Aroa Biosurgery Limited (ARX) Earnings Call Transcript & Summary

Good morning. Welcome to Aroa Biosurgery's investor webinar and Q&A following the company's half yearly results announced this morning. [Operator Instructions] Please note that today's 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.

Thank you, Neetha, and thank you, everybody, for joining the call this morning. So we're going to provide an update on the half year results, and talk a little bit about how our strategy is evolving with the business as well. So I'm just going to jump straight into the presentation. Just briefly for those that aren't familiar with Aroa, we're a well-established higher growth [indiscernible]. We've 4 product families that we sell in the U.S. predominantly to hospitals. All of our products are based on AROA ECM platform and the total addressable market for our existing products in the U.S. as in excess of $3 billion. We sell through 2 commercial channels, so through our own direct U.S. sales team and through our commercial partner, TELA Bio. The technology and products are well established. We have over 6 million products applied to treating patients, predominantly in the U.S. . Large body of scientific and clinical evidence sits behind the product. So more than 71 peer-reviewed publications, regulatory approvals in 50 countries. And we're also -- although all of our products are based on our AROA ECM platform, we've developed a new platform, it's our Enivo tissue apposition platform. This is progressing through approval, and I'll talk a little bit about that in the presentation. And in terms of scale of [indiscernible] going on sort of 280 sort of employees now. So we're continuing to grow -- continuing to add people predominantly now in the U.S. as we build out our commercial organization. So just briefly in terms of the product. So all of our products are based on the AROA ECM platform. We essentially isolate a very specific layer of tissue from the forestomach of sheep, we purify that in a way that removes all of the components that the human body would react against but conserves the framework within that tissue and important signaling molecules that attract cells into that material and encourage those cells to build new tissue. We have 4 families of -- 4 families of products, so Endoforms product we started with. That's for use in diabetic and venous ulcers. Myriad, our soft tissue reconstruction product, and this is where most of our commercial focus is in the U.S. So this is for soft tissue reconstruction. More recently, we'd launched our Symphony product, this is predominantly for diabetic and venous ulcers. And then the 2 partnered products that we have to TELA Bio, OviTex PRS for soft tissue reconstruction, predominantly in breast reconstruction and for hernia repair., And those -- the OviTex products are a combination of both the AROA ECM material and synthetic fibers to reinforce [indiscernible]. So if you look across all these products, what we typically see is 3 things that are very consistent with products built on this platform. So we get rapid formation of well vascularized functional tissue. And that's noticeably different from what you see with other materials that are used for these types of applications. The material is very well tolerated by patients and able to be used in contaminated fields and it's resistant -- seems to be relatively resistant to infection. So again, quite different from a number of these biomaterials which can be prone to infection and also break down quite quickly when they are infected. And the third thing is we don't see negative inflammatory responses when our products are used in patients. So there are 3 differentiating characteristics when you look at these products compared to alternatives of competing products. The total addressable market for our products is in excess of $3 billion in the U.S., and we've broken it out here, both on the TELA Bio side and on the Aroa side. So Aroa is predominantly focused on complex wounds, soft issue reconstruction in areas like trauma, tumor removal, general surgery and some of the inflammatory skin conditions. TELA Bio being more focused on hernia repair, abdominal wall repair and breast surgery. I think what's really important to note here is it's a very large TAM and we're very -- our penetration into this market is very low at this stage. So we're very early in the adoption of these products. There's a very large opportunity in front of the company in terms of our ability to both grab share from existing products, but also we believe there's a strong opportunity to increase the size of this market as well. So the main product that we're focused on with our direct sales team is our Myriad product, this acute soft tissue repair. There's 2 versions of this product. There's the Myriad Matrix version, which is a sheet format, and this is produced in different thicknesses based on different layers. And those different thicknesses are used depending on the type of reconstruction and the rate of tissue regeneration that's required in those different applications. Myriad Morcells is a morselized version of Myriad, so a coarse powder or a fine powder and typically used in uneven wounds, where you couldn't apply a sheet type product. So this is really driving our sales. It's almost our 70% of the sales that we sell directly through Aroa. So I want to talk briefly about our strategy with Myriad. So Myriad has been on the year now -- sorry, on the market now for 3 years. What we've seen as we've used this product over the last 3 years is this rapid volumetric fill to many other products on the market is that it tends to be more persistent. So we don't see the product needing to be applied as frequently as other products. So it tends to hold up a lot better in some of these wounds where a lot of these products break down very rapidly and aren't able to persistent enough to be useful. So it's a very persistent on product. And we're also -- it's really -- we've gone to market with a disruptive strategy around pricing as well. So typically, 20% to 30% less expensive than the incumbent. When we started, we were pretty much focused on lower limb procedures. There's a large number of these procedures. They're probably the second largest category, if you look at the TAM with its soft tissue reconstruction. As we've gained more experience with Myriad, we're focused on other areas, so areas like general surgery, colorectal surgery, trauma. And what we've learned is that Myriad is particularly well suited to use in trauma cases. The fact that it's -- we get this rapid volumetric fill, the fact that it's persistent, doesn't need to be applied a number of times and that it's affordable, make a big difference and make it really attractive for the trauma market. So we're aligning a lot of our activity now around focusing on that trauma market. We believe there's a very large opportunity there. Interestingly, the case value in that market is very large as well. So -- whereas if you look at lower limb procedures, the case value may be less than $1,000. If you look at trauma, that can be tens of thousands of dollars in the larger case. So it's a very different opportunity to what we see in some of these other procedures. The other thing we've learned with Myriad is that in Houston Trauma we tend to see it being used in combination with negative pressure wound therapy. And so negative pressure wound therapy is really the standard of care for treating many of these difficult wounds. And that's across both acute and chronic wounds. What we see when we use Myriad in combination with negative pressure wound therapy is that we seem to be able to improve the rate of healing quite significantly. We also create a better experience for the patient. So what's typically seen with negative pressure wound therapy is that it can be painful for those dressings to be changed, and you can get tissue ingrowth into that foam. And so by using Myriad in combination with negative pressure wound therapy, we're able to reduce the number of reapplications. So you go from applying the product every 3 days to applying it every 7 days, but also help prevent that tissue ingrowth and therefore, create a better experience for the patient. And then finally, by changing the rate of dressing changes, that's hugely helpful to hospitals. It saves their manpower. It saves them nursing expertise. And it also leads to cost savings for them in terms of the treatment cost of these patients. So we think that it's a really nice combination here where Myriad in combination with negative pressure wound therapy can really add to what people are able to do and the rates are healing that they're able to achieve, but also the economics of healing for hospitals. And so on the back of that, we are now setting ourselves up to develop some very solid clinical evidence about the combination of Myriad and negative pressure wound therapy, We're designing a study to look at healing rates, health economics and the patient experience for these products in combination. That will be an RCT, and we expect to kick that off at the end of this year -- end of this financial year, potentially early next financial year. What's also great about going down this pathway is that if we can really make a difference in trauma with this combination, we think that's going to spill over into other areas of wound care. So other acute areas of wound care, but also in chronic wounds. And we think that opens up an enormous opportunity for Myriad where we can really grow this market. So we're really excited about this. And we really have a lot more confidence and a lot more alignment around our strategy for commercializing Myriad. So Symphony. This is a CTP product for use predominantly in diabetics ulcers and venous ulcers either in the outpatient department or in the physician's office. It's a combination of AROA ECM material and hyaluronic acid used typically -- applied typically weekly to 2 weekly over a treatment period of 12 weeks. And so this is area of market that's quite substantive. So the market here is in excess of $1 billion. Here we think Symphony brings value to this market through fewer applications, that rapid volumetric fill and also making these products more affordable to patients. If you look at this market, there's essentially these 2 settings with 2 different reimbursement environment. So physician's office, where physicians are paid on the basis of the ASP of the product, a very kind of tricky market at the moment in terms of some of the sort of financial incentives around that market. And then the other market is a hospital outpatient department. And this is payment that's much more aligned to what you typically see in hospitals where there's a lump sum payment for these procedures. So our strategy has been to focus on the hospital outpatient department to start with, commercialize there, and then there are changes that are being muted at the moment to make to the physician's office, but none of those changes have come through yet. So we're pausing from commercializing in that physician office environment until we're more certain of what those changes look like. The interesting thing with this market is, while it's a $1 billion market, only 7% of patients with these hard-to-heal wounds actually receive CTP products. So it's a relatively limited number of patients. We think there's an opportunity to grow that market if these products are more affordable and if the incentives are aligned properly to encourage the best products to be used with the best efficacy and the best health economics. And so we think Symphony can provide that. And we're focused on delivering that over the next few years. So in terms of our progress with Symphony, we're early in the commercialization of this product. Most of our focus remains on Myriad. But we are beginning to accumulate great clinical evidence, and we are ramping up sales of Symphony. So OviTex, this is a product sold through TELA Bio. So 2 versions, the hernia version and the breast reconstruction version. In terms of market, this is data from TELA. I won't talk through this in detail. Their estimate is that it's in excess of $1.5 billion. In the plastic recon market for breast, it's about $400 million. It's a large opportunity on the TELA side that predominantly started in ventral hernia and now beginning to make some really good traction in both robotic surgery and also some of the inguinal hernias as well. I just want to talk briefly about clinical research. So the Myriad Registry has been hugely helpful to us in terms of understanding where we can be successful with Myriad. So we've done a wide range of cases. It's helped to drive us down those line of pursuing trauma. And we have -- we've looked at a whole range of other things within that registry as well. And there's a whole -- there's some publications coming through over the next 12 to 18 months from the registry. We now have, I guess, 4 or 5 trauma centers set up within the registry as well. So they're really going to help us drive more data related to Myriad's use in trauma. As I mentioned previously, we are setting ourselves up for a pivotal study and the pivotal study with Myriad will be Myriad in combination with negative pressure wound therapy over exposed structures. So what I'm talking about here is the use of Myriad over tendon, bone or exposed hardware. And this is typically injuries that are very difficult to heal due to poor blood supply. And so we think Myriad can perform exceptionally well in these indications. We now have -- the other thing about the Myriad Registry is we now have 225 patients recruited into that registry. 9 of the 10 sites up and going. So we've made very good progress recruiting into that. Symphony made good progress here as well. So we're now 45 patients of 120 that we're recruiting into this. We have 8 of the sites operational, and we need 2 more sites to get up and operational. We'll have some interim reporting from that RCT next financial year, and then that will be completed the following financial year. We're also looking at setting up a registry for Symphony as well in the same way that we did with Myriad. A little update on Enivo. So we've now treated 5 patients with Enivo. These are patients that have had mastectomy. And so the Enivo device has been implanted at the site of mastectomy and we've had very good results. And so we have had no seroma formation in those patients after the treatment period. So really thrilled with how that's going. We're doing 10 patients in total, and that will then set us up for a larger study in the future. So really, really delighted with how that's progressing. So just to sort of update on how sales tracking. So this is total AROA ECM sales, so this is TELA Bio plus Aroa direct sales. And so we're expecting 38% growth year-on-year this year. So strong growth coming from both TELA Bio but also from Aroa as well. I want to talk a little bit about TELA Bio sales and how that affects Aroa. So what we have here is a chart looking at sales over the last 5 years and the dark gray line is the trajectory of TELA Bio cells. So you can see TELA's growth is tracking very well. What we have seen from an inventory perspective, particularly in the last year, is a real focus by TELA Bio in terms of managing the level of inventory relative to the level of sales. And so we can see -- if you look at the gray dotted line, we can see that TELA Bio's inventory as a percentage of revenue that's tracking down. And so this is the normal improvement that you expect to see in a business as it matures. So we are seeing that TELA is managing the inventory levels down. And as a consequence of that, that is meant that this year's sales for TELA Bio have been sort of softer when you compare them to last year. We see this as a temporary adjustment, a transition, really the key indicator of success here is how TELA Bio sales are going. So we're still really pleased with how TELA Bio sales are going, but that has meant for this year for Aroa, we're not seeing the impact of that continued growth over -- certainly over the first 6 months of this year. We'll see a little bit of that in the second 6 months as well. In terms of our focus with the Aroa sales organization, we're really changing gears here a little bit in terms of what we're doing. So I think in the first 2 years when we commercialized Myriad, it was very much about gaining access into hospitals being opportunistic getting that broad GPO coverage and getting stock into hospitals. We now have lots of access. And so we're on 95% -- well we're on 5 or 6 GPOs in the U.S., and we have coverage for about 95% of the hospitals in the U.S. So our access is really good. Our number of accounts is really strong as well. And so we're really changing our focus in terms of focusing very much on how we can demonstrate the value of our product and building up that value proposition and how we can grow and how we can improve our sales productivity within those accounts. And so that's about focusing on growth within accounts, focusing on more surgeons using our product within accountants and doing more procedures within our accounts. We're also looking closely at our sales team in terms of optimizing our composite -- the composition of the sales team, building the supporting infrastructure that they need to succeed, and then opportunities for portfolio expansion, simple line extensions that will make them more productive in their jobs. So we're in a sort of a different phase now. I think we have much more certainty about the success of the product, the value -- success of the products, the values of the product. And we're really turning up that sales organization, so that as we scale it, we can be more successful. In terms of Enivo, we have 2 components cleared from the FDA. So that's the pump and the catheter. We've had a fantastic preclinical study published showing the difference between standard of care and using the Enivo product. So a significant difference in terms of the volume of seroma compared to using a standard of care device and we're really encouraged by the 5 patients in the pilot study. So I think there's an enormous opportunity for this product. We're now seeking clearance from the FDA for the implant and that's the ECM implant. We've had feedback from the FDA on our 510(k) submission for that, and we're working through questions with them. We expect to respond to them in the next week or so. And depending on how that review goes we may get some feedback from them by the end of December, if not December, then certainly, we'd hope to get something back by the end of January. So there is an update coming on Enivo. We had a whole bunch of questions that we've had to ask and I think answer. And I think we'll be much clearer about that certainly by the end of January. So I presented this slide a number of times before. And I think the key point, what we're looking at here is normalized EBIT and then Enivo expenses in the pink bar and then normalized EBITDA excluding the expenses for Enivo in the orange bar. The key point here is that if you look at the Aroa business in the absence of the investment in Enivo, we're highly profitable already. Now we are at a total company level, making that transition to being profitable, and we'll talk about that shortly. But I think the key point is that we've chosen to invest in Enivo, delayed profitability because we think [indiscernible] in the future and also can potentially help us increase our sales productivity with our team in the future. Just want to talk about guidance. So our guidance remains the same. So $72 million to $75 million revenue, 85% margin, $1 million to $2 million normalized EBITDA. We have made a change in that first half of the year, we were basing on Aroa $0.65 exchange rate, we're now basing that on $0.62 exchange rate. And total revenue for the full year is expected to be $73 million to $76 million. Just want to talk about the half year result and the split between the 2 halves. So we signaled this at the beginning of the year. We -- based on our demand from TELA, we knew that the first half of the year was going to be significantly softer than the second half. And you'll see that in the left side there, where our H1 actuals, product revenue of $31 million, gross margin of 84% and normalized EBITDA of negative $3 million. I think if you look forward to the second half of the year, we're forecasting revenue of $41 million to $44 million, an improvement in gross margin of 86% -- to 86%, and a normalized EBITDA of $4 million to $5 million. So quite a change between those 2 halves. And we knew that was going to be the case, and we're certainly seeing that in our forecast for the second half of the year. And so then if you sort of look at how does that fit with guidance. So that's 72% to 75%, 85% gross margin and then $1 million to $2 million in normalized EBITDA. We see Myriad continuing to build momentum. We're certainly seeing good improvement in sales rep level, sales reps progressing through those different levels of productivity based on the timing of the job and different cohorts. We're seeing this change with TELA Bio in terms of managing the stock levels down. We see that as being a realignment that will sort of come more into alignment towards the end of this year. And then I think the really notable thing here for that -- particularly for the second half, there's a real step-up in that normalized EBITDA. So just in terms of the financial outlook beyond this year, we still remain confident in our ability to build a high-growth profitable business. So looking out 2, 3 years from now, we think that there's a strong base on which we can build a business where we have a compound annual growth rate of at least 25%, product gross margins of around the high 80s, 88%, and then normalized EBITDA margins of 20-plus percent. So just in terms of catalysts, I mean this remain the same. So it's that improving Aroa sales momentum, continued sales momentum from TELA Bio, potentially an Enivo clearance. I mean then any changes that may come through in terms of physician office, CTP reimbursement would also be a significant catalyst. So Neetha, I'm going to hand it back to you for Q&A.

[Operator Instructions] Now we'll start with some live questions. So the first question I have is from Sebastian Clemens at Jarden.

Brian, James, just for that second half revenue guidance of $41 million to $44 million, just given we're 2 months into Q3. Just wondering how you're seeing that currently tracking? And if you can give us any indication of what that skew might be in Q3 versus Q4.

Well, you're breaking up there, Seb, we sort of...

Can you hear me?

I missed the last part of the question.

Okay. I was just going to say just given the second half skew of $41 million to $44 million in the second half and we're 2 months into Q3, just wondering how you're seeing that currently track at the moment. Just -- and what that breakup might be between Q3 and Q4, your revenue guidance?

Yes. Look, I mean, we have a pretty good read on the sort of TELA Bio from a demand plan aspect over the next 4 more -- remaining 4 months. So the variability in the TELA number is really their own sales performance and obviously, the revenue share top-up component. So I mean, we're definitely seeing the TELA Bio number, I guess there's not big step-ups from quarter-to-quarter in terms of the TELA Bio. I mean that's where the step-ups are. So I mean, look, we -- the first 2 months have been in line with our expectation. Each month, there's a gradual step up with obviously the final quarter being another step up from the previous quarter.

Just 1 quick follow-up. So just with the TELA BIO component, you said that the Aroa sales at TELA Bio has dropped off in the first half, and I can see that in that chart you've provided. So you're confident that that's not going to continue to lower moving forward? Is that the sort of going rate for FY '25 onwards, is that you expect?

Yes. Well, yes. I mean I think it's going to -- it is going to decline to some level. I think we're probably at the level now. I think the key number really is the top line growth. And what we're seeing is that's going -- there has been the sort of 12-month disconnect between TELA sales and Aroa sales. We see things coming more into phase now with this reducing inventory, with the realignment and that now moving to more like 6 months. So that's shortening them being at a slightly lower inventory level, but those -- obviously, their sales levels obviously coming through to us. So we think that normalizes by the end of this year.

We have a question next from Elyse Shapiro from Canaccord.

Just in terms of market access, following the additions of Premier and some of the other GPOs, are we starting to see the benefit from that ramp yet? Or if not, when do we expect to see a bit of an uptick there?

Yes. I mean I think the additions to Premier and some of the other GPOs, we are seeing that impact is coming through now. And I think that's contributing to the growth that we're getting. So I think it's now the -- we don't have the friction in the system or the barrier of GPO access to be able to get into accounts and expand. And I think that's helping us with ourselves momentum with Myriad.

Got it. And then just thinking about your OpEx base going forward, what are we thinking about in terms of sales force additions for the next 12 months or so?

Yes. Look, we've just added 5 extra sales reps. And so that's sort of setting us up. I mean they probably won't really become productive until next year. We need -- we haven't gone through a full budgeting exercise for next year, but we would expect to add potentially another 10 or so next year, but we need to firm that up over the next quarter.

Turning to a question from Madeleine Williams.

Brian, James, I just wanted to just discuss the performance of Myriad in the half. And at the start of the year, you sort of expected the product to sort of double in revenue to $26 million, $27 million. I mean, is that still the case? Is still -- are you expecting a sort of material uplift in the second half?

Yes. I think we're about 88% or something like that at the moment. So we -- our goal was to double that this year. So that's where we think things will land.

And just as a follow-up, just what you mentioned with the additional sales reps. I mean, is that premised on potentially Enivo -- the Myriad flow, Enivo sort of product getting approved and then obviously, you're needing additional sales reps for that? Or is that planned anyway just for the Myriad product alone?

Yes, it's for Myriad alone. So irrespective, we we're probably advanced that a little bit ahead of what we thought we'd do. But we -- what we've seen is we just need more sales reps to cover areas where we already have access and we are able to [indiscernible] on that opportunity.

Yes, sorry, you just cut out a little bit there, but I think I got the majority of that.

Okay. So turning to a question from Shane Storey at Wilsons. About Myriad, you recently spoken about honing in on a handful of indications where case stakes are high and product performance is favorable. Can you speak to some of those surgeries in detail and maybe update us on the market opportunities they represent and the competition you face.

Yes. So I think what we've really learned about Myriad is those sort of differentiating factors. So the fact rate of tissue ingrowth, the persistence stock and the real attraction of using it in trauma. And so trauma seems to be an area that's very well suited to Myriad because of the performance of the product, but also because of the economics of the product. And so we're seeing trauma as a real interesting area in the short to medium term. What we're also seeing in trauma is the use of Myriad in combination with negative pressure wound therapy. And if you sort of think about wound heal in general, really the standard of care for healing difficult wounds has been the use of negative pressure wound therapy. And what we're seeing with Myriad in combination with negative pressure wound therapy is the ability to heal these wounds a lot more rapidly. And at the moment, that add up total feedback from surgeons. And so what we're really focused on now is building a strong evidence base for that. And so I talked a little bit earlier about we're going to set ourselves up to do an RCT. So look at the use of Myriad in combination with negative pressure wound therapy versus negative pressure wound therapy alone. And be able to demonstrate that we're able to improve the rate, but also we'll be able to improve the health economics by decreasing the amount of dressing changes, and decreasing what that means is that [indiscernible] hospitals because they don't need such the same degree of nursing expertise in the same amount of nursing time. So I can have quite a profound impact on the cost of care of some of these patients. So we're kind of aligning our activities now around trauma, around the use of Myriad in combination with negative pressure wound therapy. The other thing we think is that if we prove it out in trauma, then that will spill over into other areas of wound care, where negative pressure wound therapy is being used extensively. And so we do see ourselves in the future undertaking other studies in other areas that support that. So I think we've had the registry up and running. We've looked at a whole lot of different areas. We've looked at where we can really stand out compared to other products and we think that's a really notable area. We think Myriad performs well with negative pressure, significantly better than a lot of these other materials.

Thanks, Brian. Another question relates to Symphony. And CMS' final rule for 2024, which was published recently. The question asks it seems a little has been done to change some of the questionable reinvestment practices around skin substitutes. Does this change the way you're thinking about the Symphony in terms of which side of services are important and how you approach pricing?

Yes. I think we're still working through it. I think the challenge for us is maintaining sales productivity with Myriad and also servicing Symphony accounts. And so the easiest thing for us to do is the hospital outpatient department where we already have access for Myriad and physicians' offices, where we're already working on those surgeons and other patients. And so I think that's going to remain our focus over the next 12 months or so. And then as we work through how these reinvestment changes worked in potentially the physician's office comes into the frame a little bit later, but I think that's probably something more for the future at the moment.

Thanks, Brian. Coming to another resin question. Noting the company's share price performance, the question asked, what are your criteria for a forming an approach to a takeover attempt.

Sorry, just broke up there a little bit at the end there, Neetha.

So the question was asking what is your approach to assessing a takeover attempt?

Look, I think if someone would -- like all companies, if someone comes to you with an offer, we need to look at that offer versus what we think the company -- how the company is valued, I mean I think if we look at the share price at the moment, we don't think that reflects the true value of the company, but we'd have to -- if we are not feeling okay, then we would have to consider it in the light of what we think the true value is.

And then so the question goes on to ask about sort of precedent forming shareholders of these things, I suppose, we have to be -- we'd have to disclose these things in accordance with continuous disclosure requirements.

Yes. I mean my understanding is that...

Okay.

Sorry, go on, Neetha.

Sorry. Continue.

No, it's fine, Neetha. Yes.

Okay. It looks like we don't have any remaining questions at this stage. I'll just take a few minutes to pause. [Operator Instructions] Okay. It looks like we don't have any further questions at this stage, Brian. So I'll hand it back to you for any closing remarks.

Thank you, Neetha. Look, we're really excited with the progress we're making. I mean we think there's huge potential for Myriad. We're really excited about our sort of realignment on the strategy there. We think we're really -- we're just getting started. Looking forward to a much stronger second half and delivering a good result for the end of this year. And then that really setting us up a stronger next year where we'll have strong revenue growth and be highly profitable. So I feel like we're on track in terms of what we set out to do, and we'll track well for the second half of the year.

Excellent. Thank you, 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.