Aroa Biosurgery Ltd

ASX:ARX

Earnings Call Transcript 2023-Q2

[Simon Hinsley]

Good afternoon, and welcome to Aroa Biosurgery's half year update related to the ASX this morning. From the company today, we have Founder and CEO, Brian Ward; and the company's CFO, James Agnew.

Before I hand over to the guys to get started through the presentation, I'll just remind you that we will conduct a Q&A session at the end of the presentation, which you can submit questions through the Q&A panel at the bottom of the screen and we'll get to those post conclusion.

Brian, I'll now hand it over to you to get started. Thank you so much.

[Brian Ward, executive]

Thank you, Simon, and thank you, everybody, for joining this webinar today. So as Simon said, we released our quarterly this morning and this is a half year update on the progress for this financial year. So I just want to briefly -- just a quick brief recap on Aroa, and I'm sure many people are familiar with the story.

So we're a soft tissue regeneration company, well established, 4 products in the market, targeting an opportunity in excess of $2.7 million. Sales through our own direct presence in the U.S. and also through our commercial partner, TELA Bio. Well-established technology used on a lot of patients, a lot of clinical and [ preclinical ] events to support the platform. So most of our products are based off our AROA ECM platform, but also we are bringing forward a new platform, our Enivo platform, for tissue apposition.

As I mentioned, we're targeting opportunities in healing complex wounds and also in soft tissue reconstruction. All of our technologies is based off our Aroa ECM technology, 4 product families here. All of our products exhibit very similar properties, and that is rapid formation of well-vascularized tissue, well tolerated with uncontaminated sites and certainly has anti-inflammatory properties and very easy to use for surgeons in a wide range of [ use stages ].

So in terms of the half year results, we're delighted where we've come in with our sales. So New Zealand, $28.8 million. That's a 44% growth rate on a constant currency basis over the same period last year and 20% up on the previous half year.

Myriad sales have really led the way for us. So sales in this half being $5.6 million. That's a 242% growth rate on a constant currency basis and 147% on the previous quarter.

Really good to see gross margin improving as well. So our guidance was at 77% and we're up to 84%. Some of that is accounted for by foreign exchange, but also we're seeing an improvement in our product mix towards higher value products, also some really nice gains in terms of process improvement in manufacturing and then foreign currency gains contributing to that as well.

So if you look at the half as a whole, we are -- on a normalized EBITDA basis, we are positive. So that's ahead of where we thought we'd be. So really good to see both the strong sales growth, but then also managing our costs and coming in, their growth here on point.

We continue to see foreign exchange tailwinds. So with high dollar, relatively low NZD, we've had a very positive contribution to the result from foreign exchange, about $3.4 million. We finished the half with a cash balance of $50 million. So still have a very strong balance sheet. We're well capitalized. Certainly don't need to go back to the market to raise money at the moment.

So we feel like we've got a number of great plethora of things happening for the company, strong sales growth, Myriad leading the way, improvement in margins and a strong balance sheet, which sets us up really well for the second half of the year.

So I just want to quickly run through progress in our different product lines. So as I said earlier, Myriad, we're seeing a very good result here. We're now at 35 salespeople in the field. We have 8 of our sales routes that have over $0.5 million run rate, and we're seeing a positive improvement in sales productivity across the team. We expect our sales team to be at 41 by the end of this financial year.

In terms of sales productivity, we are seeing the group as a whole track up positively. We're seeing our line extensions help in terms of adding to that sales productivity. And we think with the launch of Symphony, that's going to allow our sales reps to focus in fewer accounts and really drive up that productivity within those accounts. So we're really excited with the trend that we're seeing here operationally, but also that what we're also seeing is the ability of our product portfolio to contribute to sales productivity as well.

In terms of clinical, the last clinical registry is going very well. We were forecasted to have 70 patients recruited through this registry by the end of the year. We're tracking very positively here. We have 97 patients recruited, 3 sites up and running. So this is the registry that will run over 3 years, recruiting 300 patients in 10 sites and be used as a data source for a range of publications, focused on a range of different clinical procedures.

We're continuing to see success with our target procedures. So certainly seeing some success in big soft reconstruction cases such as trauma, NSTIs, open abdomens and pressure injuries. So nice to see us growing into these large procedures where the case [ value ] can be anywhere between $10,000 and $30,000.

Myriad line extensions are also set to make a contribution. So we launched Myriad Morcells, that's gone very well for us. The Morcells is now almost 60% of our sales mix. We have a finer version of this in Myriad Morcells fine product and which we expect to launch at the beginning of next financial year. And we expect that to make that significant contribution to the Myriad franchise.

In terms of Symphony, this year, we had a soft launch of Symphony into the VA, that's gone well. We've seen good clinical outcomes and it really set us up well for the full launch of us at the beginning of next financial year.

So as we have talked about previously, CMS has been looking at reimbursement changes for the Skin Substitutes category. There's some draft changes that we put out via CMS, which intent -- they intend to begin to put into place at the beginning of next year. And they certainly look very favorable for Symphony. So we're seeing a leveling of the playing field here in terms of regulatory approvals, about reimbursement coding and a move towards favoring products that have high efficacy at a relatively affordable price. So it sits very well with Symphony. Think Symphony is in a strong position to do very well next year. We also have received from CMS an A code, which will allow coverage and payment of our Symphony products. So that will come into effect within next year.

So we're now gearing up for the launch of Symphony and Symphony will be sold through our existing field team. So in addition to calling on the inpatient operating room within those same hospitals, they will also call on the outpatient wound center, and we think this has a potential to drive significant increases in productivity.

On the clinical side, we are -- we've had a pilot study running with Symphony in combination with Endoform. This has been extended into a much larger study with 50 patients. And we're in the process of setting ourselves up for a randomized controlled trial with Symphony versus standard of care. So we're very focused on generating very good clinical data to support Symphony and to support our sales team.

OviTex continues to build very nicely. So we've seen TELA Bio update their guidance. So they've narrowed their guidance towards the top end. So USD 42 million to USD 45 million, which is up significantly from last year at $29.5 million.

Good clinical data coming through. So the Bravo I study, recurrence rates of 2.6%. The ReBAR study, recurrence rates of 1.9%. So we're seeing extremely low rates of [ pain ] recurrence. And if you compare that to the market-leading products, that's anywhere between 10% and 30%. So significant difference we're seeing with the use of OviTex.

We continue to do some significant development projects with TELA Bio. So I will focus on some line extensions for [ laparoscopic surgery ], breast reconstruction and the core OviTex products as well. So those products will begin to come through next calendar year.

Endoform, this remains the base of our business at the moment. Relatively flat for this product, but we're maintaining that and really putting our focus into growing Myriad which is the strongest growth opportunity for us.

We recently put out to market an announcement about our Enivo platform. So this is our dead space management tissue apposition platform. So we expect to go to the FDA with this by the end of this year, and we're targeting November. So that's very close. All the information, all the data is coming together to support this application. We expect to have a response from the FDA by the second quarter of next calendar year.

We released an update on the preclinical results with Enivo, really strong results there in terms of minimizing dead space and tissue apposition. We think this model is very applicable to many of the procedures where surgeons encounter problems with dead space. So we're beginning to set ourselves up to do a 10-patient clinical study in mastectomy beginning next year.

This is an important platform for Aroa. We think it fits very well with our existing Aroa ECM technology. And we see the potential for our products to be used together and to get [ suggestive ] healing outcomes. So this is a platform that we've got huge expectations for to continue to drive future growth.

So just in terms of guidance, we're updating our guidance. And so product sales, we expect to come in at $60 million to $62 million this year. Total revenue, $62 million to $64 million. So that includes a license fee, a one-off license fee from TELA Bio for sales milestone and some project fees.

Gross margin, we've made good improvements with that gross margin. We can continue to maintain those. So we're forecasting gross margin to come at 84% and for the full year, we expect to be on a breakeven basis. And that would mean our cash balance is maintained at around about $50 million. So a strong position for the second half of the year and a good finish to the end of the year as well.

In terms of catalysts and milestones, we see COVID continuing to wane over the remainder of the year. It's certainly not a factor at the moment in terms of constrained sales growth. We see ourselves continuing to build on the Myriad sales momentum that we have and that's driving growth. We see the Symphony launch as being a real catalyst for us next year both from a top line perspective but also from a sales productivity perspective.

And we continue to see TELA Bio having a strong performance. And continuing to get adoption, both with OviTex and OviTex PRS. And we're also expecting Enivo to do -- go through the FDA process next year, potentially being cleared in the second half of next year.

So Simon, I'm going to leave it there and pass it back to you for Q&A.

[Simon Hinsley]

Great. Thanks, Brian. We'll just pause for a second just to allow for questions to be submitted through the Q&A panel at the bottom of the screen. First question is from Sebastian Clemens at Jarden.

Gross margin on a previous constant currency basis improved 4% from 77% to 81%. How much of this is driven by Myriad and how much is driven by manufacturing productivity improvements? Also, what is the gross margin on project license fees?

[Brian Ward, executive]

Do you want to talk about it?

[James Agnew, executive]

Yes. So I think a large part of that gross margin improvement was probably between 1 -- probably at [ 1% ] was in manufacturing. And then the balance was probably the sales mix in terms of the contribution by Myriad, particularly Myriad Morcells.

And in terms of the project and license fees, so I mean we're actually due a milestone payment in the form of a license fee from TELA Bio in the next 6 months, it's USD 1 million, and there's a 100% margin on that. Project fees -- I mean project fees sort of makes up the balance of about $0.5 million, and that's really just a co-contribution. I mean that's -- there's 100% of cost, which is sitting in our R&D line item for that.

[Simon Hinsley]

Next question, what's the risk dead space doesn't get approved for Enivo?

[Brian Ward, executive]

Yes. Look, I think it's -- there's 2 pathways forward for Enivo. So the A plan is to submit it as a 510(k) and -- for it to be cleared through that process. Now there is some risk with that. And if it doesn't get cleared as a 510(k), then we will need to submit it as a de novo. If it is a de novo, then potentially that's going to require a clinical study and that could take us another 18 to 24 months.

So I think it's -- this -- compared to other submissions that we've done previously, and this would be -- we've done at least 10 submissions before and got products cleared. This is a -- potentially a harder submission to get through on the 510(k).

Having said that, the team and the consultants that we're using in the U.S. have a reasonable degree of confidence that this will go through this 510(k). So I think it's -- until we have it in front of the FDA, they look at the data, it's very -- it's difficult to tell so the way we're thinking about it internally is it's a 50-50 chance. If we get a -- clear this 510(k), then it could be commercial in the second half of next year. If we don't, then we push it down a couple of years. But we're feeling pretty good about it at the moment.

[Simon Hinsley]

A question from Elyse Shapiro of Canaccord. Are you starting to see improvements from the onboarded GPOs in terms of new buying? And how many of the Myriad accounts are HealthTrust accounts?

[Brian Ward, executive]

Yes. I think it's about 30% of the accounts are HealthTrust. So we're certainly having success with HealthTrust, but more recently, we've had some success in some other GPOs as well. So it's a little bit all over the map depending on where our sales reps have relationships, what parts of the country they are based in. So generally, having those GPO contracts in place is -- it's one more case that's in go through. It makes our sales process a lot more efficient.

[Simon Hinsley]

[Operator Instructions] It's a question from Sebastian again at Jarden. I just wanted to confirm that Myriad direct sales force be shared across Symphony as well as Enivo? Or do you expect Enivo require their own dedicated sales force?

[Brian Ward, executive]

Yes. Look, we see all of these products being sold through the same sales force. And so our team is very excited about Enivo. We see the Enivo technology being very complementary to what we're doing with the Aroa ECM platform. We see it as being very synergistic. So over the medium term, we see all these things being sold together and actually together, improving healing outcomes. So yes, we think it's one sales team for the full portfolio.

[Simon Hinsley]

What is the current annualized U.S. sales spend?

[James Agnew, executive]

That's a good question. I don't know off the top of my head. I mean it's the U.S., and in terms of U.S. dollars, I mean of our total expenses, U.S. dollar sales is going to account for about 40% of our total expenses. So if you can reverse engineer that and the fact that we're operating at a breakeven level in our gross margin, then you should be able to figure that out.

[Simon Hinsley]

Are there any similar products to Enivo already approved by FDA?

[Brian Ward, executive]

No. There are predicates. There is a pump system for use with surgical drains and that's the closest predicate. There's a lot of technical similarities with that product. The difference being that, that's not a product that opposes tissue in the same way that Enivo does. So I think enough technical similarities in order to provide a predicate for the 510(k), but in terms of the outcomes of that, you get certainly quite a different product.

[Simon Hinsley]

Great. How do you view Dr. Mohr's contribution to the company in the medium term?

[Brian Ward, executive]

I think Dr. Mohr is -- has been a very successful entrepreneur, inventor. She's got a huge amount of experience through her time with Intuitive Surgical. Intuitive Surgical has been one of the real stars of the med tech industry over the last 10, 20 years. And she's been through the growth journey of that company since the very early stages. So I think she can bring a huge amount of experience to the Board. She has a phenomenal network. She has certainly a huge awareness of trends in surgery and trends in devices. So I think she can make a really strong strategic contribution to Aroa.

[Simon Hinsley]

That concludes the Q&A. I might just hand it back to you for closing remarks.

[Brian Ward, executive]

Thanks, everybody, for joining. I think it's -- we're really pleased with the result. We think we've got some real momentum here. And certainly, we're looking forward to deliver on the second half of the year.