by the potential we see at this point. Turning to Slide #6. I have a brief update on Monovisc. Just prior to our Q2 conference call in early August, we submitted additional analyses to the FDA for their instructions and in support of our PMA amendment. What we know today that is that the reviewers has completed his review. The amendment has been through the office level and it’s now proceeding up the management chain for a final decision by the FDA’s Chief Scientific Officer, which is where Anika’s appeal process was addressed. We expect the process to move smoothly with definitive feedback to Anika in one to two months. There is still uncertainty. But we are encouraged by the progress today, especially in light of the government shutdown earlier this month. We remain prudently optimistic about the strength of our submission and the business case for Monovisc. Our partner, Mitek is well prepared for launching the product into the U.S. market quickly. And with that, I'll turn the call back over to you, Sylvia.

[Sylvia Cheung:]

Thank you, Chuck. Please turn to Slide #7 in the presentation. Slide 7 covers our income statement highlights for the quarter. Anika’s total revenue for the third quarter of 2013 was $17.8 million, compared with $14.8 million a year earlier. Our revenue growth continues to be driven by increased viscosupplementation product sales, primarily domestic sales of Orthovisc, which were up 26% from the third quarter last year. As previously discussed, the favorable comparison with Q3 of 2012 also reflected lower product sales in that period. This was the result of a temporary scale-up issue at our Bedford manufacturing facility, which resulted in a deferral of product revenue from Q3 to Q4 of 2012. Including international, Orthovisc and Monovisc revenue as well as Srl’s orthopedic products, total global Orthobiologics franchise revenue for the third quarter increased by $3.6 million or 39% year-over-year. This increase more than offset the expected $0.5 million decline in the ophthalmic franchise revenue for the quarter. As previously discussed, the ophthalmic sales decline is consistent with our current contractual minimum with Bausch & Lomb. Our overall revenue growth excluding the ophthalmic franchise was 27% year-to-date, compared with the same period last year. The declines in dermal and surgical revenues in the quarter from the same period in the prior year were temporary and primarily order timing driven. Our third quarter product gross margin was 68%, up nearly 20 percentage points from the third quarter last year. Consistent with prior two quarters, this improvement was driven by manufacturing efficiency gains at our Bedford facility, the elimination of unprofitable Italian tissue engineering operations, as well as favorable product mix. Total operating expenses excluding cost of product revenue and restructuring charges for the third quarter of 2013 remained at a level consistent with the same period last year. Higher R&D expense, primarily related to Cingal clinical trial spending was offset by lower SG&A expense. The reduction in SG&A expense reflected two factors. First, our ongoing cost reduction initiative, and second, certain non-recurring legal expenses in Q3 of last year. Our SG&A expense for the year earlier quarter included a non-recurring settlement payment to Medtronic related to our Merogel Injectable product. The product was temporarily withdrawn from the market due to a labeling error we discovered in the products packaging. The improved version of the product was re-launched earlier this year. In the current fourth quarter, we settled our corresponding Merogel Injectable claim against Fidia Farmaceutici, the product former contract manufacturer. Going forward, there will no longer be legal expenses related to this matter affecting our SG&A line. Net income was $5 million or $0.33 per diluted shares, compared with $1.6 million or $0.11 per diluted share a year ago. Setting aside this quarter’s favorable year-over-year comparison, our underlying growth in both operating and net income continues to be primarily driven by improved product gross profit. Please now turn to slide #8, titled Profitability Overview. Our operating income for the third quarter increased 185% from the third quarter of last year. In addition to the favorable comparison with Q3 2012, this improvement was driven in large part by two factors. First, our continued product revenue growth and second, higher product gross profit. Our gross profit is up from 2012 primarily due to planned efforts to improve efficiencies in operations and manufacturing. The dynamics driving our product gross margin for the third quarter were essentially the same that we reported all year. We continue to realize the planned manufacturing and operating efficiencies in our Bedford facility, transferring Srl gel-based product manufacturing from Italy to Bedford and closing the unprofitable tissue engineering operations also contributed to these savings. In addition, the improvement in product gross margin reflected a favorable product mix as in the first and second quarters. This was due to the higher proportions of Orthobiologics revenue as a percentage of total revenue, as well as lower upcoming product sales. Turning to slide #9, Anika generated approximately $20 million of cash during the first nine months of 2013. In addition to growing profits, this increased cash flow was driven by continued increased collections on accounts receivables and option exercises during the period. We are continuing to closely monitor working capital with an eye towards reducing our long-term debt, reinvesting in the growth of our business and maintaining a readiness to make strategic investments with the right opportunity. With that, I’ll turn the call back to Chuck.

[Dr. Charles Sherwood:]

Thank you, Sylvia. Turning to slide #10 in the outlook for 2013, Anika has outperformed our internal expectations through the first nine months of the year. We have delivered 10% topline growth and operating a net income of both up approximately 90% year-over-year. This increased profitability reflects the anticipate gains we made in operations, in manufacturing, more than offset the planned increases in R&D expenses. Looking ahead to our fourth quarter results, there are some plusses and possibly some potential minuses. On the plus side, as discussed earlier our SG&A will no longer include the legal expenses we have been incurring related to Merogel Injectable. On the topline, we began seeing indications in this third quarter of Mitek taking a more conservative approach to their Orthovisc inventory management and we may well see more of that as the year comes to a close. We received transfer payments for products supplied to Mitek and royalty payments on end-user sales. Thus, any inventory management related or activity that we may see for the remainder of 2013 will be temporary and potentially influenced only one arm of our revenue stream from Mitek. It is important to note that Mitek’s inventory and financial management activity does not represents a fall off in underlying demand for Orthovisc in the market place. Given the positive demand outlook for our Orthobiologics products, the improved efficiencies in our business and the strength of our product pipeline, we believe that Anika is well positioned for continued growth in profitability improvement this year and in the future. So, with that, I will turn the call back over to Chantalle so that we can take your questions.

[Operator:]

(Operator Instructions) Your first question comes from the line of Mark Landy of Summer Street. Please proceed.

[Mark Landy:]

Good morning, folks, and again congratulations. It seems to be a -- the stock record for the year which is fantastic.

[Sylvia Cheung:]

Thank you, Mark.

[Mark Landy:]

Yes. Sylvia just a quick question on kind of the impacts of -- the inventory or the manufacturers scale up issue from last year? Of the $2.8 million that was deferred into the fourth quarter, how much of that was Orthovisc?

[Sylvia Cheung:]

A good portion of that is Orthovisc related, the 2.8 actually spreads across multiple product lines as it relates to the overall production scale up at the Bedford facility.

[Mark Landy:]

Okay. So as a good portion $2 million, $1.5 million, I mean, can you just give us some indications so that we can get an apple-to-apples comparison on what the growth rate really was?

[Sylvia Cheung:]

Great. It’s roughly between $1.5 million to $2 million.

[Mark Landy:]

Okay. I will take it at there. Thanks. Chuck, perhaps turning to you on your comments that you are growing faster or double in the market growth, are you taking share from some of the other multi-injection products that are no longer being pushed, perhaps seen maybe one being withdrawal from the market given the acquisition of Genzyme by Sanofi? Or are you taking that share from physicians who have tried a single-short now prefer, realize that they prefer third shot, three shot regime, little bit of color would be helpful?

[Dr. Charles Sherwood:]

I can give you a little color. We are taking share. There is no question about that. I believe that the share -- the share gains that we are realizing as a result of the strategies that Mitek are putting in place, related to pricing, dealing with individual physicians, they have got some website as they have constructed to get some pull from actual patients through the physicians and many other factors. I do not believe and I have no specific knowledge to say that any of the other competitive products in the marketplace right now are backing away from their efforts to promote their product site. I am just -- I can’t say, I can’t say no, I am not in a position to comment on that. I know I have said this many times and I will repeat it, Orthovisc is -- has to be at least among the safest products on the market or the safest and it’s been formulated to have all of the properties that make it very effective and includes -- and it delivers great efficacy results. So bottom-line, it’s a safe and very, very effective product that’s comes in at a reasonable price point. So some of that has to be part of the reason that we are gaining share, it’s just a very, very good product.

[Mark Landy:]

Maybe I’ll push you a little bit there, I mean if we have a look kind of that market markets prior to the Genzyme Sanofi transaction, yet Hyalgan, which perhaps is about a 17% share? Then you essentially had Synvisc, which was obviously kind of being de-emphasized given the launch of Synvisc-One. How much of that Hyalgan share do you feel is perhaps is up for grabs, was up for grabs, might still be up for grabs or is now Sanofi or Genzyme have we refer to them, I mean, they are still pushing both Synvisc and Hyalgan in the three-shot market?

[Dr. Charles Sherwood:]

Okay. I will speculate but only a little bit, not, I don’t have the real numbers in front of me. Certainly, I believe that Hyalgan market share has decreased over the last year or two and I think that we are probably the beneficiary recipient of that. I believe that from what I know that probably the Synvisc-One single-shot share is holding at a level somewhere in the mid-to-upper 40s and I have no information to suggest that, that is necessarily declining significantly. The other very recently approved or not so recently approved, but the product been approved within the last year, Gel-One being marketed by Zimmer, seems to be a pretty good product but I think that the introduction and the adoption of that product by users has been a little slow. So there -- it’s just a ripple on the pond now. But that product will seems like come on stronger in the future which is why it’s important for us to try to get MONOVISC out there. I can only tell you couple of doctors that I have talked to one of which injects me about multi versus single injection products and he says that, he likes to see his patients back because if he injects them only one time, he is not sure what happen and it’s an ongoing patient that has been working with for awhile or intends to work for awhile, he wants to get some feedback from the patient about what’s really going on. So from his point of view, he doesn’t, unless he is really clear about his patients, got a lot of history, he prefers the multi-injection therapy. Someone likes myself, who is very busy, doesn’t particularly like to go to the doctor’s office, of course, like for single injection therapy, one shot and done. So I think there are always be a market for both and we are just going have to wait and see, and may be some other factors are going to way in here, that is pricing for treatment and other things like that and how things get on formularies. And all these side factor and it may not come down to whether you get one injection or three, but some other things.

[Mark Landy:]

Okay. All right. Fair enough.

[Dr. Charles Sherwood:]

Does that helpful.

[Mark Landy:]

Yeah. Absolutely, it does. Sylvia, just a couple of clarifications, the accounts receivable was -- is done nicely both --from the end of 2012 and also sequentially? What’s driving that and what is a sustainable level in terms of accounts receivable, because it has been adding to cash flow.

[Sylvia Cheung:]

Yeah. You are correct. Accounts receivable collections definitely, is I think one of the major contributors for cash flow. Some of the key drivers related to the decrease is our continued focused efforts on managing the receivables both domestically and internationally. And as you know international receivables from management standpoint is a little more challenging, but we are making good progress in terms of reducing the receivables for our international business. And a good part of that is as well in terms of new distributors we are putting contractor terms in place with an eye on faster payment terms. So we are managing it both from our existing distributor and also new distributors standpoint. So we are happy with the results that we have been able to accomplish so far. We believe that the overall receivables balance will grow as a result of growing product and total revenue.

[Mark Landy:]

Okay. So, I guess, the ratio of the receivable as it stands right now, either little bit of days, kind of days outstanding or as a specific ratio. So should we think of this is a norm, do you have more runway room to improve? How should we think about that just as we contemplate cash flow going forward?

[Sylvia Cheung:]

Sure. I do not see any other factors that cause me to think that we are going to be dramatically different from the current ratio, the current rate. So I think this is something that we have accomplished, we will be able to maintain. So hopefully that answered your question.

[Mark Landy:]

Yeah. It did. Thank you. And then the last question in terms of the R&D spend, I know that you took lot over last year, but I think you had intimated previously that perhaps there was going to be a step up in the second half of this year related to something call activities, obviously Cingal is ongoing. On a dollar basis, third quarter was down sequentially from the second quarter and probably at the low end of the year. Should we think of a pickup in the fourth quarter around the $4 million range or in the lowest? How should we think about that kind of -- I don’t know if it was a shortfall in R&D this quarter, but I think it was a little bit lower than we were anticipating and I think may be that you had intimated?

[Sylvia Cheung:]

Right. So for the year, R&D expense, we do expect it to be significantly higher than last year as a result of Cingal, as we have been discussing all year long. Q3 is lower as you have pointed out and one of the reasons there is because the trial is outside of the U.S., multi-national trial and with several countries in Europe. And typically the summer months are months, both in terms of business and other activities, slower periods. So we saw some slower activities in the third quarter, but certainly believe that the fourth quarter will pick up. And for the year, we expect the R&D spending to be at the double digit, low double-digit level as a percentage of total revenue which is an increase comparing to our historical levels in the recent years.

[Mark Landy:]

But if you look at it on a dollar basis, would the 2013 rate, it would exceed the 2012 rate by a wide margin, correct?

[Sylvia Cheung:]

Correct.

[Mark Landy:]

Okay. Thanks, guys. Catch up offline, I appreciate the time.

[Sylvia Cheung:]

Thank you, Mark.

[Operator:]

Your next question comes from the line Joe Munda of Sidoti & Company. Please proceed.

[Joe Munda:]

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

[Sylvia Cheung:]

Good morning, Joe.

[Joe Munda:]

Chuck, real quick couple of questions here. I know you guys talked about in your prepared remarks on DePuy Mitek and the success they are having. I was wondering if you could give us a little bit of a more of a deeper dive in exactly what is working compared to some of the competitors? What effect -- how are they so effective in selling into these channels?

[Dr. Charles Sherwood:]

Honestly, Joe, I can go a little deeper but I am not sure I can go and augment the comments that I already made too much.

[Joe Munda:]

Okay.

[Dr. Charles Sherwood:]

Like I mentioned in my prepared comments and to respond to Mark, actually it was. They have set up websites. They are working on practitioner training but they are also trying to address the trends where the patients go on the web to get more information. So they are trying to set up website and they have set up website to provide information on osteoarthritis and also on Orthovisc. They do a lot of physician training and they do it by getting some very good users. And they set those users up in small groups where they can address other people that may be interested in using the product. So the strategy is multifaceted. They have reached our programs and I am not sure that I can really explain these very well but they used to be -- had some affiliation with PGA events. So they used to bring a trailer to major tournaments and they had some physicians in there. And I believe they even did some injections in there but they certainly did some education for a target population of middle age golfers who have sore knees. Recently they have switched that to working with FIFA, the international soccer organization. And I know they had slightly shifted their emphasis to make it stronger towards sports medicine and they are going after in a little bit more. The Weekend Warriors who were allowed and maybe have a little bit of sore knee and they are providing education and trying to recruit patient's that way. They are also -- they are very clear but lots of people are doing this. But I think Mitek is doing it pretty effectively is they are trying to work with the doctors to help them find ways to recruit patients and built their practices. It’s very common but it’s double than the details and how you do that and how effective you are. So they spend a lot of money. They make a lot of investments. They think about this in a greater amount of details. They have started including us in some ways in some brain storming sessions because this is one and the most important products to the Mitek franchise. So it’s just a good work and some good all blue color, hard-nosed effort.

[Joe Munda:]

Okay. Yes. That’s definitely helpful. Thank you. Also on Monovisc, we appreciate the prepared remarks. First off, I mean, were you expecting a response sooner, I am guessing you expected the government shutdown might have or may have caused delay and I was wondering when was the last time you actually had some communication contact with the FDA?

[Dr. Charles Sherwood:]

Fairly, recently to understand the status as I reported in my prepared remarks as it’s moving up the management chain. So was I expecting things sooner? This is the government after all and so -- and the political process in our legislative branch has had an influence on activities of the government. So while this people were still around the office, I mean the productivity way, way down. So given that I’m not too satisfied with the progress you’re making.

[Joe Munda:]

Okay. Okay. That’s helpful. You spoke about Hyalospine, and approval, I was wondering what in your mind is the market opportunity for Hyalospine. I guess in Europe?

[Dr. Charles Sherwood:]

We’re turning to fully develop that now. So that -- that one in my prepared remark, I said we’re looking at the true commercial opportunity here. Its -- I don’t want to go into a lot of detail on this call. Maybe we’ll report further as we go along but it’s fairly innovative product. And there is a market for this, if you can demonstrate certain things. And as I said in our trials, it was small but very promising. So we’re really looking at that to see the kinds of claims that we would be able to make for the product. It’s different from a lot of the other products that are trying to do the same sort of thing that are either under development or maybe out in the market place currently. So we’re -- I also pointed that out in my prepared remarks to give people listening to the call a little bit of insight into the fact that there are things in our pipeline that we’re bringing forward. And that while we have a loyalty successful product in Orthovisc, and we hope Monovisc follow suit, that’s not the end of our game, include Hyalofast, in between those two points but there are things in the pipeline that we believe have some potential and we’re working on others. So we’re not Orthovisc company and that’s all.

[Joe Munda:]

Okay. Thank you, I have just two others really quick. I guess the last slide you talked about Mitek inventory management slowing. You just said it’s a very important product for them. Why are they being so conservative going to the fourth quarter, fourth quarter tends to be a nice stocking quarter going into the next year. So I’m just wondering why that’s occurring and how many reps if you know is Depuy Mitek have devoted to Ortho and Mono?

[Dr. Charles Sherwood:]

Just the rep question, first. I’m not sure exactly what the number is and they work through various distribution channels. They also get some support from the other companies within (inaudible) Depuy. So just simply give you a rep number doesn’t really describe the four level of effort that they are putting forth. And their reps sometime --initially their reps just work with the offices to help them set up the reimbursement scheme. So they weren’t really going into the doctor to sell the products to the doctor, that was three years ago, four years ago, five years ago. So the reps adapted a situation that in the spectrum of activities that occur and they’re selling a promotional product to hit the ones that are most important. I know that they are adding to staff. I thought their numbers were in the 50, 60, 70 range just direct support but I know they add -- they continue to add resources as the demand for the product goes up. Getting to the inventory situation, we’re trying to really get a handle on that. You know that sometimes the inventory situation within Johnson & Johnson is interesting. And I don’t want to go in a lot of detail but -- they have logistics people in centralized services that had some impact on the way that this thing gets handled. So it’s not totally under control 100% of the President of Mitek. So sometimes decisions are made, sometimes year end decisions are made to take inventory stand and they go back up later. So there’s a lot of factors that contribute here. We were just singling a situation where there is a small possibility that the ordering pattern in Q4, maybe a little different than it has been in years before. But if you remember when I -- Sylvia and I, when I in particular talked about 2013 we stated at each call that because of some of the things that happen in 2012, this year in the comparatives is going to be a kind of difficult year to me. I can pretty much foresee that as we move through ‘14, we had some really good legitimate comparatives with ‘13. So we thought we just drove the inventory situation out there but its very, very, very important to remember that regardless of what the inventory management decisions are at Mitek, the influence on us is going to be temporary and it has no relationship to the -- building demand for the product in the sell-through sales.

[Operator:]

(Operator Instruction) Your next question comes from the line of Greg Garner of Singular Research. Please proceed.

[Greg Garner:]

Yes. First of all thanks for taking my question and congratulations on a continuation of good quarterly run here. My first question, I just want to ask a little bit about the whole Monovisc approval process with the FDA. It seems like, Chuck, you prior got -- I know the PhD. in FDA proceeds through all the time you put into this. And so with that I just -- I guess I’m wondering if it’s been elevated to the Chief Scientist. Does that mean the data basically that has been provided, does that mean that its been analyzed, approved, they agree with it and were moving it up for the Chief Scientist stamp of approval who really doesn’t go into much more analysis. Is that appropriate or could you direct me in the right way here?

[Dr. Charles Sherwood:]

Okay. I have to -- you can appreciate that. I have to be very measured in my comments because I’m going to talk about the food drug administration which to some degree has a little bit of control over our fate. We felt that we just did not get a fair assessment at the reviewer branch level and that if Monovisc was a product and we had been able to demonstrate safety and efficacy. In somewhat of our post-talk analysis about 75%, 70% of the products are approved by medical -- as medical devices these days do post-talk analysis and win successful approvals. As a result then we decided that the dialogue there was not going anywhere. So we chose to use the appeal process to take it up the line in the administration of the FDA. And we went to the next level, we felt that we didn’t get the appropriate response there. So we appealed it up one more level and wound out that the CDRH center level and the person that handles our appeal at that level was the Chief Scientific Officer. This individual is -- used to be in Boston as I believe cardiologist. He is very intelligent, very objective and so he heard our appeal and we got the chance to have a dialogue with him and bring experts in and in that dialogue, we -- those suggestions that maybe we might want to take a look and analyze our data in a slightly different way. I might point out this would be a post-talk analysis. But he opened the door and then over the last some months, we’ve been completing that analysis and that is the analysis that is currently being evaluated. Since he took on the appeal, it appears that the decision will be made with recommendation from below but at his level. So that’s why we there and that’s how the whole process ended up there. As far as how we feel about it, this has taken sometime. He has shown that it is absolutely reasonable and he shown some flexibility. And so we’re having an intelligent dialogue and we’re encouraged by that. We believe the data make our case but we will see what they come back with.

[Greg Garner:]

Does it appears that bar is a little higher because of our few single injection products out there right now? But even though your data -- recent data that you’ve shown, it looks as if the Monovisc has much faster acting higher efficacy over time. But is that bar still higher as a result of existing products or is that really difficult to look that deep in the decision process?

[Dr. Charles Sherwood:]

I don’t -- I’m not sure that I would be comfortable saying that with each new product that hits the market, the bar gets higher. But it’s the matter of record that the individual reviewer that had our review also had the other products and it’s just a matter of record that he wasn’t in support of any of those either. The first one that went to market actually had to go to panel that was (inaudible). So I don’t think they are arbitrarily raising the bar. I just think that they need to have a little more flexibility in the way that they look at this whole product category. And I believe that we’re now getting that flexibility but it took us going up the appeal chain to get it.

[Operator:]

(Operator Instructions) Your next question comes from the line of Wally Walker of Hana Road Capital. Please proceed.

[Wally Walker:]

Good morning and congratulation on another great quarter. Did I hear correctly that you settle with Fidia as of the beginning of this quarter. And if I did hear correctly, did that affect the diluted share count going forward?

[Sylvia Cheung:]

You did hear correctly, the settlement with Fidia, we’ve concluded in the fourth quarter and as a result it will be reflected in our financial results for the fourth quarter of this year.

[Wally Walker:]

But they sold some of their shares to other holders in the first tranche and this settlement has some timeframe associated with it logistically but we do not know what they will do. But I say that there is certainly a chance that they will liquidate the rest of their position. Last time they did it in a private sale, correct? Yes.

[Sylvia Cheung:]

Yes. What we’re referring to is that the claim against Fidia had a 0.5 million shares tied up in escrow and the 0.5 million shares was from the original sale of Fidia Advanced Biopolymers. That’s was part of the settlement and the comments that Chuck made is related to the release of those shares and the ultimate sale, if there is any and the timing related to that. So just to add some of the background to the commentary.

[Operator:]

Your next question comes from the line of [Timothy Cole of PHE Capital Management]. Please proceed.

[Unidentified Analyst:]

Hello. What’s the settlement, legal settlement, will there be any ongoing benefit to your company other than litigation fees being lower. And then when it comes to stock and your success in strong cash flow, will the Board consider cash dividend to reward shareholders or share buybacks to offset some of the stock option dilution?

[Sylvia Cheung:]

With regards to first question about the settlements with Fidia, it is -- there are two components to it. In the fourth quarter, it will have one-time non-recurring settlements amounts going through our P&L. And from going forward, we’ve no longer been incurring any legal expenses as we commented in our scripted section. And with regards to your question about stock price and our cash position, we continue to be actively focusing on effectively utilizing the cash position that we have created as a result of been successful in managing our business and there are a number of options that we’re looking at, as well as discussing with the Board of Directors. So, I will leave the answer to that level there. At this point, there is nothing that we can provide you in any particular or specific details.

[Dr. Charles Sherwood:]

We’re discussing a lot of options. We continue to discuss a lot of options. They aren’t any definite directions or decisions made. Also did not hopefully understand the comment you made around dilution. Hello?

[Unidentified Analyst:]

To the long-term shareholders by buying back stock and that’s accretive because the company is growing and it’s on your guidance so forth. So share buybacks as well as cash dividends are some ways to directly reward the long-term loyal shareholders.

[Dr. Charles Sherwood:]

I understood that part. I thought you use the word dilution in there somewhere and I didn't quite catch that reference.

[Unidentified Analyst:]

So sometimes when lots of stock options are issued is dilutive to long-term shareholders.

[Dr. Charles Sherwood:]

Okay. All right.

[Unidentified Analyst:]

It dilutes the earnings per share.

[Dr. Charles Sherwood:]

All right. I thought you were trying to link that with the -- in someway to the Fidia settlement and there is no link here.

[Unidentified Analyst:]

Thank you.

[Operator:]

Your next question comes from the line of [Neil Gore]. Please proceed.

[Unidentified Analyst:]

Good morning, guys. Having been to your facility in Bedford I can fully appreciate why Mitek would cut back on their inventory levels. Your plans run so efficiently that they can use your plans for inventory and get it by kind of just in time basis. But my question to is, you have, I believe four products from Fidia and the dermal product, the five of them are approved by FDA and aren’t been marketed here in the United States at the present time. How are we doing with finding new distributors for these products, large distributors?

[Sylvia Cheung:]

Okay. I believe you are referring to our advanced wound care products, the lead product there, Hyalomatrix, which is 510(k) cleared in the United States. We are working on looking for a replacement partner here in the U.S. We’re making progress toward that and looking to hopefully sign up the distributor or partner sometime in 2014. In the meantime, we're taking some marketing initiatives internally to better understand the products with regards to its use, its reimbursement situation, so that the transition can be smooth and productive when it happens in 2014.

[Unidentified Analyst:]

Thank you.

[Sylvia Cheung:]

Welcome.

[Operator:]

At this time, there are no additional questions in the audio queue.

[Dr. Charles Sherwood:]

Okay. Well, thank you, Chantalle and thank the rest of you for calling in, asking some very good questions and for your interest in Anika. We’re excited about some of the performance we had over the last few quarters, look forward to continuing that successful trend and also to reporting back to you on our fourth quarter results. So, thank you very much and goodbye.

[Operator:]

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