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 FY '24 full year results announced this morning. [Operator Instructions] There will be a presentation lasting for approximately 30 minutes, followed by Q&A. We will have to finish up by 10 a.m. AST. [Operator Instructions] Please note that this 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 our full year results webinar today. So I'm going to provide a brief intro to the company for those shareholders that are new to the company and then run through our full year results and a short overview of some of our clinical activities. I'm then going to hand it over to James, who's going to talk about some of the detail of our financials for the full year. So for those that are new to Aroa, we're a well-established high-growth soft tissue regeneration company. We have four families of products that we sell predominantly into the U.S. and all based on our AROA ECM platform. The total addressable market for the opportunities that we're targeting in the U.S. is in excess of $3 billion. We sell through two channels, our own direct sales team and then also through our commercial partner, TELA Bio. The technology is well established. We've treated over 6 million patients, and there's a large body of scientific and clinical evidence that sits behind our products. We have regulatory approvals in 50 countries. The company is about 270 people. We also have a new technology that we're working on called Enivo, tissue apposition platform, and I'll talk briefly about that in the presentation. Essentially, what we do is we isolate a very thin layer of tissue from the [indiscernible] sheet and we purify that in a way that removes all the components that the human body would react against, but retains the structure of that material and the biological molecules, and both of those things act as a scaffold for tissue regeneration. That then becomes the building block for all of our products. So we -- our first product that we launched was a product called Endoform for diabetic ulcers and venous ulcers, a simple single sheet of this material. And then progressively, we've moved on to more complex products for more complex applications. So Myriad is our soft tissue reconstruction product, a multilayer version of AROA ECM. Symphony combines AROA ECM material with hyaluronic acid for very difficult-to-heal wounds predominantly in people who are diabetic and venous ulcers. And then OviTex is a product that combines AROA ECM material with synthetic polymers designed to be used in applications where there's a high load on the implant and therefore needs structural reinforcement with those synthetic polymers. So there's two versions of that product, a version that's used in hernia that has either permanent synthetic fibers; and then also a version that's designed for soft tissue reconstruction, particularly for use in breast reconstruction. So in terms of financial results, for the last financial year FY '24, total revenue of $69.1 million against guidance of $67 million to $70 million, and product revenue of $68 million. Product gross margin, 85%, consistent with guidance; and a normalized EBITDA loss of negative $3.1 million against guidance of $3 million -- or $1 million to $3 million. We ended the year in a strong position with a cash balance of $29.5 million. In terms of sales, some challenging times and successes this year as well. So relatively modest growth, 12% year-on-year. If you break that down and look at where those sales results come from, we're very pleased with Myriad sales growth. So 73% year-on-year growth. So good growth there through our own direct sales team. OviTex was, for us, we went back this year, so negative 7% year-on-year. So despite TELA Bio sales, who's our commercial partner for those products growing at over 40%, we went back 7%, and that was really due to some inventory adjustments, which are one-off over the last year, and we expect that to come right and for our sales to come in line with this over the coming year. And James will talk about that in his section of the presentation. Endoform sales flat through the course of the year, which was in line with expectations. In terms of sales expansion, we continue to see, along with that 70% growth in Myriad, expansion to the number of active accounts as well. So a 31% increase year-on-year and the number of active accounts. We've also increased our sales team over the last year, adding 10 people. So moving from 48 to now a team of 58 in total. So that's 50 field reps and then 8 inside sales reps. Just in terms of the opportunity and market potential of the markets that we're operating in, I just want to talk a little bit more about the details and the growth opportunity for Aroa. So most of our efforts going into our Myriad products. We're targeting our soft tissue reconstruction procedures within the operating room. If you look at the number of procedures in the U.S. per year, there's over 420,000 procedures where Myriad would be an option to be used in those procedures. So we believe this represents an opportunity of over $730 million. And there's 2 big segments of this market. So a lot of them salvage procedures. 180,000 of these procedures being done in patient in the operating room. We believe that's an opportunity of about $225 million. And then there's the traumatic wound procedures where there's 90,000 of these procedures, which will be relevant for Myriad. So we believe that represents an opportunity of $300 million. So if you look at where we're putting our efforts, these are the 2 largest areas that we're targeting. We have also been selling Myriad into other procedures, and I'll talk a little bit about that when we talk about clinical evidence. But most of our effort is in lower limb and traumatic wounds. And what we've seen happen over the last 12 months is we're now beginning to do many more procedures within trauma centers. So there's been a shift over the last 12 months from being doing a lot of lower limb salvage procedures to many more trauma wounds. The difference between those 2 procedures is that the lower limb salvage procedures tend to be high volume but lower in value, whereas the trauma wounds tend to be relatively low volume but very high in value. What really differentiates us in these markets is the rapid volumetric fill, that our product Myriad provides. It's persistent in these wounds, which means that it's providing a framework for tissue regeneration for longer. And also the disruptive value that we can bring to this market. And when I talk about disruptive value, there's a couple of factors. One is that the rate of healing and changes the economics of healing for the hospital. It means that they can get patients up quicker, so it reduces their cost. But also what we find with Myriad is that it needs fewer applications. And so we're reducing the number of procedures that patients require and therefore hospitals require as well. And also our pricing is typically more affordable than some of the market-leading products. So we believe there's a very strong value proposition for our products other than the soft tissue reconstruction procedures, happening within the operating room. We've also seen a lot of these procedures in soft tissue reconstruction be combined with negative pressure wound therapy. And we believe there's a very large opportunity for Myriad to be used in combination with this technology. There's over 1 million of these procedures done per annum. And we believe that with Myriad in combination with negative pressure wound healing, we can accelerate the rate of healing, reduce the number of interventions and reduce pain for patients, and also reduce the number of negative pressure wound applications. So I think there's a fantastic opportunity to build really a new opportunity for Myriad within this market. And then we're also targeting lower limb outpatient procedures in wound centers. And so these are procedures where patients have very poor healing responses and require products that really help them heal, it's difficult-to-heal wounds like diabetic ulcers and venous ulcers. There's over 475,000 of these procedures performed per year, and this represents an opportunity of over $1 billion per year in the U.S. The benefits that we bring to the market with our products is that we believe we can widen patient access to advanced biologics, and we increase the rate and quality of healing of these wounds. So again, a large opportunity if you look at across all of these applications and our level of sales, we're really only scratching the surface in terms of the penetration that we've achieved to date and what we're able to do in the future. So I want to talk a little bit about our investment in clinical evidence. So over the last 2 or 3 years, we've made some quite significant investments in clinical evidence. We will be increasing those investments over the next couple of years. So I want to talk a little bit about why we're doing it and where we're focusing. So there's a number of reasons why we're investing in clinical evidence. I think what's important at the outset is that surgeons want to know that your products are effective for specific procedures. And this can be doing relatively small number of cases and showing that your product is successful in healing patients with those specific procedures. It's also very important to be able to determine the comparative efficacy of your product versus alternate products and the standard of care. And what I mean by that is they really want to see is your product better than what they're doing now. Clinical evidences importance in terms of showing that your products can save the hospitals money. It's important in terms of showing that your product can potentially be used for new procedures or new uses. From a sales perspective, it's very helpful and that the clinicians and surgeons find clinical research engaging, and it's very useful in terms of elevating your share of voice within the market. Once we have the data that comes from this clinical research, that also helps us go out and promote our products and show the comparative difference of our products versus alternate uses. And then finally, it's really important in terms of informing our commercial strategy and allowing us to focus on areas where we have advantages over existing standards of care or other products. So it's -- we made big investments in this area, and it does help us to be able to promote our products but also these investments have a payoff over multiple years in the future. So if we look at where we've got to now, we have a large body of clinical evidence that's being established based on our existing products and a large number of publications and presentations. We've seen 3 themes that drop out of us. So firstly, this rapid volumetric fill of the soft tissue deficits, that's well vascularized functional tissue. So it's quite a differentiator compared to alternative offerings. Our products are also tolerated very well within contaminated fields and we don't see high levels of infection, which is unusual for biologic products. And thirdly, we don't see negative inflammatory responses with our product. So I want to talk a little bit about where we're focusing in terms of our clinical research and how this aligns with our target area that the market segments that we're targeting. So if you look at trauma, trauma is certainly a big focus for us now. If you look back at the publications and the confidence that we have that our products make a difference in trauma, it's based on our clinical experience but it's also based on some preliminary data from early publications that we've had. So use of Myriad in combination with exposed -- use of Myriad in procedures with exposed structures, use in trauma, use in open abdomen. So based on our success to date in trauma, we're really now focusing on significantly larger studies and setting ourselves up to have a strong body of evidence in trauma. So over the coming year, we have 2 important studies that will be published. So Myriad in combination with negative pressure, and this comes out of our MASTRR registry that will be 40 to 50 patients. And this is a prospective study. And some of those patients will be trauma patients. We also expect to produce a 50 to -- 40 to 50 patient study from the MASTRR study, solely focused on trauma that will be in Q4. And then we're setting ourselves up for RCTs with exposed structure. We'll be using Myriad in combination with negative pressure. So initially a pilot study of 20, and then that will lead into a much larger randomized controlled trial of somewhere between 50 and 80 patients. So I think what's happening in trauma is our confidence in -- the opportunity there is -- has been strengthened and the differentiation of our product versus alternates, and we believe we're in a very strong position. So we're now seeking to generate the evidence to -- a strong body of evidence to help drive our success -- to accelerate our selling success in these areas. In lower extremities, we have both from Endoform and Myriad. So quite good existing data. We have perspective or a large prospective study that will be published this year on limb salvage with Myriad, it's 130 patients. That will probably be one of the largest published studies in limb salvage. So that's expected out in Q1. And then we're halfway through a randomized controlled trial with Symphony. That's 60 patients, and then they'll have a full readout in the first quarter of Q1 in FY '26. So this is really important for Symphony in terms of both establishing the evidence but also in terms of reimbursement for Symphony going forward in the outpatient wound centers. So think on the lower extremity side of the business, we're developing a very compelling body of evidence that we believe will help accelerate sales there. And then we have a number of other studies in colorectal. More -- we're doing this more for the sake of gaining access into hospitals. There are relatively small procedure numbers but they do help us initially get access to hospitals. But also some of these procedures are extremely challenging to heal, so to help to demonstrate the benefits of Myriad in healing generally. And similarly, in general surgery, with very, very challenging wounds that we're healing here and some nice data that are coming through on pressure injuries, 40 to 60 patient study there during the second half of this year. So if you look at that as a whole, we're beginning to see a lot of data come through to support the sales of both Myriad and Symphony for the future. And we see this as a really important catalysts for the future to drive sales traction and provide evidence but also provide the financial benefits to hospitals of using our products. In terms of OviTex, TELA Bio continues to make good progress with OviTex. They have grown by over 40% over the last year. Most of the products have really been selling across the variety of different types of hernia. So if you recall, we initially started off in the more complex end of hernias. So complex and moderate hernias, and then progressed into simple hernias, inguinal hernias and hiatal hernias. We now have a very broad portfolio. So with the launch of the inguinal hernia product very recently, we believe that TELA Bio portfolio is very well placed to succeed and continue to gain momentum. So that's a large opportunity in excess of $125 billion in the U.S. We're certainly seeing continued strong growth from TELA Bio, and particularly with the move towards robotic surgery, and we're seeing the inguinal product and some of the simple ventral products be ideally suited for use in those procedures. And on the breast side or on the plastic surgery side, we're seeing strong growth with the OviTex PRS product. This year, we've launched just a second-generation product for that market new polymer. And we're very excited about the growth in that product over the last 6 to 12 months. In terms of Enivo, this is a new technology that we've been working on for some time. We believe this presents a large opportunity for us in the future. It's a novel device, and we think this will create a whole new category of product. Based on our estimates internally, we believe the TAM for this is in excess of $1 billion. To date, we have the pump and the catheter system cleared by the FDA. There's a third component of an envelope or matrix component that needs to be cleared, and there's further pre-clinical studies required for that clearance. So we're in a dialogue with the FDA on the requirements for that. We do expect that, that's probably in the 12- to 36-month time period that product will be cleared. Based on our research to date, the preclinical model demonstrates almost complete dead space closure. So we think this addresses a major problem that's not solved by any other procedure. And we've recently completed a pilot study in the [indiscernible], which is fully recruited, and we're just going through the data analysis with that. The initial look at that data looks very positive. The great thing about this product is that it fits with our existing call point, our existing sales team. So it will be complementary to them, and we see this being sold in combination with our existing products, a great product to engage with surgeons, and to help create conversations and engagement with Aroa as a whole. We also believe this product has opportunities outside of where our existing sales team can sell. So potentially opportunities for us to out-license this product into other specialties or other market segments and also has a strong strategic alliance with our move into Myriad in combination with negative pressure. So a product that we think put a lot of utility across the whole business. So I'm now going to pass it over to James, and he's going to talk through some of the details in our financial results.

Thanks, Brian. So what I'd like to do is just present the financial results a little bit more broken down. As Brian mentioned earlier, total revenue for the year was $69.1 million, of which product revenue accounted for $68 million. As respect essentially was growth of 12% on year, so fairly modest, but really held back by the sales in the first half, okay, and predominantly TELA Bio -- sales to TELA Bio. So looking at the second half, there was a big step up, and there was a big step-up in revenue driven by two factors. So Myriad continued to grow, growing 30% on H1, and TELA grew 19% on H1, reflecting our sales to TELA, realigning with TELA's sales trajectory. Product gross margin continued to improve. Total for the year was 85%. We reached 86% in the second half. So it was sort of held back a little bit in that first half by the lower sales volumes. And then normalized EBITDA improved in the second half despite higher-than-anticipated investment into the Symphony clinical study, which was a result of patient recruitment tracking ahead of EBIT plan. So ending the year with a normalized EBITDA loss of $3 million. Just sort of talking more about the TELA situation. So as Brian mentioned, TELA's sales, which are represented in the dark gray line continue to grow very strongly. So growing in excess of 40% in the calendar year '24. But then what we've seen during a relative FY '24 year, as highlighted in the orange line, is that our sales actually reduced by about 7% for the year. Now that was solely the result of -- in the first half, particularly in the first half of the year, as TELA was undertook quite an active management of its inventory position, managing the inventory down to a much more effective level. And so their inventory reduced from 33% of revenue down to 22% at the end of the year. We're obviously confident that TELA, probably during the second half, reached a position where the sort of inventory levels have reached sort of minimum levels and now you can see that sales are tracking back in line with the trajectory. Looking at manufacturing. I touched on it earlier. We continue to improve gross margin. That's a result of the increasing sales from the higher-margin Myriad products but also supported by ongoing improvements to manufacturing efficiencies. Manufacturing capacity at the end of the year still remains about $150 million in revenue. That will increase within the next 6 months to $200 million as a result of the final -- our final investment in our tissue processing facility coming online. And capital expenditure for manufacturing. There was a large investment in the previous year, reflecting obviously the increase in capacity to $150 million. That reduced in FY '24 and will continue probably at that level just for the next year as we invest -- we'll finalize the investment in the tissue capacity. In terms of the use of funds, so just sort of highlighting here with sales and marketing. We continue to make a large investment in growing our U.S. commercial operations. Sales and marketing expenses increased from about $30 million to $40 million and -- from just under $40 million. And this was really the result of three factors. One was the annualization of the additional income that we've taken on in FY '23. There was the -- an additional team salespeople that we brought on in FY '24, but also an increase in the variable compensation linked to obviously the higher -- the high or strong sales growth of Myriad. R&D. Our spend in R&D remained relatively flat to FY '23, and that was really driven by sort of the investment -- the decreased investment in Enivo during the year. Clinical expenses, as Brian mentioned earlier, sort of our investment in clinical increased from $3 million to $6.6 million. And that was really representative of the investment during the year at the Symphony clinical study, which was a total of $3.6 million during the year. And then cash on hand. Look, we ended up with a very strong cash position of just under $30 million. We [indiscernible] the expectation that we're cash flow positive for over the next 12 months. And I think, look, again, look, we continue to obviously invest in the Enivo platform. In the absence of the Enivo investment, we would obviously be -- we would be profitable. With that, I'll hand it over to Brian.

Great. Thanks, James. So looking forward to next year, guidance is -- for revenue is $80 million to $87 million. So that will represent 21% to 32% increase on the current year, and we expect to be profitable. So the normalized EBITDA of $2 million to $6 million. In terms of catalysts and milestones for next year, we expect to see continued strong growth for Aroa, return for TELA Bio to have strong growth for them over the coming year. Enivo FDA clearance making progress on that. We don't expect it to be cleared in the next year, but we think we will be making progress towards clearance with that. Symphony completion of the RCT, and potentially some changes in reimbursement where that RCT will be extremely helpful. And then making progress with trauma and limb salvage EBITDA. So the delivery of these clinical studies coming through, and they're providing tools for our sales team to continue to promote Myriad in these areas and accelerate their success. So with that, Neetha. I'll pass it back to you for questions. Thank you.

Thank you, Brian and James. We will now move on to the Q&A session. [Operator Instructions] The first question I have is from Elyse Shapiro.

It's Elyse Shapiro from Canaccord. Just -- sorry, getting some feedback. Just wondering, looking into the guidance, what are you assuming for Symphony there?

Very modest growth over the coming year. So at least $2 million in sales. We think that we're going through a pilot with our sales team to set ourselves up for that. We don't see that gaining full traction over the next 12 months. And by following off from that, we do see Symphony starting to be pretty meaningful in terms of contribution to sales. And the reimbursement landscape in that area remains uncertain but certainly strong signals and some changes happening there.

Got it. And just on the sales force as well, what are the hiring plans for the next year or so?

Yes. So I think depending on how we're tracking in terms of sales productivity, we probably won't add anyone in the first 6 months, but the second 6 months, we have potential to add 5 to 10 field sales representatives.

The next question I have is for Rob Cassen.

Can you hear me okay?

Yes. Thank you.

Yes.

James, I know it's a little bit of an elephant in the room question but clearly, the share price hasn't performed particularly well in the last 12 months. You are growing. You're getting closer to a positive cash flow. Why do you think that is? And where do you see it going in the future? Difficult question, I know.

Yes. I mean, look, it's, Robert, incredibly frustrating. We continue to sort of scratch our heads. Look, part of us sort of thinks we're in this sort of market where it's -- we can't control. It's market related. But I think -- look, I think there's some sort of key critical sort of milestones over the next sort of 6, 12 months for us is that we improve our profitability and positive cash flow and at the upper end of guidance. I think that's a different playing field for the share price. I mean, that's my view.

The one thing -- I'll just add one thing to that as well. We did downgrade our guidance midyear, and I think that didn't help, and partly affected by -- we expected TELA to be a little bit stronger. So I think if we can execute on the sales side, TELA comes back, people see our sales coming into line with TELA, and we maintain strong growth, and I think we'll be back in favor. So I think the underlying fundamentals are there. We're just going to deliver on the growth side of sales.

Can you still hear me?

Yes, we can. Thank you.

The other thing I might suggest to you, there's not that many brokers that talk much about ARX. So possibly, I'm not sure exactly who covers us but you don't -- I read a lot of stuff and do a lot of investing, and you don't see ARX mentioned very much. So possibly, it may be worthwhile trying to get a bit more coverage with a few of these guys.

Thanks for feedback.

Okay. The next question I have is from Madeleine Williams.

I just wanted to ask a question. I mean, you touched on it a little bit in regards to guidance for FY '25. I think just understanding, obviously, the over text, you're sort of reliance on TELA there and driving growth. But maybe, how are you thinking about the guidance that you provide and the range when you can kind of get confidence in what you're looking at with Myriad, is it sort of the account productivity, sales productivity and how is it kind of tracking that throughout the year?

Yes. I think we've looked at guidance this year, obviously, we don't want to be in a situation like this year. We've made a downgrade through the middle of the year. So we put some numbers out there that we feel confident about. The range is quite wide. But I think as we go through the year, there's an opportunity for which to narrow that a little bit. So we're starting with something that is absolutely achievable. We'll change it over time. We're confident about TELA coming back. Obviously, we want to see that. We've had good ongoing growth from Myriad, and obviously going to see that continue to track through to the coming year.

Thank you, Madeleine. I have a question around the issue in the U.S. to overcome provider resistance to change. And the question is around what Aroa is doing to overcome that? Clinical evidence is obviously one aspect. But are there any other initiatives that we are going to be addressing around, say, health economics as an example?

Yes, it's a great question. Look, I think we'll focus on a few things. So clinical evidence is important to get clinicians on board and get advocates -- clinical advocates for making that change within the hospital systems. I do think financial evidence that your products make a different -- difference for hospitals is critically important. That can be built off the back of clinical evidence. So driving a good business case off the back of that to show hospitals that your products make a real difference, we're putting a lot more emphasis on that. And I think over the next couple of years, we'll really start to broaden out that picture. So I think that's important for our products, particularly because not only are we making a big difference for patients but we've also got a very good story for hospitals as well. And with the significant value that we bring to hospitals, I think that gives us the opportunity to increase our velocity of success within those hospitals, but also to be much more anchored within those hospitals because the financial case is so strong. So it is something that we're turning our minds to a lot more and starting to build out that base of evidence level.

Thank you, Brian. There is an associated question given that insurers are a dominant funder in the U.S. market. And the question is around whether we are engaged with insurers as well?

Yes. Well, then it depends on -- we're not because most of the procedures that we're covering within the hospitals are paid. There's reimbursement through the hospitals under fixed fee DRG code. So it's a lump sum payment for a particular surgery. And the hospitals are making the decisions around the products that they use in those procedures. And so we're well placed for that. And some of the outpatient procedures, particularly in the outpatient wound centers, they are -- they do have an influence for the younger patient population. So I think going forward, there may be some -- any area that we put more emphasis. But short term, we're in a pretty strong position without having necessarily having payers on board.

Thank you. And sort of a final question on that theme of conversion and change. Do you have any final comments on the competitive environment generally?

Look, I think we're in a good position. I think we've got a very unique offering and that we're beginning to build out based on the differentiation of our products, the clinical evidence that we're accumulating. And as we just talked about, as we start to build the business case and the financial evidence for what we're doing. So I think we're uniquely positioned. We don't see with the existing competitor set, other companies being able to replicate that. And I think if we look at potential new entrants into the market, we're not seeing anything that looks disruptive there. So I think Aroa's got a very long way to run. We feel like we're just getting started, and we're beginning to get the fundamentals in place that will set us up for success.

Great . Thank you. So there's also a question that's come through around, Aroa's obviously chosen to invest internally, including into U.S. sales and New Zealand staff and has not yet elected to return a dividend. Is that something you can comment on, please?

Yes. I think we're a bit of away from a dividend. I mean, we are a growth company, and we're making this transition now to becoming profitable. And I think we should be profitable in the next 12 months and be able to track towards being increasingly profitable in the out year. So yes, we do want to continue to invest in growth and invest in growing our top line. So I think the dividends are probably still a little bit way out.