Aroa Biosurgery Ltd

ASX:ARX

Earnings Call Transcript 2024-Q1

[Neetha Alex-Kumar, executive]

[Audio Gap]

[Operator Instructions]

Please note that this session is being recorded. On behalf of Aroa today, we have the CEO, Brian Ward and CFO, James Agnew. I will now hand over to Brian and James. Please go ahead.

[Brian Ward, executive]

Thank you, Neetha and thanks to everybody for joining the quarterly this morning. So it's going to be a relatively quick run through. So just quickly, for those people who are new to Aroa, we're well-established high-growth soft tissue regeneration company, selling 4 products probably in the U.S., everything based on our AROA ECM technology platform. The total addressable market for our products in the U.S. is in excess of $3.5 billion. We sell through our own direct sales force in the U.S. and also through our commercial partner, TELA Bio, Inc.

More recently, we've been working on a new technology platform which is Enivo tissue apposition platform. The company is about almost 300 people. So most of those people based here in New Zealand, that's manufacturing, development, corporate function, marketing, regulatory quality. And then in the U.S., we have sales operation.

So just to go to the financial highlights. So cash receipts from customers increased to $15.2 million in the last quarter, up from $12.3 million. Our net cash outflow from operations of $4.8 million compared to $1.9 million in the previous quarter. So this is in line with expectations. It represents some end of year payments and also what we expected in terms of sales and marketing expenses in the first quarter of this year. And also our revenue for the first quarter of the year as well. Net cash outflow from investing activities, $1.3 million, and this represents additional investment into our manufacturing plant and equipment, again, in line with our internal budget.

So we finished the quarter with a strong cash balance of $38.5 million, so on plan where we expected to be.

Operational highlights. We continue to have good success in the U.S. with our Myriad product. So particularly in the last quarter, some large hospital systems where we had some key wins. So we're now in the Cleveland Clinic System, our Case Western, Ohio State University and better health systems. So this comes from some really good foundational work being done over the last 12 to 18 months. It is beginning to get us into some very large hospital systems. Field sales representing productivity continuing to improve in line with expectations. So we now have 8 of our field reps that are on an average run rate of over $750,000 per annum. So again, tracking very well.

Symphony launch has gone in line with plans. So this is a call point within the hospital system, the outpatient departments. We've focused our launch within those hospitals where we already have a presence. And we're seeing the results that we expected at this stage within the year. So I'm very happy with how that's proceeding. On Symphony, we've recently seen an announcement from CMS with regard to the reimbursement for next year. So they have said that they're going to remain unchanged to the outpatient department and the physician office over the next year.

So this is consistent with what we thought would be happening within the outpatient department where we are focused. We did expect to see a change within the physician office. And still expect to see something over the next couple of years. We don't see this as having an impact on our launch or on our sales trajectory for Symphony over the next 24 months. So those changes within the physician office may still come into place. Unless they don't, then we are seeing regulatory measures which are being introduced predominantly with regard to auditing, the requirement for ASP reporting, just to some of the gaming around that and also some changes with some products requiring new clearances for those products through the FDA.

So we think all these measures collectively are going to help change the landscape in the physician's office over the next couple of years. So not really a big impediment in the short term, but hopefully it's an upside downstream over the next couple of years there.

We've now treated our first patient with the Enivo system in mastectomy, went off extremely well. And that's the first of 10 patients. So that study has been undertaken here in New Zealand, but a more hospital. We've also had 2 clinical publications of note published in the last quarter. So one of those using Myriad Matrix to treat anal fistula. And we saw very good healing rates in this condition. And this is a condition that's very difficult to treat and often products fail within this. We've also recently published a study of using Myriad Matrix and pressure injury algorithm. So we brought together a group of physicians to look at the use of Myriad and how that would be used in pressure injury reconstruction. So this is the published that's -- sorry, a publication that's recently been published.

I think the highlight with both of these publications is that Myriad is being used and conditions that are very contaminated sites, so very difficult sites to treat. And these wounds are very, very inflamed. And what we're seeing with Myriad is that it performs very well in these types of indications. And if you look at the spectrum of severity of soft issue reconstruction, these procedures are at the top end of that spectrum. So they are not only good for treating these particular conditions, but I also think it gives surgeons the confidence that Myriad performs well, where there is a contamination of a site next and many of the procedures where Myriad is being used.

We continue to make very good progress with our Myriad registry. So we're now up to 183 patients. So that's up 24 since the last quarter. And we now have 5 study sites up and going. So we've added an additional site over the last quarter.

So just to touch on guidance. At this stage, there's no change to our guidance. So product revenue is still expected to be between $72 million and $75 million, our gross margin increasing to 85%, and we expect to finish the year with a normalized EBITDA of $1 million to $2 million. So very confident in how we're tracking for that guidance.

So I'm going to hand it back to you, Neetha, and we're happy to take questions.

[Neetha Alex-Kumar, executive]

Thanks, Brian. Okay. We will now move on to the Q&A session. The questions are based on those sent over by e-mail or submitted by the Q&A function on Zoom. So if you have any questions, please send them through.

So one question that we received is around the improvement in Myriad sales and what you might think are the factors contributing towards that.

[Brian Ward, executive]

I think there's a couple of things, I think, growing clinical evidence of experience with our products. And we are seeing Myriad perform very well in a wide range of soft tissue reconstruction procedures. I think that the evidence is simply growing on that. I think also increased success from our sales team. So our sales people have now been in the territories for longer. We sort of expect to see those territories mature, we're certainly seeing that as well. So I think that's helping and we are also getting into some new territories, introduce some new hospitals as well. So I think it's a culmination of all of those things build in momentum with Myriad.

[Neetha Alex-Kumar, executive]

There's another question that sort of noted [indiscernible] to recent acquisition [indiscernible] for $1.3 billion. And the question is around what impact or significance do you think this has on the biologics industry?

[Brian Ward, executive]

Yes. I think it's great to see a strategic investor acquiring a smaller biologics company. I think what's notable about this is a couple of things. I think it really underlines the utility and use of biologics and soft tissue reconstruction and really validates the market opportunity for these products. I think the valuation -- it is a very strong valuation. I mean it's certainly [ 13x, 14x ] revenue. So that's a very good benchmark, I think, for high-growth company like [indiscernible], we also think like a robotic surgery. So I think it's certainly a good market or the market opportunity and a good market for valuation and a good market for the prospects. If I think about our role compared to [indiscernible], certainly from a technology perspective. We think we're very well placed to be superior to [indiscernible]. So I think that provides a lot of confidence to our role that there's a very strong opportunity in the future.

[Neetha Alex-Kumar, executive]

Okay. Another question has come around when does Aroa expect to focus more on EBIT and reduce R&D spend accordingly?

[Brian Ward, executive]

Yes. Look, I think we are focused on EBIT. And I think this year, for the second year, we'll be on a normalized basis, EBITDA positive. I think if you look forward to the next financial year, we have continued growth in our top line revenue and expenses, some of them have expenses in R&D, a growing investment in our sales and marketing. We're going to be strongly EBITDA positive next year. So the other way I think about development expense is we're making an investment there in the medium to long-term prospects for the company. We think that there's a lot of strategic sense and the ongoing investment into Enivo platform.

Even despite that, we will be strongly EBITDA positive next year. I think the other thing to note with that is if we backed out that expense from Enivo over the last couple of years, we would have been strongly EBITDA positive anyway. So it's really about investing in the long term, investing in the success of the company. We're also well placed to do that because we have a strong cash balance.

[Neetha Alex-Kumar, executive]

There's been a question around Enivo and what is the pathway towards commercialization? And when do you expect to see -- when do you expect its launch in market and see material revenue?

[Brian Ward, executive]

Yes. So we're working through the final clearance for Enivo. And this couple of pathways possible. I think if we go on this Enivo halfway, we're probably 24 months away from commercializing that product. There's also a potential pathway that's much more straightforward through [ 10-K ]. We're investigating that at the moment. That would bring Enivo to the point where begin to be sold in the coming financial year. Irrespective of which way it's clear, we do see Enivo as being a medium-term revenue opportunity. So it's about having a very full pipeline for the next 5 years and going to be quite a lot of value in the future.

So Enivo is not a short-term story. It's a medium to long-term story. In the meantime, if you look at our other products like Symphony and Myriad that really only just getting started. Myriad, we have less than 2% of the total market for Myriad. There's a long way to run with that. So we think the prospects for that are very strong. The importance of Enivo in terms of revenue over the next couple of years is quite small.

[Neetha Alex-Kumar, executive]

And in one of the previous questions, you touched on the cash flow and that Aroa has strong cash flow -- cash position at the moment. There's a question around what were the elements contributing towards a higher cash outflow this particular quarter?

[Brian Ward, executive]

Jamie, you want to talk to that?

[James Agnew, executive]

Yes. Look, by no means is the cash burn in this quarter reflective of our recurring cash burn. That's definitely not. So I think a couple of things is we had a reduction in our working capital. So mainly in the sort of payment of annual expenses, for instance, very short-term incentives was one. We also increased our inventory in raw materials, and I mean that's just a matter of timing. We're sort of purchasing raw materials 2 to 3 times a year. So that was one aspect. But I think also, it was just the quarter that we actually expected an operating loss for this quarter, and that was really sort of driven by relatively one-off expenses across clinical development and in R&D, but also was conference season in the U.S. So we think a large part of our budget and marketing this quarter and for the year -- so again, I just like to reiterate, that's relatively one-off this quarter. And again, if you look at our guidance for the full year, we're still looking at a relatively lower -- low cash burn.

[Neetha Alex-Kumar, executive]

Thanks, James. So it looks like there was an increase in cash received this quarter. The question is how many sales reps we're planning to invest in, in the coming year?

[Brian Ward, executive]

Yes. I mean at this stage, we are budgeted to add 5. So we're in the process of recruiting sales rep. So there was a little bit of churn in the sales rep numbers, but that's sort of in line with expectations. It might be that when we get to the midyear point, we may revisit that number, but I think that's really -- we're banking on doing at least 5 this financial year, but we got out there.

[Neetha Alex-Kumar, executive]

Thanks, Brian. I'll just take a moment for if there are any further questions, please send them through. Well, it looks like we don't have any further questions today. So I'll hand it back to Brian for closing comments.

[Brian Ward, executive]

Great. Thanks. We're pleased with how the first quarter is going, tracked in line with where we expected it to be, really thrilled with the momentum that we're seeing with Myriad. And yes, I think we're on track for the year for where we want to be. So thanks, everybody, for joining, and we'll simply catch up with you at the half year. Thank you.