Aroa Biosurgery Limited (ARX) Earnings Call Transcript & Summary

Welcome to Aroa's full year results for FY '23. From the company today, we have the Founder and CEO, Brian Ward; and the company's CFO, James Agnew. Before I hand it over to Brian and James to go through the presentation up on the screen related to the ASX, I'd just remind you that you can submit questions through the Q&A panel at the bottom of this screen. We'll get to those post the end of the presentation. Brian and James, I'll now hand it over to you to go through the presentation. Thanks.

Thank you, Simon, and welcome to everybody to Aroa, and thank you for joining. I want to just give a quick intro to the company for those people that are less familiar with the company, and then talk about our final year results for FY '23 and then cover our guidance for FY '24. So Aroa is a well-established high-growth, soft-tissue regeneration company. We have 4 families of products that we're selling probably in the U.S. but all based on our ECN platform. So this is a soft-tissue regeneration platform. The total addressable market for the products that are selling in the U.S. is in excess of $3 billion. So large potential opportunity in front of the company. We sell through 2 channels: our own direct sales team in the U.S. and also through our commercial partner for hernia and breast, TELA Bio. But the technology is very well established. We treated over 6 million patients with this technology. A large body of scientists sits behind us overfilling peer-reviewed publications. We have multiple approvals in the U.S. and then outside of the U.S., regulatory approvals in over 50 countries and distributors in 15 countries now. We've recently developed -- focusing on developing a new technology platform, our Enivo platform. And we think this is a very large opportunity all this technology that complements our existing business. In terms of the people, we're 270 people, 200 of those based in New Zealand, manufacturing, development and our corporate part of our business based in Auckland. And in the U.S., we have a sales team of 70 based across the United States. We do as had a very specific layer of tissue from the full stomach to sheet and purify that in a way that can be implanted into people and not causing immunological problems. This material attract cells [indiscernible] work for soft-tissue regeneration. We've used this technology as a building block for a wide range of soft-tissue repair devices. So devices for chronic wounds, so diabetic ulcers and veinous ulcers. Devices for soft tissue reconstruction. That's our Myriad franchise. And then devices for breast reconstruction and hernia reconstruction, that's our OviTex franchise. So across all of these products, we've seen very similar results in terms of record tissue formation, a high tolerance for this material and contaminated fields. No negative inflammatory response for this material. And the ability to use this technology to reduce the complexity of a number of surgeries. So that runs across all of our products. Each product is purposely designed for each of the different applications that we use the products for. In terms of the opportunity in front of us, we've recently updated our TAM. So we now see a larger opportunity for our Myriad franchise. And so that -- the TAM for that has increased recently. We also -- so we have Aroa cells, the Symphony Endoform and Myriad products, that's a TAM of $1.8 billion. The opportunity for the OviTex products is in excess of $1.3 billion in the U.S. So just to sort of cover off the TAMs of the various products. So you can see that with the addition of Symphony in FY '23, that's taken the potential TAM for our existing products over $3 billion. The Myriad market, we now believe to be in excess of $700 million, and the OviTex products, obviously, in excess of $1 billion. So altogether, it's a TAM in excess of $3 billion. We have a tiny, tiny proportion of this market at the moment. So we think there's a very large growth opportunity in front of the company over the short and medium term. The Enivo product is a new product platform that we've been developing. This product is though the management of debt space. So this is where cavity is formed during the surgery at a surgical site. This product is comprised of an implant that's put into the surgical site, which has been exerted to a negative pressure pump system outside the body. And when the vacuum is applied to the system, it draws the tissue together and holds the tissue in place to help it heal and prevent that cavity from being there. We think there's a very large opportunity for this product in the procedures that we are performing at the moment with our products, but also in some other procedures as well. So that product is an opportunity for a stand-alone product. There's an opportunity for that client in combination with our existing products. And we think this is a potential accelerator for the business as well in terms of engagement with surgeons. So we think this is a really important franchise for the business in the future. So in terms of key results, we announced some of these results a month or so ago. So from a revenue perspective, our product revenue was $60.5 million against guidance of $60 million to $62 million. Total revenue was $63.4 million, and that includes some licensing fees and some project fees. Gross margin came into -- came in at 84%, which is in line with guidance and that's up from 77% last year. So we've made some very good gains there, both from productivity improvements but also a more favorable product mix due to high-margin products like Myriad selling. And from a normalized EBITDA perspective, our guidance was breakeven and we've come in at positive $1.5 billion. So it was certainly turned to the corner and starting to demonstrate that we can -- the business can be profitable. We ended the year with a cash balance of $45 million. From a product sales perspective, our total product sales has grown significantly this year on the Aroa side. So we've seen a 55% increase in sales year-on-year. It increases across the board. So Endoform sales were up 12%, predominantly driven by our international business. Myriad sales up 268% on last year. So really pleased with how Myriad has performed and TELA Bio sales up 41% year-on-year. So we're seeing strong growth across the whole business, which we're really thrilled with. If you look at the growth rate for all of the Aroa products, so it's the TELA products and the Aroa products that we're selling directly, we're seeing strong year-on-year growth. So the aggregate is continuing to track very positively. We're very optimistic about the growth over the medium term. From a sales perspective, we have been investing in our commercial infrastructure in the U.S. and adding people in the U.S., so you can see we've added Myriad salespeople over the last 12 months, a 28% increase in our sales team. And consequently, through adding people, but also through the maturity of our sales team, we've seen a significant uptick in the number of accounts where we now have active sales. That's up 131% year-on-year. We now have over 160 active Mary accounts. From a manufacturing perspective, we've made some great gains from a margin perspective, so an 8% improvement in gross margin. So that's 77% up to 84%. We've also had a significant investment in our manufacturing capacity to make sure that we're prepared for future demand. So we now had almost 300% increase, and the potential for us to meet growing demand. So in terms of the -- some of you that we now have in place, and we're well placed to meet the demand over the next 2 to 3 years. We've had an uplift in CapEx in terms of building out our infrastructure, but relatively modest investment given the increase in capacity that we've been able to bring online. In terms of use of funds, we -- our cash balance is around about $45 million. The 2 areas that we really invested in over the last 12 months have been sales and marketing expenses. So that's really focused on expanding the team. And our R&D spend has increased as well. So the R&D spend, a lot of this has been going into a Enivo. We sort of see this beginning to top out. So a lot of the upfront work has been done on Enivo, and that will transition more to work that's about maintaining the product. So there has been an uplift in Enivo that accounts for a large portion of our existing R&D. Outside of that, we've capitalized a small amount of R&D. That capitalization is for line extensions or process improvements where we have a high certainty that, that development expenditure will lead to a future economic return. We also have a relatively modest investment in line extensions for existing or ECM technology. So you can see in the gray box here in the chart on the right. We've got a relatively modest investment in continuing to roll out new products based on Aroa ECM. So just want to talk a little bit about how we sort of think about Enivo and how that fits into our future competitive advantage. I think the first sort of point is that we think that this very complementary to our existing business and can add an opportunity in excess of $1 billion. So very large opportunity in front of us. We've chosen to make this investment because we think it's a great opportunity on its own, but also it complements our existing business and really differentiates us substantially from existing competitors. So if you look at the chart, the gray bars show our normalized EBITDA between FY '20 and FY '23. You can see that's obviously gone negative in FY '21, FY '22, and we've now returned to being positive. The reason that, that's gone negative is that we've chosen to invest in the Enivo project. You can see that slightly pinkish bars, quite a significant investment between FY '20 and FY '23 in the Enivo project. I think the important point here is that that's an investment that we've chosen to make because we think it's going to lead to a very strong competitive position over the medium term. If we were to back out that expenditure, if you look at the orange bars, Aroa would already be extremely profitable at this stage. So we've chosen to sacrifice short-term profitability for longer-term competitive advantage and profit. And we think there's an enormous opportunity there, and we think that's a very good investment for us in the future. If you look at the gray bars, despite that significant investment in Enivo, we are now becoming profitable. We -- I'll talk about guidance shortly. We will be modestly profitable the coming year, but then that should transition to being highly profitable in the future. I think the other point to make here is that the Enivo product also leverages our existing sales force. And we believe by having another product within the portfolio that has the potential to significantly improve sales productivity as well. Other sort highlights I'd like to point out in terms of the last year include the Myriad sales. So Myriad has been the major driver of Aroa direct sales force performance. They have had a great result with Myriad Morcells and that's growing very strongly. And now accounts by over 60% of our Myriad sales. We've also recently launched Myriad Morcell's spine version in May. And we think this has the potential to expand the opportunity for the Myriad franchise. So we found that the Myriad Morcells has really carved out a unique niche within this mark and has been used as a conformable graft a little bit differently to how Matrix products and partner products are currently being used. And so the fault with developing Myriad Morcells spine was really to compete more directly against the existing fine products that exist on the market at the moment. So we see variables as being provincial opportunity for us, not certainly taking away from the unique position that Myriad Morcells has carved out. Symphony is now fully launched with our sales team, and we're launching that into what we see as a changing outpatient reimbursement landscape. And there's a whole mix of factors that are changing in that environment where potential reimbursement changes, potential changes in the regulatory framework and the use of products and particularly around the amniotic products. Changes in how payments may be made, and just sort of a landscape where we believe we can get going with Symphony and a large opportunity will open up for us over the next 2 to 3 years. We've had excellent success with GPOs over the last couple of years, and that's really been capped off by the recent Premier contract. So we now have contracts with Premier, Vizient, HealthTrust and Acension. And this means that if you look at all of the hospitals across the U.S., we have coverage with more than 95% of those hospitals now. So GPO access for us in the hospitals is now open, and that's not really a constraint for us in terms of gaining access to some to hospitals. Our Myriad registry has gone very well. So we now have 156 patients recruited into this. That's tracking ahead of time. That's been up for a year now. We have all sites in place, and we're targeted to get 10 sites. So I think we're probably tracking a year ahead of where we thought we'd be with that registry. And we'll see some studies beginning to come out of that registry over the next 12 months. For Enivo, we've been delighted to receive a 510(k) clearance for the pump and the catheter. These are 2 complex components of the system that we've now had cleared. So we've derisked this products significantly. There's new component of the system, which is the ECM envelope, we're currently in discussions with the FDA regarding the regulatory pathway for that. We see some options for that, potentially a nearer-term option or a slightly longer option. I think we really won't be really clear about that with the feedback from the FDA until probably the end of the second quarter of this year. TELA Bio continues to perform very well. We've seen the calendar year '22 result of $41 million, that would be up 41% on the previous year, and we've been very encouraged by the guidance for the coming year, which is between $60 million and $65 million, which is up 45% and 57% growing. So strong growth from TELA Bio. Also really good to see that they have completed a capital raising which sets them up very well to continue to expand the sales team and trade through to potential profitability. So we feel like the TELA Bio side of the business, the strong revenue growth of financing puts them in a really strong position to continue to perform. So just going to guidance now. Our product revenue guidance for FY '24 is $72 million to $75 million. On a constant currency basis, this represents 25% to 30%. Now we think total revenue will be $73 million to $76 million. So this is guidance that we feel comfortable, we're very comfortable putting out at this stage in the year. And obviously, as things progress through the year, we'll keep an eye on this and provide updates as necessary. Gross margin, we see that improving. We are facing some foreign currency -- we're allowing for some foreign currency headwinds in our budgeting. So we will see productivity improvements. We'll see improvements in product mix, but we are budgeting up -- we are basing our budget on a stronger currency. So I think 85% is very doable goal at this stage of the year. And so we'll finish the year positive again from an EBITDA perspective. So similar sort of result to this year. And then we think the following year, we transition to being highly profitable year. So just want to sort of step through how we think about revenue growth and profitability. So if we look at the top line here, product revenue, so FY '22 we had $43.8 million, we've gone to $60.4 million for FY '23. That represents a 38% increase in revenue. If we're on a constant currency of $0.62, then we'd go to $76 million to $79 million in the upcoming year. So that would represent a year-on-year growth of 25% to 30%. If you look at gross -- product gross margin, we've gone from 79%, 84%, so 5% increase, we're budgeting 85% to 86%, so that's 1% to 2% increase. Now if you look at the normalized EBITDA. So that's backing out our extraordinary sort of items, so licensing these project fees. We have normalized EBITDA from $1.1 million, $1.1 million again in FY '23. And if it was -- if we're using a constant currency, that will be going to $3 million to $4 million. So we are budgeting our guidance on $0.65. So what that means is that product revenue is $72 million or $75 million, gross margin is 85% and normalized EBITDA is at $1 million to $2 million. If we sort of step out beyond next year and think about our sort of assumptions for growth, we continue to think that product revenue will grow strongly. So we sort of think about 25% year-on-year growth. And we think margins have the potential to increase. And so we can see margins moving into the high 80s. We see sales force efficiency improving. And so our percentage of expenses of sales relative to revenue decreasing from 75% to 50%. And over time, we see our normalized EBITDA in the raising beyond 20%. So if we sort of think about our sort of financial model as a whole, we see a transition coming reasonably quickly to being highly profitable and delivering strong positive EBITDA results. So if you look sort of FY '24, what are the catalysts and milestones? I think really, it's continuing to drive sales, both on the Aroa side and on the TELA Bio side. I think the changes within the reimbursement environment, some of the changes that are happening in some of our competitors, do offer opportunities for considerable growth. And there's those things -- some of those changes are not particularly factored into the guidance at this stage. Symphony product launch, that certainly there's potential for that to step up. But we'll see how the year pans out. And Enivo, we're -- we have several sort of parallel options running in terms of the clearance of Enivo. And I think we're going to be advancing those over the next 2 quarters. And I think by the end of that time, we'll have a much clearer view on whether the Enivo clearance will come in short term or may be more in the medium term. So I think that's -- at this stage, that's -- that's still to be determined. So Simon, I'm going to pause there and hand it back over to you. Thank you.

A big thanks, Brian. First question is from Shane Storey of Wilsons. On the guidance. Can you give us an estimate of how you expect to OviTex plus PRS sales to come up -- to phase between the first and second halves. Would 46% be a reasonable prediction?

Yes. I mean I think for us, yes, it's certainly going to be stronger in the second half. I think 46% is probably not a bad place to start. Yes. Anything to add James?

Yes, no, that's about right.

Yes. Yes.

Next question from Elyse Shapiro of Canaccord. Can you talk to us about anticipated sales force growth in FY '24?

Yes. I think there's a couple of things. I mean, I think we are going to add some more salespeople in the coming year. It's just probably in the 5% to 10% range. I think to be a little bit cautious in the first half of the year and then let's see how things look at the half year. One of the things we're really focused on at the moment is improving sales force productivity. The way that we think about that, and we are seeing this happen is putting new people into territories the same before earlier. Once we feel like we can we reduce that time to breakeven, then we will scale things up considerably. But we do want to be sure that we are getting that productivity coming quicker and we've got around our ability to give a faster return on investment there. So we're seeing some good gains there, and I think we really sort of build on that a little bit over the next 6 months.

Can you comment on the recent Integra product recall and what opportunities to potentially present to Aroa? When would you expect this to be able to demonstrate any tangible benefit this may deliver, assuming you haven't seen anything yet?

Yes. Look, I mean, this has been a big thing in the last week or so. And so Integra has recalled 2 pipes that are reasonable competitors are with us in both hernia and breast but also in the complex wound market. And so we're seeing inquiries from customers or potential customers at the moment. So it could have quite a material effect on the next 12 months. I think it's very early for us to be able to call that. I think there is -- I think there's nothing about that, that adoption would be pretty accelerated as that comes through because the products are being recalled now and it's not clear that there's for those products to be back on the market in quickly. So I think that's certainly a factor at the moment. It's something that's not factored into guidance at the moment.