Aroa Biosurgery Limited (ARX) Earnings Call Transcript & Summary

Okay. I think we can begin. Welcome to Aroa Biosurgery's Investor Webinar and Q&A following the company's March 2025 quarter results announcement released this morning. [Operator Instructions] There will be a presentation lasting approximately 20 minutes followed by a Q&A session. The webinar will conclude at approximately 9:30 a.m. Australian Standard Time. [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 will now hand over to Brian and James. Please go ahead.

Thank you, Sarah, and good morning, and thank you for joining today's webinar. It's going to be a relatively short call. I'm just going to go through key financial results. We have our full year results that we'll present at the end of May. So the information today will be relatively limited as there will be a much more fulsome update at the full year results. So I'm just going to jump straight into it a little bit of a background on the company for those that are new to the company, and then I'll talk about the highlights from the March quarter. So we're a well-established high-growth soft tissue regeneration company. We sell 4 [ meds ] products predominantly into hospitals in the U.S. All of our products are based on our AROA ECM platform, and this is a soft tissue regeneration technology from which we're building a wide range of products. The total addressable market for the products that are already commercial in the U.S. is in excess of $3 billion. We sell through our own direct sales team. They're responsible for more than half of our sales. The balance of our sales are sold through a commercial partner, TELA Bio, who have licensed from us the rights to sell hernia and soft tissue reconstruction products predominantly for breast reconstruction. We've treated with over 7 million patient treatments with our technology. So it's well established and demonstrated both great efficacy, but also very good safety as well. We've now published over 100 peer-reviewed publications or a little bit about that shortly. Regulatory approvals throughout the world. We're predominantly focused on the U.S. That's where more than 95% of our sales are, but we also have regulatory approvals in other countries and we're selling in 15 or so other countries through local distributors. We also have a program of work based on a new technology platform. This is our Enivo platform. Two of the components from that platform are cleared by the FDA. We have a third component that we're working on study for full approval. [ Overall ] we're about 270 people, both 100 or so of those based in the U.S. and then the balance based here in New Zealand. So in terms of our technology, so we isolate a very particular tissue from the forestomach of sheep. We purify that in a way that it can be implanted into people and cause remodeling and regeneration of tissue. This material has been demonstrated to have great biology and structure, promote the formation of your blood vessels and also orchestrate the process of soft tissue regeneration. From this, we've developed 4 families of products. So our Endoform product are predominantly for venous leg ulcers and diabetic foot ulcers. Myriad for soft tissue reconstruction in the operating room and hospitals. Symphony is a product also for diabetic ulcers and venous ulcers typically used at a later phase in healing compared to Endoform. And then our OviTex products, which are used for hernia repair and breast reconstruction sold through TELA Bio. So if you look at the split between our 2 sales channels, Aroa, we have about a $1.8 billion opportunity in front of us in the complex wound market and acute soft tissue reconstruction. On the TELA Bio side, this is an opportunity in excess of $1.3 billion, both -- and I'm talking really about the opportunity in the U.S. market with these products. So we're really, as a company, focused on making this technology much more accessible for patients. And there's 3 things that underpin our strategy. So world-leading outcomes. We're demonstrating through the clinical research that we're running, particularly the MASTRR registry now outcomes that above and beyond what's previously been seen for this type of technology, particularly in terms of the rate of healing, the lack of complications and being able to achieve very good outcomes with a single application of our product. We've also been able to demonstrate that we can deliver unmatched value to hospitals. And this comes through the fact that our products are more affordable than competing products, but also we get less complications and therefore, there's less cost associated for the hospital in terms of treating those complications and the fact that we have a single application but not needing to take the patient back to the operating theater so frequently. So there's big cost savings in there as well. We're also seeing that our technology can have widespread impact. And what I mean by that is it's not a product, but these are not products that only work in particular procedures, we're seeing that they tend to work very successfully across a wide range of different procedures. And that's important because it means that they're very flexible for the hospitals, but also that they can standardize on a single product and be able to use them in a wide range of different specialties. So it's very helpful for both surgeons and hospitals in order to be able to standardize to have a single product. So let me just quickly talk through the financial highlights. So importantly, we're reaffirming our guidance for the full year. So total revenue guidance of $81 million to $84 million and that's maintained and a normalized EBITDA of $2 million to $4 million. So that's on a reported basis. On a constant currency basis, that's $76 million to $79 million on a constant currency for revenue and up to $2 million on a constant currency for EBITDA profit. So really pleased that we've come in, where we're going to come in and that we can -- we're able to maintain that guidance. Great news on cash flow. So this is the second quarter of positive cash flow. So second half of the year has been positive for cash flow, which is great. And for this last quarter, $1.1 million. So pleased that we've been able to deliver that. There was an outflow from investing in terms of CapEx, routine CapEx, $0.6 million to that. Cash receipts for the quarter, $20 million, and then we ended up with cash balance of $22 million at the end of the quarter. So we're finishing the year in a strong position, having a strong cash balance, but then also having demonstrated 2 quarters of positive cash flow, which we're very pleased about. Operational highlights. Myriad sales are up 11% against the previous quarter, 32% against the previous corresponding period. We had the highest reported sales for Myriad in March at USD 2 million. So great to see the strength of Myriad sales and the progress that we're making there. On the TELA Bio side, they reported their full year revenue, which was $69.3 million, up 19% on the previous year. Demand for TELA Bio still remains very strong and it was up 17% compared to the previous corresponding period. And that's important because typically, the first quarter of the calendar year tends to be soft. So nice to see a nice little bump there on TELA demand. In terms of AROA ECM evidence, a big milestone for us in the last quarter. We now have 100 peer-reviewed studies that have been published that validate the efficacy and safety of the AROA ECM platform. So really nice to see that body of evidence growing and we're certainly very helpful from a sales perspective now that we've got a strong body of evidence there. There was 3 peer-reviewed case studies published in the last quarter. And we have a pipeline of publications coming down the line over the next 6 months, most notably in trauma, burns and pilonidal sinus disease. So we're continuing to build that evidence and that's important for engaging our surgeons. Just a quick note on tariffs. So as listeners will be aware, the U.S. government has imposed 10% tariffs on New Zealand goods. Due to the commercial arrangements that we have with TELA Bio and particularly how pricing works, but also how our cost showing -- sorry, our cost sharing works, we expect that the net impact of this will be substantially lower than 10%. So don't feel this is going to be a major headwind for us in the coming year. So I'm going to conclude there and pass it back to you, Sarah, for questions.

Thank you, Brian. We will now move on to the Q&A session. [Operator Instructions] We'll start with some live questions. So we've got Elyse Shapiro here.

I guess just kind of looking at that CMS reimbursement code, does that impact pricing at all for you? Are you getting any sort of improvements in ASP? Or is it more of a streamline the actual process kind of tool?

Yes. So it's -- there's no change in pricing. So the pricing is controlled through contracts with the GPOs, but it does mean that our product will be tracked better through use in hospitals, but also gives a code to claim against in the outpatient setting, particularly in ambulatory surgical centers. So it does -- in some of those centers where pricing is capped, it does provide a good opportunity for us in terms of sales. So getting that Myriad code is helpful in that particular context.

Got it. And then just looking at that new Head of Marketing that you've put in from Integra, it's probably early days, but are you anticipating any sort of changes in terms of the sales team, the pitch, the structure? What sort of new initiatives will come in through there on the commercial side?

Yes. Look, I think we've added some more resource into the U.S. sales and marketing operation. So we've added -- Ruth has come onboard as the Marketing Director there. I think that's going to help in terms of directly supporting the U.S. sales team in their own time zone, a little bit of more cohesiveness around what we're doing there as well, more alignment to the strategy. So I think that's going to help. We've also added a Director of Training to the U.S. team as well. So I think it's important that our team is well trained, that we get them up and running quickly and that they really understand all of the materials and information that we have. So I think those 2 things are going to make quite a big difference. Certainly, up till now, that hasn't been happening in the structured way as we would have liked. So I think we'll get some momentum from that.

Okay. We have got a written comment here. At the TELA Bio quarterly held on the 21st of March, management reported significant sales headwinds with loss of sales staff and fierce competition. Has there been any recent softening of OviTex sales to TELA? And if so, what is the size of this change? It's a fairly complex question.

Yes. Look, I think I wouldn't cast it quite so dramatically as that. I mean they've certainly had a couple of -- have had some quarters that have been up, some quarters that have been down. And I think that is not unusual. What we have seen over the last quarter is good demand from TELA Bio. So I think their guidance is out this year, and there's good growth on the previous year. And look, we're expecting TELA Bio to continue to grow strongly over the next 12 months. And obviously, if they're at a higher baseline, it gets harder to grow at the same rate. But in absolute dollar terms, certainly good strong growth there.

All right. Okay. Let's have a look and see don't have any further questions at this stage to answer live. There is another written question from Jesse Livermore. If TELA Bio enter Chapter 10 at some point, would you take distribution of OviTex in-house or appoint another distributor?

Yes. So there's some change of control provisions within the contract that we obviously take into account. So if TELA was not to remain viable, I think Aroa is well placed to be part of whatever process takes place there. So I think with where we're at, it's quite different from where we were when we put the original arrangements in place with TELA Bio. We now have our own sales team in the U.S. And so I think we're in a very different position. The TELA products are complementary with our own products. But look, I think there's a lot of things that can happen from where we are now. I mean I think TELA is in a position where they could trade through successfully and continue to grow strongly. If that doesn't happen, then you'd expect that there would -- it's a valuable product franchise in its own right. And so there will be other acquirers interested in that technology that may be major companies, it may be smaller companies as well. I think Aroa would certainly have an interest in that process.

We've just got another question from Elyse.

Yes. So just kind of pressing into TELA Bio a little bit. Are there any additional kind of safeguards or kind of forecasting measures in place to help you better be able to understand some of the ebbs and flows that are coming through on their side?

Yes, absolutely, Elyse. So obviously, the key indicator for us is demand plan. So as you're aware, TELA Bio provides us a rolling 12-month demand plan. And the first 3 months of that demand plan are always sort of binding, okay? So that's always -- that's the immediate sort of indicator to sort of track how sales are happening at TELA Bio on a monthly basis. I mean that being said, we're also in close -- we have a very close relationship with TELA Bio. So, we're also in very good conversations with TELA. I think as Brian mentioned earlier, we also point out in the quarterly is that whilst TELA Bio had a soft December quarter, what would typically happen is we'd see a drop-off in demand in the first quarter of this calendar year. And we've actually seen the opposite, so which is a good indicator that sales for the March quarter actually fit really well for TELA and it's definitely indicative of the demand plan if we look out to the next quarter that things are going well.

Got it. And then maybe just thinking a bit more broadly around hospital ordering patterns and demand. There have been some pretty material Medicare changes that have come through. We've seen the insurers also get hit pretty hard. How does that affect the demand profile, both on the kind of Myriad side and the OviTex side?

Yes. I think on our side, with Myriad, we're not really seeing any changes there. And we think the downward pressure on hospitals cost constraints actually is helpful for us. And so we have been having conversations at the hospital level and IDN level and sort of electing to go with our Myriad portfolio certainly provides some substantial savings for hospitals. So we see a great opportunity there. I think if you look at TELA Bio, their pricing is certainly considerably less expensive than other biologics and very similar or maybe even a slight discount to some of the resorbable synthetics. So similarly, I think they are well placed, probably better placed now because they also have more a full portfolio. So they're able to be not just the products for the complex surgery, but also in those more routine surgeries as well. So I think both companies are well placed in that changing environment. Any more questions there, Sarah?

No, there are no more questions at this stage. So I think we can close out. Did you have any concluding remarks to add?

Yes. Look, we feel like we finished the year strongly. As I said, we're going to report results at the end of May. We're certainly pleased that we've been able to deliver on this transition from burning cash to now being cash flow positive and profitable. And as we go into next year, then we expect to have both growth at the top line, but also improvement in that cash flow and increasing profitability. So having come through the end of the year through those last 2 quarters, very happy with how that's tracked.

Great. Thanks. So thank you, Brian and James, for presenting the results, and thank you, everyone, for attending. This concludes the webinar for today.