Aroa Biosurgery Ltd

ASX:ARX

Earnings Call Transcript 2025-Q2

[Operator]

Okay. Thank you for your patience, and we'll kick off now. Welcome to Aroa Biosurgery's Investor Webinar Q&A following the company's second quarter cash flow report released 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]

Great. Thank you, Anita, and welcome to everybody. Thank you for joining today's quarterly report. I'm going to talk briefly about our cash flow position and then talk a little bit about why we think Aroa is going to be successful, and then we're going to conclude with some Q&A. So in terms of financial highlights for the last quarter, net cash flow from operations was $1.2 million, which is a $2.4 million improvement on the previous quarter. We expect to be operating cash flow positive in the second half of the year as we've previously outlined. Net cash flow from investing activities was $0.6 million, reflecting a small amount of routine CapEx. At the end of the quarter, we finished the quarter with $21.6 million cash balance. So that's a decrease of 58% in our quarterly cash burn.

So if you look at that as a whole, we're making this transition through from being cash -- burning cash to transitioning through to being cash flow positive. And just reiterating, we expect to be cash flow -- operating cash flow positive in the second half of the year. In terms of operational highlights, we continue to make improvements in our commercial operations. We're very focused on improving our sales productivity. We've seen gains there over the last quarter. So a 5% increase quarter-on-quarter in terms of growth in active accounts as well. So that's an area of focus for us. We've made some changes in terms of our sales organization in the U.S. We've promoted Mark Martin, who is our regional manager in the Florida region to be our national sales manager and promoted 2 of our territory managers into regional manager roles. So we now have 6 regions across the U.S. We've also established a new role for our distribution networks in the U.S. as well. So making good progress on that, and we'll report more detail on that at our half year. We've had regulatory approval for Endoform and Myriad Matrix in Argentina and Endoform in Egypt.

So we continue to expand what we're doing ex U.S. Over the last quarter, we've had 4 peer-reviewed studies be published. Two of those studies were in oral cancer, so tumor resections and the use of Myriad in the oral cavity, sort of notable for a couple of reasons. It's a very hostile environment, very prone to infection, prone to early breakdown of the graft. And what this shows is that Myriad Matrix stands up very well in that hostile environment. We don't see infections, and we see very good healing and restoration of the mucosa in those areas. So important for oral surgery, but also important in terms of validating what we see in other clinical situations where Myriad remains resistant to infection and is persistent. Also a really nice study in the -- on vascularization of Myriad in reconstructive surgery. So we've established both on the bench and also preclinical models that Myriad revascularizes very quickly. And we're seeing this with imaging technology in reconstructive surgery that Myriad revascularizes very quickly and particularly in areas where circulation to some of these grafts can be doubtful. So again, just sort of validating what we tend to see across a range of different clinical situations.

The publication looks at Myriad compared to other commercially available extracellular matrix products. And what it shows is that Myriad has optimal structure and also a lack of DNA and cellular material compared to other commercial products. That's important in terms of showing that our devices are less likely to be immunogenic in these sorts of applications. So a nice sort of collection studies there that kind of support what we're seeing generally. The other sort of notable event in the last quarter has been that we've successfully completed our DEKRA audit. DEKRA is an international notified body that reviews our manufacturing and quality systems with a view to acting on behalf of the European authorities, but also we're in a scheme that allows DEKRA to audit us on behalf of the FDA. So important for ongoing operations. And we've sort of come through that audit in good shape. And it's part of our kind of sort of annual confidence in our manufacturing capabilities.

So I just want to briefly talk about where we're putting our effort. And I presented this information previously, just to show you what's driving growth for Aroa. So Aroa's direct team is focused on Myriad sales. And if you look back over the last 4 years, you'll see strong growth here. Last year, 70% year-on-year. Myriad continues to be our main focus. It's our top priority. It's certainly where we've got sales momentum. We're seeing a lot of success in large volumetric defects. But interestingly, we're also seeing Myriad succeed in a wide range of different soft tissue reconstruction procedures. So what's been particularly interesting is that we haven't really seen Myriad not be successful in soft tissue reconstruction procedures. So we're not seeing contamination be an issue that leads to infection. So that's very interesting. We're also seeing that the rates of application for Myriad are very low. So that has a huge impact on the economics of using our products. We're continuing to build a compelling body of clinical data. Adam Young presented a summary of our clinical data at our last quarterly. We have an upcoming study for lower limb reconstruction, which has just been accepted for publication.

So we expect that to be released over the next -- within the next month. That outlines the treatment of 120 patients with 130 defects. And the -- what we see in there is no infection, which is super interesting given that these patients are compromised and typically, these wounds are contaminated. So look out for that publication. We think that's very relevant for lower limb reconstruction, but also translates into a wide range of other procedures, and we see similar outcomes in other procedures. Myriad also offers disruptive value. I'm going to talk a little bit about that further in the presentation. On the TELA Bio side, this still accounts for 50% of our sales. So they're a key partner. They have the rights for selling hernia and breast reconstruction. As you can see, over the last 5 years, they've had very strong momentum in terms of sales. At the quarterly release last quarter, they had a flat quarter, but previous to that have been strong. We expect that to continue to grow strongly, and we believe that the OviTex products are very well placed for success. So we expect continuing momentum on the TELA Bio side.

The clinical data looks very strong. The value proposition looks very strong as well. And particularly with the recent class action settlements with Bard with their permanent synthetic measures, we think the TELA Bio portfolio is very well placed to capitalize on the withdrawal of some of those products. So to talk briefly about why we think that we can be very successful in this market. And I think it's a combination of 5 things. We think that -- we think we know that the clinical outcomes with Myriad are superior to what we're seeing with other competing products, particularly when you look at the rates of healing, so this volumetric fill of soft tissue defects. What really stands out also is the low rates of complication. So in our published reports, our published studies, we don't see infection rates. And I think if you contrast that with synthetic products, and that's synthetic polymers, but also synthetically synthesized products like Tegra, you see a very different level of infection. So I think Myriad certainly shows low rates of complications. That's very important both for the patient, but also for hospitals.

And the reason is that patients that have infections tend to require additional treatment, they stay in hospital longer, and that erodes the reimbursement [indiscernible] erodes the -- increases the cost and profitability for hospitals. So this has a huge impact on the economics of treating. We also see that our products typically require fewer applications. So particularly in soft tissue reconstruction, we're seeing that a single use of Myriad leads to very good clinical outcomes. And if we contrast that with competing products, what we tend to see there is that they may require 2, 3, 4, 5 applications to get the same result. So patients don't need to be taken back to surgery. It's great for the patient, great for the hospital because that incurs additional cost. there's fewer complications, there's a shorter length of stay for patients as well. So again, saving hospitals money. And we've priced our products to be competitive and provide cost savings to hospitals. And we think this does a couple of things. straight off the bat, it saves hospitals money, but it also presents the opportunity for our products to be used much more widely on more patients.

So I think if you take those 5 factors together, we're very well placed to do exceptionally well within this market. We've got a great product portfolio, and it's built off 2 platforms, our AROA ECM platform and our emerging Enivo platform. Both of these platforms have the ability to -- for us to produce a number of different products. We've seen that with AROA ECM. We see further opportunities with AROA ECM to develop a wider group of products. We also see with Enivo the opportunity for that to develop a family of products as well. With Enivo, we're still in discussions with the FDA regarding the design of a clinical study to have the third component of that Enivo platform cleared. And we're looking at options whereby we can potentially accelerate the commercialization of Enivo. And I think the other thing that's important is that we have designed our products and our processes so that we can do this at very large scale in a very economical way. And what that means is that our margins for -- we have very high margins on our products. And I think with continuous improvement, that's going to only improve.

Our scale up for our manufacturing is very simple. Manufacturing is very well established and for us to continue to scale up, it's just essentially replicating modules of that process going forward. So this is a mature part of our business. There's certainly opportunities for us to improve this and that will lead to margin improvement, but also increase in capacity as well. So just in terms of the financial outlook, we maintain our guidance for FY '25. So guidance range between $80 million to $87 million in product revenue. Gross margin, we expect to be in excess of 85% and normalized EBITDA between $2 million and $6 million Myriad and OviTex continue to drive growth. Over time, we see gross margin improving beyond that 85%. We're focused on that improvement in sales productivity. So seeing that sales operating leverage come through. R&D is relatively flat, and we'll see that trend towards being 10% of sales over the next couple of years. And then EBITDA margins obviously expanding as revenue increases. So I'm going to leave it there and pass it back to you, Nita, for questions.

[Operator]

Thank you, Brian. We will now move on to the Q&A session. We'll go to the first live question.

[Elyse Shapiro, analyst]

It's Elyse from Canaccord. With Myriad, we've obviously seen a big push into trauma and additional indications. How are we seeing the utilization playing out? And is that strategy starting to reap some rewards in the bigger TAM segments?

[Brian Ward, executive]

Yes. No, we're definitely seeing success in trauma. And what's interesting is that the case value is increasing because those wounds are much larger. I think clinically, we're seeing great results. And I think the interesting thing there is, as I said during the presentation, often just a single use of Myriad is leading to good outcomes. So yes, I think what we are seeing also is sort of surprisingly, I think, is that some of these other higher volume, smaller value procedures continue to be quite large contributors to the total number.

And so I think we're seeing kind of this emerging trend of trauma being less frequent but high case value, but also this baseline of smaller procedures happening on a regular basis. that's helping contribute to the total month-on-month. So -- and as I said through the presentation, I think what's really interesting is that we're not seeing that Myriad has a particular weak spot in any of these soft tissue reconstruction procedures. And particularly some of the ones -- some of the procedures that are known to be really difficult and where there's high degrees of contamination or the material breaks down quickly. And we're seeing Myriads hold up really well in those procedures. So I think we can see this opportunity where we think that Myriad could become a standard in soft tissue reconstruction across a wide range of procedures. So that's super interesting.

[Elyse Shapiro, analyst]

Great. And just one quick follow-up. As we think about the opportunity, obviously, we are seeing the sales force expand a little bit, but it is maturing. How many more reps do you think you'll need to be able to service the U.S. broadly geographically and across the opportunities that you've just discussed?

[Brian Ward, executive]

Yes. I think our target number is 100 to 120, and we'll build that out over time. I think this year, we're likely to add another 5 or so. So that will take us up to 55, 56. Next year, it's going to be sort of 10 to 15. So at the moment, we're focused on improving that productivity so that when we add a new rep, the lag between adding them and getting a reasonable amount of sales is shortened then we get sort of higher productivity quicker. Once we have increased confidence around that, we may accelerate the rate at which we add. I think that's going to line up quite well with where we are in terms of growing sort of sales, but also profitability as well. We sort of moving into a slightly different phase next year as we become more profitable.

[Operator]

Thank you, Brian. I do not have any other live questions at the moment, so I'll switch to some written questions for now. But if you do have any questions you'd like to ask live, please do raise your hand. So Brian, there's a question here that references the Bard settlement that you talked about earlier. So obviously, Becton Dickinson has recently announced an $85 million cash settlement in the U.S. relating to about 38,000 hernia mesh lawsuits that were filed relating to the Bard synthetic product. So the question is, do you think that this will change future U.S. buying patterns?

[Brian Ward, executive]

Yes. I mean it's very interesting. I think there's certainly been concerns around the use of permanent synthetic mesh in -- particularly in hernia, and this relates to that. I think there's -- I think it opens up an opportunity for a new technology platform where there's a different type of healing, you don't have permanent material left behind that can cause complications. And so in that respect, I think the OviTex products are very well placed. They represent a new way of tackling hernia repair. I think they have shown very good results in complex hernia, ventral hernia, lack of complications post surgery, lack of recurrence.

And I think -- so I think OviTex has the potential to become the new standard of care. I think if you look at the procedure numbers, a lot of the procedure numbers are in inguinal hernia. And with the launch of the inguinal hernia product, earlier this year. That puts us in a great position for the wider opportunity. I think the portfolio there now is also quite broad. So it spans the complicated procedures and also right through to the less complicated procedures. So yes, I think there's certainly change coming in that market. I think with the portfolio for OviTex, I think it's very well placed to address that change that's coming down the line.

[Operator]

And then another written question once again on that OviTex part of the business. So it references TELA Bio sales in Q2. And the question there is, has this had an impact on the level of ordering from Aura?

[Brian Ward, executive]

Yes. Look, I mean, I don't want to kind of preempt our half year result, but certainly, it was a little bit softer there for a period of time. We have seen things strengthen over the last -- particularly over the last quarter. So we're on track. In terms of guidance, we feel like we're still on track for where we expect it to be.

[Operator]

Thank you, Brian. I don't have any questions at the moment. So I'll just take a few more minutes to pause. If you have any more questions to ask, please feel free to send them through.

[Elyse Shapiro, analyst]

It's Elyse again from Canaccord. Just as we think about TELA and some of the lumpiness that has come through in terms of their sales, what kind of systems and processes have you put in place when it comes to formulating guidance to make sure that we're not seeing any big hits or swings there?

[James Agnew, executive]

Yes. Look, I mean, I think, look, last year, we obviously saw lumpiness with the inventory management. And I mean that's absolutely confident. I mean we have regular meetings with TELA that that's behind us, okay? So that we're now in sync I mean in terms of guidance, I mean, look, at the start of the year, I mean there is quite a large degree of uncertainty on both sides of the business. So I mean, look, we take a very prudent approach in setting our guidance to allow for the ups and downs because, hey, it's business, right? It's business. Nothing ever goes exactly to plan. Otherwise, it would be incredibly easy. So I guess, yes, I mean, look, we factor in ups and downs. And like I said, this was one quarter for TELA. It's the first quarter that they haven't -- they've had this flatness since they've actually launched the product. So I wouldn't read too much into it.

[Operator]

Thank you, Elyse. I'll now move to a written question that's come through and still along the lines of that OviTex portfolio. The question is specifically around the TAM that was quoted earlier in the preso. And it's about whether the -- whether that reflects the forecast extra revenue that you might expect to see coming from the Bard settlement.

[Brian Ward, executive]

Yes. So I mean the TAMs will be the same. I mean the total addressable market, I don't think that changes. I think do we -- have we factored in any sort of tailwind from the Bard settlement realizing that this year? I think the answer is no. So these things take a little time to come through, but maybe there's potential upside through the rest of the year.

[Operator]

Okay. It looks like we don't have any further questions. So Brian, I'll hand it back to you for any closing remarks.

[Brian Ward, executive]

Great. Thanks, everybody, for joining. I think we're in a good position. I think what's really interesting is we really feel like the pieces are coming together for Aura to really build on and increase that momentum, particularly around the clinical evidence, particularly around the clarity of the value that we can bring to surgeons, hospitals and patients.

And I think we're much clearer about how we deliver value, and I think that's going to help us from a sales perspective. So yes, looking forward to the second half of the year, we have our half year results on Tuesday, the 26th of November. So we'll be giving a detailed breakdown of our first half. So look forward to people joining that meeting and happy to provide more detail at that point.

[Operator]

Thank you, Brian and James, and thank you, everyone, for taking the time to join today. We'll leave it at that and look forward to seeing you next time.

[Brian Ward, executive]

Great. Thank you.