Aroa Biosurgery Ltd

ASX:ARX

Earnings Call Transcript 2024-Q4

[Neetha Alex-Kumar, executive]

Okay. Thank you for your patience. We will kick off now. Welcome to Aroa Biosurgery's Investor Webinar and Q&A following the company's fourth quarter results announced this morning. Please note that participants are in a listen-only mode. There will be a presentation lasting for approximately 10 minutes followed by Q&A. We will be finishing up by 11:30 a.m. Australian Eastern Standard Time. [Operator Instructions]. Finally, 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 will now hand over to Brian and James. Please go ahead.

[Brian Ward, executive]

Thank you, Neetha, and welcome, everybody, and thank you for joining our call this morning. So this is our report on our quarterly cash flow. I'm going to briefly introduce the company and then talk about our results and some operational achievements over the last quarter.

So briefly, Aroa is a well-established, high-growth soft tissue regeneration company. We're selling 4 families of products predominantly into hospitals in the U.S. All of our products are based on our proprietary AROA ECM platform. So soft tissue regeneration that's targeting an opportunity in excess of $3 billion in the U.S. alone. We sell through 2 commercial channels, our own U.S. direct sales team of 50 and then through a partnership with NASDAQ listed TELA Bio licensed from us on the rights for hernia and breast reconstruction.

Technology is well established. We've applied over 6 million patient treatments, is a large body of scientific and clinical evidence that sits behind the products over 71 peer-reviewed publications. In addition to our AROA ECM platform, we also been advancing our Enivo soft tissue apposition platform that's in the process of regulatory approval with the FDA. And all up, we're an organization of approximately 270 people. So 80 or so of those are based in the U.S., our direct sales team and supporting infrastructure for that and then the balance of people based here in Auckland. So that's our corporate manufacturing development, quality, regulatory and marketing functions.

In terms of the base technology center, what we do is we isolate the very specific layer of tissue from the forestomach of sheep. This material has very unique properties in terms of the structure and porosity of it and also the biological composition. We purify that in a way whereby we remove all of the components that the human body would react against cause an immune response, but retain within that native structure and biological molecules that encourage tissue regeneration. So that becomes a building block for our range of products.

We sell products for a variety of different procedures and conditions. So Endoform, the first product we launched is designed for use in outpatient wound centers in the early stages of healing diabetic and venous ulcers. Our Myriad product is designed to be used in the operating room for acute soft tissue reconstruction. So in surgical procedures, procedures like trauma, tumor resections and pressure injuries, a key procedure where there's been large volumetric loss of tissue.

Symphony is a product that we are in the early stages of commercializing that includes AROA ECM, but also hyaluronic acid. It's designed to be used with patients that have very severe and delayed healing and predominantly used in chronic complex wounds like diabetic ulcers and venous leg ulcers. And then the 2 products that we've licensed to TELA Bio, OviTex products. So these -- this is OviTex for use in hernia repair. There's a version of this that has a permanent synthetic polymer and a version that has absorbable synthetic polymer and then also OviTex PRS, which is signed for soft tissue reconstruction and predominantly used in breast reconstruction.

So in terms of the Q4 financial results, strong cash receipts from customers of $18 million, which really reflects both the step-up in Myriad sales but also very encouraging to see OviTex and OviTex PRS sales coming back online and beginning to realign with TELA's growth trajectory. So if you recall, the first half of the year was -- sales were very low to TELA as they managed some inventory levels and improve their inventory management. We've seen a step up in that in the second half of the year, and our sales began to come back into line with their sales.

Positive net cash flow from operations in this quarter of $300,000, that exceeded our expectations of breakeven for the quarter. Net cash outflows from investing activities of $700,000, and that reflects continued investment into additional manufacturing planted equipment. So there's a couple of things going on here. We're investing to improve our capacity so to make sure that our tissue processing capacity matches our fabrication capacity. We're also investing in this to improve the efficiency of manufacturing, which in the future should lead to improvements in margin over time. So benefits from a future capacity perspective, but also benefits from our ongoing margin improvement as well.

For the full quarter, we achieved a 71% reduction in quarterly cash burn to $1 million. So ended with a strong cash balance of $29.5 million. So still at a very solid position in terms of our balance sheet, and we are well positioned to fund our way through to breakeven being cash flow positive.

Just on the sales side. So we've continued to make good progress with Myriad sales over the last quarter. And we've increased the number of active accounts from 205 to 218 during the quarter. If you will recall, in terms of our strategy with Myriad, what we've seen over the last 3 years is, Myriad really providing this rapid volumetric fill of sub-tissue deficits. It's really notable in terms of the rate of that fill, but also the persistence of Myriad. And these 2 things really differentiate it from other products within the market. We've used Myriad in a wide range of different procedures.

And more recently, we've been focusing on these large volumetric soft tissue deficits, where surgeons need to quickly rebuild large volumes of tissue and particularly focused in the last half of the year on trauma procedures where often patients have been involved in vehicle accidents or other traumatic incidents where they've lost a lot of tissue and the surgeon needs to be able to rapidly rebuild that. So we've had a lot of success in trauma. And so we are realigning our sales team to put more focus on this area. So it's attractive because the results we're seeing is also attractive because we're seeing Myriad be used in combination with negative pressure wound therapy. And the combination of Myriad and negative pressure wound therapy looks like it gives us -- gives surgeons faster rates of healing than they'd see with negative pressure alone.

And so the preliminary data with this looks strong. So based on that, we will be producing more publications around this and setting ourselves up [ this year ] for a pilot study to look at the difference between Myriad and negative pressure versus Myriad and negative pressure alone in a pilot study, which will then flow into a randomized controlled trial. So we feel pretty bullish about the opportunity here. Certainly from procedure numbers, there's over 1 million procedures done with negative pressure wound therapy in the U.S. So we think that opens up a really large opportunity for the company.

In terms of TELA Bio, we continue to see strong growth in TELA Bio over the last year. So their sales were $58.5 million for the full year. So that's up 41% on the previous year. Also the guidance for this calendar year is $74 million to $76 million, which is 27% to 30% up on last year. So we're continuing to see strong growth there.

From Aroa perspective, we're also seeing that our shipments are picking up to TELA to realign with the sales trajectory. And that's reflected in our cash receipts from TELA Bio over the last year, which have increased by 20% compared to the first half of the year. The other notable achievement with TELA Bio is the launch of a new version of OviTex. This version is designed specifically for use in inguinal repair. So it's a new format, a new combination of AROA ECM with polymers in a different density designed to be used, so that it can be easily used with a trocar to introduce the graft into the body with robotic-assisted hernia repair or minimally invasive techniques.

So this is an extension to the range of products. We think this is important strategically. It means that TELA is offering is much wider, opens up an opportunity beyond ventral hernia and complex hernia and makes it easier for TELA to compete in those accounts where customers are looking for a much fuller and wider offering from companies. So very much an enabler for increasing sales with TELA into further accounts.

In terms of clinical evidence, made some very good progress in terms of studies that we're running. We've completed the enrollment of the first in-human study with a Enivo. So this is a study of 10 patients in unilateral breast -- sorry, mastectomy. And so that study is now complete, and we'll be in writing it up for publication. We've also now recruited 300 patients into the MASTRR registry. So this is the registry that we've been running over 10 sites over the last 2 years, and we'll now begin publishing from that registry, a series of publications over the next 12 months, looking at specific subgroups based on particular types of procedures, but then also consolidating that data we're looking right across these patients to look at healing complications -- sorry, healing rates and complication rates.

We have progressed with the Symphony RCT is going very well. We now have 90 patients enrolled in this trial and a further 30 patients to recruit. So we expect this to conclude midyear and with interim reporting towards the end of the calendar year. Notable publication over the last quarter is a publication of the use of both Myriad Matrix and Myriad Morcells in abdominal soft tissue defects. And so these are typically open abdomen procedures where there's been a loss of the abdominal wall over internal organs and the surgeons need to be able to reconstruct the abdominal wall. This is a serious procedures, very difficult to achieve closure with. And we've had great success and relatively limited number of cases of rebuilding that abdominal wall and healing these deficits. I think there's 2 things that are notable about this.

One is the rate of tissue repair, the fact that we were able to rebuild abdominal wall tissue. But also, again, what we're seeing here is the use of Myriad in combination with negative pressure wound therapy being very successful. So it sort of dovetails really nicely into what we're doing with Myriad in terms of pursuing the combination ensuring that, that increases the rate of healing. I think it also fits very well with the publication or a previous publication where we looked at Myriad and trauma procedures. I think there was 13 cases, had good outcomes with that as well in combination with negative pressure wound therapy.

So Neetha, I'm going to pause there and pass it back to you. Thank you.

[Neetha Alex-Kumar, executive]

Thanks, Brian. We will now move on to the Q&A session. [Operator Instructions] The first question I have is from lease. Elyse.

[Elyse Shapiro, analyst]

Elyse Shapiro from Canaccord. Just kind of framing the result in line with the guidance that you put out at the third quarter. Do you kind of see yourself falling in line with the range? And how do we view that kind of cash conversion for the -- that we got in the 4C?

[Brian Ward, executive]

Yes, we're releasing our full year results on the 21st of May. I mean, certainly, we don't have -- obviously haven't pulled that out for release yes, but it's broadly in line with where we thought we'd be.

[Elyse Shapiro, analyst]

Got it. Great. And then just looking at that inguinal hernia product that TELA has just released, what sort of uptake are we seeing this close post launch? And are we expecting that to have a material impact on near-term sales?

[Brian Ward, executive]

Yes. I think it's very early days. I mean we certainly had -- well, maybe I'll sort of step back. In terms of the development of this product, this product has been -- it's -- there's been a -- what we've been doing is -- what TELA has been doing has been modifying the existing OviTex products to create a profile like this that could be used in inguinal hernia surgery. So there's been quite a lot of preliminary work testing out this concept. And so surgeons have been using that for some time. And so what we've done with the development project essentially give them that project -- give then that product ready to go.

And so I think there's a group of surgeons that are already primed to use this product. There's also a wider group of surgeons that haven't been exposed to this product where we can see it being something that can be quite a quick add on. And then I think there's accounts whereby because TELA didn't have a wider offering that's not been able to gain traction within those accounts. So I think there's a number of opportunities here. And I think the delivery of that, I'd expect that to be impactful this year.

[Neetha Alex-Kumar, executive]

Thank you, Elyse. There was a recent question around when we'll be releasing full year results? And that will be on the 21st of May. There was a question around why we have not released unaudited results at this point?

[Brian Ward, executive]

Yes. Look, we -- obviously, we have the results going through the order process. It's really preparation and I'm talking together kind of a full release. And so our thought was rather than rush to get it out for this quarterly, we do a much more fulsome release of information on 21st of May. If we can provide a much more comprehensive picture of where we're at.

[Neetha Alex-Kumar, executive]

Thanks Brian. The next question I have is from Madeleine.

[Madeleine Williams, analyst]

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Brian and James, it's Madeleine from Wilsons. I just wondered whether or not you've had -- just you sort of mentioned the account growth for Myriad and your ability to sort of access accounts and sort of turn them into productive accounts. I mean if have you had any issues there and just maybe a little bit more color that you can provide?

[Brian Ward, executive]

Yes. I think it varies a little bit between accounts in terms of how quickly those accounts come online. I mean, I think once we have consignment stock and accounts or we stock in those accounts, it's really about working with individual stages and getting them up to speed. So I don't think we've -- since we've got started, I think we've seen that the speed at which we're able to do that increase and the efficiency at which we do that increase. So I don't think there's any kind of notable changes or impediments that we're seeing in terms of that rate of uptake. Probably [ the converse ] really, we're seeing that improve over time.

[Madeleine Williams, analyst]

Okay. Great. And my other question was just in regards to, I guess, the uptake in the Myriad Matrix and Morcells product, I mean, are you still sort of seeing surgeons favoring Morcells for sort of those soft issue large volume defects?

[Brian Ward, executive]

Yes. I mean our sales are certainly skewed towards Myriad Morcells. So 60% of the sales are at the Morcells format. That does depend a little bit on the use case that we're seeing Morcells being used earlier than procedures and particularly where those wounds have very uneven surfaces. And sometimes, what we're seeing with Morcells is that a single application is actually leading to a good outcome. And so there may not be follow-on use with the Matrix format. So I think that's part of the reason. There are cases where we're seeing 2 applications. The product can initially with Morcells and then follow on use of Matrix.

[Neetha Alex-Kumar, executive]

Thank you, Madeleine. I'll now move to a written question. There's a question around how the move towards focusing Myriad in the trauma space is panning out?

[Brian Ward, executive]

Yes. I think the way we're thinking about this is it's a move over a period of time. And so we've built a pipeline of opportunities with our surgeons based on a wide range of procedures. And some of those things are in other specialties. So they're in colorectal surgery, there might be in plastic surgery. There could be a range of different specialties. So we don't want to walk away from those opportunities. But as we -- as the company is evolving, what we are seeing is that the trauma procedures, there's certainly a very good use case for Myriad. So as we're bringing on new sales people, we're putting those new sales people, getting them to focus on trauma early.

And for existing salespeople, as they look at new prospects, we're getting them to focus on trauma certainly, as an organization, as we're looking to generate clinical evidence, we're focusing much more on trauma with clinical evidence. So it's a slow shift, and I think that's going to -- shift that's going to take 12 to 18 months. But what we do see with trauma is a really differentiated outcome with Myriad, but also large defects and high case value and where we can really demonstrate value to both the surgeons and the hospital. So that's what's sort of pulling us towards that.

[Neetha Alex-Kumar, executive]

Thank you, Brian. And there's also a written question received. Asking if you can please comment on current production capacity and if there are any material potential bottlenecks you see coming up?

[Brian Ward, executive]

Yes. Look, I think we've built a significant amount of production capacity over the last 2 years. So our downstream manufacturing, so that's the process beyond isolating and purifying the tissue. We have only capacity to do, I'd say, in excess of $200 million in the existing facility. And that depends a little bit on product mix. It may be higher than that. What we've been working on over the last 12 months is to match that capacity with our tissue processing capacity.

And so we're a little bit behind where we thought we'd be with implementing that new processing capacity. So some of the CapEx that we thought would fall into this year gets pushed out to next year. But we see that we'll be able to match the $200 million with the new facility that we're putting into place. So if you looked at our sales growth over the next couple of years, at least, probably beyond that, we have plenty of capacity in place to meet the requirements to probably go way beyond the requirements that we think [indiscernible].

[Neetha Alex-Kumar, executive]

And then the final question is around FY '25 cash flow expectations.

[Brian Ward, executive]

Yes. So, do you want to talk to that?

[James Agnew, executive]

Yes, absolutely. So look, I think we've been very clear in a lot of announcements over the last sort of 6 months that the company is driving to positive cash flow and profitability or higher profitability over the next 12 months. I mean I will sort of mention though that, yes, it is our goal to be cash flow positive on the full year FY '25. There was seasonality, and there was some lumpiness in our cash flows. And typically, the first quarter being typically softer or a bit of a dip in cash flows in the first quarter, but we should see it come back to sort of positive cash flows in the last 3 quarters, specifically in the last half of FY '25.

[Brian Ward, executive]

Yes. I mean maybe I want to underscore that as well. I mean we are very conscious of the market conditions and being profitable and transitioning to being cash flow positive. So we are focused on top line growth, but also focused on expense management to make sure that we make that transition. So that is a very high priority for us over the next 12 months.

[Neetha Alex-Kumar, executive]

Thank you, Brian. We are coming up to the end of the time. So I'll hand it back to you for any closing remarks.

[Brian Ward, executive]

Thanks, Neetha. Thank you for joining. I would encourage you to join the full year results on 21st of May. We have a webinar -- a similar webinar in the morning. We'll certainly provide a much more comprehensive update on, obviously, Aroa direct sales and also TELA and we'll be revising our guidance for the upcoming year on the same stage. So certainly a much more comprehensive update than today. So thank you for joining and look forward to talk to you then.