Aroa Biosurgery Ltd

ASX:ARX

Earnings Call Analysis

Aroa Biosurgery Posts 20% Revenue Boost

Aroa Biosurgery saw a 20% increase in customer cash receipts to $17.7 million, with net cash outflows from operations declining to $1.7 million as the company moves towards breakeven operational cash flows. Total revenues were adjusted downwards to $67 to $70 million, accounting for a one-off decrease due to an overestimated revenue share from TELA Bio. Product revenue forecasts sit at $66 to $69 million, maintaining a gross margin of 85%, and normalizing EBITDA losses between $1 to $3 million. Myriad product line reported robust sales with a 10% increase in active accounts and is expected to see a 70% to 85% year-on-year growth. With $30.5 million in cash and no debt, Aroa is in a strong position, recently receiving FDA clearance for a new dental product and advancing clinical studies anticipated to complete by mid-year with interim reports due towards the end of the year.

Financial Highlights and Guidance Update

The company reported positive financial movements with cash receipts rising to $17.7 million, a 20% increase from the previous quarter, signaling good progress towards achieving breakeven operational cash flows. Operational cash outflows saw a significant reduction, indicating strong financial management and a trajectory towards profitability. The company concluded the quarter with a sturdy cash balance of $30.5 million and maintains a debt-free status. In updating its financial guidance, the company now anticipates total revenues between $67 million to $70 million, with product revenues contributing $66 million to $69 million of this figure and an expected gross margin to remain at 85%. However, the company foresees a normalized EBITDA loss ranging from $1 million to $3 million.

Performance of Key Products and Future Growth Prospects

The sales performance of Myriad remains robust, exhibiting a 10% quarter-over-quarter growth in active accounts while maintaining sales productivity. This robust momentum sets the product on a course for a remarkable 70% to 85% year-on-year growth for the full year. Moreover, the company successfully secured a 510(k) clearance for a new resorbable dental membrane product, cultivated over four to five years, reflecting its continuous innovation and expansion of product lines through potential partnerships, thereby strengthening its market presence. The company is expected to become strongly profitable next year, indicating a clear path towards financial robustness and sustained growth.

Clinical Trials and Regulatory Matters

On the clinical front, the company reported no complications among the six patients enrolled in a pilot study for Enivo, its tissue apposition platform, demonstrating a promising outlook for future applications and adoption of the technology. An additional 36 patients have been enrolled in the MASTRR study for Myriad, bringing up the total to 268 patients, which may be increased to above the 300 patient target to generate further marketing data. The study for another product, Symphony, has also progressed well, reaching 86 out of the planned 120 participants. Lastly, the FDA's review of the 510(k) submission for Myriad Flow is down to the final two questions on preclinical and clinical safety, with both required studies seemingly straightforward to conduct.

Market Positioning and Strategic Focus

In the face of slight tempered growth predictions, the company is shifting its focus to high-value areas, aiming to quickly get back on the anticipated growth trajectory. The management is confident in the product performance of Myriad, citing significant advantages in the rate of tissue formation and minimal infection rates as factors that set it apart within the market. Focus is being refined to high-impact procedures with higher case values, suggesting a strategic pivot towards maximizing returns from its best-performing assets.

Outlook and Growth Confidence

The company remains confident in its growth trajectory and expects the TELA Bio partnership to regain momentum and contribute significantly to its top line growth. This optimism is grounded in the continued market share wins and robust clinical data of products such as OviTex. Furthermore, the recent 510(k) clearance provides an opportunity to aggressively pursue the dental market, where the company's technology offers distinct advantages over competitors' older technology. This move signals potential new revenue streams and strengthens the company's competitive positioning.

Earnings Call Transcript 2024-Q3

[Neetha Alex-Kumar, executive]

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 third quarter results announced this morning.

[Operator Instructions]

We will have to finish up by 9:50 a.m. Australian Eastern Standard Time.

[Operator Instructions]

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

[Brian Ward, executive]

Thank you, Neetha, and welcome to the Q3 quarterly update, morning and thank you for joining. So as Neetha said, this is going to be a relatively quick presentation. So just for those that are new to the company, Aroa is a well-established soft tissue regeneration company, 4 families of products that we sell in the U.S., all based on our AROA ECM technology and targeting an opportunity in the U.S. excess of $3 billion. We sell through 2 channels. Our own U.S. direct sales team and our commercial partner, TELA Bio. The technology is well established, we're treated in excess of 6 million patient treatments and large body of scientific and clinical evidence sits behind the technology. So we essentially isolate a tissue layer from the forestomach of sheep. We purify that in a way that allows it to be implanted into people and removes all of the things that the human body would react against, but conserves the structure and the biology of that material. And from that, we derive 4 different products adapted for specific use cases.

So Endoform, Myriad and Symphony sold by Aroa and OviTex sold by our commercial partner, TELA Bio. So just going straight to the financial highlights. So $17.7 million cash receipts from customers in the last quarter. So this is up 20% on the previous quarter. We continue to make good progress towards breakeven operational cash flows. Net cash outflows from operations decreased to $1.7 million from $3.2 million in the prior quarter. So if you look at operational cash flows, we're certainly tracking towards breakeven. Our net cash outflows from investing activities of $1.1 million for the quarter, and this reflects further investment into additional manufacturing plant and equipment to build capacity. We finished the quarter with a strong cash balance of $30.5 million and the company remains debt free.

So we have a very strong balance sheet and are simply well positioned to continue to fund the company and track towards breakeven. Just in terms of guidance, we are updating our revenue and EBITDA guidance. So we're reducing that to $67 million to $70 million of total revenues. So this reflects of $66 million to $69 million of product revenue and gross margin is expected to be maintained at 85% and a normalized EBITDA loss of $1 million to $3 million.

We have a one-off decrease in expected revenue from TELA Bio that has contributed to this really due to an overestimation of our revenue share from TELA Bio and based on inventory supply to them and a delay to joint product development project, which we were forecasting to ship product from OviTex and OviTex PRS remain on a strong growth trajectory.

We continue to see very strong sales performance with Myriad, 10% growth in the active accounts between Q2 and Q3. And comparable field sales productivity to last quarter. And so we're looking at a 70% to 85% year-on-year growth of Myriad for the full year. So, strong revenue growth for Myriad, not quite at the 100%, which we've been expecting, but still tracking very positively.

In terms of operational highlights, in the last quarter, we have received a 510(k) clearance for a new product. This is a resorbable dental membrane product. It's a project that we've been chipping away at for the last 4 or 5 years. We've completed a clinical study for the -- sorry, preclinical study for this, which was required for clearance, and that was submitted to the FDA last year, and we, in the last week, was received notification that they are clearing this product. So we see this as an opportunity to develop another line of products that will contribute through a partnership. So we're out looking to secure a partnership with another company to commercialize this product for us.

It doesn't fit with our own strategy and with our own sales team targeted. So in our minds, this makes sense to partner off in a similar way that we did with TELA Bio. We've received feedback from the FDA regarding our Myriad Flow device. So this is a version of Myriad designed specifically for use in combination with Enivo. They have requested some additional preclinical and clinical data to support their clearance. We expect that this may be the case. I think the good news on this certainly what they're acquiring doesn't appear to be particularly onerous, and the studies look less complex. And we think worst case, this is -- we expect to have this cleared within 24 months, it could be quicker than that. So really kind of pleased with how that's tracking certainly feel like we have more certainty around the clearance of that and the indications that, that will be cleared for.

We now have 6 patients that have been enrolled into the pilot study for Enivo. This is our tissue apposition platform. They've undergone a unilateral mastectomy and complete follow-up after that. What we've been looking for here is seroma formation and complications post-mastectomy. We're really pleased to report that none of the patients have had clinically relevant seromas or reported complication. So we're seeing a very similar outcome in the first 6 patients to what we've seen previously in the preclinical models, which is very encouraging.

On the Myriad side, we now have enrolled 36 patients -- additional 36 patients into our MASTRR study. So this takes the total number to 268 patients. We have been targeting 300 patients into the study, and we may extend that to increase the number of patients. But really pleased with how this is tracking and this serves as a source of further clinical data for future marketing in the future for our Myriad.

The study for Symphony continues to progress well. We're now at 86 participants of the total 120. We expect to complete this study through the middle of this current calendar year and then report out on an interim basis towards the end of the year, the final reporting at the end of this -- at the end of the FY '25 financial year. So this is progressing very well in terms of recruitment and very excited to be recruiting at the pace that we are. So I'm going to leave it there, Neetha, and pass it back to you for more questions.

[Neetha Alex-Kumar, executive]

[Operator Instructions]

The first question I have is from Sebastian Clemens of Jarden Australia.

[Sebastian Clemens, analyst]

Just on the TELA revenue share, the one-off downgrade, can you maybe refresh us on the different components of that agreement and how they work. And then is this reflecting sales to TELA early in the year or this quarter? I just want to understand your confidence that this isn't going to continue to impact further quarters.

[Brian Ward, executive]

Yes. Maybe I will start, and then James can sort of pick up around the technicalities of how the true-up works. So we have a revenue sharing agreement where for every $100 that TELA receives, we received $27. Over the last -- over this financial year, what we've seen is a big focus for TELA Bio on improving the inventory management, really to address some issues around product obsolescence. But also, I think there's a function of the maturity of their business and refining some of their business processes, so they've made good progress on that.

We saw a big impact from that in the first half of the year. We've seen that turn around in the second half of the year and track more positively. So they've significantly decreased their inventory holdings. When you look at the materiality of that, and that is material for us this year. We don't see that continuing into the future. We think to have a -- to make a similar type of effect that would be out of phase or wouldn't be able to sustain demand in the future. So it is a one-off effect. And certainly, we've seen -- and as we look into the next quarter, we see that coming right. So James, maybe if you want to talk about the true-up and how we've been impacted there.

[James Agnew, executive]

So part of our accounting treatment for under the agreement of TELA Bio as Brian mentioned, we ship certain product at transferred price. And then every quarter, we receive a true-up in cash, okay? Now for accounting purposes, when we ship product, we essentially accrue an amount that is attributable to the top-up, okay? And in the past, to date, we've always taken a relatively conservative approach to that accrual. One of the sort of key assumptions we made with our estimates for the second half was that we're seeing -- it was going to be much better stock management. And as a result, that accrual increasing. However, what we saw -- what we've sort of -- what we've learned is that we had to make a one-off adjustment to that. And again, sort of there is an adjustment. I see it as a one-off. And I think the other important factor is it's also noncash, so it doesn't impact cash flow.

[Sebastian Clemens, analyst]

Okay. And just a follow-up. So this is a change in your assumptions because I know that we were -- I guess, we are familiar with the inventory issues with TELA Bio last quarter. I'm just wondering if this is -- those issues getting worse from your perspective? Or if this is more, as you said, an accounting assumption.

[James Agnew, executive]

I think it's most more right than accounting assumption. And if anything, we haven't really changed our assumptions, I think we -- our assumptions -- well, we've made assumptions that it was going to improve a bit more than what we anticipated.

[Audio Gap]

[Brian Ward, executive]

Elyse?

[Elyse Shapiro, analyst]

So I guess on the Myriad side, you previously anticipated triple-digit growth. Is that downgrade due to like slower account growth, slower growth within your existing accounts? Or are you finding some variability in your kind of dollars per patient or per procedure?

[Brian Ward, executive]

Yes. I think it's -- I would say there's 2 things. So a little bit of a just a softer quarter in the last quarter, not particularly explainable because of more holidays at that time of the year. But I think part of it -- I mean, the second thing I'd say is mainly being part of is a bit of a tweak to the strategy and that having an effect in terms of changing focus. So we're putting more focus on trauma now, let's focus on the areas, and it's taken us a little bit of time to continue with the momentum there. So I see it as a temporary change, but getting back on track pretty quickly.

[Elyse Shapiro, analyst]

And then just kind of delving into that comment that you just had around traumas like things like neck [ frac ] or trauma wounds, I mean, do you really think that those would be variable depending on kind of a holiday season? Or was it used historically in the non-trauma setting.

[Brian Ward, executive]

Yes. There's a little bit -- I mean, some of our guys taking breaks as well. So that's a little bit of it. It's normally -- I mean acute is normally pretty constant throughout the year. So I think it's more of a -- just a change in our alignment around where our sales team is.

[Neetha Alex-Kumar, executive]

Thanks, Elyse. Do you have any more questions?

[Elyse Shapiro, analyst]

I was just going to pop back in the queue there. But yes, maybe just one more. Looking at that Myriad Flow study that has to be done, what are the costs associated with those, and how that was incorporated into guidance?

[Brian Ward, executive]

Yes, they are. The costs are incorporated. We've budgeted for that. I think when we look at what we've got back from the FDA, it appears to be reasonably simple request from them. So we're just in the process of reaching out to CROs and looking to see what they might cost, what they might cost and how long that might take. I think whether being less complex, we think it's going to be more straightforward for us to do less cost probably takes a short of time, but we need to confirm that.

[Neetha Alex-Kumar, executive]

Now turning to some written questions. I've got a question around TELA's demand and what their reorder profile might look like?

[Brian Ward, executive]

Yes. Look, I mean, if you look at TELA Bio, they're growing in excess of 40% per annum. So you're still seeing very strong growth there. And so we are reordering will reestablish itself as -- or is reestablishing itself as they work through inventory. So we don't really see -- we see a slight -- this year has been a bit of a disconnect in terms of what's been happening from a customer demand perspective and what's been happening from a demand on a role perspective. By continuing to win accounts, they're continuing to grow, and we see that starting to flow through. And next year, we certainly see things tracking back to how they were in the previous year.

[Neetha Alex-Kumar, executive]

Thanks, Brian. Turning to another question. There's a question around Myriad performance. And if you can speak to that as well as how it might have impacted guidance.

[Brian Ward, executive]

Look, I think from a product perspective, we're not worried at all about the product performance. We're seeing excellent results in a range of soft tissue procedures. I mean, I think what really stands out with Myriad is the rate of tissue formation and the lack of infections. And I think that's very relevant and all soft tissue recon. So we're thrilled with how that's going. I think we're -- if you look back over the last 3 years, we've commercialized Myriad in a range of different sorts of procedures. We're now refining our strategy and focusing on those target procedures that are where we think we can be most impactful and where the case value is high. And I think that's what we're seeing a little bit in the Myriad numbers is a realignment around moving from doing lots of things to a more refined strategy focusing on doing a few things.

[Neetha Alex-Kumar, executive]

Now there's another -- there is a question on the 510(k) for Myriad Flow. And asking you to expand on the feedback that's come through from the FDA to the extent that you're able to share that?

[Brian Ward, executive]

Yes. So we submitted a 510(K) to the FDA. They reviewed the full dossier and the way these interactions normally work as they come back and there'll be, I think, they might have been 16 questions that came back we had to address. We're now left with 2 outstanding questions. And they really relate to the safety of the envelope in a range and some of the procedures and soft tissue reconstruction. And so the FDA is -- it has looked at our previous preclinical studies. They included a small AROA ECM envelope on the device. We're now proposing to use a much larger device. So they want to see a preclinical study with that larger device.

And then on the clinical side, they want to see some safety data in humans relating to the removal of the catheter. So both studies are relatively straightforward. They're focused more on safety. They don't require sitting on the face of it don't seem to require very large sample sizes and seem to be quite straightforward to execute. So that's what we're focused on. I mean, we -- as I say, we need to work this up a little bit. And we can come back with an update later, but there appears to be smaller studies and will take a shorter period of time and be less expensive than we've previously anticipated.

[Neetha Alex-Kumar, executive]

Thanks, Brian. And now I've got sort of 2 questions on the similar theme. The first question is when does Aroa expect to become profitable? And the second question is noting share price performance, what is the company doing to maximize shareholder returns.

[Brian Ward, executive]

Yes. So we are tracking towards profitability. And I think as we've updated the guidance this year, it's 1 million to -- potentially $1 million to $3 million negative at an EBITDA level now. We expect to track to being cash flow positive on an operational perspective quarter-on-quarter now and for next year to become strongly profitable. So I think we're continuing to track that way. We have a strong balance sheet anyway, but we're certainly focused on profitability.

When you think about share price, I think, certainly within the current market, people are focused on top line growth in combination with profitability. And that's certainly how we're thinking about things. And so we can see that next year, as TELA Bio sales return to the sort of demand that we've seen from them previously and aligned with the strong growth, we'll be back on a trajectory to have strong top line growth. At the same time, we are focused on expanding our sales team, so investing in that to help drive Aroa's continued growth of our own products that we sell, but also keeping in mind at the same time, managing our expenses so that we aren't overinvesting and building to -- and not being profitable.

So we will invest in our own sales growth, but we are focused on developing increasing profitability over time. So I think we would expect that as more money flows back into the small cap end of the market, that we will be rewarded for both the top line growth and an increase in profitability. So that's kind of our strategy, I guess, from a share price perspective.

[Neetha Alex-Kumar, executive]

Brian. I'll just take a few minutes to pause to see if there are any more questions to come through. So the question -- questions come through around TELA Bio. And what are the factors that give you confidence around TELA Bio's continued growth of OviTex sales?

[Brian Ward, executive]

Yes. I think if you look at both the hernia business and the breast business, they're continuing to win share. I mean OviTex is now the leading biologic product in the U.S. It's probably -- if you look at the clinical data, I don't think the data is probably second to none in terms of the outcomes with OviTex. Breast recon continues to grow really strongly. So I think the product set is very strong. And the clinical data showing that. I think they're continuing to build out the sales team. And as those -- as the sales team becomes more successful, we expect that to lead to stronger sales as well. So I think from a both the commercial perspective, but also from a clinical perspective, it looks very encouraging.

[Neetha Alex-Kumar, executive]

And just a final question [ Hess Nikon ]. So I was asking for you to expand on the dental opportunity associated with the new regulatory clearance and as well as how you see the competitive position relative to other products.

[Brian Ward, executive]

Yes. So the dental product is a product that we licensed to somebody else. There's -- the use of these products in periodontal procedures is increasing. So they're typically used as a barrier between bony tissue and the soft tissue to hold bone chips in place when you try to augment bone in the jaw. And so it's a growing market. I mean the growth projections are strong. I think at the moment, it's about a $400 million market globally, expected to grow -- it's a $600 million or $700 million over the next 10 years or so. So good opportunity there. And it's a market that we -- there are a number of products in this market segment. We think if you look at those products, it's a little bit similar to what we see in soft tissue reconstruction generally.

There are biologic products used within this market. Many of them are based on old technology. So they're essentially reconstituted collagen products. I think you get 2 things that are advantageous when you use a product based on our technology. The first thing is we get great biology. So all of those things that hold true for Myriad, where you get cells attracted into the tissue quickly, the signals that are there that help develop that tissue quickly you get there. I think the other thing that's really important in the periodontal procedures, is the handling of these -- the existing products is quite tricky. They tend to be very fragile and quite difficult to handle. I think if you contrast that with a product based on the Aroa ECM, it's much more robust, easier to handle, easier to suture, easier to hold in place.

So not dissimilar from the Myriad story. I think our advantage is more biology, so faster tissue repair, more robust tissue repair, but also something that's clinically easier to use, and we think there will be a preference for that. So it's early days for us. We are talking to a number of companies who've had some good engagement already. And I think now that we have the clearance in hand, then we can begin to pursue that a bit more aggressively.

[Neetha Alex-Kumar, executive]

Thank you, Brian. I think we've run out of time now. So I'll hand it back to you for any closing remarks.

[Brian Ward, executive]

Great. Well, thanks, Neetha. Look, we're still very positive about how things are tracking. This year has been a little bit flat for us, but we see that as [indiscernible] washing its way through on the TELA side, on the Myriad side, still very strong growth. And we're going to continue to build on that and certainly see a great opportunity for Myriad going forward.

[Neetha Alex-Kumar, executive]

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