Aroa Biosurgery Ltd

ASX:ARX

Earnings Call Transcript 2024-Q2

[Neetha Alex-Kumar, executive]

Good morning. Welcome to Aroa Biosurgery's investor webinar and Q&A following the company's Appendix 4C and quarterly update announced this morning. [Operator Instructions] Please note that this session is being recorded.

On behalf of Aroa today, we have Brian Ward, Founder and CEO; and James Agnew, CFO. I will now hand over to Brian and James. Please go ahead.

[Brian Ward, executive]

Thank you, Neetha, and thank you, everybody, for joining our call this morning. So I'm going to go through a quick presentation, and as Neetha said, then we can go to Q&A, so just jump straight into it.

So just a quick background on Aroa Biosurgery. So we're a well-established, high-growth, soft tissue regeneration company. Our four families of products that we sell in the U.S., all based on our ECM platform. Timing and opportunity, total addressable opportunity in excess of $3 billion in the U.S. We sell through two channels, our own direct channel through our own direct sales team. And that's -- and also through our partner, TELA Bio.

The technology is well established. We've had over 6 million product applications to patients in the U.S. And there's a large body of scientific and clinical events that sits behind these products. In addition to our AROA ECM platform, and we've also been working on our new technology platform, our Enivo platform, which we'll talk more about that in the presentation.

Just briefly in terms of our technology and products. So what we do is we isolate very specific layers from the forestomach of sheep. We purify that in a way that it will result in some content, those components that the human body wouldn't react against. But we retain the structure of the matrix and the important signals that attract cells and encourage them to grow. That becomes a building block for all of our products.

Myriad, our soft tissue reconstruction product, used in acute surgery. This is the product that most of our efforts are going in terms of commercial activity in the U.S. We recently launched Symphony, the CTP or skin substitute product to use in the outpatient wound center and physician's office, predominantly in diabetic foot ulcers.

Historically, a key part of our portfolio has been our Endoform product, a product also used in the outpatient wound center for diabetic ulcers. We've partnered two products with TELA Bio, an OviTex product for hernia, and an OviTex PRS product for use in breast reconstruction.

So if we look across all of these products, we keenly see that our AROA ECM restores functional tissue. We have a large body of scientific evidence based on both Endoform, Myriad and OviTex that support this. So there's three things that we know our innovative technology can do.

We get rapid formation of well vascularized tissue that's tolerated very well in contaminated field and resistant to infection. And we don't see any negative inflammatory response with technology reviews. And so we tend to see that irrespective whether it's Endoform, Myriad or OviTex.

So then we go to our Q2 financial highlights. Cash receipts from customers for the quarter was $14.8 million. Our net cash outflow from operations was $3.2 million. That reduced by $1.6 million from the previous quarter. Net cash outflows from investing activity was $1.2 million for the quarter. And that reflects additional investment into our manufacturing plant and equipment capacity.

So last year, we put a significant investment into our downstream fabrication capacity. This year, we are increasing our tissue processing capacity, adding [indiscernible] capacity and tissue processing capacity. And we ended the quarter with a strong cash balance of $34 million, so in very good shape in terms of cash.

And we're seeing that the net cash flow from operations is expected to move to breakeven for the balance of FY '24. So we're making an important transition in that we are from an operating perspective getting towards breakeven in the second half of this year.

So on that basis, we're maintaining our guidance. So guidance remains $72 million to $75 million based on a constant currency growth of 25% to 30%, gross margin of 85% and a normalized EBITDA of $1 million to $2 million.

So let's talk a little bit about sales. So we've been putting a lot of effort as a company into improving our sales profitability and optimizing our sales model. In the last quarter, we saw 10 field reps average run rate of over $750,000. That's up from 8 from the previous quarter and 5 the quarter before that. Half of our sales team now have a run rate in excess of $250,000.

Myriad continued to grow strongly. So this now represents 67% of our direct sales mix. And that's up from 50% in the previous comparable period. So we'd like to see Myriad are continuing to track well and the net sales grow strongly.

If you think about where we are from a sales organization, we're simply changing phase. So in the early years, the first 2 years, we put in place our own direct sales team. We were very focused on building access, and so getting into accounts, beginning to establish the ability to sell. With that, there is a long lag in terms of the timing of bringing sales reps onboard to get them to actually sell.

We're now moving into a very different phase in our business. And so we have good access into a large number of accounts. So we run over 180 accounts with our salespeople. And so we're now moving to access being less important, being much more important to demonstrate the value to our clients and to set ourselves up with a sales model that is very scalable.

So if you look at value, what we've determined with the AROA ECM platform is that the technology very particularly rapidly fills in volumetric defects. We've been able to use Myriad's simplified procedures. And what I mean by that is we're commonly seeing that Myriad only needs to be applied once. And it's simplifies the [indiscernible] for surgeons and it simplifies the aftercare for [indiscernible], but more about that shortly.

When we started off, we were using Myriad in a wide range of different procedures. And we've learned that Myriad is particularly well suited in these large volumetric wounds, where they're commonly contaminated. And so we've now much more focused on trauma. And we see trauma and the procedures that enable us to be in trauma as a real strategic beachhead for us. And we're also beginning to expand the clinical data in this area and the health economic data on this area.

The other thing that's really important for us is focusing on how can we scale the [indiscernible] effectively. And so there's two things that we're thinking about here. The first is sales productivity, so growing within accounts, bringing more surgeons on, more procedures and looking at ways at how can we do that properly. And we're optimizing the sales team composition. So how can we use the different class of salespeople that we have to build an efficient sales structure?

And we're also looking at supporting our infrastructure that we need in terms of being able to support the sales teams to be successful. And then finally, what is the portfolio that the sales team needs to be able to expand rapidly and leverage that mix of [indiscernible] portfolio. So there's a real focus on getting this productivity right. And so as we scale the organization, we've really done it an efficient way.

Secondly, we're focused on profitable growth. So to do that, it's really about efficiency. So extending the IDNs, and so what I mean by that is when we gain access to one hospital, [indiscernible] into hospital system. So then as we place new people in new territories, making sure that the [indiscernible] systems, where we already have access so that we don't have a large lag in gaining access before we bring somebody on and able to achieve sales.

And we're also looking at how quickly can we scale the sales team, so making sure that we're scaling that sales team but also at the same time, remaining profitable. So I think we've come a long way over a couple of years. I think there's a lot of focus now on improving the ability for us to scale this up in an efficient way.

In terms of Enivo, we do have two of the components for Enivo now. So we have the Enivo pump and Enivo catheter. And in August, we submitted a 510(k) to the FDA for Myriad Flow. So Myriad Flow is a new product that currently can be used in combination with the Enivo pump and the Enivo catheter. And that has now progressed to a substantive review by the FDA.

So what that means is that now it's at a stage where the FDA is considering that [indiscernible] under the 510(k) pathway. We've received some initial questions back from the FDA, which we will respond to by mid-November. And we would expect those questions to be reviewed and have a response back from the FDA by December. And so with this new version of Myriad, we'll have much more clarity in terms of will the FDA will consider clearing this under [indiscernible] by the end of December, potential early January.

Just to kind of reinforce our Enivo presence in our portfolio. This product for dead space management or [indiscernible], used in many of the surgeries where products like Myriad will be used. So we have surgeons separate tissue -- cavities within that tissue that are predisposed to filling up with fluids [indiscernible] and that's related to these complications. So we've seen this as a product that's very complementary to our existing portfolio, provides an opportunity for us to improve outcomes but also provide a wider portfolio for our salespeople to sell into the surgeries that they are currently involved.

And we've previously talked about this. But we have a very good preclinical evidence that supports the use of this product. So when we looked at flow from dead space, reduction of seroma, very strong results in preclinical model. And we've now pressed on to testing this in patients. And we'll talk a little bit about in a few minutes.

So I'd just like to highlight one clinical paper that appeared in the [indiscernible] in the last month. So this is the use of OFM, which is Myriad, in surgical management of complex volumetric soft tissue defects. So this is a retrospective pilot case series. So these cases are typically cases where a large amount of soft tissue has been lost. And they've lost both the skin but often underlying tissues like muscle and fat cells. So it's a very deep defect.

And so this case series looked at 10 patients with [indiscernible] defects and evaluated the effectiveness of Myriad in creating regulation tissue and covering those defects. The primary endpoint was the time to 100% granulation tissue. And the secondary endpoint was any device-related postoperative complications. These are large defects. So not only were they deep, but they are quite large in terms of surface area.

So mean area was over 200 square centimeters. And the defect time of treatment took about 3.5 weeks. Most of these defects had exposed structures. So what I mean by that is vital structures, so arteries, veins, nerves or [indiscernible] historically, defects that need to be covered quickly and often are very difficult defects to heal. So the mean time to 100% granulation was 23 days doing -- so [indiscernible], which was great to see. No major postoperative infections or adverse events.

There's a couple of other things that really jumped out from this study. I think the first thing is that while all of these defects healed, they only required a single application of Myriad. And commonly, new source defects, they can require multiple applications of ECM or [indiscernible] substitute products. The second thing with this is that all of these defects were used in combination with negative pressure wound therapy.

And typically, with negative pressure wound therapy, the negative pressure wound therapy dressings have been changed -- potentially two to three times a week. What we saw with the study is that the negative pressure wound therapy dressing only needs to be changed weekly. So [indiscernible] reduction in the frequency of changing those dressings. And that is a significant impact for the cost of healing, the [indiscernible] time to change these dressings but also for patient comfort.

The change in the negative pressure wound dressing is often very uncomfortable for patients and can be quite a [indiscernible] process. So not only are we seeing great clinical outcomes here, we're also seeing economic benefits and patient benefits. So I think that's demonstrated the use of Myriad and some very traumatic soft tissue defects, great outcomes but also great outcomes in terms of patients and economics.

So let me just go through our clinical research program. So I think across the board, the upside is progressing very well. So the Myriad registry is recruiting well ahead of time. So we now have 225 patients recruited in the registry and we have 9 sites operational. When we first started recruiting in the registry, all those 9 sites, the initial sites were more focused on podiatric and [indiscernible] procedures.

We made quite a switch recently to really power up the number of trauma centers within the registry. So we now have five trauma centers that we're working on as part of the registry. And that will start to really generate a lot of cases for the registry. And you see there, we plan to reduce trauma publication by the end of the year and extremities publication from the registry towards the end of the year as well.

Based on our experience, our recent experience in using Myriad in trauma cases on a day-to-day basis but also what we've seen in the registry, we've decided to set up a pivotal study using Myriad in combination with negative pressure wound therapy in acute reconstruction over exposed structures. So this will probably be within trauma centers. And we're looking to evaluate Myriad in combination with negative pressure versus negative pressure alone. So we think from what we've seen through the work of the registry that we believe that this study can be very successful.

From a Symphony perspective, making good progress there as well. So we now have 45 patients recruited into the initial phase study. We're targeting 120 in total. We have 8 of the 10 sites now operational, so recruitment for the [indiscernible] study should accelerate over the next 6 months. So we're also setting up a registry for Symphony. And we've seen a huge benefit from the registry with Myriad. And we're now pursuing a similar registry for Symphony, so give us a good readout across the range, these different types of points.

In terms of Enivo, we've progressed doing our first-in-human study in Enivo. And this has been [indiscernible] post -- sorry, [indiscernible], we're recruiting 10 patients into the study, 3 patients have been recruited then into a single site. And we see this as a setup for a larger prospective interventional study with Enivo starting later in the year.

So just a brief comment on manufacturing and production. So our manufacturing capabilities are well established here in Auckland. And every year, we are audited by a notified body from Europe, who reviews our quality systems and looks at the way in which products are manufactured overall. This is a requirement by the European authorities. But they also serve as an auditor for the FDA.

And so we've just completed this audit program with notified body and come through it with flying colors. So I think it's really important in terms of ensuring that we are operating to the highest standards in that manufacturing processes and the way that things are being done here comply with the requirements both in the U.S. and Europe. So very pleased with how we've come through that. And I think that gives us a slight confidence in our ongoing manufacturing capabilities.

So let's now talk about catalysts. I think there's five [indiscernible] that really better. Obviously, sales momentum from [indiscernible], this is predominantly driven by Myriad, so continued strong growth there. Strong sales by TELA Bio, so expanding the sales team, recently closed some finance, really building on their clinical evidence as well. So we're continuing to see that.

Enivo FDA clearance, so this is the final component of Myriad Flow. So that will allow us to launch full product. Changes around physician office CTP reimbursement. So we've seen CMS step back from fundamental changes to this reimbursement but push forward with some more minor changes on things like ASP reporting, so [indiscernible] and some of the other actions that are going on. So that's -- there may be more fundamental changes, but in fact, those small changes, it will make a difference.

I think the other key thing is where we are as a business, so now transitioning from a company that was operating at a loss to being profitable and then transitioning through to being cash flow positive. So this is something that we've been very focused on over the last 12 months. I think we'll see that come through over the next 12 months.

So Neetha, that concludes my presentation. So I'll pass it back to you for Q&A.

[Neetha Alex-Kumar, executive]

[Operator Instructions] Now we'll start with some live questions. And it looks like there is a question coming through from Sebastian Clemens from Jarden.

[Sebastian Clemens, analyst]

Just wondering if you can give us some insight into the sales momentum quarter-on-quarter, just in particular to TELA Bio if you've seen that accelerate in Q3?

[Brian Ward, executive]

Seb, you're talking about TELA Bio [indiscernible]?

[Sebastian Clemens, analyst]

Correct. Yes.

[Brian Ward, executive]

Yes, we're seeing -- the first half of the year was quite flat for us. And then we've seen an increase in sales coming through in the second half.

[Sebastian Clemens, analyst]

Okay, good. And I've just got one other one. Just on the EBITDA guidance of $1 million to $2 million for the full year, just noting the net operating cash outflows for the half around negative $8 million, how should we think about EBITDA for the half. And I guess, the expectations for the second half, it seems like quite a skew in the second half. Is that right?

[Brian Ward, executive]

Yes, that's correct, Seb. I mean, it's pretty clear that we ran operating losses in the first half. And look, we're maintaining that guidance. So you'll see in the second half, there's obviously profit to EBITDA, profit to not only sort of offset those losses but to provide a small EBITDA for the full year. So I think, look, we'll provide more insight into that when we report our results at the end of November.

[Neetha Alex-Kumar, executive]

It looks like there's also questions coming through from Madeleine Williams from Wilsons.

[Madeleine Williams, analyst]

Just sort of, I guess, wanting to [indiscernible] that a little bit more with a product-level breakdown. I mean, has Myriad -- it seems that Myriad is potentially performing better than you expected. And if you can give sort of any indication, I guess, then if there is some contribution from Symphony in the first half and what those expectations are for the second half.

[Brian Ward, executive]

Yes. I would say that Myriad is performing to plan. So it's where we thought it would be. We did see -- we did expect we'd have a strong quarter-on-quarter growth. And we've seen that. And we think that will happen through the second half of the year. With Symphony, sales this year [indiscernible] forecast was relatively modest. With the first year of Symphony being launched directly, we're focused more on the outpatient wound center, given the instability on reimbursement there, less on the physicians' office. And so this year has really sort of set up Symphony roughly below [indiscernible] in this year but picking up a little bit more so next year. I think the main driver this year continues to be Myriad.

[Madeleine Williams, analyst]

Yes, okay. And then just in regards to Enivo and the Myriad Flow product, I mean, is that different to the -- I know you obviously had the catheter and pump approved. And there was meant to be a third element, which was the [indiscernible] implant. Is that Myriad Flow sort of slightly different to that [indiscernible] implant? And sort of what happened there? Is that just trying to get the full product, I guess, approved sooner?

[Brian Ward, executive]

Yes. In terms of [indiscernible], I think what Myriad Flow [indiscernible] is the ability to have that [indiscernible] component in a much wider range of format. And so I think there's upside in terms of we can potentially do with that product. It's also about giving us the ability to get it cleared earlier. So Myriad is a product that the FDA is much more familiar with. We submitted what we called the envelope, which was [indiscernible] component of the pump [indiscernible] of the FDA, clearly within [indiscernible]. So we think this simplifies the approval process. And it gives us a much better shot of getting it cleared through that 510(k) pathway. I think to date, we've had a pretty good run with the FDA. I think we certainly -- there's still quite a lot of uncertainty around will it be cleared through that pathway. I think by the end of the year, we'll be in a much better position to know if that pans out.

[Madeleine Williams, analyst]

Okay. And just really quickly, I'm sorry, just wanted to check how many people -- I'm sorry if I missed this, but in the pivotal trials for Myriad?

[Brian Ward, executive]

Yes. We haven't determined the number yet. And we're [indiscernible] around working out how much of a difference we think there's going to be [indiscernible] it accordingly. So I think we'll come back at the end of quarter [indiscernible]

[Neetha Alex-Kumar, executive]

Thank you all. And it looks like we're coming up to the end of the session. So if you submitted a written question and have registered your name against that, we will try and respond by e-mail. Otherwise, please feel present to any questions to investor@aroabio e-mail address. Brian, I'll hand it over to you for any closing comments.

[Brian Ward, executive]

Great. Thanks, Neetha. Yes, we think we had a good start to first half of the year, good quarter. We can see ourselves now going into a quarter where TELA Bio sales are stronger in the second half. We continue to [indiscernible] So it certainly feels that we're on track in terms of guidance and growth for this year. So thanks, everybody, for joining. And we'll have our half year results at the end of November.

[Neetha Alex-Kumar, executive]

Thank you, Brian and James. And we will leave it at that for now. And we look forward seeing you next time. Thank you. Bye.