Aroa Biosurgery Ltd

ASX:ARX

Earnings Call Analysis

Earnings Call Transcript 2025-Q1

[Operator]

Okay. Thank you for your patience, and we'll kick off now. Welcome to Aroa Biosurgery's Investor Webinar and Q&A following the company's first quarter cash flow report released this morning. Please note that participants are in a listen-only mode. There will be a presentation lasting for approximately 20 minutes followed by Q&A. We will have to finish up by 9:30 a.m. Australian Eastern Standard Time. If you have a question you'd like to submit, please type it in using the Q&A function on the Zoom app. We will also be opening the floor to live questions. If you would like to do that, when the Q&A session commences, please use the raise hand function on the Zoom app. Please note that the session is being recorded.

On behalf of Aroa today, we have Brian Ward, Founder and CEO; James Agnew, CFO; and Adam Young, VP of Medical Affairs. I'll now hand over to Brian, James and Adam. Please go ahead.

[Brian Ward, executive]

Thank you, Anita, and thank you to everybody for joining this morning. This morning, what we thought we'd do is a quick overview of the highlights of our quarterly cash flow report. We didn't want to talk about our clinical research activities, particularly where we've got to with the clinical research that we've done to date, and then what we can look forward to over the next 12 months. Adam Young will take us through that. I then want to spend a little bit of time talking about why we think Aroa is well set up to win in the markets that we're participating in. And at later stage, we'll wrap it up within 20 minutes and there will be a period at the end for question and answers.

Let us jump straight to the financial highlights. So, cash receipts for the last quarter were $17.8 million. The net cash outflow from operations was $3.6 million, really reflecting post financial year payments and ongoing payments for our Symphony RCT. We do expect to be cash flow positive on an operating basis in the second half of the current financial year and we remain on track for that. Our net cash outflow from investing activities was $1.6 million and that reflects plant and equipment purchases related to our expansion of our tissue manufacturing processes. So, we're continuing to complete the tissue expansion. That will be complete in the first half of this year and then we'll do a little bit more expansion activities next year. So, we concluded the quarter with $23.9 million in the -- cash balance in the bank. And we maintain our guidance for revenue at $80 million to $87 million and an EBITDA profit of $2 million to $6 million, so tracking according to plan there.

In terms of operational highlights, we continue to have good positive momentum with our U.S. commercial operations for our direct operations for Aroa. Myriad continues to grow strongly. So now, an increase of 11% quarter-on-quarter for accounts. So, active accounts now up to 242 accounts. And nice to see reps coming on within the first 12 months of being with us. A jump up in terms of 17.5% quarterly increase in average sales by those reps. So, good to see growing productivity in those early cohorts of our sales team.

More regulatory and distribution arrangements coming into place ex-U.S., so a regulatory approval in Taiwan. And we now have distributors in place in Switzerland, Chile and South Africa. So, continuing to build out our ex-U.S. operations. Enrollment for Symphony RCT is completed. So, we now have 120 patients enrolled in that. We expect to report that out early next year with our final analysis. And Adam will talk a little bit about that. The MASTRR study is fully recruited as well at 300 patients. We've extended this now to add an additional 5 sites and up to 800 patients. So, we found that this has been a very good vehicle to collect some of the data. We have a burst of clinical data coming this year. And from that registry and by extending the registry, we're going to continue to build our clinical data out over the next couple of years.

So now, I'd like to hand it over to Adam. Adam joined us in November last year and he's responsible for leading our clinical research activities. He's had a long history in soft tissue regeneration. He's our VP of Medical Affairs. He came to us from experience at both Integra and ACell. So, very well versed in soft tissue reconstruction and the use of extracellular matrix-based products for this application.

So Adam, I'll hand it over to you to take us through the next section.

[Adam Young, executive]

Thank you, Brian. It's a pleasure to be with you all here today, and I'll be giving a brief update on our clinical evidence as it stands today. If you go to the next slide, Brian. So as you mentioned, I came over as the Medical Director from Integra and then now here at Aroa to really help continue to push our clinical evidence. As you're looking at here, this is the clinical evidence to date that's been published. In the orange bars, you can see that we've had over 80 publications to date in peer-reviewed journal articles and in the blue bar there, you're seeing over 3,500 patients to date published with the outcomes following AROA ECM application. Most notably, over the last 4 years, you'll see what those orange bars, we've been averaging just under 10 clinical publications per year. However, this year, we're going to push to 12 and continue that momentum upwards of getting clinical evidence out in the literature.

If you move to the next slide. What we're seeing -- I'll go briefly through some of the highlights from this recent evidence. What you'll see, namely is the authentic complexity of AROA ECM. It's not a me-too collagen dressing or collagen product. It is a unique ECM material, and we do see that by the meticulous care we take to the biology and structure of that technology that it does then lead into the tissue regeneration outcomes that we see in the clinical evidence. So namely, if you look at the Myriad evidence that's been published over the last 12 months, you start to see a couple of trends emerge from that data, namely, we do start to see rapid granulation or vascularized tissue, developing to protect exposed structures, which would be tendon bone or viscera. We also see resilience and persistence of this AROA ECM even in the challenging situations of contamination or inflammatory microenvironment. And ultimately, that's lending to a cost-effective utilization and additional clinical value for the patients in the hospital as well.

If you move to the next slide, you'll see here following up on that note about coverage in rapid vascularized tissue to protect exposed structures. These are 3 publications with the Myriad product over the last 12 months that have come out. Across a range of different traumatic defects, you're seeing large defect sizes. But namely, on the right-hand side, you're seeing the time to tissue coverage of roughly 3 to 4 weeks. And so that's the time it takes to develop vascularized tissue, overexposed bone tendon or viscera. In the context of these types of defects without the use of AROA ECM, [Technical Difficulty] you typically see that in 4 to 6 weeks or longer. So certainly, seeing improved outcomes for patients, but also an improvement in terms of hospital resource utilization and moving these patients on.

If you go to the next slide, speaking to contamination and inflammation that you see in the success of AROA ECM in these settings. You're seeing 8 publications here across a range of defects, both chronic and acute wound types. And what you're seeing in the middle column there is CDC or Centers for Disease Control in the U.S. has an established and validated mechanism for evaluating contamination present within a wound bed. This ranges from Grade I to IV from a clean wound to a clean contaminated-contaminated and then an infected wound being a Grade IV. So, across these more complex grades or highly contaminated wound beds, you're actually seeing very positive outcomes with the Myriad product and that we are seeing 0% infections following most applications. You do see the one patient there in the [ Devine ] article. So ultimately, seeing good outcomes here in terms of usage of the Myriad product in contaminated defects, where much other competitor products are usually around the 10% to 20% infection rate when used in complicated wound types like this.

If you move to the next slide, Brian, you'll see across these same publications here, we've now on the right-hand side are looking at median number of product applications. So again, despite the contamination and complex etiology of these wounds, we're still seeing a median of 1 product application across all of these patients and defect sizes. So again, showing the persistence of the product in these contaminated or complex wound environment that ultimately is going to lead to additional clinical value, not only for the patient, but also for the hospital as well in terms of getting these patients closed without needing repeat applications and getting them out of the hospital reducing length of stay.

If you move to the last slide, I'll give you some of the highlights to expect for the rest of this financial year. Namely there, number one, this is the first publication that will come out from our MASTRR registry. This is a sub-cohort of that looking at the use of Myriad in complex lower extremity reconstruction. It covers 130 defects across the whole cohort. As part of this analysis, we did include a literature synthesis. And to our knowledge, this will be the largest prospective cohort of patients receiving a dermal substitute or skin substitute in the lower extremity reconstruction world.

The second line here is a second sub-analysis of our MASTRR registry. These are patients across trauma reconstruction across 4 Level 1 trauma centers. Currently, we have 40 patients that have already been analyzed and were submitted to a U.S.-based trauma that will take place in Q4 of our financial year. We'll continue to enroll patients and expect to publish that manuscript again at the end of the financial year. The third line item, looking at Endoform, so this is part of the AROA ECM family, but used in the outpatient setting. We have completed a real-world evidence, retrospective review of the use of this product and Venous Leg Ulcers compared to another collagen dressing known as Promogran. Within this analysis, it's a retrospective review of Net-HealthData, which is an electronic medical record software provider and we're seeing a significantly shorter time to closure as well as significantly increased incidence of closure compared to collagen dressing.

Lastly, as Brian mentioned, we are wrapping up our Symphony RCT study in diabetic foot ulcers. We enrolled the 120th patient last month and expect that patient to exit the study in September. So, we will be continuing data analysis and hope to have this data completed by the end of this financial year as well and believe that, that data positions us well for that outpatient DFU setting. So collectively, looking forward to bringing new outcomes of all 4 of these studies at our next quarterly review.

So with that, I'll pass it back to Brian to continue with the business overview.

[Brian Ward, executive]

Great. Thank you, Adam. So, you can see that there's a large pipeline of studies coming down the line. I think what's really different this year is just the sample size. So, these are much larger studies that were published previously and we're now starting to be some very solid data that we think will differentiate our products from competitors going forward. So, what I want to do is briefly just talk about where we are with sales number, Myriad and OviTex side and then why we think we're really well placed to do well over the next few years.

So, if you look at Myriad, that's really been our top priority where we're putting all of our energy and with our field sales team. We've got a family of products here that we're selling Myriad Matrix and Myriad Morcells. You can see that this product range has only been on the market for 3 years where we've had the opportunity to sell it aggressively. So, we were a little bit restricted during COVID. And then since we've got back into the field, we were be able to promote it, we've had strong growth. So last year, over 70% year-on-year growth with Myriad. We see enormous opportunity for Myriad going forward. So, we're thrilled with the momentum that we've got here, we see that this has a long way to run in terms of the markets that we're targeting.

When we launched Myriad, our focus was initially in smaller defects. The reason for that is surgeons are naturally conservative and they want to see the product work in lower-risk procedures before they use the product in larger defects. What we have seen over the last 12 months or so, as surgeons gaining more confidence in Myriad and beginning to use Myriad in much larger volumetric defects and we're seeing great results there. And what really stands out as Adam talked about, was the rapid regeneration of tissue, the rate at which that happens, the quality of that tissue.

And the other thing that's striking is that in many of these defects, the wounds or the defects are contaminated. And so, we're seeing that Myriad being used in these defects, it's resilient in those defects and assists very well. And surgeons gaining confidence in seeing that and have been seeing that soft tissue regeneration. So, we're seeing a lot more use in areas like trauma and an area like trauma is great because the much larger cases and obviously the case value from a financial perspective, is a lot more attractive.

We will see a more compelling clinical data coming through this year and we think that's really going to add to the momentum for Myriad over the coming years. What's interesting about Myriad is that we're getting great clinical outcomes, but we're also able to deliver some significant cost savings to hospitals. So, I want to talk a little bit about that in the following slide. I think the other thing that stands out with Myriad is that we only have a tiny [ silver ] of the total addressable market for this product. So, we're really just getting started with Myriad. And I think as the evidence comes through, as we start to target more of these large volumetric defects, there's certainly opportunity to grow from where we are now to particularly be a market leader in this area.

On the OviTex side, TELA Bio is a key partnership for us. They are responsible for commercializing OviTex in North America and Europe. They've done a great job. So, you can see sales there are still growing strongly. So last year, 40% year-on-year growth. They've licensed from us rights for hernia and breast. What we've seen happen here over the last few years is the product portfolio evolve. And so when we first started with TELA Bio, we had a relatively narrow product portfolio. So in hernia, predominantly targeting complex ventral hernia. We've built that portfolio out. So, we now have products designed for robotic surgery, products designed for inguinal hernia.

So, we're getting to the stage earlier where we have a comprehensive portfolio and that positions us very well to compete directly with the large players in this market. So, I think we -- the time is now coming for OviTex to really shine. I think the other thing that's interesting in the hernia market is that we're seeing some of the older style products being withdrawn from the market. So, the [indiscernible] products with the complications that come with those products, you're seeing those products come out of the market. So, I think that's also creating an opportunity for OviTex as well.

On the breast side, our products have advanced a lot in that area as well. So, we're now into a second generation product for breast with a long-acting polymer, something that's been more specifically designed for use in those procedures and we going to see some really good uptake there as well. So, we're really happy with how that portfolio is looking and the opportunity for TELA and obviously, the momentum that they're seeing in their sales.

In terms of clinical data, I think on the TELA side, the BRAVO Study really stood out in terms of the low rate of recurrence, 3% recurrence rate. If you compare that to what's typically being seen in ventral hernia and complex hernia at 10% to 30%, staying resolved. What we're now seeing is those results being replicated by other independent investigators. So, there's now 3 or 4 studies that support some of the results. So, we think that's also going to help in terms of OviTex sales. And similarly to Myriad, not only are we delivering great fit outcomes, but we're offering better outcomes with less complications and obviously, the product cost here for OviTex is certainly at a discount to what the sort of incumbent market leaders, particularly on the biologics side. So, OviTex has a long way to run. Currently, about USD 63 million, total addressable market in excess of $1.9 billion. So again, we're just getting started in this market.

So, I want to talk briefly about why we think the fundamental pieces are coming into place to make Aroa very successful over the coming years. I think there's 4 things that really stand out in terms of factors that contribute to our competitive advantage and give us winning business model. I want to briefly talk through these. So, the first one is value. And I think we look at value now in -- through a couple of lenses. So, I think the first lens is we've obviously got to contribute value to clinical outcomes. So, better clinical outcomes, faster healing, fewer complications. That's absolutely critical.

I think the other thing that we're beginning to be able to show from our studies and I think we'll really start to have the data this year to show this is that our products are able to provide significant cost savings for hospitals and those cost savings are coming in a number of different ways, and Adam talked a little bit about this in his presentation. So number one, lower complication rates. And particularly what we're seeing with our products now and Myriad is a very good example of this is very low rates of infection.

And if you think about infections, if a patient does get infected, their wound gets infected. There's a very large cost that goes with that for the hospital. So often, hospitals paid lump sum fees for doing particular procedures. They're paid under a system order DRG. So, if there's additional cost that comes from treating a patient with an infection, they're having to pick up that cost. And that can be anywhere between $5,000 to $10,000 for a simple infection, but it can go into tens of thousands of dollars if those complications are severe. So, if we can help them prevent the cost of infections, that has huge impact for them, and it's massive savings. So, we're beginning to be able to develop the data that shows that we can make a difference for hospitals with infections. And that's without taking into consideration the impact on the patients. Obviously, if the patient, their surgery gets an infection that's obviously the pain and suffering for them, but also the added procedures, the added treatment that they require for the infection.

Adam highlighted also that what we're seeing with our products is because of the persistence and resilience of our products, we're requiring fewer applications when compared to competing products. And so there's a couple of savings that come there. The first saving is just the cost of the product. And so only putting the product on once versus multiple applications. The second saving is the cost of a follow-up procedure. So, not having to take the patient back to surgery or bring the patient into a clinic to treat them. So, we're saving the money twice and that can be very significant for hospitals.

We're also with being able to generate tissue faster and get to definitive closure quickly, we're able to shorten up the time that the patient is in the hospital and being treated. And if you -- again, if you're under a fixed payment, we're receiving a fixed sum for treating that patient. If you can get them out of hospital quicker, that's a saving for the hospital. And then finally, just simply the cost of the product. So, we are typically less expensive than the leading biologics that have been on the market for some time. We believe that biologics have been rationed because of their high expense. And so we can save them money by having a small discount to those other products. But also, we believe that we can open up a much wider opportunity for these products to be used much more widely. So, we think there's -- if you pull all those things together, we think we have a very strong and rounded value proposition that's very differentiating from other companies and that puts us in a strong position to win in the future.

From a product portfolio perspective, we also think we're well positioned. So, over the last 15 years, we've made a big investment in our AROA ECM technology. And it's been, that investment has grown to a stage now where we have a very strong technology platform. We know it very well and we're able to at relatively low cost, generate new products, product line extensions from the technology platform. So, it's very easy for us now to build out our portfolio, to tweak the design of our products from both an engineering perspective and a design perspective to adapt them to new clinical procedures. So, we think we've put an enormous opportunity in terms of being able to continue to iterate on what we have and to generate new products for our sales team. And that is what now well established with that AROA ECM platform. We have a very unique collection of technical expertise and capabilities within the company as well. So, strong group of scientists, strong group of engineers and people that have developed deep experience in tissue engineering and clinical applications. And I think that puts us in a very unique and strong position for the future.

And then thirdly, we have an Enivo technology platform as well. So, this is something that we've been working on for last 3 or 4 years that complements the procedures that we're in today in soft tissue reconstruction. This is a new class of product. We think there's an enormous opportunity for this in its own right, but also has the potential to be very synergistic with our other products as well. So, the Enivo platform, we can see a family of products that can be built from this platform. So, great opportunity to be able to add to our portfolio and increase our productivity and the ability to grow the company. So, if you look at these 3 things together, I think Aroa has a very strong pipeline of innovation for the coming years that's going to be able to continue to fuel the growth of the company.

We're also, I think, interestingly, beginning to be able to build out a very strong sales organization. I think what's -- what I see as being really outstanding is that we're attracting to the company, people that have deep experience in soft tissue regeneration that have been involved in sales and marketing activities in this area for quite some time. So, if we look across our U.S. sales leadership team, we've got a group of sales leaders there that have been in the markets that we're participating in for the last 10 to 15 years and have developed deep insights from that. They bring a lot of very good experience that we can leverage and we can use to build out our organization. They're agile, they're adaptable, they don't have a legacy sales organization. So, we're able to set this up in a way that's going to allow us to be very successful.

We're also very energized by what we want to do in terms of increase the access of these products to more people and make regenerative medicine unlock regenerative medicine for everyone. So, I think there's a lot of drive in this team and they're really excited about what we think we can do with for these products and this technology. And then finally, on the sales side, I think as a small company, our team has done a fantastic job in building out its GPOs and IDNs. So, we're now on contract with GPOs in the U.S. where we have access to over 95% of the hospitals. So, we're able to prospect in accounts right across the U.S. now where we're not constrained, we're not having GPO access. We have a very strong position there to build on that base and then grow from where we are.

And the fourth to mention, which I think is really interesting is our manufacturing capacity. So, Aroa has unusually lower cost of goods. And so what this means is that our margins for a medical device company are extremely high. So typically, in a device company, your margins are in the 60% to 65% area. Our margins, we will sell products in our own right in excess of 90%. So, it's more in the pharma type margins rather than in the medical device margins. We have a very sort of driven by a couple of things. So, one is access to a tissue source that's essentially a waste product, so, at a relatively low cost.

The other thing that we've done is set up our manufacturing in a very industrial way. It's a very efficient process. It's a very low-cost process to manage a very, very high value and high quality product. And so I think that's really put us in a very unique place. There's a lot of effort going into manufacturing to make some improvements to lower the cost. So, we can see those margins continuing to expand. Also, as our sales mix changes, as we sell higher value products, we can see our margins moving up that as well. And then the third factor with manufacturing is our process is well established. It's very scalable and it's very modular. So now, for us to increase capacity is relatively simple and we can do it with relatively low capital investment. So, we are in a really strong position to be able to continually build capacity and do that in a very straightforward way.

So, if you sort of think about why is Aroa going to be successful. And I think it's a combination of a number of factors. So, it's value. I think it's value appreciated by great clinical outcomes, but also, probably becoming increasingly important, the value that we can bring to hospitals. It's the fact that we've got a great portfolio with the ability to incrementally build our products now in a relatively low-cost way and adapt them very specifically to different procedures with clever design, clever engineer based on having a great team that could do it. We're building out a commercial operation based on people that know this business very well, where we can do that from a bottom-up basis and think about it in a slightly different way than companies that are much larger. And then fourthly, we've got very low cost of goods, high margins. So, we've got a business model here that is -- we think it's a winning business model and it can make the company very successful for the future.

So, in terms of financial outlook. Last year, we had $69 million in sales. Our guidance for this year is 87%. That's going to be driven on continued growth with both OviTex and Myriad. Gross margin, we see improving. So, 85% last year. We'll spend beyond 85% this year and EBITDA margins going from a $3 million loss last year to a $2 million to $6 million profit in the coming year. We see increased operating leverage coming through now through increases in sales productivity. So, as our sales team mature, we now have people that have been in place for over 3 years. So, the territories are more mature, they're becoming more productive. So, we see that sales leverage really starting to add now to our ability to develop a profitable business.

We're also -- we see sales, we see R&D expenses beginning to decline as well as a percentage of sales. So, going from 20% of sales to trending towards 10% of sales. So, really part of that is just an increase in top line. But the other part of that is that we feel that we can keep those R&D expenses at a relatively flat level now, but still be able to achieve the portfolio that we need in expanding our portfolio at a relatively low cost. So all in all, we think the company is in great shape, well set up for future growth and certainly looking forward to making some great progress over the coming year.

So, I'm going to pass it back to you, Anita. And we still have Adam on the line, James on the line as well, and I'm happy to take questions.

[Operator]

Thank you, Brian and Adam. That was a very informative presentation. Unfortunately, we have run over our allocated time. So, I don't think we'll be able to take questions on the call. But I see that questions have been submitted. And so where we have your contact details, we will respond to those questions offline. And I think we'll have to end it there, Brian.

And so thank you, everyone, for taking the time to join today and we look forward to seeing you next time.