Aroa Biosurgery Ltd

ASX:ARX

Earnings Call Transcript 2023-Q4

[Simon Hinsley]

[Audio Gap] released on the ASX this morning. I'll just remind you that you can ask questions through the Q&A function at the bottom of your screen, and we'll get to those at the end of the presentation. Brian I'll now hand it over to you to get started. Thanks so much.

[Brian Ward, executive]

Great, Simon, thanks for that, and thanks to everybody for joining the call this morning. We're going to run through our -- some preliminary full year results. So look forward to talking about those, just normal disclaimer. Just quickly on the cash flow. So our cash receipts from customers were $12.3 million during the quarter, and we had net cash outflows from operations of $1.9 million for the quarter. Net cash outflows from investing activities was $1.8 million for the quarter, and that really reflects our investment into plant and equipment for additional manufacturing capacity. We ended the quarter with a strong cash balance of $44.7 million as of the end of the 31st of March.

So in terms of high-level numbers. So our full year product revenue number was $60.4 million, really thrilled with that and we came in between our guidance of $60 million and $62 million. So that's up significantly on last year, so 55% growth on last year. Our total revenue was $63.1 million. So that's up 60% on last year. So we're seeing really strong solid growth coming from our Myriad portfolio and also continued growth coming through from TELA Bio which are really setting us up extremely well. From a gross margin perspective, we made some really good strides during the year in terms of improving our gross margin. In the first half of the year, we've maintained that in the second half of the year coming at 84%, which was spot on guidance. So again, thrilled with that. And that's a number that we believe is certainly sustainable.

From an EBITDA perspective -- normalized EBITDA perspective, we're positive. The details of that will come through in our full year financial results and we're obviously working through the collection and the [ routing ] of all those numbers at the moment. So for the full year -- sorry, so at the end of the year, cash balance of $45 million versus our guidance of $50 million and it's a timing impact in that cash balance. So sort of in summary, if you look at that strong revenue performance, strong growth, really strong margins and the company's extremely well positioned from a cash perspective. So we're really, really thrilled with how that's gone.

So in terms of highlights, we continue to make good progress with our U.S.-based field sales team. So that number has been consistent over the last quarter. We're at 40 reps at the moment, an increase in the number of active accounts for Myriad. So we're continuing to grow these accounts. So that's now up to 166 accounts and we have 4 reps that have a run rate now in excess of $1 million and 10 rates with an average run rate over $0.5 million. So we're continuing to see the reps' sales productivity improve, which is extremely heartening.

From Myriad perspective, Myriad continues to be the major growth driver. So that's the combination of Myriad Matrix and Myriad Morcells. As I've been saying through the course of the last year, Myriad Morcells is going extremely well for us. From a sales mix perspective, probably represents almost 60% of our Myriad sales now. We're finding that the use of Myriad Morcells is quite different from Myriad of the other powders on the market. So it's commonly being used as almost like an intermediate form of Myriad, so halfway between a powder and a matrix. So a really nice conformable graft. It's a course of products that compared to many of the powders that are on the market and is being used in a different way. And so to respond to that, we also have developed a very fine version of our Myriad Morcells product as well that's currently being prepared to be shipped to the U.S., and we will launch that at the beginning of May.

So we expect that Myriad Matrix will be used alone. Myriad Matrix will be used in combination with this new fine powder as well and in Morcells, Myriad Morcells will continue to be used as a conformal graft on its own. So overall, with that Myriad portfolio, we see a really strong opportunity here for continued growth for that portfolio over the next 2 or 3 years.

[ In chemical development ] perspective, the Myriad MASTRR chemical registry is tracking very well. So we now have 156 patients recruited into the registry. That's over half of the patients already recruited, which is great. The mix within that registry is beginning to evolve a little bit. So when we started doing the registry, we had a high number of cases in pediatric surgery. As we've got further into the registry, we're now bringing in a whole range of other sorts of cases, so colorectal cases, trauma cases and a mix of some of the inflammatory skin diseases as well. So really pleased with how that's tracking and it's certainly going to be a very important source of clinical evidence for our products.

Symphony, that's our skin substitute product for sale in the outpatient wound center. We're preparing to launch that product this week here in the United States. So there's a major wound conference happening in Washington, D.C. That's SAWC Spring, and we have a formal launch of Symphony at that conference. So that's a new growth opportunity for us this year. Probably be getting ourselves going this year and then really expecting to get -- really gain some significant traction with that in the following year. As we've mentioned previously, in our quarterly, we're thrilled that we've had been awarded a contract with Premier for both Myriad and Symphony. Endoform will be added to that contract in April as well. So we now have all of the major GPOs in the U.S. that are -- that we have contracts for and for our portfolio of products. So we cover -- over 90% of the hospitals in the U.S. have access to our products through their primary GPOs, so we're very well positioned from a GPO access perspective.

We recently received a 510(k) clearance for our Enivo pump and catheter. So these are 2 key components of our Enivo Tissue Apposition Platform, I'll talk a little bit about that later in the presentation. So extremely pleased to have those 2 components cleared. They certainly derisks the clearance of the whole platform. There's a huge amount of work that's gone into getting these products to the stage. We're in the process of working with the FDA to finalize the requirements for the clearance of the third component, which is the ECM sleeve, and we expect to be able to come back and announce the pathway forward to that over the next 3 or 4 months. So we'll provide an update on that at that stage.

TELA Bio, things have gone very well there. So they had a good year last year. They have recently released guidance for the full year, which is $60 million to $65 million. So that's versus $41.4 million last year. So strong growth there. And in addition to that, they're now in the process of completing around of almost -- well, about $45 million, which means that they'll have -- be well financed to continue to build the commercial organization in the U.S. So TELA is well capitalized by continuing to hire sales reps, and have we certainly got good clinical data coming through, good GPO access. So I think they're really set up to do very well over the next couple of years.

To sort of talk a little bit about our existing products and how Enivo fits into our portfolio. So all of our current products that are commercial at the moment are based on our AROA ECM platform. And what we see with this platform is rapid formation of this robust granulation tissue, which is a critical step in healing. And that really provides the basis for a wound to heal. And so when we benchmark our products in the market, there's been clear differences with our base technology, and we see that across all of our technologies, whether it be in OviTex, whether it be in Myriad, whether it be in Symphony. So for AROA, the opportunity that we're targeting is in soft tissue reconstruction. So we've designed a range of different devices for use in soft tissue reconstruction, the Symphony device, the Myriad device. We're also using Endoform in chronic wounds.

We're predominantly targeting plastic surgeons, general surgeons and [ former ] surgeons. What we see in a lot of these procedures is that when surgeons separate tissue, they create a cavity. And that cavity delays healing, but it also can lead to downstream complications where fluid accumulates at that site, and that can lead to either serum or blood forming there, slowing down healing, but also potentially leading to the wound becoming infected or the wound breaking down. So that was really the genesis of the idea to develop the Enivo product. So our thought was that if we could combine our AROA ECM products with a product that removed that cavity that sits around the area where our products are implanted or used, that would firstly reduce the risk of those complications developing, but then secondly, help with that tissue healing process and allow that to happen faster and allow there to be fewer complications at the site. So the quality of the healing was better at that site.

And so when we talked about Enivo in the past, we've talked about Enivo in terms of managing dead space and being used in combination with our AROA ECM based products. I think there's an important point to make here, and that is that while both Myriad, Symphony, Endoform and our Enivo products represent opportunities in their own right. And we've talked about a market size, the soft tissue reconstruction products is $1.4 billion. A market size for Enivo is $1 billion. The real opportunity for these products is where they are used together. And we see this as being a way to really change the standard of care in treating these soft issue reconstructions to accelerate the rate of healing because you don't have this cavity that forms that delays healing because you do have good apposition of tissue and to give you a better outcome.

So one of the things about this combination is we think it really provides an opportunity to significantly differentiate the AROA product portfolio offering and allow us to really create a step change in soft tissue reconstruction. And we see this as something that is very proprietary to AROA and can make a significant difference in the surgery. So there's an opportunity for us for our products alone, but there's also a really important opportunity for us in terms of combining these products and having that combination be able to really change the quality and the rate of healing. And I think that's an important thing to note with these combinations.

So just briefly in terms of a little bit more detail around the clearance with the FDA. So the Enivo system is comprised of a pump, a catheter, silicone catheter that's then inserted into an implant, which is made up of an ECM sleeve. And so the FDA has cleared the pump, the vacuum device and the catheter, but it hasn't cleared the sleeve. And the reason for that is that there was a comparable -- there is a comparable product on the market that includes pump and a catheter, but there's nothing comparable that also includes a ECM sleeve. So we need to provide some additional data to the FDA to satisfy them around the safety of having the addition of the ECM sleeve.

We have provided some justifications to them on this. Obviously, ECM is used in our existing products and many existing procedures. They just want to see the use of that ECM sleeve in combination with the silicon catheter. So we are working on putting some more data together for that. Once we've put that submission in front of them, we'll go through a round of questions, just to clarify exactly what their requirements are and that may or may not require additional preclinical or clinical work. So at this stage, it's hard to be really clear on what that time frame is. It could be a relatively short time frame that may be that we are able to clear this device within the next 12 months. It could be that it requires more extensive further data and that may take us up to 36 months. But I think within the next 2 to 3 months, we have a very clear view of the time frame for the stock -- this full device to be cleared and what the likely cost of that are.

So just sort of touching on catalysts and milestones for us. So I think we've got -- continue to have really good sales and momentum on the AROA side. And I think if you look back over the last 3 years, we've had strong growth year-on-year. It's important to note that we're still only addressing a tiny proportion of the total available -- total accessible market for our products. So we are just scratching the surface and just getting going. We're certainly just building a sales team, just building clinical data. There's a huge amount of upside here for these products in the near term.

TELA Bio, very similar state. Some great data there in terms of recurrence rates, a lot of effort going into building out the commercial operation, the sales team, I think, with the recent funding that we talked about, we're going to see that increase as well. So I think really starting to see good momentum on the TELA Bio side as well. The Symphony product launch is important. So that's a very large opportunity for us, fits well with our existing business. We're targeting hospital outpatient wound centers in hospitals where we are already selling Myriad. So we already have access into those hospitals. We have established relationships in those hospitals. So it's a nice add-on to our existing Myriad business.

Yes, Enivo, we've made good progress with Enivo. We've significantly derisked the clearance of that product. As I said earlier, we'll have a much clearer view of time frame on that in the next couple of months. And from a COVID perspective, we are seeing an almost normal state in terms of operating capacity in hospitals, still a little bit of slowness on the administrative side, but certainly not no significant lags there that are going to affect our performance and our ability to continue to grow the company really aggressively over the next couple of years.

Just in terms of investor events coming up. So we have our full year results and guidance webinar on the 30th of May. So that will be a virtual event. We are planning to put on a special investor meeting on the 1st of June in Sydney, between 1 and 4 p.m. So we're planning to bring a slightly extended team to Sydney for this and provide a deep dive into some of the critical areas of the business and how we think about that over the coming years. So I think that's a great event to attend, we're going provide some more insight into how we're thinking about the growth opportunity in front of us and how we're seeing things play out across the business.

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

[Simon Hinsley]

Yes. Thanks, Brian. First question is from Elyse Shapiro at Canaccord. Can you just talk to the timing to see the impact of the Premier addition for AROA products. Looks like this is slower than expected for TELA?And is this something that's being experienced across the board?

[Brian Ward, executive]

Yes. I know I could tell it. It has been a little bit slower than expected. I think that, that will pick up. I mean our own experience has been pretty positive with Premier to be honest. And Premier is, for us, now our #1 GPO. It's one of the largest GPOs and for us, I think it's like 40% of our sales now going through Premier. So Premier has been a strong GPO for us.

[Simon Hinsley]

Great. Myriad looks to have strong momentum. What are hiring intentions, and it looks like Myriad's on track to more than double revenue in FY '24. Is that a fair assumption?

[Brian Ward, executive]

Yes. Look, I think exactly, I mean, we've grown by, I think, it's 233% this year for Myriad. So that's gone really well. We expect to double that revenue over the next 12 months as well. So it continues to go well. From a sales force perspective, there's 2 things we're focused on, focused on the -- our sales people maturing in their territories over the next couple of years and improving their -- and net run rate improving as that access improves as well. And then also probably secondarily, adding more people. So we -- I think the most important thing for us is to really ensure that we get our salespeople to high levels of productivity over the next 12 months. And we will add people, we may add 5 to 10 people over the next 12 months, but I think we're just going to see how it goes and just how -- what the environment looks like over the next 12 months. And we'll provide more detail about that in May.

[Simon Hinsley]

Great. Thanks, Brian. Brian and James I know in the past, you're reluctant to provide any color about the long-term financials given the reasonable large TAMs potentially available to AROA, could you please give shareholders an aspirational feel on where you see AROA in 5 years' time? How large do you see AROA getting in terms of revenue and profitability?

[Brian Ward, executive]

Yes. Look, I think -- I mean I would sort of -- and there's a couple of ways to look at it, right? I think the -- we're in large by -- as we're scratching the surface of those. We're growing year-on-year, we're growing at sort of high rates, $10 million, $20 million a year. So if you look forward, I think you can see AROA being a company in excess of $100 million within 2 or 3 years. I think that's a pretty reasonable number. There's no reason to think that there's a ceiling on that level of growth. And we should be able to continue to build momentum over time at a high level of growth, certainly in excess of 30%, potentially higher. So I think there's a [ genuine ] opportunity to build a globally leading soft tissue reconstruction company with this technology over 5 to 10 years that has revenue north of $200 million. I mean that's the plan. I mean our plan is to build a very large successful company here.

[Simon Hinsley]

Great. Thanks, Brian. AROA was EBITDA positive in FY '23, including Enivo. How much was spent on Enivo in FY '23?

[Brian Ward, executive]

James, do you want to address that?

[James Agnew, executive]

Yes. Look, a large portion of our R&D was spent on Enivo and it's in excess of close to $6 million. I mean look, we'll provide more color on that when we release our results in the next 3 weeks.

[Brian Ward, executive]

Yes, I think there's just one thing to add to James' comment there. I think if you think about the expense on Enivo, if we were investing that $6 million or so in Enivo, we backed that out, then AROA will really be a highly profitable company where we are in our kind of growth cycle at the moment. So the fundamentals of the company are extremely good. We're choosing to invest in Enivo because we see a fantastic opportunity for that product. And because we see it as an opportunity to really position us very uniquely within the market. So we're strong believers in Enivo. We think the combination of our products in Enivo will set us up really well for the future. It's worth the investment. But if we had postponed that investment or we didn't make that investment, I think people would be looking at AROA and thinking that's already a highly profitable company at a relatively low level of sales.

[Simon Hinsley]

Great, Thanks, Brian. Just on Enivo, when do you expect to see tangible sales given you recently had the approval?

[Brian Ward, executive]

Yes, at the moment, we are certainly at least 12 to 18 months away. And that's even if we were to get the product cleared reasonably soon, there's -- we would be undertaking some early experience, clinical development with it. It's a very unique product that needs to be put in the hands of some really well-regarded surgeons in that initial period of use. So yes, it's a little way away. We think that Enivo can be a huge catalyst for the company. And so once we get some confidence in the performance of Enivo, then we think that, that can really drive some strong growth for us.

[Simon Hinsley]

Great. Thanks, Brian. Just a question from Sebastian Clemens at Jarden. The cash balance of [ NZ$44 to NZ$50 ] was due to timing of product revenues. Is this something we should therefore expect to correct next quarter?

[James Agnew, executive]

Yes, absolutely. We should see a correction next quarter.

[Simon Hinsley]

Okay. I think that concludes the Q&A segment. Just a reminder on the Investor Day, the 1st of June, if you did have interest just e-mail. The details are at the bottom of the ASX release, but Brian I must hand it back to you for closing remarks.

[Brian Ward, executive]

Great. Thanks, Simon. Look, we're delighted that we've delivered the result. We have strong growth, [ 50% ] on last year, which we think is fantastic. We're establishing a really strong platform here to build a successful business in the U.S. I think it's the third year in a row where we've met our guidance. So very pleased about that as well. And really also pleased to see our partner TELA Bio doing well in terms of their growth, putting on some great guidance for the coming year and also putting fuel in the tank and raising some more money to put them in a good state. So I think all of it bodes very well for AROA over the coming 12 months.

[Simon Hinsley]

Perfect. Thanks, Brian. Thanks all for attending.

[Brian Ward, executive]

Thank you.