Q4 2022 Anika Therapeutics Inc Earnings Call

Speaker 1: The the.

Speaker 2: Greetings and welcome to ANICA's fourth quarter and year-end 2022 earnings conference call.

Speaker 2: At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation.

Speaker 2: If anyone should require operator assistance during the conference, please press star zero on your telephone keypad.

Speaker 2: As a reminder, this conference is being recorded.

Speaker 2: It is now my pleasure to introduce your host, Mark Namaroff, Vice President Investor Relations, ESG, and Corporate Communications. Thank you. You may begin.

Speaker 3: Thank you very much and thank you. Good afternoon to everyone. Thank you for joining us for ANICA's fourth quarter and year-end conference call and webcast. Our Q4 earnings press release was issued after the close of the market today and is available on our investor relations website located at anica.com.

Speaker 3: as are the supplementary PowerPoint slides that will be used for the discussion today.

Speaker 3: With me on the call today are Dr. Cheryl Blanchard, President and Chief Executive Officer, and Mike Levitz, Executive Vice President, Chief Financial Officer, and Treasurer.

Speaker 3: Please take a moment and open the slide presentation and refer to slide number two.

Speaker 3: Before we begin, please understand that certain statements made during the call today constitute forward-looking statements as defined in the Securities Exchange Act of 1934. These statements are based on our current beliefs and expectations and are subject to certain risks and uncertainties. For more information, please visit www.fema.gov

Speaker 3: The company's actual result could differ materially from any anticipated future results performance or achievements.

Speaker 3: We make no obligation to update these statements should future financial data or events occur that differ from the forward-looking statements presented today.

Speaker 3: Please also see our most recent SEC filings for more information about risk factors that could affect our performance.

Speaker 3: In addition, during the call we may refer to several adjusted or non-GAAP financial measures, which include adjusted gross margin, adjusted EBITDA, adjusted net income, and adjusted earnings per share, which are used in addition to results presented in accordance with GAAP financial measures. For more information, please visit www.usda.gov.au

Speaker 3: We believe that non-GAT measures provide an additional way of viewing aspects of our operation and performance.

Speaker 3: But when considered with GAAP financial measures, the reconciliation of GAAP measures, they provide an even more complete understanding of our business.

Speaker 3: The reconciliation of adjusted non-GAAP financial results to the most comparable GAAP measurements are available at the end of the presentation slide deck and our fourth quarter year-end 2022 press release.

Speaker 3: And now I'd like to turn the call over to our President and CEO , Dr. Cheryl Blanchard.

Speaker 4: Thanks, Mark. Good afternoon, everyone, and thanks for joining us. Please turn to slide 3.

Speaker 4: I want to start today's call with a high-level overview of where we are and why we're so excited about the value creation potential of our business.

Speaker 4: Over the last three years we have expanded our addressable market from $1 billion to $8 billion plus dollars.

Speaker 4: We've attracted leading industry talent and we've developed and are now introducing into the market differentiated solutions in the largest and fastest growing segments of orthopedics.

Speaker 4: As we enter this next phase of execution with a strong balance sheet, an expanded portfolio, and an energized team, we are very excited about the path ahead.

Speaker 4: In just this last year alone, we made a number of strategic investments and our teams continue to execute well.

Speaker 4: XTwist, our new cornerstone product in sports medicine, just moved into full market release at the beginning of this year.

Speaker 4: We've initiated the limited market release of our RevoMotion reverse shoulder arthroplasty system.

Speaker 4: We completed significant development and filed multiple 510Ks to the FDA for our hyaluronic acid-based regenerative rotator cuff patch system.

Speaker 4: We have nearly completed enrollment for the High-Lifase Carlyd Repair Phase 3 Pivotal Trial.

Speaker 4: And we are in the process of engaging with the FDA on Singal, our next generation OA in therapy.

Speaker 4: Following the exciting news last quarter that we met the end point of our Phase 3 clinical trial.

Speaker 4: 2023 is an inflection point for ANECA as we build towards our accelerated growth targets over the coming years. 25 years of Was should be film bybig Ready!

Speaker 4: Now let me get into more specifics.

Speaker 4: As you can see on slide four, we delivered strong financial performance with revenue up 11% for the fourth quarter and 6% for the full year, even with sustained supply chain headwinds through the year. ANICA continues to be a leader in the HALIRANIC acid-based OAP management market.

Speaker 4: with monovisk and orthovisk in the US and internationally.

Speaker 4: Also, outside the US, we continue to be excited by the growth of single, our next generation non-opioid single injection product to treat both short and long-term OAPane.

Speaker 4: Through our long-term partnership with J&J MyTech for Orthovisk and Monovisk in the U.S., we have strengthened our number one market share position in the U.S. VSCO supplement market.

Speaker 4: Singal is a tremendous opportunity for ANACA.

Speaker 4: We have successfully commercialized Singal in more than 35 countries outside the United States where more and more clinicians and their osteoarthritis patients are realizing the benefits of this next generation OA pain product. Given its international commercial success and our recently reported exciting Phase III clinical data, we have been able to

Speaker 4: We're continuing to advance Singhal towards FDA approval in the U.S.

Speaker 4: We expect our joint preservation business will accelerate its growth as we move through 2023 based on the strength of our recent product launches.

Speaker 4: While we're still in the early stages, we are receiving great feedback from surgeons about the differentiated benefits of Anika's products.

Speaker 4: TactiSAT, our rapidly growing regenerative solutions product that we launched in 2019, continues to capture market share with revenue up 28% for the full year. Given the success of this platform, we're targeting further TactiSAT expansion, which we'll discuss in more detail shortly.

Speaker 4: Following the successful limited launch of X-Twist late in the third quarter of last year, we moved into full release early in 2023.

Speaker 4: We're thrilled to be positioned to meet demand now that we are past the initial X-Twist supply chain challenges that constrained its growth during its limited launch last year. Surgeon feedback continues to be positive as they highlight the confidence they have in using it in a variety of sports medicine applications.

Speaker 4: We've also received great feedback on the surgical versatility that X-Twist has given them across procedures in the shoulder, foot and ankle, and other extremities.

Speaker 4: and that our design facilitates soft tissue repairs that other systems are unable to accommodate.

Speaker 4: In addition, we recently commenced the limited market release of our new RevoMotion reverse shoulder system with the first surgeries performed in early 2023.

Speaker 4: RevoMotion significantly expands our shoulder arthroplasty portfolio and early feedback from the limited release surgeons has been fantastic.

Speaker 4: As I'll discuss further on the next slide, this product launch marks our entrance into the rapidly growing $800 million U.S. reverse shoulder market segment, the largest and fastest growing segment of the shoulder replacement market.

Speaker 4: I'm also pleased to report that Hialafast has been designated as a breakthrough device by the FDA, allowing for prioritized interaction and review to enable patients faster access to new therapies.

Speaker 4: As a reminder, Hyalufast is our highly differentiated, off-the-shelf cartilage repair product that only requires a single surgery and is bone-preserving.

Speaker 4: We are now approaching full enrollment in our HILOFAS pivotal Phase III clinical trial, having enrolled 199 of 200 subjects, and we remain on track to file a PMA for HILOFAS with the FDA in 2025.

Speaker 4: Finally, we made tremendous progress in our global medical education program in 2022, conducting in-person training for more than 450 surgeons in the U.S. alone, in addition to other training activities at orthopedic meetings.

Speaker 4: Our medical education programs are enhancing technical and procedural confidence for our surgeons as they integrate our products into their practice and return their patients to active living.

Speaker 4: Let's turn to slide five where I'd like to expand a bit on our recent launch of the Revo Motion Reverse Shoulder System.

Speaker 4: Rebo-motion is a highly differentiated and innovative reverse shoulder system, specifically designed for the ASC and enhanced OR efficiency. On the implant side, Rebo-motion offers the industry's smallest diameter threaded glenoid base plate, which enhances intraoperative flexibility.

Speaker 4: It also provides patient personalization with bone-preserving glenoid and humeral designs that match the native anatomy, similar to other implant designs in our Arthur Surface portfolio.

Speaker 4: Some of the most exciting features of this system are on the instrument side. With a streamlined two instrument tray design, the consolidated instrumentation is both ASC and hospital friendly, limiting sterile reprocessing volume and reducing relative cost for our customers.

Speaker 4: In fact, most competitive systems require between four to six trays of instruments, which presents a major burden to hospital efficiency and makes those systems difficult to use in the ASC setting.

Speaker 4: We've received great feedback following first surgeries with surgeons commenting that RebaMotion is much more bone conserving and that the system is very efficient.

Speaker 4: Most importantly, patients are doing well in their early post-op visits, and surgeons are extremely pleased with the post-op x-rays.

Speaker 4: We look forward to building on this momentum ahead of a full launch, which we are targeting toward the end of this year.

Speaker 4: Now I'd like to spend a few minutes reviewing our new product development pipeline.

Speaker 4: As you can see on slide six, ANICA has been incredibly productive with our NPD work with now several successful product launches beginning in 2021, including the Total Wrist Motion, Tacticet Augmentation, X-Twist, and most recently, RevoMotion.

Speaker 4: These new product introductions are key to our growth strategy in achieving our multi-year targets.

Speaker 4: By launching these innovative new products across categories and procedures, we are continuing to expand our market opportunity and enhance the value that ANICA brings to both the ASC and hospital settings.,

Speaker 4: In our Regenerative Solutions portfolio, we remain focused on advancing our cactus

Speaker 4: We have multiple 510ks in process which will expand indications and allow us to further build on the commercial success We've had since launching this in late 2019 We believe that with the continued expansion of the tax asset franchise We can increase the addressable market to well beyond 100 million dollars by creating a new market for hardware

Speaker 4: plus US market opportunity. X-Twist is a cornerstone addition to the ANICA Sports Medicine portfolio. And we believe it has the potential to become a true platform technology as we look to leverage its design in future products. And we believe it has the potential to become a true platform technology as we look to leverage its design in future products.

Speaker 4: We're also pleased to announce that we will be launching a hyaluronic acid-based regenerative hatch system next year that will further strengthen our growing and differentiated shoulder portfolio.

Speaker 4: It is initially designed for the shoulder to provide augmentation to the tendon to support healing for rotator cuff tears.

Speaker 4: Anacos patch is not only mechanically stronger, but our pre-clinical data shows that the regenerative capacity is improved compared with the first generation collagen patches on the market.

Speaker 4: Along with our arthroscopic delivery and fixation methods, the system promises to truly be a game changer.

Speaker 4: We completed multiple 510K submissions at the end of 2022 and will share additional details about the product once the system has been cleared and we're gearing up for first surgery.

Speaker 4: Given the attractive market for regenerative patches, we believe this system has expansion opportunities beyond the shoulder and will be a key driver for growth.

Speaker 4: Finally, we have two important longer-term opportunities with Hylafas and Singal that will further augment and reinforce ANICA's growth once they are approved and available for the U.S. market. For more information, visit www.usda.gov

Speaker 4: We're making great progress advancing Hylifast and are excited about its significant US market potential, which will enable us to reach an addressable market that we have conservatively sized to be at at least $350 million. Due to its differentiation, we also believe that Hylifast has significant market expanding potential.

Speaker 4: given that it is a single stage, off the shelf solution.

Speaker 4: We look forward to advancing high-level fasts through the FDA. We're also continuing to advance single toward U.S. commercialization.

Speaker 4: In the third quarter, we announced that it successfully demonstrated superiority over steroid alone for pain reduction at 26 weeks.

Speaker 4: Tengal is a true next generation non-opioid OAPane product and given its strong international performance and clinical data, we believe it could potentially double our total addressable market in the OAPane space and become a key revenue engine for ANICA for years to come.

Speaker 4: As we look ahead, we will continue to engage with the FDA regarding next steps for US regulatory approval.

Speaker 4: In parallel, we are exploring the potential to advance Bengal through commercial partnerships in US and select Asian markets.

Speaker 4: As a reminder, ANICA controls full global rights for Singapore, and we intend to proceed thoughtfully as we evaluate our options to commercialize Singapore to best serve us to our rightest patients around the world and drive shareholder values.

Speaker 4: We will continue to provide updates over the coming quarters as we make progress on this important strategic asset.

Speaker 4: Similar to last quarter, I want to use slide seven briefly as an opportunity to reflect on how far our business has come as we continue to expand into large and growing markets that represent high opportunity spaces within orthopedics.

Speaker 4: Over the past three years, we have expanded ANICA's market opportunity from $1 billion to more than $8 billion today. In addition to advancing Singal through clinical development, we have grown and evolved our portfolio, actively investing in higher growth yet highly complementary areas.

Speaker 4: to build a comprehensive joint preservation portfolio in regenerative solutions, sports medicine and arthrosurface joint solutions.

Speaker 4: Moving to slide 8, we are targeting the largest and fastest growing segments of the joint preservation market by focusing on the shoulder, particularly across the continuum of rotator of your cuff disease, representing a $2 billion US market opportunity.

Speaker 4: Our portfolio, using ANICA's unique and proprietary technologies, includes recent product launches that specifically address the shoulder continuum.

Speaker 4: First, looking to the upper right-hand corner of the slide, we believe X-Twist has the potential to become a true platform technology as we look to leverage its design in future products.

Speaker 4: Then continuing clockwise, on the regenerative side, we offer tachyset to augment hardware, specifically with suture anchors when surgeons encounter poor bone quality to provide a differentiated solution to achieve a strong repair. And now that we are in more rotator cuff procedures, we have the opportunity to cross-sell tachyset augmentations with X-twist.

Speaker 4: In the pipeline is our regenerative rotator cuff patch system providing a strong foundation in regeneration alongside Tacti-Set.

Speaker 4: Finally, adding ReboMotion enables access to the full joint replacement market in the shoulder with a focus on a differentiated and bone-sparing design.

Speaker 4: This means our portfolio will now address the full spectrum of shoulder arthroplasty needs for surgeons in the hospital and ASD settings.

Speaker 4: Now that we have this major product category filled, the opportunity to drive our Arthur Surface Joint Solutions products specifically over motion, our total shoulder, is dramatically enhanced.

Speaker 4: We expect that X-twist and RevoMotion will be significant growth drivers positioning ANECA to deliver double-digit growth in joint preservation and restoration in 2023, which will be augmented further by our regenerative patch system in 2024.

Speaker 4: I'll now turn it over to Mike for a review of our fourth quarter and year-end results in 2023 outlook. Mike? Thank you

Speaker 5: Thank you, Cheryl. I will now walk you through our financial results for the fourth quarter of 2022. All comparisons will be against the same period of 2021.

Speaker 5: I will now walk you through our financial results for the fourth quarter of 2022. All comparisons will be against the same period of 2021. Please turn to slide 9.

Speaker 5: Total revenue for the quarter was $39.6 million, an increase of 11%.

Speaker 5: Revenue in our largest product family, OAPAN management, increased 20% to $23.7 million.

Speaker 5: Do primarily to favorable year-over-year ordering patterns from J&J Mytek, which had greater quarterly volatility last year, and to a lesser extent due to continued year-over-year international growth.

Speaker 5: As a reminder, revenues in our OAP management product family can vary significantly on a quarterly basis based on ordering patterns by our partners and distributors, both in the US and internationally.

Speaker 5: However, that quarterly volatility generally stabilizes on an annual basis.

Speaker 5: Our joint preservation and restoration revenue in the quarter increased 8% to $14.3 million on improved elective procedure volumes with continued strong growth in taxis.

Speaker 5: Our non-orcipetic revenue declined to $1.5 million compared with $2.8 million. Our last time buys a certainly legacy products last year.

Speaker 5: Our gross margin in the fourth quarter was 61 percent and includes the impact of $1.6 million of non-cash acquisition related expenses from the 2020 acquisitions of Arthur's Surface and Parkas Medical.

Speaker 5: as well as a product rationalization related reserve of approximately $600,000 associated with legacy non-orathopedic products we no longer expect to sell.

Speaker 5: Our adjusted gross margin, which excludes the non-cash acquisition related expenses and product rationalization charge, was 66% in the fourth quarter.

Speaker 5: That's up 9 points from 57 percent last year. As we continue to successfully navigate the global staffing and supply chain challenges that cause production inefficiencies and increased reserves in Q4 last year. And that's up 9 points from 57 percent last year.

Speaker 5: From a spending standpoint, our research and development in S-GNA expenses together totaled $30.8 million in the fourth quarter, up 17% from $26.5 million, as we continue investment in development of key products and expand our internal capabilities in support of our growth initiative.

Speaker 5: The higher spending in the quarter included commissions on higher U.S. Joint Preservation and Restoration sales, along with increased medical education to support safe and effective use of ANECA's growing product portfolio.

Speaker 5: Fending in the quarter also included higher general corporate costs as well as non-cash stock base compensation expense.

Speaker 5: driven in part by the growth and personality support anicus strategic transformation. Our net loss for the quarter was $4.9 million, or $3.4 per share, compared to a net loss of $5.8 million or $0.40 per share in the priority. Our adjust in net loss was $3 million, or $21 cents per share.

Speaker 5: favorable compared to our adjusted net loss of $3.2 million or $23 cents per share in the prior year. As we continue to execute on anicus strategic transformation and growth acceleration initiatives.

Speaker 5: Our adjusted EBITDA generated in the quarter was 1.4 million dollars.

Speaker 5: That's up from an adjusted EBITDA loss of $200,000. The increase was primarily due to our revenue growth along with the operational improvements reflected in our higher adjusted gross margin.

Speaker 5: Lastly, with regards to our cash flow and capital structure, ANICA's balance sheet remains strong with $86.3 million in cash and no outstanding debt as of December 31.

Speaker 5: We generated operating cash of half a million dollars during the fourth quarter, down from $4.5 million. And our capital expenditures in the quarter totaled $2.6 million, up from $1.1 million last year.

Speaker 5: Reflecting investments in working capital and fixed assets in support of our new product launches and overall business growth.

Speaker 5: capital and fixed assets in support of our new product launches and overall business growth. Please turn to slide 10.

Speaker 5: I would now like to walk you through our full year results for 2022 as compared to the prior year and compared to our most recent guys.

Speaker 5: For the full year, ANICA generated revenue of $156.2 million, an increase of 6% from the $147.8 million of revenue reported in 2021.

Speaker 5: at the upper end of our most recent guidance.

Speaker 5: By product family, our O18 management revenue finished up 9% at $97.9 million.

Speaker 5: at the high end of our most recent guidance expectations.

Speaker 5: primarily reflecting above normal international growth due to recovery from the initial COVID impact.

Speaker 5: favorable distributor ordering patterns, as well as continued growing global commercial adoption of our combined portfolio of single, monovisc and ortho-visc.

Speaker 5: Our revenue from J&J MyTech increased to 2% in fiscal 2022, as higher growth in single injection monovisc was offset by lower multi-injection ortho-visc revenues. And the growth in OAP management revenue also included $5.9 million of veterinary product sales.

Speaker 5: up from $4.4 million in the prior year.

Speaker 5: Our joint preservation and restoration revenue grew 4% to $50.4 million for the year, in line with our most recent guidance of low to mid single digit growth.

Speaker 5: We were pleased to see the sequential quarterly growth in joint preservation and restoration throughout the year.

Speaker 5: Our non-author pita revenues, which represent 5% of our revenues, totaled $7.9 million for the year, down 18%, which was slightly favorable to our guidance.

Speaker 5: For the full year, our gap gross margin was 60 percent and our adjusted gross margin was 66 percent at the up to end of our guidance and in line with last year's adjusted gross margin, despite the ongoing supply chance staffing challenges that we experienced throughout

Speaker 5: Adjusted EBITDA margin, finished at 8%, was favorable to our mid-single digit guidance, as we continue to self-fund investments supporting our key growth initiatives. For the year we generated operating cash of $4.4 million, our capital expenditures totaled $7.5 million, and we ended the year with $86.3 million in cash and no outstanding debt.

Speaker 5: Please turn to slide 11. Now I'd like to review our full-year financial outlook for fiscal year 2023. First, I'd like to make a brief clerical comment about a change we are making to product family reporting to provide investors a clearer representation of the performance trends in our business.

Speaker 5: Beginning in the first quarter of 2023, veterinary product revenues, historically reported with an OAPAN management, will be reported in the non-orcipitic product family.

Speaker 5: The growth outlook for 2023 reflects this reclassification of veterinary product revenue for both 2023 and 2022.

Speaker 5: We currently expect total company revenue for 2023 to be between 158 million and 163 million dollars, representing growth of 1 to 4 percent compared to 2022.

Speaker 5: As continued growth in OAPAN management and joint preservation and restoration is offset by lower ancillary non-or-tipita grubbis.

Speaker 5: The lower non-orthopedic revenues reduce total company growth by approximately 3 to 4 percentage points.

Speaker 5: In OAPA management, we expect revenue of $93.5 million to $96 million, up to 4% over 2022.

Speaker 5: which is above market as our market leading products continue to gain adoption globally and also reflects the favorable international timing that we had in 2022.

Speaker 5: As a reminder, this guidance reflects the reclassification of veterinary revenue from away pain management to non-orthopedic.

Speaker 5: With the key product launches and joint preservation and restoration, we expect full year 2023 revenue of 55.5 million dollars to 58 million dollars. That's up 10 to 15 percent over last year.

Speaker 5: Given we are early in the full market release of X-Twist, and we expect to begin full market release of Revo Motion toward the end of 2023.

Speaker 5: Along with normal seasonality, with Q1 being the weakest and Q4 being the strongest quarter of the year, we expect the growth and joint preservation and restoration to be weighted more toward the second half of this year.

Speaker 5: We expect non-worthopedic revenue to decrease approximately 35% to $9 million. Do primarily to hire revenues in the prior year from last time buys of legacy products and order timing and veterinary product sales last year.

Speaker 5: The decline in non-orthopedic revenues reflects the continued impact of product rationalization decisions that we have made to exit legacy product lines that do not support our growth and profitability objectives.

Speaker 5: The decline in non-warthupiate revenues reflects the continued impact of product rationalization decisions that we have made to exit legacy product lines that do not support our growth and profitability objectives. With regard to gross margin.

Speaker 5: We expect adjusted gross margin for the year to be roughly in line with the 66% we reported last year. We remain focused on driving margin expansion, but we anticipate the headwinds from the global trends in supply chain and staffing challenges will likely continue through the year. With regard to spending,

Speaker 5: In 2023, we are continuing to self-fund critical growth initiatives and investments in key research and development programs and commercial execution.

Speaker 5: and other operational investments to support our transformation and will enable us to scale as we grow. In addition, our 2023 spending will include investments to support our existing revenue

Speaker 5: such as the significant efforts to meet the new EU MDR medical device regulatory requirements for our international sales.

Speaker 5: as well as required investments in equipment and personnel for our OAP management manufacturing.

Speaker 5: As such, we expect operating expenses for 2023 to increase over 2022 as a percentage of revenue, as we self fund our growth strategy.

Speaker 5: Resulting and expected adjusted EBITDA margin for the year in the low single digits as compared to the 8% EBITDA margin we reported in 2022.

Speaker 5: We also expect capital expenditures to increase in 2023 above depreciation to support the rollout of key new product introductions and necessary investments in manufacturing equipment to support our legacy business. As Cheryl mentioned, we view 2023 as an inflection point in Annika's multi-year growth strategy.

Speaker 5: With key shoulder-related product launches in 2023 and 2024, we are diligently driving execution to realize the significant multi-year growth prospects within joint preservation and restoration. All of these efforts support delivering on our 2025 growth targets of $230 million in revenue and 70% adjusted growth margins.

Speaker 5: as well as our adjusted EBITDA margin target of 20%, which we expect in 2026, reflecting in part the expected timing of the international MDR efforts.

Speaker 5: Our team remains focused on both Antica's company mission to restore active living and on driving value creation for our stakeholders. And we look forward to updating you on our continued execution of this strategy.

Speaker 4: I will now turn the call back over to Cheryl. Thanks, Mike. Please turn to slide 12.

Speaker 4: I'd like to close by reiterating the 2023 is a real value inflection point for ANICA. We are building a best in class portfolio as we continue launching exciting new products in high opportunity spaces and optimize our US commercial reach and focus.

Speaker 4: With the key shoulder-related product launches in 2023 of X-Twist and RevoMotion, as well as the efforts supporting the planned 2024 launch of our HA-based Regenerative Rotator Cough patch system, we are diligently driving execution supporting the multi-year growth prospects with enjoying preservation and restoration.

Speaker 4: This year, we are also exploring the potential U.S. and Asian market opportunities for Singhal, as well as completing the clinical follow-up work for Hylophast as we approach completing enrollment in our Phase 3 Pivotal Trial.

Speaker 4: We remain disciplined as we deploy our capital, further enhance our portfolio, and deliver on our many growth opportunities. Annika continues to have a healthy balance sheet with a solid cash position and no debt, and we remain laser focused on delivering our multi-year growth targets. Before I open up the call for questions.

Speaker 4: I'd like to take a moment to thank all of our employees for their hard work and dedication to ANICA. We have a talented team supporting our efforts and we appreciate all that they do each day to advance our mission to serve our customers and their patients as we restore active living for people around the world. We look forward to providing updates on our progress in 2023.

Speaker 2: And with that, we'll open up the line for questions. Thank you. Ladies and gentlemen, at this time we will be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. If you would like to ask a question, you may press star 2.

Speaker 2: and maybe not start to pick up your handset before pressing the star key. Our first question comes from the line of George Sellers with Stevens. Please proceed with your questions. Hi, this is Harrison on for George. Good afternoon and congrats on the quarter and strong finish to the year. My first question is just wanting to dig in on your 2023 guidance.

Speaker 6: is baked into those numbers. Thanks.

Speaker 5: Hi, thank you, Harrison. This is Mike. So I just want to make sure that you understand one element of it, which is the non-orthopedic revenues. That is an area where we're expecting a 35% decrease year over year because it's not driving value for us long-term in terms of our growth strategy. So...

Speaker 5: As it relates to our expectations for this year, you know, I think this is the growth in OAP management of 2 to 4 percent is above market growth in this more mature market and also coming off of a very strong year internationally which was in part related to timing.

Speaker 5: as we call that last year. We just finished a year where we grew 9%. And most of that came from international, which a lot of that was COVID recovery, as well as distributive timing. It can be a lumpy part of our business. It also though international represents a significant growth opportunity for us. We're very excited about it, but there was some favorable timing in the year.

Speaker 5: As it relates to our joint preservation guidance, again, we're more than doubling the growth rate of that business and moving into the teens there. So we're definitely reflecting our excitement in that business in what we've got here for guidance. But we're also reflecting the reality of the timing of our launch. We announced that we're moving into full market or removed this.

Speaker 5: year with some initial supply chain challenges as so many other companies are. But those supply chain challenges were addressed and we were able to move into full market release here in the first quarter. Also the Revo Motion, our new Reverse Shoulder product, is going to be a wonderful product, but it's in limited market release and moving into full market release toward the end of the year.

Speaker 5: And that's why the guidance there is really second half oriented. One, if you recall the growth in that business this last year, it grew into a bunch of quarter. Q1 is always the lightest quarter, Q4 is generally the strongest quarter in orthopedics. And so we expect a similar trajectory.

Speaker 5: but more weighted to the second half because of the timing of these new product launches in the related ramp. So, you know, it's early in the year, it's early in these product launches, the feedback's been great, but we don't want to get ahead of ourselves so early on in these launches. Got it, yeah, that makes sense. And I wanted to follow up on the...

Speaker 5: the veterinary products and what the quarterly cadence you're expecting from those products throughout 2023. Yeah, so we don't provide quarterly guidance generally and there are reasons for that one of them being it can be pretty lumpy. Frankly, and as we said, as I said in my earlier remarks,

Speaker 5: So, you know, it's not a big non-northopedic as a small part of our business. But what I think it reflects is us focusing on the things that are really going to drive the most growth and us making decisions to place more priority there and to really drive value from what we've got in the non-northopedic segment.

Speaker 2: Thank you. That's helpful and thanks again or congrats again on the on a great on the charm quarter. As a reminder, it is Star One to ask a question. Our next question comes from the line of Jim Sedotti with Sedotti in company. Please proceed with your question.

Speaker 7: Hi, good afternoon. Thanks for taking the question.

Speaker 7: A couple of questions on Shingal. The first one has the release of the Phase III critical data. Helped your business overseas.

Speaker 4: I know it's a US child, but have you been able to use that to build some of the business outside the US? Hi Jim, yeah, thanks for the question. We will be using that data. It's obviously fairly new that it's come out, but it is being incorporated into our marketing materials for use overseas. It's obviously very supportive.

Speaker 4: of the strength of the product. We've got what we think is unparalleled clinical data for especially an OAPane product, but the next generation of OAPane product because it really demonstrates.

Speaker 4: the majority over both of the active ingredients in SINGDOL and placebo across all three of the clinical trials that we've run. So yes, we are using all of that data for use in our marketing efforts overseas. And in general, the OA business, the Valetolini was less in 2022 than it was in 2021.

Speaker 7: Do you think that turn continues in 2023 or do you go back to a more lumpy year?

Speaker 5: Quarter or quarter? Quarter. Jim, this is Mike. That business, it can be lumpy, but one of the reasons that it is, it's less so in the end user side than it is in the transfer units. Over half of our revenue comes from transfer sales.

Speaker 5: with the corresponding remainder being related to royalties. On the transfer sales, that's entirely driven by how J&J MyTech manages their business within their buying group. And so it does become a bit challenging to predict that because it's really driven by their own internal decisions.

Speaker 5: That's why we generally say, you know, focus more on the year than on the quarter because that quarterly volatility tends to offset itself. I think historically in that business, Q2 tends to be a stronger quarter than other quarters, but as I say, it really is unfortunately more impacted by the decisions within J&J of how they manage their own operations.

Speaker 7: And then on the other side of the business, it looks like the big, launch, will be the reverse shoulder. You know, what investments do you need to get that out to market other than the tooling? Is there going to be an increase in sales people or increase in, in, uh, surgeon training?

Speaker 7: How should we factor that into the expenses for 2023?

Speaker 4: Yeah, let me start Jim on that and then Mike may have some comments to add. I mean, for a product launch as significant as a new implant system, there are a number of things. The first thing is, right now with the limited release, we are getting feedback around the instruments.

Speaker 4: the instrument trays and how they're deployed. I think you heard me talk about the fact that we're really excited about this streamlined two tray design. It's highly differentiated and drives a lot of efficiency. But with that, we want to make sure we really get it right. So we'll get that feedback and then for full launch...

Speaker 4: deployed toward the end of this year. So there will be expense dollars that we've got factored in relative to the training activities and on the instrument and inventory build. And Mike, I don't know if you have anything you want to add to that.

Speaker 5: Yeah, the only thing I would add is just, as I mentioned before, we do expect CAPEX to be above depreciation this year. Last year it was essentially in line with depreciation, but it includes some of those instruments that we could move into this limited release. We will be adding more instruments that we are encouraged by the strong demand and great feedback that Cheryl mentioned.

Speaker 5: So, you know, we do expect CAPEX about depreciation for the instrument sets. We also have investments in production capacity. A good amount of our CAPEX also has to do with the legacy business and the need to make sure that we've got the production capacity for what we're seeing there as well. So a bit of a higher level of spending this year, but it's all in support of our multi-year growth targets.

Speaker 8: Thank you. That's it for me.

Thanks, Jim. Our next question comes from the line of Mike Petuski with Barrington Research. Please proceed with your question.

Our next question comes from the line of Mike Batuski with Barrington Research. Please receive your question. Hi. Good evening.

Terrell, you mentioned being laser focused on multi-year growth targets. Are you guys willing to sort of define that? I'm not sure I completely understand that there is a target out there for a specific year. Mike, I'm happy to respond to that. As I said in my remarks, it called minutes ago. So the specific multi-year growth targets that we have are...

efforts related to the new regulatory regime.

It doesn't feel like we're tracking any of that, but okay. And also Mike, I guess I wanted to understand stock comp, and what's the difference between

It's elevated and I'm just curious, is it going to stay at these levels going forward?

Yeah, so Mike, let me clarify. So one of the things that's happened over the last couple of years is there's been a lot of management transition as you would expect in this type of transformation. And so one of the things that happens in the stock-based comp for run rate is as executives who have been around for a while leave, you get their forefritors, which artificially lower stock-based comp.

And that was happening a lot more in the last couple years. And so when you look at year over year comparisons, that's one of the things that you need to keep in mind. So no, we don't expect, I mean, we've got the team to drive the growth in this business. And the team that we've attracted is highly energized around doing that. We have had to spend some more money in stock based comp in line with market.

compensation, just to make sure that we have the right people to realize the significant opportunity in front of us. And I just want to absolutely make sure I understand the EBITDAG guidance would suggest something like more than 50% down in terms of adjusted EBITDAG in 23 versus 22, correct?

So when we guided for the year, when we started the year, we guided last year at mid-single digits. We came in at 8%. And as we're guiding this year, we are guiding at the low single digits because of the multiple product launches, increased general court for spend.

And all the things that Cheryl and I just referred to. You know, one of the things that we are, when Cheryl says we're letting you answer your question, Cheryl says we're laser focused on these targets. It's because we are, these are very large market opportunities, very different than the market opportunities the company has historically had.

in its joint preservation business, as you can see by the size of the X-twist rotator cuff market, the RevoMotion reverse shoulder market, and then now as Cheryl described, the new patch system that we're coming out with that we're really excited about. These are very big opportunities. The dollar amounts that we're spending are much smaller than, you know, what you're seeing a lot of companies out there.

spending a lot of money to buy into this space. And we've decided that we're able to do it organically with a much smaller level of spend. So we, as we've been saying, our capital allocation approach is to focus on investments in those things nearest to home, our organic opportunities to really drive this value and realize the opportunity in front of us. And that's what's reflected in the guide.

Right, but you are going to be down based on your guidance 50% plus.

Our guided EBITDA number for 2023 is lower than our guided EBITDA in 2022 and is purely a function of the timing of these investments so that we can realize the value from them. In addition to the fact that there are increased costs associated with the legacy business.

And so those are the things that we just have to factor in. I mean, we're not immune from the things you hear about from all the other companies out there of inflation and people costs and all these other things. And so that's reflected in there. But we also reiterated our multi-year targets because the opportunity is significant and the dropdown to be able to leverage this spend, we believe is very real and tangible.

All right, thank you. I appreciate it.

All right, thank you. I appreciate it.

There are no further questions in the queue. I'd like to hand the call back over to Cheryl Blanchard for closing remarks. I'd like to thank everybody for...

as we're in and as we optimize our commercial US reach and focus. So thanks everybody for your time tonight. We appreciate your time.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.