Aroa Biosurgery Limited (ARX) Earnings Call Transcript & Summary

Okay. Thank you for your patience, and we'll kick off now. Welcome to Aroa Biosurgery's Investor Webinar and Q&A following the company's third quarter results announced this morning. [Operator Instructions] We will have to finish up by 9:50 a.m. Australian Eastern Standard Time. [Operator Instructions] Please note that the session is being recorded. On behalf of Aroa today, we have Brian Ward, Founder and CEO; and James Agnew, CFO. I'll now hand over to Brian and James. Please go ahead.

Thank you, Neetha, and welcome to the Q3 quarterly update, morning and thank you for joining. So as Neetha said, this is going to be a relatively quick presentation. So just for those that are new to the company, Aroa is a well-established soft tissue regeneration company, 4 families of products that we sell in the U.S., all based on our AROA ECM technology and targeting an opportunity in the U.S. in excess of $3 billion. We sell through 2 channels, our own U.S. direct sales team and our commercial partner, TELA Bio. The technology is well established, we're treated in excess of 6 million patient treatments and large body of scientific and clinical evidence sits behind the technology. So we essentially isolate a tissue layer from the forestomach of sheep. We purify that in a way that allows it to be implanted into people and removes all of the things that the human body would react against, but conserves the structure and the biology of that material. And from that, we derive 4 different products adapted for specific use cases. So Endoform, Myriad and Symphony sold by Aroa and OviTex sold by our commercial partner, TELA Bio. So just going straight to the financial highlights. So $17.7 million cash receipts from customers in the last quarter. So this is up 20% on the previous quarter. We continue to make good progress towards breakeven operational cash flows. Net cash outflows from operations decreased to $1.7 million from $3.2 million in the prior quarter. So if you look at operational cash flows, we're certainly tracking towards breakeven. Our net cash outflows from investing activities of $1.1 million for the quarter, and this reflects further investment into additional manufacturing plant and equipment to build capacity. We finished the quarter with a strong cash balance of $30.5 million and the company remains debt-free. So we have a very strong balance sheet and are certainly well-positioned to continue to fund the company and track towards breakeven. Just in terms of guidance, we are updating our revenue and EBITDA guidance. So we're reducing that to $67 million to $70 million of total revenues. So this reflects $66 million to $69 million of product revenue and gross margin is expected to be maintained at 85% and a normalized EBITDA loss of $1 million to $3 million. We have a one-off decrease in expected revenue from TELA Bio that has contributed to this really due to an overestimation of our revenue share from TELA Bio and based on inventory supply to them and a delay to joint product development project, which we were forecasting to ship product from OviTex and OviTex PRS remain on a strong growth trajectory. We continue to see very strong sales performance with Myriad, 10% growth in the active accounts between Q2 and Q3. And comparable field sales productivity to last quarter. And so we're looking at a 70% to 85% year-on-year growth of Myriad for the full year. So strong revenue growth for Myriad, not quite at the 100%, which we've been expecting, but still tracking very positively. In terms of operational highlights, in the last quarter, we have received a 510(k) clearance for a new product. This is a resorbable dental membrane product. It's a project that we've been chipping away at for the last 4 or 5 years. We've completed a clinical study for the -- sorry, preclinical study for this, which was required for clearance, and that was submitted to the FDA last year, and we, in the last week, received notification that they are clearing this product. So we see this as an opportunity to develop another line of products that will contribute through a partnership. So we're out looking to secure a partnership with another company to commercialize this product for us. It doesn't fit with our own strategy and with our own sales team targeted. So in our minds, this makes sense to partner off in a similar way that we did with TELA Bio. We've received feedback from the FDA regarding our Myriad Flow device. So this is a version of Myriad designed specifically for use in combination with Enivo. They have requested some additional preclinical and clinical data to support their clearance. We expect that this may be the case. I think the good news on this certainly what they're acquiring doesn't appear to be particularly onerous, and the studies look less complex. And we think worst case, this is -- we expect to have this cleared within 24 months, it could be quicker than that. So really kind of pleased with how that's tracking, certainly feel like we have more certainty around the clearance of that and the indications that, that will be cleared for. We now have 6 patients that have been enrolled into the pilot study for Enivo. This is our tissue apposition platform. They've undergone a unilateral mastectomy and completed follow-up after that. What we've been looking for here is seroma formation and complications post-mastectomy. We're really pleased to report that none of the patients have had clinically relevant seromas or reported complications. So we're seeing a very similar outcome in the first 6 patients to what we've seen previously in the preclinical models, which is very encouraging. On the Myriad side, we now have enrolled 36 patients -- an additional 36 patients into our MASTRR study. So this takes the total number to 268 patients. We have been targeting 300 patients into the study, and we may extend that to increase the number of patients. But really pleased with how this is tracking and this serves as a source of further clinical data for future marketing in the future for our Myriad. The study for Symphony continues to progress well. We're now at 86 participants of the total 120. We expect to complete this study through the middle of this current calendar year and then report out on an interim basis towards the end of the year, the final reporting at the end of this -- at the end of the FY '25 financial year. So this is progressing very well in terms of recruitment and very excited to be recruiting at the pace that we are. So I'm going to leave it there, Neetha, and pass it back to you for questions.

[Operator Instructions] The first question I have is from Sebastian Clemens of Jarden Australia.

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

Yes. Maybe I will start, and then James can sort of pick up around the technicalities of how the true-up works. So we have a revenue-sharing agreement where for every $100 that TELA receives, we received $27. Over the last -- over this financial year, what we've seen is a big focus for TELA Bio on improving the inventory management, really to address some issues around product obsolescence. But also, I think there's a function of the maturity of their business and refining some of their business processes, so they've made good progress on that. We saw a big impact from that in the first half of the year. We've seen that turn around in the second half of the year and track more positively. So they've significantly decreased their inventory holdings. When you look at the materiality of that, and that is material for us this year. We don't see that continuing into the future. We think to have a -- to make a similar type of effect that would be out of phase or wouldn't be able to sustain demand in the future. So it is a one-off effect. And certainly, we've seen -- and as we look into the next quarter, we see that coming right. So James, maybe if you want to talk about the true-up and how we've been impacted there.

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

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

I think it's more around of an accounting assumption. And if anything, we haven't really changed our assumptions, I think we -- our assumptions -- well, we've made assumptions that it was going to improve a bit more than what we anticipated. [Audio Gap]

Elyse?

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

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

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

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

Thanks, Elyse. Do you have any more questions?

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

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