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Edited Transcript of ANIK earnings conference call or presentation 27-Feb-04 4:00pm GMT

Q4 2003 Anika Therapeutics Earnings Conference Call

BEDFORD Mar 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Anika Therapeutics Inc (Pre-Reincorporation) earnings conference call or presentation Friday, February 27, 2004 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Charles Sherwood

Anika Therapeutics - CEO

* Bill Knight

Anika Therapeutics - CFO

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Conference Call Participants

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* Joaquin Forten

Nollenberger Capital - Analyst

* John Postarro

John Francis Group - Analyst

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Presentation

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Operator [1]

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Good morning. My name is Jody, and I will be your conference facilitator today. At this time I would like to welcome everyone to the Anika Therapeutics 2003 fourth-quarter financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer period. If you would like to ask a question during this time, (OPERATOR INSTRUCTIONS).

I would now like to introduce Mr. Charles Sherwood, CEO of Anika Therapeutics. Sir, you may begin.

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Charles Sherwood, Anika Therapeutics - CEO [2]

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Thank you, Jody. Good morning, everyone, and welcome to the Anika Therapeutics conference call for the fourth quarter of 2003. I am Charles Sherwood, President and CEO. And with me on the call this morning is our CFO, Bill Knight.

Fourth-quarter results were issued yesterday evening. If you have not received a copy of the news release, please contact Gladys Perez (ph) at area code 323-866-6060, extension 6072, for a copy. The release is also posted on our website.

This has been an extremely exciting and professionally rewarding period for all of us here at Anika. In recent months we have achieved some major milestones that we have been focused on for some time. I plan to discuss these developments in some detail on the call today. I will also lay out our plans and goals for 2004. As usual, we will begin the call with a detailed review of fourth-quarter results -- so at this point I will turn the call over to Bill Knight.

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Bill Knight, Anika Therapeutics - CFO [3]

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Thanks, Chuck. Before the results today, I (indiscernible) recently review Anika's Safe Harbor statement with regard to forward-looking statements.

The statements made in this call which are not statements of historical fact are forward-looking statements as defined in the Securities Exchange Act of 1934. Words such as will, believe, plan, expect, anticipate, currently, forward, seek, continue, target, goals, objectives, on tracked, intend, pursue, look, always -- as well as other expressions which are predictions or indications of future events or trends and which do not constitute historical matters identify forward-looking statements. These statements are based upon current belief and expectations of management and are subject to significant risks and uncertainties. The Company's actual results could differ materially from any anticipated future result, performance or achievement described in the forward-looking statement as a result of a number of factors, including those set forth in last night's press release, the Company's SEC filings, and other press releases.

At this point, I would like to review our fourth-quarter financial results.

For the fourth quarter, ended December 31, 2003, revenues rose 12 percent to 5,014,000, compared with 4,471,000 in the same period last year. These results included 846,000 in deferred revenue from the first three quarters of 2003 for certain ophthalmic products in accordance with our revenue recognition policy. This amount is basically on par with 839 (technical difficulty) in deferred revenue recognized in the corresponding periods of 2002.

Net income for the 2003 fourth quarter equals 801,000 or 7 cents per fully diluted share; compared with 829,004 or 8 cents per diluted share in the fourth quarter of 2002.

For the full year, revenues increased 17 percent to 15,404,000 from 13,187,000 for 2002. Chuck will go into more detail shortly about the main contributors to this revenue growth.

One point I would like to note here, however, is that sales of Hyvisc, Anika's treatment for equine (ph) osteoarthritis, were higher year over year, mainly due to distributor inventory replenishment for certain units shipped without regulatory approval in the latter part of 2002, as we previously reported.

Net income for 2003 was 827,000 or 8 cents per diluted share. This compares with a net loss for 2002 of 3,040,000, or 31 cents per diluted share.

Overall, we made positive gains in gross margins for the year, due to a higher-margin product mix and efficiency gains in our manufacturing operations. Gross margins for 2003 was 48 percent versus 39 percent for 2002. Although gross margins decreased slightly in the fourth quarter from 59 percent in 2002 to 55 percent in 2003, reflecting lower production levels.

Research and development expenses for the fourth quarter decreased 17 percent on an overall basis, primarily due to the fact that the corresponding 2002 period, we were still supporting the OrthoVisc Phase III clinical trial. For the full year, overall R&D, including clinical development, was down 34 percent -- again due to the wrapup of OrthoVisc clinical trial activity before the year began.

Fourth-quarter SG&A expenses were up 20 percent to 1,264,000 compared with 1,057,000 for the fourth quarter of 2002. This increase reflects a variety of factors -- the largest contributors being personnel-related costs and outside and professional service fees. For the full year, SG&A dropped 5 percent. This decrease is primarily attributable to lower overall outside and professional service fees.

Interest income for the full year was approximately $144,000, reflecting a decline in market interest rates for short-term investments.

Moving now to the balance sheet, cash, restricted cash and marketable securities at December 31, 2003, totaled 15.4 million compared with 13.5 million at December 31, 2002.

Our cash position reflects the initial payment of 2 million received when we signed the U.S. and Mexico licensing and supply agreement for OrthoVisc with Ortho Biotech product in late December.

Last month, when we announced FDA approval for OrthoVisc, we also stated that we expect to receive a milestone payment of 20 million from Ortho Biotech in the first quarter of 2004, tied to obtaining FDA approval. These two cash payments of 2 million and 20 million have been received, and consistent with our revenue recognition policy, will be recognized commencing with the first quarter of 2004 as revenue over the remaining initial 10-year term of the agreement.

DSO's or day sales outstanding were at 34 days on average for 2003 compared with 33 days for 2002. Both numbers are low for the health-care industry. I expect to see DSO's in the 40 to 50 day range for the first quarter of 2004.

Inventory stood at 3.6 million at the end of the year, compared with 3.3 million at the end of the third quarter of 2003, and 2.9 million at December 31, 2002. Inventory turns averaged 2.6 times for 2003, slightly higher than the 2.4 turns at the end of the third quarter, and an average of 2.4 turns for 2002.

That completes the financial summary for the quarter. I will now turn the call over to Chuck.

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Charles Sherwood, Anika Therapeutics - CEO [4]

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Thanks, Bill. This has been an excellent quarter for Anika, which we view as the culmination of the turnaround of the Company -- a turnaround that we have been working on for several years.

We ended the year in a profitable position with a new product -- OrthoVisc -- set to enter the U.S. market. We're anticipating entering into clinical trials with two additional products in 2004 and have ample cash reserves to fund additional growth.

In my comments today, I will first discuss recent major business developments for Anika in some depth, putting them in the context of our overall objectives for 2003. I will then discuss some of the exciting research and development progress we have made in recent months.

Finally, I will wrapup with a review of the major initiatives we intend to tackle in the first part of 2004, as well as our overall objectives for the year.

To a great extent, 2003 has been a pivotal year for Anika. We set clear objectives for ourselves and delivered on them.

Among our chief accomplishments for the year, in line with our 2003 goal -- we had profitable financial results with 17-percent sales growth. We achieved this by expanding our distributor base and continuing efficiency gains in manufacturing.

We secured U.S. marketing approval for OrthoVisc shortly after year-end. And just prior to 2004, signed on a U.S. distribution and marketing partner for the product.

And finally, we made good strides in the development of two near-term potential products in our pipeline -- cosmetic tissue augmentation and INCERT.

The two most important developments since our last conference call pertain to our osteoarthritis franchise -- specifically, OrthoVisc, our product for osteoarthritis of the knee. I would first like to discuss our U.S. marketing and distribution relationship with Ortho Biotech products, a unit of Johnson & Johnson.

We announced this relationship in December. Ortho Biotech is an established market leader in Epoetian Alpha (ph) therapy for anemia management across multiple indications. It focuses its research and marketing effort on four clinical areas -- oncology, nephrology, immunology and surgery. We are delighted to have established this relationship. OrthoVisc is clearly going to be an important part of Othro Biotech's product lineup.

While you're (ph) are not going to talk or discuss their goals for OrthoVisc today, Johnson & Johnson and all of its subsidiaries have high standards for representing top-quality applications products. They also aim to become one of the market leaders in their respective categories. We certainly intend to support those goals at Anika.

Given the strength of our safety data and the effectiveness data from the OrthoVisc clinical trials, we believe there is a significant opportunity for penetrating the U.S. market for viscosupplementation therapy.

Regarding the financial aspects of the agreement, as Bill mentioned earlier, we received assigning payment of $2 million and another payment in the first quarter of 2004 of $20 million for receipt of the FDA approval.

There are additional performance and sales-based milestone payments built into the agreement. They are contingent upon insurer reimbursement approval, achieving certain sales targets, and planned manufacturing upgrades. All of us at Anika will naturally be very focused on attaining these milestones within the specified timeframe.

In addition, Ortho Biotech will fund future postmarketing clinical trials for OrthoVisc, and the development of other products, based on our proprietary viscosupplementation technology.

Now let's turn to FDA approval. Several weeks after finalizing our agreement with Ortho Biotech, we were granted U.S. FDA approval for OrthoVisc for the treatment of osteoarthritis of the knee. I would like to share with you now some of the labeling information and top-level clinical trial results.

OrthoVisc is indicated for the treatment of pain in OA ph of the knee in patients who have failed to respond adequately to conservative and pharmacological therapy and to simple analgesics such as acetaminophen. Among the characteristics that we feel make OrthoVisc superior to competing viscosupplementation products are its excellent safety record, high molecular weight, high concentration of HA and purity. OrthoVisc is injected into the knee joint in a series of three intra-articular injections, one week apart.

FDA approval of OrthoVisc was based on integrated effectiveness data from two randomized, controlled, double-blind, multi-center Phase III U.S. clinical studies, encompassing a total of 458 patients suffering from OA of the knee. Safety data from the third U.S. trial were also included in the FDA review.

The objectives of the study was to assess the effectiveness of OrthoVisc for the treatment of joint pain, and patients were divided into treatment groups and control groups. Patients were evaluated for improvement in pain as measured by the Western Ontario and McMasters University osteoarthritis index. This is commonly called WOMAC. And they were evaluated (indiscernible) follow-up assessments over weeks 7 through 22 of the study.

The primary effectiveness analysis compared the proportion of OrthoVisc patients achieving a greater improvement from baseline in WOMAC pain score versus control. Patients in the treatment groups experienced a (technical difficulty) significant improvement as measured by change in WOMAC pain score.

Key findings showed, of the patients receiving three weekly OrthoVisc injections, approximately 55 percent experienced a statistically significant improvement of 40 percent or greater reduction in pain -- again, as measured by change in WOMAC pain score. Moreover, approximately 46 percent of the patients experienced an improvement of 50 percent or more over baseline WOMAC pain score.

An integrated safety analysis, which included 552 (ph) patients treated with OrthoVisc, had an extremely low rate of adverse events, and there were no serious adverse events (indiscernible) with OrthoVisc.

Preparations have been made for a U.S. commercial launch on Monday, March 1st -- that's this coming Monday -- and a major promotional effort to take place in conjunction with the American Academy of Orthopedic Surgeons in San Francisco March 10 through 14. We very much look forward to reporting on these events in our next conference call.

Now that I have covered in detail two of our most significant developments since our last conference call, let's turn to some of the business trends behind fourth-quarter results. I will review our performance in the context of our two primary business franchises -- osteoarthritis and ophthalmics.

We saw strong international sales growth for OrthoVisc in the fourth quarter, due in part to a major order from our distributor for Turkey and good growth in several other countries. Sales of OrthoVisc for the quarter rose 55 percent, to 886,000 -- as compared to $570,000 for Q4 2002.

All in all, we saw a 33-percent growth -- or $766,000 -- in international OrthoVisc sales for 2003. We anticipate more growth in 2004, as sales come online in Germany and France, where we have recently established marketing and distribution relationships. We believe France and Germany are extremely promising markets for us, but it will take sometime for OrthoVisc to become established in these markets. We are currently awaiting reimbursement approval in France before commencing major sales efforts there.

As we have mentioned before on previous calls, we continue to see pricing pressures from generic products in European markets. But, for physicians in clinics where efficacy and safety are of highest importance, we believe that OrthoVisc is the product of choice.

We also see U.S. FDA approval and (ph) the strong efficacy and safety data from the our U.S. clinical trials as an opportunity for our international distributors to reposition the product. These results will enable our distributors to better differentiate OrthoVisc and demonstrate advantages over competitive products.

Regarding our other osteoarthritis product, Hyvisc, sales to Boehringer Ingelheim Vetmedica, our marketing partner for this equine osteoarthritis treatment, nearly doubled on a year-over-year basis, due in part to the disruption in order flow at the end of 2003 that Bill discussed earlier.

I will now turn to our ophthalmics business.

Sales of viscoelastic products for ophthalmics surgery were up 6 percent on year-over-year basis, but down slightly for the quarter. These trends fit in line with expectations for modest revenue growth for our ophthalmics product lines, given that this is a relatively mature market. We remain pleased with the growth we have seen with our new ophthalmic partners, particularly for sales of CoEase, which is marketed by the Allergan (ph) spinoff, Advanced Medical Optics.

At this point I would like to turn to our R&D program, which, along with the U.S. launch for OrthoVisc will be a primary management focus in early 2004.

To provide an overview, our R&D program is focused in a few areas -- all of which leverage our expertise in HA technology. The two areas where we are furthest along involve chemically modified HA product; and, secondly, second-generation versions of existing products.

From a budget standpoint, we will be making increased investments in R&D in 2004. Research and development expenditures were lower in 2003, mainly because we are not conducting extensive clinical trials during the year.

We did, however, increase investments in research and engineering for preclinical work on two potential products and intend to initiate clinical trials for these potential products in 2004.

Specifically, we are gearing up to commence a pivotal Phase III human trial in the United States for our cosmetic tissue augmentation product in the next few months.

Cosmetic tissue augmentation is therapy, designed to meet the growing demand for soft tissue fillers for facial wrinkles, scar remediation and lip augmentation. A new class of tissue filler technologies based on HA is rapidly gaining popularity in Europe, and is now commanding nearly half of the worldwide market. These supplant the collogen (ph) -based products that have been on the market for more than 20 years.

One competitive HA wrinkle-filler product, Restalen, was approved by the U.S. FDA in December, and another is undergoing FDA review. Based on our extensive knowledge of HA, and our patented techniques for materials of longer duration in the body, we believe we have an opportunity to produce a tissue augmentation therapy that may have significant competitive advantages.

We are developing a worldwide commercialization strategy for this fast-growing market, and our commercialization strategy includes establishing a relationship with a corporate partner, one with global marketing and distribution reach. We are currently in active strategic discussions with potential partners who can add significant value at this early stage of product development.

Now let's turn to the other potential product we intend to move into clinical trials this year, which is INCERT. INCERT is a gel-like therapy, tailored to remain in place in the body for up to 30 days. It is designed to prevent postsurgical adhesions following spinal, abdominal, gastrointestinal and cardiac-related surgery. Is an important therapy because postsurgical adhesions can result in recurrent pain, other complications -- and possibly even necessitate a second surgery.

Next month, we plan to commence a small, pilot human trial in Europe, involving approximately 45 patients undergoing spinal surgery. We are also concurrently formulating our worldwide strategy for this product category.

Another area that we have been focusing on, from a research and development perspective, is second-generation versions of existing ophthalmic and osteoarthritis products. This includes the room temperature version of OrthoVisc as well as pH-buffered versions of our viscoelastic products for eyesurgery.

We continue to evaluate the potential use of OrthoVisc-like products for osteoarthritis in other joints in the body, such as the shoulder, hip and ankle. This will likely eventually require separate clinical trials for approval in other joints.

Longer term, we will be focused on applications were HA-based biomaterials can provide unique solutions to existing medical problems. Some potential applications may include -- injectable solutions or gels that can be combined with other compounds or entities, such as cells, growth factors (ph), genes, et cetera, and time degradation of matrix materials for localized drug delivery.

Finally, we are in the process of hiring a VP of Research and Development to oversee and direct this critical function, and hope to have a candidate on board by midyear.

Looking at our strategic goals for 2004, our initial goals for the year are to support a successful U.S. launch for OrthoVisc, commence clinical trials for both the CTA product and INCERT, and to continue achieving topline growth with U.S. OrthoVisc sales as the prime driver.

In addition to these objectives, 2004 will be a major year for planning Amoco's future focus, and setting the stage for long-term growth.

One of the challenges that lies before us is determining how to put the cash on our balance sheet, (indiscernible) to increase the value of our business and yield the highest return. Among the strategies we will be examining this year is the possibility of using our resources to acquire complementary products or technologies, or to invest in internal development program, or perhaps a combination of these two approaches. The decisions that come out of this strategic planning process should also determine the direction and scope of our internal R&D program.

Now moving to summarize, this has been an exciting and rewarding time for all of us here at Anika. It has been very gratifying to see several of the major initiatives we have been working on for several years come to pass.

Having said that, we of course have a considerable amount of challenging work ahead of us in 2004, not the least of which is setting the course for our next stage of growth.

We certainly appreciate your attention during these longer-than-normal formal remarks, and now look forward to answering any questions you may have. Jody, we're ready for questions.

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Questions and Answers

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Operator [1]

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(OPERATOR INSTRUCTIONS). Joaquin Forten (ph), Nollenberger Capital.

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Joaquin Forten, Nollenberger Capital - Analyst [2]

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It looks like you had a great quarter. A couple of questions -- I would like to know how big the size of the market is for the OrthoVisc product -- currently is?

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Charles Sherwood, Anika Therapeutics - CEO [3]

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OrthoVisc currently is --

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Joaquin Forten, Nollenberger Capital - Analyst [4]

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I mean, you know, for the HA product, you know, counting (indiscernible) sales and (indiscernible)

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Bill Knight, Anika Therapeutics - CFO [5]

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Our best estimate at that market, at the current time for last year, is just about 320 to $330 million.

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Joaquin Forten, Nollenberger Capital - Analyst [6]

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Now, in the tissue augmentation area, as you know, Medica has paid Q-Med $160 million for their rights to market Q-Med product for the tissue augmentation area just in the U.S. What is the difference between their product and your product, or do you know?

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Charles Sherwood, Anika Therapeutics - CEO [7]

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Both products are chemically modified HA, designed to increase the durability or resident time in the body, and decrease the susceptibility to sensamatic (ph) degradation.

We believe, based on the clinical data that we have seen and some of the other publications that we have seen, that the Restylane product is quite a good product. It has been successful in Europe. There has been a lot of use in Canada and, remarkably enough, there appears to have been a lot of product that has found its way to the United States around the time or even potentially before the official approval of the product in the United States.

As I said during the text (ph), we believe, based on some of the animal work that we have, that we have the potential to have a very competitive product in this space. Of course, that has to be borne out in the clinical trials that we are on the verge of entering.

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Joaquin Forten, Nollenberger Capital - Analyst [8]

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Is it your plan to enter this -- your test by the end of this quarter, or --

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Charles Sherwood, Anika Therapeutics - CEO [9]

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I believe I said, in the next few months. We are moving as rapidly as we can.

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Operator [10]

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John Postarro (ph), John Francis Group (ph).

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John Postarro, John Francis Group - Analyst [11]

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Congratulations on an excellent year. In terms of the OrthoVisc product launch, can you elaborate on how you're going to derive revenues from that? Are they just going to simply buy product from you?

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Charles Sherwood, Anika Therapeutics - CEO [12]

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The agreement is structured such that there are royalties and then transfer costs for the product. And we will derive revenue in that way. And there are also, as I mentioned, potential for us to achieve certain other milestone payments, based on success of certain tasks.

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John Postarro, John Francis Group - Analyst [13]

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Can you tell us what the royalty is?

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Charles Sherwood, Anika Therapeutics - CEO [14]

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I would rather not divulge that in this call.

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John Postarro, John Francis Group - Analyst [15]

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In terms of your R&D focus for '04, do you have a budget in mind in terms of a number? What you're going to spend on R&D in 2004?

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Bill Knight, Anika Therapeutics - CFO [16]

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We are certainly looking to increase investment over what we had spent in 2003. We have got two clinical trials that we are entering with CTA and INCERT, as we discussed earlier.

2003 we really had no clinical trial expenses, certainly investing in preclinical. So you can expect to see investment ahead of what we spent in 2003.

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John Postarro, John Francis Group - Analyst [17]

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In terms of the cosmetic tissue augmentation program, you said you are seeking potentially to partner on that one?

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Charles Sherwood, Anika Therapeutics - CEO [18]

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Yes.

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John Postarro, John Francis Group - Analyst [19]

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Would you look for them, potentially, to pick up some of the R&D, then, on that?

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Charles Sherwood, Anika Therapeutics - CEO [20]

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That would be an item that we would certainly discuss. I don't think we have really taken a final position as to what is best for both parties on whether they will pay for the further development in the clinical trials or whether we would share those expenses, but that certainly is a potential that our partner with pickup development costs from this point forward.

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John Postarro, John Francis Group - Analyst [21]

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In terms of your gross profit margin -- you had improvement year-over-year in 2003. Do you expect you will be able to do better on that line in 2004?

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Bill Knight, Anika Therapeutics - CFO [22]

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We have had, I think, over the last two to three years a good trend in improvement -- from the high 20s to high 30s to high 40s in '03.

So we feel there are further opportunities both in achieving additional sales volumes, and continuing our work in manufacturing efficiencies. So, again, we feel there are further opportunities in that area.

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John Postarro, John Francis Group - Analyst [23]

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And the last question -- just going back to your revenue in the fourth quarter, can you break down what was U.S. versus international?

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Charles Sherwood, Anika Therapeutics - CEO [24]

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I don't know if you that. Well, you can give (indiscernible).

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John Postarro, John Francis Group - Analyst [25]

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Is it like 80-20?

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Bill Knight, Anika Therapeutics - CFO [26]

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It is a fairly high percent in the U.S.; it's probably close to an 80-percent U.S. derived business.

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John Postarro, John Francis Group - Analyst [27]

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And just one last quick question on OrthoVisc again. Internationally -- you had a great quarter with product sales there, I guess particularly in Turkey. What are your expectations for Germany and friends? How big are those potential markets?

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Charles Sherwood, Anika Therapeutics - CEO [28]

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The markets in Germany -- Germany is one of the biggest markets in Europe. Germany also has quite a few people that are already participating in that market space.

So for us to enter the market, at least in the short term, it is not our expectation to dominate the market.

I think that we need to build inroads, and we will be, hopefully, one of the stronger players after a year or two or three. But people are not waiting for OrthoVisc to hit the market in Germany. And I think the same thing is true in France.

It is our goal going forward also to gain some more distribution agreements in other countries. Either in the Middle East, possibly the Far East or around Eastern Europe.

One thing that I would like too, however -- and I alluded to it in the call -- but, bring your attention to the biggest opportunity for OrthoVisc, particularly in the near-term, rests with entering the market in the United States. That's where the pricing is the highest, the barriers to entry are the highest because of the requirement to get by the FDA's standards. And that is by far our single biggest opportunity.

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John Postarro, John Francis Group - Analyst [29]

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Very good. And then the 20 million payment you got from Ortho?

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Charles Sherwood, Anika Therapeutics - CEO [30]

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Yes?

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John Postarro, John Francis Group - Analyst [31]

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So you're going to book 500,000 per quarter, I guess, for 10 years?

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Bill Knight, Anika Therapeutics - CFO [32]

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Right. That will be recognized over the life of the contract.

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Operator [33]

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(OPERATOR INSTRUCTIONS). There are no further questions at this time, sir.

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Charles Sherwood, Anika Therapeutics - CEO [34]

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Very good, Jody. Well, thank all of you for joining us for today's call. We certainly appreciate your interest in Anika, and we look forward to reporting our progress in future conference calls. Goodbye.

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Operator [35]

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This concludes today's conference. You may now disconnect.