Anika Therapeutics (NASDAQ:ANIK) Q4 2018 Earnings Call

0:00 Good evening, ladies and gentlemen, and welcome to ANECA Therapeutics' fourth quarter 2018 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero, on your touch-tone telephone. As a reminder, this conference call is being recorded. I will now turn the call over to Sylvia Chung, Chief Financial Officer. Please proceed.

0:30 Thank you, Ashley. Good evening, everyone, and thank you for joining our fourth quarter and full year 2018 earnings call. With me on the call today is Anika's president and chief executive officer, Joseph Darling. During today's call, Joe and I will review our fourth quarter and full year 2018 financial results and key business highlights, which were summarized in our earnings release issued today. A copy of the earnings release is available in the Investors Relations section of our website at annacatherapeutics.com. In addition, a slide presentation is posted on our website in the Investors Relations section under the Events and Presentations tab. We invite you to take a moment to open a file and follow the presentation along with us. Please turn to slide number one.

1:19 Before we begin, please remember that certain statements made during this conference call constitute forward-looking statements as defined in the Securities and 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. Please see our CPC filings for more information about factors that could affect our results. Please turn to slide number two as I now turn the call over to our CEO, Joseph Darling. Joe.

1:58 Thank you, Sylvia, and good evening, everyone. Welcome to our fourth quarter and full year 2018 earnings call. 2018 was a pivotal and dynamic year for ANACA as we continue to deliver strong earnings and cash flow while building on the foundation that will drive ANACA's next phase of growth. Our fourth quarter and full year results are a snapshot of a company undergoing a transformation. The 2018 performance highlights our ability to capably manage the elements of our business that are within our direct control, with strict financial discipline and an eye toward generating cash and returning value to our shareholders.

2:43 More importantly, we continue to focus on strategic growth initiatives to address near-term challenges relating to the structure of our legacy contracts. Overall, Anika remains a profitable and cash-producing growth company, and I am very confident in our future. We are executing against our strategic vision of being a global commercial company that delivers a continuum of innovative orthopedic therapies. We are assured of our value proposition to patients, physicians, and our shareholders and I know that by leveraging our strong foundation and executing on our new and ongoing strategic and operational initiatives, we have multiple opportunities as well as the resources to drive revenue and earnings growth over the next several years.

3:37 We are also making solid progress toward developing and finalizing our five-year strategic plan which will guide our continued transformation into a global commercial company. While we have indicated some of the broad elements of that plan, we look forward to sharing specific details later this year following board review and approval. Last quarter, I spoke about our people, our pipeline, and profitability being the key drivers of our future growth. Through that lens, 2018 marked the beginning of a transformative period. Just look at what we have achieved. First, we expanded our leadership team by appointing a new vice president of operations in the U.S. to drive operational efficiencies and a vice president of international sales to evaluate and improve our international performance.

4:37 We also added two new highly qualified independent directors to our board of directors who we believe will bring new perspectives and drive enhanced value for our company. Later, I will discuss additional plans to strengthen our organization. We also made significant progress toward developing and deploying a hybrid commercial model as we worked to launch our first surgically delivered regenerative therapy for bone repair procedures in the U.S. later this year. We completed an initial prototype for our second surgically delivered regenerative therapy for rotator cuff tears and remain well positioned to deliver a series of innovative new treatments to the global orthopedic community over the next several years.

5:29 We also resumed global production and distribution of HyloFast, Hylograph C and HyloMatrix in the fourth quarter as planned following our voluntary non-safety related recall of these products in the second quarter of 2018. We saw improved product gross margin from this and other related initiatives. As we refine and finalize our strategic plan, we are confident in our strengths, understand our challenges, and are working to capture the incredible opportunity that we have to make a difference in the lives of patients. Anika has a robust product pipeline spanning beyond osteoarthritis pain management to tissue repair and regeneration and cartilage restoration.

6:20 We remain focused on delivering innovative solutions for patients to drive the next phase of our growth. The important steps that we are now taking will help pave the way for new product lines, increase control over the commercial management of those products, and create value for our physician users, patients, and our shareholders. As I noted last quarter, enhancing our profitability won't happen overnight. but I know that we have the right team in place which we will continue to strengthen with experienced leaders including in the regulatory and quality area as well as the product innovation area to execute our strategy to drive sustained growth and enhance shareholder value.

7:07 ANACA also continues to have a healthy balance sheet that we can leverage as we identify additional growth opportunities in the years ahead which I will discuss further shortly. Please now turn to slide number three. I'd now like to provide an update on Syngal. We recently met with the FDA to discuss our clinical data, including data from the 1702 extension study, and talked about the pathway for Syngal approval. As the meeting occurred a short time ago, we have not yet received the written meeting minutes from the FDA. While we believe it was a productive discussion, it has become clear that we will need to conduct another Phase III clinical trial before we can obtain approval for Syngol in the U.S.

8:00 But we did obtain clarity that additional clinical data are needed, and we have understanding on the broad outlines of the study. There are additional matters that need to be worked out in order to finalize a design. As I have discussed on previous investors' calls, We were aware that we might have to gather additional clinical data to support U.S. approval and included this outcome in our contingency planning. We will work with the agency and pursue the most expeditious path to FDA for approval for SYNGAL. As we have further discussions and interactions with the FDA to obtain alignment on approval requirements and trial parameters, we will be able to provide substantive details about the nature Design, timeframe, and cost of a potential clinical trial at the appropriate point in time.

8:56 We continue to believe that our clinical trial data, together with real-world evidence gathered in markets around the world, demonstrate the efficacy, safety, and clinical utility of this novel treatment. Importantly, we continue to experience strong international demand for Syngal in Canada and Europe which further reinforces our conviction in its market opportunity. For the full year of 2018, Syngal OUS revenue increased 34% year-over-year, and we are aggressively pursuing near-term revenue growth by expanding our global footprint for Syngal and the orthobiologics business.

9:42 To that end, we added eight new international distributors in 2018. expanding the presence of our franchise in Europe, Asia, Africa, and South America. I will now turn to an update on the Monavis Phase III trial to support the expanded HIP-OA indication conducted by our U.S. commercial partner. After analyzing interim data as required by the clinical protocol during the fourth quarter of 2018, our partner informed us that they discontinued the study. We have not yet had the opportunity to review the interim data underlying this decision internally.

10:29 We intend to thoroughly examine our options, including by vetting the recent regulatory development regarding FDA's intention to begin treating the use of HA for osteoarthritis as a drug rather than a medical device, which has been the regulatory status for decades. While the changes in the regulatory environment present challenges for companies developing HA products, we do believe that such changes may deliver positive benefits for established companies like Inecon with extensive product and clinical development capabilities, as they could increase the barriers for competing products to reach the market, potentially limit new competition, and possibly even stabilize pricing.

11:17 More importantly, Our product development strategy has already expanded beyond physical supplements with newer surgical products that purposefully move away from this legacy pathway. This is a nice segue to HylaFast, our innovative cartilage repair solution. Please turn to slide number four. We are continuing to pursue strategies to accelerate enrollment in our phase three trial to support FDA approval. patient enrollment has advanced over 50% and we continue to see a very high level of enthusiasm among physicians and patients for this unique regenerative treatment. In fact, numerous surgeons have noted how the product properties greatly enhance the surgical procedure.

12:08 We continue to view Hylafast as an important product with significant future revenue potential. Conservatively, We estimate the U.S. market size for HyloFast to be greater than half a billion dollars annually. As noted on slide five, we remain on track to launch our first HA-based, surgically delivered, regenerative therapy for bone repair procedures in the U.S. in the second half of this year. This is a momentous catalyst for ANACA, as it will be our first domestic surgical product developed internally and launched under our hybrid commercial model. As we prepare for the launch, we look forward to showcasing the advantages of this therapy to the global orthopedic surgery community at multiple upcoming industry conferences, including the American Academy of Orthopedic Surgeons, AAOS, the International Cartilage Regeneration and Joint Preservation Society, also known as ICRS, and the International Society of Arthroscopy, Knee Surgery and Orthopedic Sports Medicine, known as ISACOS.

13:23 Engaging with orthopedic medicine thought leaders at these meetings is critical to our success and we look forward to their feedback as we move towards commercial launch. Importantly, we are confident that we are well positioned to deliver on the estimated 250 to 300 million market opportunity We are also continuing to develop the initial prototype we created for our second surgically delivered regenerative therapy for rotator cuff repair procedures. This product is designed to be used in both partial and full thickness rotator cuff tears. It will be a unique therapy that complements our growing portfolio of regenerative medicine products.

14:13 We anticipate that we will be completing key pre-clinical work in early 2019, and we will be focused on surgical instrumentation development for the remainder of 2019. This therapy represents another significant growth opportunity for ANACA. With more than 650,000 procedures reported in the U.S. each year, this treatment represents a $150 to $200 million market opportunity and the US alone. Further, given the potential addressable international market, we believe it can become a large global franchise. In summary, our organic product launch plans over the next several years will provide a continuum of new products to fuel our growth in the orthobiologic sector.

15:05 I'll now turn the call over to Sylvia to review our fourth quarter and full year 2018 financial results before I provide more details about our ongoing initiatives to drive near and long-term growth. Sylvia.

15:20 Thank you, Joe. Please turn to slide number six. Total revenue for the fourth quarter was $27 million compared to $29.4 million for the fourth quarter of last year. Total revenue for the full year of 2018 was $105.6 million compared to 113.4 million for 2017. As we anticipated, the decrease in both periods was primarily due to lower U.S. fiscal supplement pricing and the impact of the voluntary recall. Prior year full year results included $5 million in milestone revenue generated in 2017, which did not recur in 2018.

16:07 For the full year of 2018, Global monovisc revenue increased 12% and single international revenue grew 34%, showing the strength and the uptick in adoption of our single injection product lines. As a result, global visco-supplement revenue was up slightly for the year, despite lower pricing in the United States. For the full year, U.S. Orphovets end-user sales volume experienced a 6% decrease, while Monovisc end user volume increased by 26%. On a full year basis, pricing for Orthovisc and Monovisc in the U.S. experienced a decrease in the low to make double digit percentage range.

16:54 While pricing pressure is impacting the overall U.S. physical supplement market, we continue to see strong total patient and volume growth for our physical supplement products, driven by demographic trends, the reliable safety profile of our brands, and the efforts of our U.S. partner with investments in their field-based organization. Product growth margin increased to 74% for the fourth quarter compared to 69% for the third quarter of 2018 and 70% for the fourth quarter of last year. The increase in product growth margin is primarily due to improved manufacturing efficiency and changes in product mix. For the full year of 2018, we delivered a strong product growth margin of 70%.

17:45 Total operating expenses in the quarter were $17.2 million, compared to $19.7 million in the fourth quarter of 2017. For the full year, total operating expenses were $83.8 million, compared to $67.7 million for 2017. The increase for the year was due primarily to three factors. First is a one-time charge of $8.4 million, which consisted mainly of non-cash stock-based compensation expense related to the retirement of Anika's former CEO. Second is an approximate $2 million of non-recurring Sengal U.S. prelaunch market research activities in the first half of 2018.

18:33 and lastly, increased personnel and professional costs. Net income for the quarter was 7.7 million or 54 cents per diluted share compared to net income of 8.1 million or 53 cents per diluted share in the fourth quarter of 2017. For the full year, net income was 18.7 million or $1.27 cents per diluted share compared to $31.8 million or $2.11 per diluted share for 2017. The decline in net income for the year was due primarily to decrease in total revenue and increase in operating expenses previously discussed.

19:19 The non-recurring charges mentioned previously impacted diluted EPS by nearly $0.70 on a full year basis. We remain focused on increasing efficiency in our call structure and maintaining our culture of disciplined cost management in the year ahead while advancing the regulatory and commercial plans Joe just discussed. For the 12-month period ending December 31, 2018, we generated approximately $35 million of cash from operations. We are in a strong financial position with cash and investments totaling $159 million at the end of the fourth quarter. Last July, we completed a $30 million accelerated share repurchase program and repurchased a total of approximately 800,000 shares under the program.

20:12 Our cash deployment strategy remains focused on making organic investments to drive top-line growth, pursuing strategic M&A to complement organic growth, and returning capital to shareholders through share repurchases. Please now turn to slide number seven to review our guidance for 2019. For the full year of 2019, we expect total revenue to be approximately 3% to 6% below the prior year level. That said, we expect Q1 2019 total revenue to be slightly above prior year's first quarter due to the variability of quarterly orders by our distributors, which is inherent to our current business.

20:59 Licensing, milestone, and contract revenue is expected to be flat for the year. As we discussed in prior quarters, under the terms of our U.S. partnership agreement, we have limited visibility into or control over pricing, which creates a suboptimal environment for forecasting and managing based on real-time information. As a result, our current expectations are based on recent trends in the U.S. fiscal market and existing information on hand. Given the pricing dynamics we observed in the market, we noted last quarter that a $5 million Monavis milestone payment was under review by us as well as by our partner.

21:44 Following this review, we have determined that the ongoing pricing pressure and the terms of the contract make its achievement unattainable. Total operating expenses are expected to be in the high 70 million up to $80 million range. While we have not included an additional single trial in our estimated operating expenses for 2019, we do have the cash resources to invest in an additional study as necessary. Adjusted EBITDA is expected to be in the low $30 million range based on a net income expectation in the mid-teen to around $20 million range.

22:37 Adjusted EBITDA is defined by the company as U.S. GAAP net income excluding depreciation and amortization, interest and other income or expense, income taxes, and share-based compensation expense. Capital expenditures are expected to be between $5 and $8 million, primarily for manufacturing and operations automation initiatives. In 2019, our disciplined financial plan is focused on key ongoing initiatives, including, number one, launching the company's first HA-based, surgically derived regenerative therapy for bone repair procedures in the second half of 19. Two, International Expansion of Orthopedics and Dermal Product Portfolios 3. Develop and Finalize a Regulatory Strategy for Senga in the United States 4. Advancing our Hyalofast, Rotator Cup Therapy, and Other Development Programs I'd like now to turn a call back to Joe to discuss our near and long-term growth drivers.

23:47 Thank you, Sylvia. Please turn to slide number 8. As we look ahead to the remainder of 2019, we are continuing to take important steps to transform our business. With an emphasis on our people, our pipeline, and ultimately on maximizing profitability, we will continue to take advantage of the multiple levers we have to advance our long-term goal of returning to double-digit revenue growth. Our first lever is the development of our hybrid commercial model. We intend to structure any new partnership contract to provide more favorable economics and greater control over market access, sales and marketing, minimum annual growth objectives, and pricing than our previous commercial partnerships have had historically.

24:41 We are confident that this hybrid commercial model will deliver the greatest value to ANACA and our shareholders, and it will enable us to better control our own destiny towards increased profitability and growth. We are actively evaluating a number of potential commercial partners with established orthopedic surgical sales forces that would fit with our organization and can support the launch of our bone repair therapy plan for the second half of this year. We are already implementing brand development initiatives and measured operational scale-up activities. We plan to hire a small field-based team of elite and highly skilled regional sales directors in the second quarter of this year who will be strategically located to effectively drive prelaunch activities and awareness, build relationships with key surgeons and accounts, and train our partner sales force when appropriate.

25:44 Our second lever is the continued international expansion of our orthobiologics franchise. mainly Manavisk, Singhal, and Hylafast. I am confident that with the new leadership on the ground, we can drive greater growth in these products and continue to expand our commercial network. Additionally, our new VP of International Sales is actively directing, refreshing, and upgrading our international distribution network. And we look forward to seeing operating and commercial results from these efforts in 2019. The third lever is advancing our multiple clinical programs. We have an established culture of innovation spanning more than 25 years and remain committed to advancing our orthobiologics and regenerative medicine pipeline programs.

26:37 Our goal is to deliver a steady cascade of product launches over the next several years. This year, we intend to continue R&D investments to execute the OrthoVis-T post-market clinical study, HyloFast Phase III trial for U.S. approval, and advance the development for regenerative therapy for rotator cuff tears. We also plan to further strengthen our development and regulatory expertise with new executive hires in these areas. In the next several weeks, we plan on announcing a new leader for the R&D team that will focus his or her efforts We look forward to their contributions as we advance our clinical programs, develop regulatory strategies worldwide, and continue to the full potential of our strong technology platform.

27:34 That brings me to our fourth growth lever. We have the financial strength to invest in the right opportunities that will generate value to our business and our shareholders. We have been diligently screening candidates for targeted partnership and evaluating potential acquisitions to augment organic growth. We are actively focused on evaluating smaller tuck-in acquisitions which would complement our existing product portfolio, supplement our technology, or enhance our commercialization capabilities. As we have said, we are interested in targets that are aligned with our core competencies and Orthopedics and potentially have a strong distribution channel in place as well as the potential to generate sustained double-digit revenue and earnings growth.

28:28 We are confident that these levers will drive increase in sustainable value for Anika and our shareholders over time. We are working diligently to execute on our initiatives and continue Anika's transformation into a global commercial company. We are now happy to take your questions. Thank you. Thank you. Ladies and gentlemen, if you have a question at this time, please press the star, then the number one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, that's star, then one to ask a question. To prevent any background noise, we ask that you please place your line on mute once your question has been stated. In the convenience of time, we ask that you remove yourself to one question and one follow-up.

29:16 and their first question comes from the line of Mike Petusky with Barrington Research. Your line is now open.

29:23 Good morning. I'm sorry, good afternoon. Sorry, it's been a long week already. Sorry. Good afternoon, Mike.

29:29 Thank you.

29:30 So anyway, so let's talk about Singhal US first. In terms of sort of the cadence of what you guys expect to happen, I mean, do you think you'll have clarity in terms of sort of the go-forward path, you know, first half of this year and then start to execute it in the back half? Or do you think, you know, this could sort of drag out and you not have a great sense, you know, for several months?

30:02 Mike, thank you for the question. We, as Joe had mentioned, are waiting to receive the written minutes from the FDA. and based on that we'll look to have additional discussion with the FDA. Our plan and goal is to work expeditiously but we have to also rely on the FDA's response and the timing of their response. So at this point I don't have a specific, we don't have a specific month but we do expect that within 2019 we would have clarity surrounding the pathway in terms of study scope nature and all the critical elements related to that.

30:49 Mike, I'll just add to that. You know, the key for us is first, to Sylvia's point, obtaining the written minutes, sitting down with FDA to make sure that we're in alignment on the pathway forward to get this done as expeditiously as possible. So, you know, just reinforcing You know, we like to do this as quickly as possible, but right now we're pretty much dependent on the pathway that the FDA's gonna lay out here a little bit.

31:22 Can I just ask, Sylvia, your guidance on OpEx, I'm assuming that that sort of assumes that there is some increased spend in R&D related to a new trial. Is that fair to say?

31:42 I would say that there is not a significant amount in that. The guidance really reflects the development and clinical programs that we articulated in the script section, meaning the continued enrollment of Halifax, our product development for the rotator cuff therapy, as well as some post-market clinical studies related to our European approvals. One is Orphavis T, which is the tennis elbow product, and the other one is our Monavis product. There will be some strategy-related work and planning work on that, but not the actual study itself.

32:29 Okay. All right. You didn't specifically give guidance around gross margin, but if I just sort of do the math of what you've sort of given, it feels like sort of upper 60s. Is that in the ballpark of what you guys are sort of internally assuming on gross margin?

32:47 Yeah, we prefer to keep the guidance to what we just spoke about in terms of operating expenses. In terms of the product gross margin, as you know, it's impacted by Our ability to continue to control cost as well as the market impact of pricing. So the range that you stated I think is a reasonable expectation from your part, but we're not going to provide a specific quantified set of numbers at this time.

33:21 All right, just one more real quick. Joe, obviously there's a lot of interest and excitement around the longer-term potential of HylaFast, but there's probably a lot of internal frustration there that you guys can't seem to really get a footing in terms of enrolling that trial. Are there things that you guys can do to sort of juice the process a little bit and expedite things so we can see this product progress a little bit?

33:51 Yeah, I think what's important for us, Mike, and that's a great question, is a couple things we're doing. One is we are getting our internal clinical team in the field to the study sites more frequently and helping in the patient selection criteria and keeping them educated on how to look for the appropriate patients. So that's number one. Number two is we've increased our internal activities on what I would call weekly updates on how we're progressing on our clinical studies. So we're keeping a very close eye on this, recognizing the enormous capabilities the product has in the market.

34:38 You know, it is frustrating, but I think we've got a good plan in place to work with the study sites, increase the enrollment, and try to get this done as quickly as possible.

34:48 Is there any kind of aspirational goal? I mean, are you shooting for, you know, full enrollment by the end of this year or by the end of next year? I mean, is there a way to think about this, you know, in terms of what you guys really want to accomplish?

35:01 Yeah, you know, aspirationally, you know, tomorrow or yesterday, right? No, I mean, we've got to be realistic, too. And we want to do the study the correct way. So we want to make sure, you know, aspirationally that we're You know, we're really holding the team accountable, getting them in the field more frequently, and getting them in front of the surgical sites more often and frequently to help on the patient enrollment. But it's, you know, to put an aspirational goal in there, I think it's counterproductive. It's more what's realistic and working with the sites in tandem to make sure that we're optimizing the protocol.

35:48 Okay, fair enough. Thank you.

35:50 Yep, thank you. Thank you. Thank you. And our next question comes from the line of Joe Munza with First Analysis. Your line is now open.

35:59 Good afternoon, Sylvia and Joe. Just a couple quick questions here. First off, Joe, can you give us some color in regards to the meeting with the FDA? I know you had gone in. I think last we spoke, you know, you were doing this data package, going in with your best shot. Coming out of there, even though you don't have the minutes, you're convinced that you're still going to have to go and do a Phase 3 trial. Maybe could you give us some thoughts of the interactions with the FDA? You know, it's been a constant talk amongst investors, you know, trying to figure out what the FDA would do here. So, I mean, can you give us some color there? And then in addition, you know, a little bit of talk about the growth outside the U.S. with Syngal. Sylvia, if you can provide us with maybe some what Singhal was as a percentage of revenue.

36:49 I'll jump back in the queue and I'll come back with a follow-up.

36:54 Yeah, well first, good afternoon, Joe. Thank you for the question. And I'll take the first part and Sylvia will take the second part. So, you know, relative to giving you a little color on the interaction with the FDA, it was a very productive meeting. A lot of discussion back and forth, obviously on the data. I think one thing that I would say is it clarified some key points that I think we've got to take into consideration. But it was a healthy, amicable discussion around how to get this product into the market. And, you know, what's key for us now, you go in, you have that conversation, you've got to wait for the meeting, excuse me, the meeting minutes to come through so that, you know, we can put pen to paper develop a protocol that's acceptable and move forward. So I'm not quite sure what more color I can give you than that, aside from it was a good conversation, productive, very upbeat, but obviously is going to require some further clinical studies to get the product approved.

38:10 I guess what I'm looking for is, I mean, you presented the extension study data to them, you know, were they dismissive of it in the fact that you feel like you have to go back and do another trial? Or, I mean, are they supportive towards HA products being in the marketplace? You know, anything along those lines as you move forward here. because, you know, as investors look at the company and they look at Zingale as the near-term next leg of, if you will, growth, I think that, you know, any color you could provide as far as, you know, them being supportive or, hey, yes, you know, HA products being in the marketplace, I think, you know, investors would love to hear about that.

38:59 Yeah, so first of all, you know, the extension study was not part of the original FDA protocol. So that was really more of a gimme to get the extended time period, excuse me, if you will, on the durability of pain relief. So I want to make that clear. We thought we could use that data, but clearly because it wasn't part of the protocol, didn't fall necessarily within the scope of what I would like to have seen and FDA Reaction from. That being said, I think the agency is supportive of HA products but they want to make sure that the clinical studies achieve their primary endpoints and that's their expectation.

39:49 They pretty much are holding hard lines now towards the primary endpoints as we've seen with not only us but other companies. That's why I want to be a little cautious I'm waiting for the meeting minutes to come back from the written ones, Joe, to come back from the FDA. Sylvia, you want to take the?

40:11 Sure. With regards to international Zingale revenue, year-over-year growth was 34%, as we mentioned earlier, and as a percentage of product revenue, it's close to 5%. And from a growth expectation standpoint, We do see that the product is very strong and should generate double-digit percentage growth in the next period in 2019.

40:40 I have just two more quick ones, if I may. You talked about milestone revenue not in your forecast for 2019. I think we had it forecasted in our model Maybe a little bit of background there. And then as far as the split between monovisc and orthovisc, if you can give us maybe a mixed split for orthobiologics, monovisc versus orthovisc. Thank you.

41:13 Okay, sure. With regards to the milestones, I think you're referring to in the contract there is a potential additional sales threshold milestone which we originally expected in 2018. A little bit of background information there. Without the pricing decline that we saw in 2018, that next sales threshold milestone would have been achieved with the volume increase. Unfortunately, as a result of the continued pricing erosion, which we reported on over the last few quarters now, and under the existing contract terms, We've come to the conclusion that achievement of that milestone is no longer attainable, which is the reason why I made the statement earlier in terms of not expecting that in the revenue.

42:10 With regards to the Orphovisc and Monovisc revenue split, I think you're referring to the domestic split. We actually see that for the full year of 2018, Monavis is slightly higher from a revenue standpoint over Orfavisk. So we've now really turned the tide. It used to be, as you remember, a heavier portion on Orfavisk. Now we're seeing that Monavis is taking over that split between the two product lines. Hopefully that answered your question, Joe. Thank you. You're welcome.

42:56 Thank you. And our next question comes from the line of Lisa Springer with Singular Research. Your line is now open.

43:03 Good afternoon. Sophie, I wanted to ask you about the product gross margin in the fourth quarter. You mentioned the improvement was a result of operating efficiencies and improved product mix performance. If you had to assign a weight to each of those, what would it be? And could you give us a little more color about the improvement in the product mix?

43:22 Sure. To assign the proportion of the product gross margin improvement between the two factors, I would say that it's heavier toward manufacturing efficiency and slightly lower on the product mix size. The second part of your question is related to kind of the details behind the initiatives that we have. As Joe mentioned before, our new VP of Operation joined the company a few months ago, and he has been very focused on looking at reducing product costs. So we have a pretty comprehensive view, not only in terms of looking at efficiency, but also looking at raw material costs and so forth. And a lot of the manufacturing efficiencies that we are looking to achieve are through automation and scale.

44:24 So we are looking at every aspect of our manufacturing production to see that we can improve The efficiency as well as reducing the per unit cost for our products.

44:39 Okay, thank you. And I wanted to ask Joe a question about the tennis elbow product. Could you provide us with a little more detail regarding the progress towards partnerships to drive sales of the tennis elbow product in Europe and the status of the U.S. phase three clinical study?

44:58 So the tennis elbow product is currently CE marked, as you know. One of our initiatives in 2019 is to commence a post-market study which will help us get clinical information in the marketplace so that we can help to drive commercial demand in the OUS market. And from a commercialization standpoint, we utilize and other country level distributors to market our OVT or tennis elbow product outside of the United States. With regards to the domestic market, we are planning on employing a partnership approach on that product.

45:45 As you pointed out, we do have a protocol that the FDA had approved and from a prioritization standpoint, we're looking to focus our R&D effort on the programs that I discussed earlier. and this one potentially will be a collaborative initiative on our part and our partners' part. So that is at a high level where we are in terms of the domestic and international tennis elbow program.

46:12 Yeah, Lisa, just a point of clarification. OUS, we use local distributors. US, obviously we're looking for that broader partnership domestically. So I just want to make sure that we were clear You know, they're independent distributors outside the U.S., but when we look for partnerships in the U.S., we're looking for the broader national partnership.

46:38 Right. Thank you, Jeff. Thank you. And we have a follow-up question from the line of Mike Patisky with Barrington Research. You may proceed. Thank you.

46:48 Yeah, just sticking on the partnership theme, Joe, obviously you're targeting a commercial launch for bone repair in second half 19.

46:57 I mean, I guess are there multiple discussions taking place?

47:02 Are there end stage discussions taking place? Can you just kind of give a sense of is this likely to be sort of an early second half launch? Are you close in terms of signing an agreement there? and when you do sign an agreement, is that the type of thing that you guys would press release? Thanks.

47:22 Yeah, so I'll answer the very end of your question. We would press release it, no question about it. Secondly, we are in multiple discussions, Mike. We have different stages, so it's kind of hard to segment for you where those different stages are based upon the number of discussions we're having. I think the good news is There's a pretty high interest level in partnership opportunities in partnering with us for that particular product. And it's probably what you think it would normally be for what we're looking for, and that is an established, large orthopedic sales organization that has the capabilities for depth of reach into the physician community.

48:11 So I think we're in a pretty good spot. Our target is soft launch in Q3. So we hope to have the partnership announcement by the end of the first half of this year. But we've got flexibility in that. The soft launch, just for clarity, is where you go out and you start to build market awareness. Then you develop your key opinion leader base. You start getting some trials and usages with it. Then you go into the full hard launch. So I think we're in a pretty good spot. I feel pretty good about it. I feel good about the number of discussions we're having. in the depth of those discussions.

48:48 Okay, very good. Thank you. Thank you. And we have a follow-up question from the line of Joe Munda with First Analysis. Your line is now open.

49:03 Just really one quick follow-up in regards to the bone repair product. Is that going to be booked in surgical? And I'm guessing, does the 2019 guidance reflect a contribution from bone repair? And if so, ballpark, what are you guys looking for as far as maybe potential revenue first half year of launch? Thank you.

49:30 Yep. The bone repair product would be included in Orthobiologics because of its orthopedic intended use. The surgical franchise is primarily anti-ahesion related surgical products. With regards to the revenue expectation, given the timing of soft launch in the third quarter and a full launch towards the end of the year, We expect that the revenue contribution would be less than a million dollars in 2019. And, sorry, Joe, it reminds me about the last question. I think there was a three-part question.

50:15 Just, I was looking for expectations in 2019 for the soft launch and where you guys were going to be booking the revenue. I think...

50:25 I think I answered both. Yeah. Okay. Good. Thank you. And thank you. Ladies and gentlemen, this concludes today's Q&A session. I would now like to turn the call back over to management for any closing remarks.

50:42 So thank you for your time today. We are pleased with the progress that we are collectively making across our organization to transform ANACA into a global commercial company and gain greater control of our future. We are very excited about our growth prospects and we look forward to continuing to update you as we execute on our strategic initiatives in the year ahead. Thank you and have a great evening. Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program and you may all disconnect. Everyone have a wonderful day.