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Anika Therapeutics Inc (ANIK) Q3 2018 Earnings Conference Call Transcript


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Anika Therapeutics Inc (NASDAQ: ANIK)
Q3 2018 Earnings Conference Call
Oct. 24, 2018 , 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good evening, ladies and gentlemen, and welcome to the Anika Therapeutics Third 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. (Operator Instructions) And I will now turn the call over to Sylvia Cheung, Chief Financial Officer. Please proceed.

Sylvia Cheung -- President and Chief Executive Officer

Thank you, Sandra. Good evening, everyone, and thank you for joining our third quarter 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 third quarter 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 anikatherapeutics.com.

In addition, a slide presentation is posted on our website in the Investor Relations section under the Events & Presentations tab. We invite you to take a moment to open the file and follow the presentation along with us.

Please turn to Slide number 1. 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 and achievements. Please also see our SEC filings for more information about factors that could affect our results.

Please turn to Slide number 2, as I now turn the call over our CEO, Joseph Darling. Joe?

Joseph Darling -- President and Chief Executive Officer

Thank you, Sylvia, and good evening, everyone. Welcome to our third quarter 2018 earnings call. I am pleased to report that we made important progress this quarter in enhancing the foundational elements needed to drive near- and long-term growth. I have long believed that a company in its growth are powered by a strategy that is focused on its people, its pipeline and profitability. So I'd like to frame my comments within the context of those three areas.

While we continue to successfully transform our company within these thee areas, I am confident that Anika will be recognized as a company with clear values, defined success milestones and ultimately increased growth, profitability and value for our shareholders. It is important to note that while we are focused on increasing our profitability, we know it may not come immediately. We are making investments in implementing initiatives to get us there. It takes time to deliver sustained improvements to profitability, but importantly, it is at the center of how we think and where we are going, and we know what we need to do to drive our next phase of growth.

Before I get into the details, I want to comment briefly on the changes we are making today and our strategy to better position Anika for the future. While this kind of transformation won't happen overnight, I am pleased with our third quarter results, particularly our bottom-line performance. As Sylvia would discuss in more detail, we have slightly lowered our full-year 2018 revenue guidance. We are keenly focused on the issues impacting our near-term results and believe the transformational efforts we have under way will enable us to emerge as a stronger company. We are focused on solid execution, driving improved operational and financial performance and increasing efficiency and productivity.

Last quarter, I spoke about our evolution from a contract manufacturer with far too little control over our destiny into a fully integrated commercial company, but we will fully support our legacy contracts, optimizing and predicting revenue stream is always a challenge due to the way the legacy contracts are structured, particularly given our partner's control of the end-market pricing, sales and marketing and payer relations. That being said, I am pleased with the progress that we are collectively making. Our continued market penetration and the motivation that gives us to broaden our sources of revenue through new types of partnership models and contracts that deliver greater value to Anika's shareholders. This quarter we continue to actively leverage our internal resources in innovative foundation to optimize and enhance our commercial reach and deliver continued progress in our pipeline and ensure that we are delivering value for our shareholders.

Please turn to Slide number 3. I noted earlier that people, pipeline and profitability are key to enhancing Anika's growth trajectory. First, I'd like to talk about a few recent leadership hires that will help to further position Anika for success in the marketplace. Since my appointment as CEO, I have had the opportunity to work closely with teams across functions in the US and internationally. Through that process, we have identified several areas where Anika could enhance the talent in our organization to broaden our competencies and better position Anika for the future.

Last quarter, I discussed two new senior level hires; our Vice President of Operations in the US and our Vice President of International Sales, and we've been pleased with their contributions to date. Importantly, we continue to actively assess the needs of our organization to ensure that we have world-class operational and commercial executives across the Anika. During the third quarter, our new VP of International Sales spearheaded our Annual International Orthobiologics Distributor meeting in Europe, which was attended by 24 international distribution partners, who responded positively to our expansive commercial and pipeline portfolio. We were pleased with the feedback we received, as we continue to educate current and potential partners, key opinion leaders and highlighted the exciting growth of our portfolio. Importantly, we continue to identify those distribution partners we can depend on to drive increased growth and reliable results in the respective regions.

In the third quarter, we also expanded our Board of Directors with the appointment of Dr. Cheryl Blanchard as a new independent member. Dr. Blanchard currently serves as President and CEO of a privately held drug delivery in regenerative medicine company called Keratin Biosciences. She is an experienced medtech and biotech leader who brings to Anika's Board of Directors more than 30 years of executive leadership and Board experience.

I am also very pleased to announce Susan Vogt, as our latest Board addition. Ms. Vogt most recently served as CEO and Director of on Aushon BioSystems a venture-backed company with a novel multiplex immunoassay platform. In addition, Sue was CEO of SeraCare Life Sciences, and also served as President of Millipore Corporations, BioPharmaceutical division based up here in the Boston area. Sue brings Anika's Board more than 35 years of executive experience and the global life science research, pharmaceutical, biotech and clinical diagnostics industries. She also brings a deep understanding of finance and accounting to our Board from financial roles throughout her career in past services and the audit committees of several private companies. We look forward to benefiting from her financial and operational expertise.

As part of our Board refreshment, Steven Wheeler has notified the Board of his intention to retire as of February 8, 2019. Steve has been a longtime contributor to the Board and we are very grateful for his years of service. As evidenced by the additions of Dr. Blanchard and Ms. Vogt to our Board, we are committed to the highest standards of corporate governance in ensuring we have the right mix of expertise, independence and experience to best position Anika for the future. We are pleased with the Board refreshment activities and we look forward to the contributions of these new Board members. As we look toward the future, we want to ensure that we have a well-rounded Board of Directors with a proven expertise to guide Anika through its transformation into its next phase of growth.

I'd now like to discuss our continued progress across our pipeline, which is focused on addressing the continuum of orthopedic care from palliative to regenerative solutions. Before I provide an update on each program, I wanted to know that our pipeline remains an area of great opportunity for Anika, not only with the technologies and products that we have developed from internal innovation, but also external technologies that may be available through a potential partnership or acquisitions that would be a strategic fit as we build and leverage our hybrid commercial model.

Please turn to Slide number 4. I'll start with a brief update on CINGAL. We continue to pursue multiple strategies that would allow us to move expeditiously toward approval once we receive guidance from the FDA. Part of that process entails compiling and evaluating the totality of our extensive pivotal data along with the real-world evidence from physicians in Canada and Europe to demonstrate the efficacy and clinical utility of this novel treatment. We are scheduled to meet with the FDA in the first quarter of 2019 and remain committed to pursuing the most expeditious path to approval. We intend to provide our next update on CINGAL once we've had these discussions with the FDA about our total package submission and have received direction from them about the most appropriate path forward for approval of CINGAL.

Please turn to Slide number 5. We are continuing to prepare for the 2019 commercial launch of our first US surgically delivered regenerative therapies and HA-based bone repair product, which received 510-K clearance last December. We are also currently working on a prototype for our second surgically delivered regenerative therapy for rotator cuff repair procedures and recently completed an initial product prototype. This product can be used in both partial and full-thickness rotator cuff tears and we view it as a potentially significant growth opportunity for Anika. With more than 650,000 procedures reported in the US alone each year, this product candidate represents a $150 million to $200 million US market opportunity. Further, given the potential addressable international market, we do believe it can become a large global franchise.

Turning to Slide number 6, we highlight the newest member of our HA injectable therapy in the orthobiologics franchise, ORTHOVISC-T. This is a treatment currently indicated in Europe to relieve pain and restore function in patients affected by chronic lateral epicondylosis, or tennis elbow. We launched ORTHOVISC-T in Europe in the first quarter of 2017. In the coming months, we will be commencing a post-market study in Europe to collect clinical information to aid our marketing efforts and provide evidence to the European health authorities. We also plan to initiate a Phase III clinical trial in 2019 to seek US approval. This product launch will also be considered as part of our overall partnership model approach.

Lastly, we are continuing to pursue strategies to accelerate enrollment in our HYALOFAST Phase III clinical trial to support FDA approval, and we continue to view HYALOFAST as an important product with significant future revenue potential. We continue to see a very high level of enthusiasm among physicians and patients for this unique regenerative treatment, and numerous surgeons have noted how the product properties greatly enhance the surgical procedure. With a conservative US market size of greater than $0.5 billion annually, we continue to view HYALOFAST as an important product with significant future revenue potential. While we continue to work with our current partner in aggressively pursuing market share gains for our fiscal supplement business, we recognize the importance of bringing new products to the market to help balance the effects of what we're seeing in the market today with pricing pressures and increase payer control over the viscosupplement franchise. Our product launch plans over the next several years will provide a continuum of new products to fuel our growth in the orthobiologics sector.

I'd like to now turn the call back over to our Chief Financial Officer, Sylvia Cheung, to review our third quarter financial results before I provide more details about our ongoing initiatives to drive near- and long-term growth. Sylvia?

Sylvia Cheung -- President and Chief Executive Officer

Thank you, Joe. Please turn to Slide number 7. Total revenue for the quarter was $26.8 million compared to $27.2 million for the third quarter of last year. As we anticipated, total revenue was down slightly year-over-year, due primarily to the voluntary recall initiated earlier this year for certain of our HYAFF-based products. Importantly, we expect to resume shipments of the impact of products before the end of this year. Global viscosupplement revenue in the third quarter increased 2% year-over-year due to strong growth in the international markets. International viscosupplement revenue increased 31% year-over-year, driven primarily by CINGAL. CINGAL international revenue grew approximately 180% year-over-year for the quarter and approximately 70% for the first nine months of 2018. Our continued and renewed efforts with our VP of International Sales will enable us to expand and grow our international viscosupplement franchise, and this will be with an increased focus on accountability and execution in markets where we serve. US viscosupplement revenue decreased approximately $500,000 year-over-year for the third quarter, due primarily to timing of product shipments and lower pricing. As expected, we experienced the impact on US ORTHOVISC and MONOVISC product transfer prices from the decreased market pricing that occurred in the first quarter of this year. But more importantly, ORTHOVISC and MONOVISC continued to maintain a strong position in the US market. Since its initial launch in the second quarter of 2014, MONOVISC experienced 14 consecutive quarters of year-over-year growth.

Our partner has indicated that they continue to see an increase in patients placed on our viscosupplements, as a result of taking share from competitive products. On a year-over-year quarter basis, ORTHOVISC end-users unit sales experienced a low-single-digit percentage decrease, while MONOVISC end-user sales experienced a 20% increase in volume. During the third quarter, we also experienced small pricing declines for ORTHOVISC and MONOVISC, comparing to the second quarter of this year. While pricing pressure is impacting the overall US viscosupplement market, we see strong total patient growth for our visco products. This is critical for continued market share expansion and we are monitoring the market environment closely with our partner and we will provide updates on future calls. Product gross margin was 69% for the third quarter compared to 73% for the second quarter of 2018 and 77% for the third quarter of last year. The decline in product gross margin is primarily due to increased production costs, voluntary recall recovery related costs and decline in the reported US viscosupplement pricing. We are actively executing a number of initiatives to increase operating efficiency over time. Total operating expenses in the quarter were $18.2 million compared to $16.9 million in the third quarter of 2017. The increase was primarily due to higher production costs and increased personnel and professional costs. That said, we are continuing to focus on increasing efficiency in our cost structure and maintaining our culture of disciplined cost management.

Net income for the quarter increased to $7.6 million or $0.53 per diluted share compared to net income of $6.9 million or $0.46 per diluted share in the third quarter of 2017. The increase in net income was due primarily to the decreased research and development expenses, as a result of the completion of the CINGAL 16-02 study and lower income tax expenses in 2018.

We generated approximately $25 million of cash from operations for the first nine months of 2018 and we ended the quarter with $149 million in cash and investments on our balance sheet. Our cash deployment strategy remains focused on organic investments to accelerate top-line growth, strategic M&A to augment organic growth and returning capital to shareholders through share repurchases, which we executed during the second and third quarters of this year in the amount of $30 million. We plan to continue to take a disciplined approach to capital allocation to ensure we are deploying our capital to the most value creating opportunities.

Based on our year-to-date results and information recently shared by our key partners, we expect product revenue for the full year of 2018 to be approximately 3% below 2017. In addition to the US pricing dynamics I discussed earlier, part of the expected decline is due to longer time needed to refresh and upgrade the international dermal distribution network. This effort is part of our plan to increase near- and long-term revenue growth for our dermal business.

As a result of successful cost control initiatives, we're now expecting total operating expenses for the full year of 2018 to be in the high $80 million range. We are on track to deliver product gross margin around the high 60% range for the full year of 2018.

With that, I would like now to turn the call over to Joe to discuss our near- and long-term growth drivers.

Joseph Darling -- President and Chief Executive Officer

Thank you, Sylvia. Please turn to Slide number 8. As I've stated previously, Anika is a growth company and by leveraging our strong foundation in executing on our strategic and operational initiatives, we are confident we have the opportunities and the resources to accelerate our revenue and earnings growth over the next several years.

As we discussed last quarter, we're in the process of developing a detailed five-year strategic plan, which I look forward to sharing in the coming months. As we continue our diligent work on the plan, we are focused on five clear opportunities to drive near-term revenue growth. First, are the ongoing efforts led by our new VP of International Sales to assess and optimize distributor-led sales and marketing operations to improve market performance outside the US and we are already starting to realize the strategic and financial benefits of our efforts.

In the third quarter, we added four new distributors to our international network and expanded the reach of our viscosupplement business in Europe, Asia and South America. Second, is resuming the shipment of HYAFF-based products impacted by the voluntary recall, which as Sylvia noted earlier, we continue to expect to occur before the end of this year. Third, is driving the continued international growth of CINGAL. We are excited about our results and continued the momentum in Canada and Europe, which has enabled us to deliver approximately 70% revenue growth year-to-date for CINGAL. Fourth, is the upcoming US commercial launch of our surgically delivered regenerative therapy for bone repair procedures. This treatment provides an injectable self-setting osteoconductive bone graft substitute that is resorbed by the body and replaced by the growth of new bone during the healing process.

The current market size for treating injuries that damaged cartilage such as tibial plateau fractures, stress fractures around the joints, is approximately $250 million to $300 million in the US. Given the anticipated utility in demand for this treatment, in our projected launch in the second half of 2019, we continue to believe that a hybrid commercial model would deliver the greatest value to Anika, which I will discuss further shortly. Fifth, is potential targeted partnerships and technology acquisitions, which we continue to view as an important growth driver for Anika. We are actively focused on evaluating smaller tuck-in acquisitions, which would complement our existing product portfolio, augment our technology or enhance our commercialization capabilities. Specifically, we are interested in targets that complement our core competencies in orthopedics and potentially have a strong distribution channel in place and have the potential to generate sustained double-digit revenue and earnings growth.

I'd now like to discuss the development of our hybrid commercial model. We are currently seeking commercial partners with an established surgical orthopedic sales force. This commercial partner would work in tandem with our small in-house team of (inaudible) and highly skilled clinical marketing specialist. Our small in-house team was served as our boots on the ground to drive pre-launch activities and awareness, build relationships with key surgeons and accounts and provide the training necessary for our partner sales force when appropriate.

We expect that this hybrid commercial approach will yield significant benefits for Anika as we will not need to invest the time and the enormous financial resources that are fully deployed large scale direct commercialization model would require. We believe that this commercial approach will enable us to benefit from more rapid market penetration and drive stronger revenue growth and increase profitability without the significant investment associated with building a large sales force and related infrastructure to support it.

As I noted last quarter, we are also working to structure any new partnership contracts to provide more favorable economics in greater control over market access, sales and marketing and pricing than our previous commercial partnerships have had historically. This will enable us to better control our own destiny toward increased profitability and growth for our shareholders.

In conclusion, we are actively working to gain greater control over our future as a company under new leadership and with new commercial and strategic initiatives to accelerate growth. We're taking a hard look at every aspect of our business and making the changes needed to drive the transformation of Anika into the next phase of our growth.

While we still have work ahead of us, we've made continued progress in our transition to a global commercial company in the third quarter and we are very excited about our growth prospects.

We are now happy to take your questions. Thank you.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from the line of Mike Petusky with Barrington Research. Your line is now open.

Mike Petusky -- Barrington Research -- Analyst

Hey guys, good evening. Few questions. So, Sylvia, can you talk about MONOVISC and ORTHOVISC pricing sort of the trend year-over-year rather than -- I think you said sequentially down, but how much is pricing down year-over-year in those products?

Sylvia Cheung -- President and Chief Executive Officer

Yep. So from a US fiscal settlement pricing standpoint, we do see that year-over-year pricing has come down. The decline in the first quarter as we spoke about during our Q1 earnings call was larger than expected in the high single-digit range. During the second quarter, we saw some stabilization of both ORTHOVISC and MONOVISC pricing. And in the third quarter, we saw some small continued decline for both products.

Mike Petusky -- Barrington Research -- Analyst

So if we are looking at kind of this pricing in the third quarter this year versus a year ago, I mean was it down more than 10% for the products?

Sylvia Cheung -- President and Chief Executive Officer

It's less than 10%, in a single-digit percent range.

Mike Petusky -- Barrington Research -- Analyst

Okay, all right, very good. And then, Joe, I guess if you could remind me, the extension piece of the CINGAL work that you guys have done, is that 13 weeks, is that finished now or is that about to finish?

Joseph Darling -- President and Chief Executive Officer

Yeah, Mike. So first of all, thank you for your questions, and hello, back to you by the way, we didn't get a chance to say hello in your introduction. So, yes, so the study-- that portion of the study is completed. We are going through the process of analyzing the data and putting all the data together to submit ae package to the FDA.

Mike Petusky -- Barrington Research -- Analyst

Okay. So really, really there is there is probably not going to be an update in terms of the data until you talk to the FDA, is that correct?

Joseph Darling -- President and Chief Executive Officer

Mike, that's correct. I've been consistent. In fact, I believe I mentioned on the quarter two earnings call that we would announce all the data upon completion of our meeting in agreement with the FDA after our first quarter meeting that we planned for 2019, so.

Mike Petusky -- Barrington Research -- Analyst

Okay, all right. And then just in terms of the commercial partnership that you hope to strike, I mean is Mitek a part of that discussions or is it likely that you're going to sort of go in another direction for future products?

Joseph Darling -- President and Chief Executive Officer

Yeah, we have to be obviously very cognizant of what a great job they've done for us and they continue to do for us and I think I've mentioned previously too, that the relationship has strengthened over time. So while I'm not had -- necessarily liberty to say that Mitek is in the discussion, I wouldn't rule them out. So the reality is, especially when you take a look at the viscosupplements, the opportunity for continued partnership with a very strong partners such as Mitek has some benefits to it.

Mike Petusky -- Barrington Research -- Analyst

Okay. And then just a last real quick one for Sylvia. Sylvia, do you expect orthobiologics revenue to grow sequentially in Q4 versus Q3?

Sylvia Cheung -- President and Chief Executive Officer

We do expect sequential quarter growth for orthobiologics for a couple of reasons. One is, we see continued strong international market revenue growth and we expect that trend will continue into the fourth quarter and in addition to that, as we -- Joe and myself both mentioned in our script section that we are executing a number of international market expansion efforts with our new VP of International Sales' -- under his leadership. So based on that, we believe that the growth projections for orthobiologic is supported.

Mike Petusky -- Barrington Research -- Analyst

Okay, very good. Thanks, guys. Really appreciate it.

Joseph Darling -- President and Chief Executive Officer

Thank you, Mike.

Operator

Thank you. And our next question comes from the line of Joe Munda with First Analysis. Your line is now open.

Joe Munda -- First Analysis -- Analyst

Good evening, Joe and Sylvia. Can you hear me OK?

Joseph Darling -- President and Chief Executive Officer

We can, Joe.

Sylvia Cheung -- President and Chief Executive Officer

Yeah, good evening, Joe.

Joseph Darling -- President and Chief Executive Officer

Good evening to you.

Joe Munda -- First Analysis -- Analyst

Good evening. So couple of quick items here. I was just wondering if you can give us a breakout on international visco versus US visco, as well as could you breakout CINGAL from the rest of orthobiologics?

Sylvia Cheung -- President and Chief Executive Officer

For nine months year-to-date, international visco is roughly about 15% of our product revenue, give or take, and Mitek's -- ORTHOVISC and MONOVISC contribution to our product revenue historically has been in the low to mid-70% and that is consistent for this year as well. From a CINGAL perspective -- hold on one second here -- CINGAL's contribution to our total revenue is approaching 5% for 2018, which reflected the robust growth that we discussed earlier.

Joe Munda -- First Analysis -- Analyst

So 5% of orthobiologics or total product revenue --?

Sylvia Cheung -- President and Chief Executive Officer

Of total.

Joe Munda -- First Analysis -- Analyst

Of total?

Sylvia Cheung -- President and Chief Executive Officer

Correct.

Joe Munda -- First Analysis -- Analyst

Okay. And then, Joe, you touched a little bit on -- you had mentioned pricing pressure and payer controls there. I mean, are they going hand in hand, and -- I mean, give us a little bit more color, especially on the payer control side of what you're seeing.

Joseph Darling -- President and Chief Executive Officer

Yeah. Joe, I think the way you posed the question pretty much almost itself answers that itself. Yeah, it is a combination of the two. Typically, you see that not only with large payers, but with the regional payers as well. So the two go hand in hand with each other. I wouldn't necessarily separate them, but for the most part they do go hand in hand.

Joe Munda -- First Analysis -- Analyst

Do you -- does Mitek anticipate further sort of regional players putting in controls or we had a sort of a plateau here?

Joseph Darling -- President and Chief Executive Officer

I would say, we're probably pretty close to a plateau. I'm not really sure how to interpret the question, Joe, so I apologize.

Joe Munda -- First Analysis -- Analyst

So are you expecting more -- are you expecting more payers to essentially put more controls or payers that haven't put controls on visco to begin doing so?

Sylvia Cheung -- President and Chief Executive Officer

Yeah, Joe, by control, are you referring to coverage or are you referring to pricing? I just want to make sure that we are (multiple speakers).

Joe Munda -- First Analysis -- Analyst

I'm referring to coverage, but are you referring to pricing?

Sylvia Cheung -- President and Chief Executive Officer

Yeah. So from a coverage standpoint, I think Anthem was a big news last year and based on the information that we have on hand and including speaking with our partner, we're not aware of any nationwide coverage related issues, so that is currently the situation. From a pricing standpoint, as we all know that, typically contracts will come up for renewal. So as Mitek gets into the contract renewal discussions and those type of activities, we may see period-over-period related impacts. On that particular piece, we don't have the exact level of visibility into the timing and the extent of those negotiations. So we'll share the information as they become available -- as it become available, but at this time, we don't see any major or dramatic changes based on our conversation with Mitek.

Joe Munda -- First Analysis -- Analyst

Okay. That's helpful. Thank you. Just a couple more here. As far as gross margin is concerned, you talked a little bit about some of the drivers, and I'm just wondering how much -- how much of that decline year-over-year on product gross margin is due to pricing itself?

Sylvia Cheung -- President and Chief Executive Officer

The decline in product gross margin primarily are driven by three, I would say, roughly equal contributors, which I mentioned earlier. One is, higher production costs. The other one is related to pricing, and I would call pricing/product mix, and the third one is really recall and the related recovery activities. So those are really the three major drivers, and you can think of them as kind of contributing more or less equally to the drop in the product gross margin year-over-year.

Joe Munda -- First Analysis -- Analyst

Okay, that's helpful. And then, Joe, taking a step back here in big picture, at the end of the quarter, back in August -- I'm sorry, back at the end of 2Q, you talked about delivering double-digit growth going forward in '19, '20. I mean, is that still the bogey. Can you still get there. I notice there wasn't really that not much commentary regarding that on this call. So is that something that you still have your sights set on?

Sylvia Cheung -- President and Chief Executive Officer

Joe, I'll try to answer that question and then Joe will add additional color. From a 2019 standpoint, we haven't given the guidance for next year, but what I can say is, we do believe that there are several positive and growth opportunities. And in particular, I would say that it's the number 1, the continued growth in our MONOVISC and CINGAL products. The second would be international distributor expansion under the leadership of our new VP of International Sales that Joe mentioned earlier. The third piece is related to the launch of our surgical bone repair product in the United States, which will bring incremental new product revenues for us. And then the fourth factor is the relaunch of the HYAFF products post recall. As you recall, that represented about 3% -- the three recalled products represented about 3% of our 2017 revenue. And then from there, I think, target of partnerships and potential acquisitions could act as accelerator from a revenue standpoint. So we're in the process of preparing the 2019 budget, as we speak, but we look forward to providing additional color and guidance during the fourth quarter earnings call.

Joe Munda -- First Analysis -- Analyst

So, does the milestone payment of $5 million fit into that equation as well? Should we still expect that in 2019?

Sylvia Cheung -- President and Chief Executive Officer

We are taking a close look at that. We have received the preliminary Q3 information and we're analyzing the -- rest of the year as well as 2019. So, as part of the increase in revenue, I think we can put that under the bracket of MONOVISC revenue increase. In terms of the exact timing and whether or not it will be achieved is something that's under review by ourselves as well as our partner.

Joseph Darling -- President and Chief Executive Officer

Joe, you might recall that in the Q2 earnings, it was so close to the end of the year in our discussions with our partnership, we want to wait till we get closer to the end of the year to have a better feel for when we think that may potentially imminent.

Joe Munda -- First Analysis -- Analyst

Okay. So it's just a question timing than -- ?

Joseph Darling -- President and Chief Executive Officer

Yeah.

Joe Munda -- First Analysis -- Analyst

Okay. And then lastly, Joe, I mean, you talk about an intriguing model here with a small hybrid sales force, possibly -- in terms of size, what are you thinking? Are we talking 10, 20 or we talking more of 5 like highly skilled people going out regionally?

Joseph Darling -- President and Chief Executive Officer

Yeah. The way we're planning -- and that's a great question you know is, obviously, we don't need to scale up to a real big sales force. I'm thinking roughly in the neighborhood of 6 to 10 strategically placed especially around some of the key teaching institutions in the US, where you can have more of an affect and an impact based on the population densities and such. So we're probably in the neighborhood of 6 to 10, Joe.

Joe Munda -- First Analysis -- Analyst

Okay, thank you. I'll hop back in the queue.

Joseph Darling -- President and Chief Executive Officer

Thank you.

Operator

Thank you. And our next question comes from the line of Jim Sidoti with Sidoti & Company. Your line is now open.

Jim Sidoti -- Sidoti & Company -- Analyst

Good evening. Can you hear me, Joe and Sylvia?

Joseph Darling -- President and Chief Executive Officer

We can, Jim, good evening.

Sylvia Cheung -- President and Chief Executive Officer

Yes. Good evening.

Jim Sidoti -- Sidoti & Company -- Analyst

Great. A couple of quick ones. One, the dermal products where you said you're going to have some distribution changes in Europe, what percent of revenue was that in 2017?

Sylvia Cheung -- President and Chief Executive Officer

In 2017, dermal was approximately $3 million from a product revenue standpoint. If you look at the year-to-date dermal business, I think it's up (ph) $200,000. So that business was heavily impacted by the voluntary product recall. In addition to that, we were working on distribution network upgrades and refreshment.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay, right. And then R&D was down in Q3, it was also down in Q2 from where Q1 was. Should we assume that number starts to pickup again over the next few quarters, as the clinical trials for the the tennis elbow start and also I guess increased activity with the HYALOFAST?

Sylvia Cheung -- President and Chief Executive Officer

Yep, yes. The short answer is, yes. The downward trends for Q2 and Q3 were related to the completion of the CINGAL studies for six months follow-up as well as a three-month extension studies. Looking ahead for the fourth quarter, as you noted correctly that the, OVT European post-market study will commence, so that would add to the R&D expense line, and we also, in the fourth quarter, have CINGAL FDA-related meeting preparation activities that we would incur additional expenses related to that. And for 2019, we do expect R&D expenses to go up given the development programs that we have talked about.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay, right. And then third your question on the bone repair product, will that be launched through this hybrid sales force?

Joseph Darling -- President and Chief Executive Officer

It will. So it'll be a combination of the hybrid sales force and a partnership model, Jim. So it will be a combination of both, yes.

Jim Sidoti -- Sidoti & Company -- Analyst

Right. And then the last one from me is, the tax rate so far this year has been between 13% and 16%, should we assume that goes up in the fourth quarter or is that going to be a good number for the fourth quarter?

Sylvia Cheung -- President and Chief Executive Officer

Jim, for the fourth quarter the rate will go up slightly probably to the low 20%. The reasons -- or the reason why Q1, Q2 and Q3 were lower than expected were due to discrete non-recurring item, as well as some tax reform act transition implementation rules that recently came out. So we were able to take additional credits or deductions -- sorry, I shouldn't say credit, the additional deductions related to certain one-time events. I do not expect that the fourth quarter's tax rate will be at the low rates that we experience from Q1 through Q3.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay. Right. And then I just wanted to say, Joe, I can imagine how tough it is being a Yankee sitting up there with all those (inaudible) I hope you get through the next week or so.

Joseph Darling -- President and Chief Executive Officer

I appreciate that, Jim. Thank you.

Operator

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

Lisa Springer -- Singular Research -- Analyst

Good afternoon. I wanted to ask you about the core new distributor partners that were added during the quarter. With those new partnerships in place, do you feel like you have the distribution network you need to take CINGAL where you want to take it in Europe? Are there still some holes in the system that need to be filled?

Joseph Darling -- President and Chief Executive Officer

I think it's a combination -- Lisa, this is Joe, obviously, but I think it's a combination of factors. One is, these are opportunistic for us to expand into, number one. Number two, with the new VP of International Sales, one of the things that we have spoken about is the commitment and accountability at the local distributorship level as well. So as I look at the overall international market where we are not performing, we need to take a hard look at and where we don't have a presence, that's where we need to bring the new distributors on board. So by the addition of these new four distributorships, that filled some of the gaps that we had on the international front, but I do believe we still have a ways to go in making sure we've got the right distributors in place in other parts of the world. So it's a constant process that the VP of International Sales will be going through to ensure we're optimizing our international efforts.

Lisa Springer -- Singular Research -- Analyst

Okay, thank you.

Sylvia Cheung -- President and Chief Executive Officer

Thank you, Lisa.

Operator

Thank you. And our next question comes from the line of Andy Summers with Summers Value Partners. Your line is now open.

Andy Summers -- Summers Value Partners -- Analyst

Hi, Joe. Hi, Sylvia.

Joseph Darling -- President and Chief Executive Officer

Hi, Andy.

Sylvia Cheung -- President and Chief Executive Officer

Hi, Andy.

Andy Summers -- Summers Value Partners -- Analyst

Hi, thanks for taking the question. So maybe just starting with CINGAL, have you commented on the type of meeting you're having with the FDA and the format of the meeting?

Joseph Darling -- President and Chief Executive Officer

We have not, Andy. No.

Andy Summers -- Summers Value Partners -- Analyst

So you're not, that's not something you willing to talk about?

Joseph Darling -- President and Chief Executive Officer

I think right now that the way we've got the meetings set up for the FDA, it'll be kind of a complex conversation to have , which would put us in a situation from a competitor perspective not feeling necessarily the right comfort level over a call like this.

Andy Summers -- Summers Value Partners -- Analyst

Okay, but you did confirm that you're going to have the nine-month data in the submission package. Is that right?

Joseph Darling -- President and Chief Executive Officer

We're actually going to take all the data including the nine-month data into the submission package. Absolutely, yes.

Andy Summers -- Summers Value Partners -- Analyst

Okay. And do you expect to have the FDA minutes in the first quarter of 2019 as well from the meeting?

Joseph Darling -- President and Chief Executive Officer

I would assume we would. I'd have to honestly get back to you on that to figure out exactly what we will have coming out of that meeting. I would assume, we would have the minutes but --

Andy Summers -- Summers Value Partners -- Analyst

Okay. So once you have the minutes then you'll decide sort of the path forward and you able to communicate that with shareholders. Is that right?

Joseph Darling -- President and Chief Executive Officer

Yeah. The key is sitting down with them, walking through the data, talking about the different studies that have been done and then making sure that there is agreement on a pathway forward to approval for the product.

Andy Summers -- Summers Value Partners -- Analyst

Okay. And another large scale Phase III program could be one of the scenarios?

Joseph Darling -- President and Chief Executive Officer

I'd rather wait till we sit down with the FDA before I make a commitment like that, but CINGAL is a very important product for us and as we articulated in this call today, it has done very well for us in the international markets. We would expect to see the same in the US upon approval of the product. So we are very committed to this product in the future of CINGAL coming into the US.

Andy Summers -- Summers Value Partners -- Analyst

Okay, great. And have you quantified what you think the ex-US opportunity is for CINGAL? It sounds like you roughly doing $5 million of sales now. What could that be over time?

Sylvia Cheung -- President and Chief Executive Officer

I think the opportunity is -- can be quite large. Right now, we're in the process of building out a much broader distribution network outside of the US. The four recent additions are examples of recent achievements. Beyond these countries, we have additional target countries that we're working on, and looking at the near-term approval charts, there's about half a dozen or so countries that we expect to receive CINGAL approval within the next 12 months. So from a revenue growth standpoint, we do continue to expect CINGAL to be a meaningful contributor for our revenue growth.

Andy Summers -- Summers Value Partners -- Analyst

Okay, great. And just switching gears to the surgical bone repair product, is the delay between the approval and the launch, is it solely due to this partnering concept or is there other gating factors that kind of caused the gap between the approval and the launch?

Joseph Darling -- President and Chief Executive Officer

The simple answer to that is the approval this past December was a pretty rapid approval, which took us by surprise. So we weren't ready for scale up in production, we weren't ready with the commercial plan at that point. It's purely what you're seeing is really a reflection of unfortunately not being ready upon approval and I want to do this right. Typically, you get one shot at a product launch, so I will make sure that when we launched the product that we've got the right people in place in the field, we've got a good strong distribution partner in place and we can accelerate our penetration in the market by doing it correctly the first time.

Andy Summers -- Summers Value Partners -- Analyst

Okay. And can you comment on whether you're expecting this to happen in July or more toward December of 2019, just around the second-half launch -- yeah.

Joseph Darling -- President and Chief Executive Officer

Yeah. So what we're looking at is, starting with what I'll call a soft launch in mid-year, so you are in that June-July time frame and through there, and then accelerating the launch with the full partnership by that point in time. And part of the reason is, because I want to make sure that as we put these clinical marketing specialist in place and we see them in appropriately from a timing perspective that they have the adequate materials to go in and start converting accounts and use of the product. So I think from my perspective, I want to call it a soft launch mid-year and then accelerate into what I would call a hard full-scale launch as we move into the second half.

Andy Summers -- Summers Value Partners -- Analyst

Okay. And can you provide a little more color around the market opportunity. Are you -- will this product replace something that's already being used today or is this something that's going to be new and additive to existing surgeries? Could you just talk about how this product is going to fit into the the paradigm here?

Joseph Darling -- President and Chief Executive Officer

Yeah. Couple of things. One is, there are competitive products in the marketplace. We do have an advantage with our setup time, the throughput through the OR should be quicker than competitive products, which is a big factor when you start to measure OR time on a per minute basis. So, we will also be capturing users that may not have wanted to use competitive products due to the time factor involved in the setup of the product. So on a high-level scale when you take a look at this particular product and the applications in tibial plateau fractures or even femoral neck fractures, stress fractures, I think will play a bigger role as we move into this market.

Andy Summers -- Summers Value Partners -- Analyst

Okay, great. And since we haven't seen a partnership deal yet, can you just comment on whether or not you're expecting to receive some upfront payments along with a partnership or is this just basically just a royalty structure or how are you thinking about the economics of a partnership going forward?

Joseph Darling -- President and Chief Executive Officer

Yeah. A couple of things, Andy. I got to be careful here, because obviously trying to explain this in an environment where you're still negotiating wouldn't (ph) advantageous for me to put all the cards on the table, but that being said, I want to make sure that we do have a model that obviously gives us more pricing authority over how the product is priced in the market, number one. Number two, we want to control a degree of the positioning of the product in the market. So the economics of the deal -- we can't really talk about today and I prefer to talk about that once the deal is all signed and delivered than speculating, because as you know these things are -- usually are a long process. So --

Operator

Thank you. And we do have a follow-up question from the line of Mike Petusky with Barrington Research. Your line is now open.

Mike Petusky -- Barrington Research -- Analyst

I'll try to be quick here. Sylvia, just on your tax rate commentary. As you look longer-term, I think at one point, there was maybe a thought that your effective tax seem like 26%, 27%. Has that changed longer term, have you guys -- as you've got into it found that maybe a lower-20% tax rate is more likely or can you talk about that?

Sylvia Cheung -- President and Chief Executive Officer

Great. So for 2018 after we reviewed all the recent tax reform implementation and transition guidance, we saw additional opportunities to lower our rate and we currently feel that in the fourth quarter a low-20% is an appropriate rate. Going forward for 2019, we need to take a closer look at that during the budget process and we will provide the expectation during the Q4 earnings call.

Mike Petusky -- Barrington Research -- Analyst

Okay. All right. And then Joe, just a quick one. When you think about strategic plan -- longer-term strategic plan that you are going to, I guess, roll our, is that something you think could be ready to be shared with the year-end conference call or is that more of a longer-term project?

Joseph Darling -- President and Chief Executive Officer

Mike, couple of things. One is, the planned time frame for completion, we've got to bring it through the Board as well, which we plan on doing early in the first quarter of 2019. So it's going to be sometime in the early 2019 time frame before we can share, because obviously, it's got to be approved, but I think when we're ready to share it, it will be very comprehensive for the future direction of where we intend to steer Anika from a strategic perspective.

Mike Petusky -- Barrington Research -- Analyst

Okay. Right, great. And Sylvia, just last one. Do you have the depreciation and amortization expense and CapEx for the quarter by any chance?

Sylvia Cheung -- President and Chief Executive Officer

Mike, from a depreciation and amortization standpoint, nine months to-date, it's approximately $4.5 million; and stock-based comp, which is also a non-cash item, that's approximately $10 million; and from a CapEx spending standpoint, we are looking at approximately $4 million to $5 million.

Mike Petusky -- Barrington Research -- Analyst

Great. Thanks guys. Really appreciate it.

Joseph Darling -- President and Chief Executive Officer

Yeah. You're welcome, Mike.

Operator

Thank you. And I'm showing no further questions at this time. And I'd like to return the call to Mr. Joseph Darling for any closing remarks.

Joseph Darling -- President and Chief Executive Officer

Thank you, Sandra. And thank you to all of you for your time today. We're very proud of our progress in the third quarter and we are very excited about the many growth opportunities in front of us. We look forward to continuing to update you on our progress, as we execute on our initiatives to drive both near and long-term growth for our shareholders. Thank you and have a great evening.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day.

Duration: 58 minutes

Call participants:

Sylvia Cheung -- President and Chief Executive Officer

Joseph Darling -- President and Chief Executive Officer

Mike Petusky -- Barrington Research -- Analyst

Joe Munda -- First Analysis -- Analyst

Jim Sidoti -- Sidoti & Company -- Analyst

Lisa Springer -- Singular Research -- Analyst

Andy Summers -- Summers Value Partners -- Analyst

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Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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This article appears in: Personal Finance , Stocks
Referenced Symbols: ANIK



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