RUA Life Sciences plc (RUA) Earnings Call Transcript & Summary

Thank you for those of you who are joining us today to hear from RUA Life Sciences, who yesterday announced their interim results and have earlier this month completed a fundraising to give them the means to continue with their many products, which they're going to talk us through today. There will be an opportunity for Q&A at the end. Please feel free to submit as we go along or at the end via the Q&A function within Zoom. Otherwise, without further ado, I will hand over to Bill Brown.

Thank you, Hannah. We just move on. Joining here today with Lachlan Smith, our Chief Financial Officer, to brief [indiscernible] and Lachlan will introduce himself in a second. But I think just on quickly introducing RUA Life Sciences business. The 2 main USPs within RUA that's the textile expertise in implantable textile and implantable medical devices, the underlying elastin technology that sits within the group. And we're using the elastin technology as a platform technology to build a developing company. Within the portfolio, the sport business is to a profit cash [indiscernible] -- there's [indiscernible] and there's 2 businesses that are being developed through R&D phases and moving on to commercialization. And the strategy for each part of the business is to realize value create value from the company. We're based in Scotland, we've got 3 sites in Asia, [indiscernible] side of Glasgow and currently have 42 employees. And if I can pass to Lachlan, who'll take us through the interim results and position of the company.

Thank you very much, Bill. Yes, the past number of years have been underpinned by a number of factors, mainly the funds raised in 2020, which enabled the business to scale up this R&D activities relating to both our vascular graft asset and also make significant improvements in development in our hot valve asset. Coupled with that foundries, the business has seen over the past couple of years, a steady return to pre-covid levels of sales at both our cash-generating units. Encouragingly, both cash-generating units are expected to go over the short term. Our loyalty income stream, which is derived through our Biomaterials business unit and have seen a steady rise in revenues and modest growth of 6% on the prior period. Our contract manufacturing revenues were impacted by -- in H1 due to some operational challenges related to a delay in order fulfillment. And pleased to announce that the operational team at [indiscernible] worked exceptionally well both internally and externally with our customer during October and November and ultimately bring orders back in line towards our target by the end of month in November. Preserving our cash runway and focus on [indiscernible] has been essential to our financial strategy over the past 2 years with a small investment to upgrade our systems and new processes, including enhancing our financial planning processes. We operated [ indiscernible ] over expenditure. Furthermore, our new reporting processes are providing valuable insight to management to drive better decision-making. Over the course of the last 2 years, the business has continued to improve, the profile of both our Vascular and structural hot assets, with H1 [indiscernible] operating R&D expense, just under $0.5 million against a similar trend in the prior period. Excellent [ indiscerible ] costs in relation to R&D has reduced significantly as we pursued FDA requirement in our [indiscernible]. Reconcile back on losses before R&D is important for a number of reasons. Firstly, it provides a clearer picture of the company's core operational performance by excluding the impact of research and development expenditures. This helps the business base to understand how well the company's regular business activities are performing without the influence of R&D costs. Secondly, separating our R&D expenses allowed for a more accurate comparison. This is crucial for assessing the company's competitiveness and efficiency in its core business operations. Furthermore, it helps in evaluating whether the company is investing wisely in innovation and if those investments are translating into improved financial performance. Additionally, it enables better financial planning and forecasting by understanding the underlying operational performance without the noise of R&D spend, the business can make more important decisions about resource allocation, budgeting and overall financial strategy. Cash position as at September 23, was just under $0.5 million. Cash was impacted, as mentioned in H1 due to the aforementioned operational challenges and order fulfillment. A trading update in just the other week, they highlighted our current cash position at just over $1 million, which was boosted by both the business overcoming short-term operational challenges and the successful R&D tax credit claim. The total investment in fixed assets has resulted in the establishment of a pilot plan at our head office here in Irvine, and our pilot plant will be producing actual volumes of graft once the commercial partner has been sourced. It's worth noting also that there is no further significant capital expenditure anticipated in the near term. As mentioned, our cash position at the time was just under $0.5 million. We have close to about $1 million just as at the end of November. And the company recently announced that it has concluded a recent fundraising, which will see around GBP 4 million being added to the balance sheet. This additional fundraise [indiscernible] to the presentation. We'll provide the business with an enhanced and strengthened balance sheet to enable a better and more constructive conversations with commercial partners across over half of our assets and also that our vascular graft asset. And for interim period in 2022, management undertook the exercise to review how the business is managed and ultimately, how it should be presented to key users of our financial information. The segmental analysis and reporting has played a pivotal role in enhancing managerial decision-making. Segmentation, risk management to analyze the distinct business segments separately, [indiscernible] into the individual performance, the rest associated with each segment and the more the growth potential for each of those business segments. This detailed information enables management to allocate resources more effectively identify markets, optimize operational strategies and assess the impact of external factors on regional specific segments. A granular understanding of each operating segment, management can make informed decisions, allowing resources to opportunities, mitigating risk and ultimately scaling the business to more sustained success dynamic and competitive landscape. Moving on to briefly describe our portfolio of assets. Firstly, we have 2 profitable and cash-generating businesses. RUA Biomaterials did the IPO licensing business that own [indiscernible] a growing annuity business with a patent portfolio of 14 patent families. It doesn't require a huge amount of attention and sales are mostly generated through historical contracts. Ultimately, RUA Biomaterials is a fundamental and profitable business for the business and it generates a significant cash flow to help sustain some of the other R&D work that we have. We're contract manufacturing as we are [indiscernible] tech sales and medical devices set. It benefits from a long-term contract of over 10 years, and we have a fantastic partnership with our main customer, and that [indiscernible] could see revenues double over the short term. In terms of our pre-revenue businesses, we have RUA Structural Heart, which has evolved from a heart-valve developer to create of an outstanding hard-value for material, now that we made available to the heart valve industry and which is now needing commercialization. And the fourth and final portfolio company is RUA Vascular, which has had significant investment and now has the opportunity to develop into a medical device company in its own right, targeting the $1 billion vascular graft market in partnership with our global distributor [indiscernible]. Our passion [indiscernible] bit more insight into the overall business strategy looks like.

[indiscernible] what is the last [indiscernible] the key platform technology that sits within the group. I say is a family of polymers, so is able to be made in various mechanical properties to suit the needs of a medical device, a R&D designer. The benefits of Elast-Eon it is biostable, and it is very biostable and there are many materials that are biocompatible, but the body does break them down. Elast-Eon is designed to be a long-term implant, a lifetime implant. And as such, very little happens to [indiscernible] in the body. So it's been clinically proven that it's not calcific, so there's no buildup of calcium. No calcium attaches to it, which is very important, particularly we're looking at, say, in that hard valve uses. It is very durable and abrasive resistance that is biocompatible and is a very good in contact with blood and doesn't form clots. So the synthetic nature of the polymer is being used certainly within Elast-Eon and other customers as a replacement for what was head of tubing used as an animal byproducts. And I think that will become a growing feature in the medical device industry over the next few years as getting rid of, I'd say, that animal byproduct. The great thing about Elast-Eon is not something that requires for the development of what it has been in the market, but while it's clinically proven is well over 9 million devices now. And these are long term as in lifetime devices implanted in patients, well protected from an IP perspective, both from a trade secret know-how, but also the 14 patent families that sits sort of rounded material. And we've got the benefit of having an FT marsupial to provide the data to use Elast-Eon for regulatory approved material. It's a virtual business now in that we have licensed out both the manufacturer and the use of the Elast-Eon and that is growing. Some of the customers are shown you in the top right hand corner, the little graph showing the sales progression over the course of the last few years. So it's growing steadily. It will never be a multimillion-pound company, but we would expect to see that growth not dissimilar to what we actually achieved over the last few years. And moving on to the contract manufacturing business, it truly is an end-to-end a medical device contract manufacturer. The [ indiscernible ] will come in one door fully packaged medical devices can go out the other door. We're very much a specialist in [indiscernible] textiles. That's the niche in the market that we're operating in. And this part business came through the acquisition of RUA Medical back in 2020. We operate out of 4, a [indiscernible] clean rooms. [indiscernible] registered [indiscernible] with the FDA. And the key figures that say that particularly the customers you're looking for and have we got capacity to take on more work at something good the contract can we fulfill that. We've got -- we've got the space and capacity [indiscernible] then joining buildings that we can develop into. Moving on to [indiscernible] move on the slide, please. And cash, performance-wise, had a great growth in the [indiscernible] last year, pretty much recovery from COVID and the business operates on a very attractive 60% operating margin. The revenue forecast in the current year as Lachlan said earlier, it would be second half weighted because of some of the operational issues. We're now in the line if not just slightly ahead of budget within that part of the business, but we're expecting GBP 1.7 million in revenue from the contract manufacturing business this year. It's a business that we expect to grow over the next couple of years, and we've been working with global companies in bringing new devices into the manufactured with Rua. We've had a 6-figure supply agreement with the global business last year. And our principal customer will just create [indiscernible] a proper contract extension in that area. The opportunities for growth requests -- quotations requested proposals, which are working their way through with a couple of key customers and those should help the capacity to bring in excess of $2 million a year in annualized revenues once they've brought in. So you see the sales graph there for 2018, 2019, a very stable business. It was a product that was taken off the market by one of the customers within 2023 and suffered from COVID in '21, '22, the good growth from 2023, recovery from COVID you draw that line from 1.4 to 1.6 by the growth trend on accelerated be expected. So I agree business with they have good margins and kind of very visible growth opportunities from [indiscernible]. Moving on to the structural heart business by what we are trying to achieve. New technology is required within our [indiscernible] material. And the current technology is all based on 1970s technology. A two distinct types of valves, mechanical valves sort the black pit on the top or [indiscernible] tissue valves, which are used in both a surgical implanted valves and transcatheter valves. So the vast majority of the market is dependent upon the biological tissue. And the [ indiscernible ] valves that are actually [indiscernible] balanced cardium which is a coderived material. The continued use of the animal tissue, I think will eventually go. The market itself is best looking for alternative material to replace [indiscernible] 80% to 90% of the market is [indiscernible] on that [indiscernible]. For good material, what's required, it needs to be durable. If it feels, it needs to feel safely so that it's not catastrophic and can be used in both surgical or a transcatheter valve [indiscernible] surgical [indiscernible] the transcatheter valve replacement. We've been working in this area for a number of years, and we think we've got a solution to the problems that sit within the heart [indiscernible] material. We've created an in-house composite, and that's been designed as we say, they are to eliminate the use of animal byproducts, reduce or even eliminate the need for lifetime anticoagulation treatment. So a patient who's got a mechanical valve will be [indiscernible] for the rest of the life to avoid the risks of [indiscernible] and the calcification that you get in animal tissue valves, we believe, can be eliminated for the use of Elast-Eon. And with the last deal being a very good copolymer of a silicon and polyurethane is readily processable and can be taken into the form of [indiscernible]. And we think that was something that is a man made, it came from manufacturing cost of a valve itself that can be reduced to make it more [indiscernible] market. So moving on to the next slide Hannah. The chart on the right-hand side, it sets out the 5 or 6 requirements that are necessary for a successful heart valve [indiscernible] material, same 5 or 6, the one step sitting out the can stability is required in transcatheter. All the others are required in surgical valves, but the transcatheter also requires [indiscernible] stability. We've known from historic what the clinical work that's been carried out in the last [indiscernible] the green areas of local calcium susceptibility, low thrombogenic [indiscernible] through in clots and the hemo compatibility. So it's being fine within the blood you know that Elast-Eon provides that. The question is can our composite material that is related to a combination of Elast-Eon and underline textile substrates can be durable. We kind of work us [indiscernible]. And that's been the focus of what has been a [indiscernible] for the last year. We can move on and just pick up on the testing results that we've had from the material. The results have been spectacular in my opinion, based on some of the testing results that the team here have undertaken. But one of the biggest risks that we thought could be for a composite material is would it start to delaminate. It will not be stable enough to last in a moving environment long term. So we undertook, I think, will flex fatigue testing and run the material through 400 million cycles. 400 million cycles about equivalent to 10 years of a beating heart and the material at the end of that period was pretty much exactly the same as it was at the start off. There's no delamination and even the marks and [indiscernible] they haven't changed at all. We've put the material into a thin rudimentary heart valve design and ran both a durability testing and hydrodynamic test to see how it works. In durability, one of the key requirements for the flexible leaflet valve, which is certainly ISO standard and the FDA requirements is that the valve must be able to exceed 200 million cycles. The durability testing of the valve has been through that has demonstrated itself to be very, very stable. In hydrodynamic testing, basically what we're looking for there is does the material work as a heart valve and [indiscernible] perform well. The principal test within is looking at the pressure grading of the energy that's required to open valve [indiscernible] pump, a healthy heart valve will require maybe 5 millimeters or 6 millimeters of [indiscernible] to open if it's requiring 20 million to 25 million [indiscernible] started showing signs of the aortic valve stenosis. And at the time of that [indiscernible] gets about 40 the patients [indiscernible] valve. The mechanical valves in the market are very efficient from that perspective requiring maybe 6 or 7 millimeters [indiscernible] to operate. The biological valves are maybe 12 to 15. So they're getting closer to what would be stenosis still working the heart. Our leaflets we're working at 6 or 7 millimeters of [indiscernible] required to operate them. So very, very efficient from that energy perspective. The size of the valve and the leaflets is going to open, it certainly demonstrating that it's about a 25% increase in the size, compared to some on the market, we involved and the -- if we're looking from a transcatheter perspective, the bottom by [indiscernible] of the screens, which demonstrates will [indiscernible] 23-millimeter diameter valve does not necessarily need [indiscernible] bovine pericardium and in [indiscernible] down to the middle size using our composite, which is much thinner, bovine pericardium can reduce the size of potential of transplant of our delivery. So we think that we have to ticked all the boxes that's required in the development of the heart valve from both the right materials we're using the last year to the mechanical properties and the testing requirements that promotes the progress being done in 2 months. So just sort of moving on to the commercialization of the material. With the results to have and using relatively limited resources, we've achieved a huge amount within this part of the business. Because of leaflets has been developed, we've been able to manufacture and manufacture repeatedly the underlying comps of material. The [indiscernible] testing has been fabulous consuming over 10 years and [indiscernible] in terms of elimination. And then importantly, we have now filed a U.K. pattern, which is now been filed and submitted. So that's there to protect our underlying intellectual property in the business. So now rather than looking at developing a heart valve for sales, we think some of that's such interest that we're looking to take the material to the market by making available to other heart valve companies, they present to use our underlying technology to replace bovine pericardium. And with those developing interest from the industry, we'll have an agreement with one of the major companies in the industry, who will be undergoing their own testing to prove themselves with the data we provided them. It makes sense [indiscernible]. So the great thing about the composite is that it's almost design agnostic. So it doesn't require a special design to work or model the [indiscernible] polymer valve they've worked in the past that the limitations of mechanical properties of polymer to a specific design strength that sits within the polymer, the content material broadens the opportunity and reduces the risk potential within the valve. So we've been demonstrating that, that durability and flexibility and we've done nationalization groups through which we are licensing or partnering or even somebody [indiscernible] new time business available for outline sales, but that was not in the future. And moving on to the vascular business, if I can just sort of dig through the economics and where we stand with that business. As Lachlan mentioned earlier today, we've invested about GBP 5.7 million in the vascular area, that's sort of [indiscernible] with intangible assets, which we've invested through the P&L account before the restructure, an additional GBP 1.3 million in plants and equipment within that. The budget as it currently stands, which we hope will reduce, but just kind of putting everything in that's required. It's a little over GBP 6.5 million of the costs need to be taken to be expanded in this area before a regulatory approval would be available. But on that point once is approved just from the output of the pilot plant alone based on the sales multiples that vascular businesses change hands up, but the entire project just on the pilot plant would be worth north of GBP 25 million, double the capacity by moving into another site. It goes in a straight line with your sales potential. So that GBP 26 million is limited formally by the production capacity of the pilot plant. The cost of capital to RUA is painful enough with the fundraise we've recently gone through. But to fund the additional cost, I think it was just -- would be too dilutive. So the opportunity that is to pursue a third-party funding for the regulatory pathway of the vascular projects. So just in sort of summarizing through as to where what we've achieved with the vascular business, we have a really good data set of what has been done on us and the performance and viability of the project, which we place to develop and manufacture the pipeline. The manufacturing plant has been set up, will be in the pilot capacity, but we verify that it can produce the enough product in the commercial market launch requirements, and it can be done at commercial margins. We understand the economics and the potential of the market itself and just the pilot plants, our party revenue share through distribution north of GBP 5 million on that at a very attractive margin. And it's a scalable business as it scales the cost of goods, which is I just mentioned to you the distribution partnership that we've got a place to take the product to market. And some OEM interest in the -- in our product line, we saw some already to medical-based companies as part one of their devices. And the last 2 years we've spent on the FDA subprocess, and a really great pathway. So what we're looking to do is capitalize what has been done to date by bringing a third-party financing to take it to the stage of being a remarkably safe [indiscernible]. We got real pathway in the next slide, which is available [indiscernible] to spend a huge amount of time on it. This is the path we're looking to be [indiscernible]. But based on the [indiscernible] that need to be carried out there [indiscernible]. Basically repeating some of the done previously on the product, but taking additional pain points and [indiscernible]. And then the clinical work relatively small clinical trial of our [indiscernible], maybe just a bit of excess in the [indiscernible]. So the process that is, I think, a couple of years working at a well-defined well understood, but it's just over 2 years before we have a commercial product with [indiscernible] is subject to the market funding [indiscernible]. So the portfolio wise, the portfolio management, we know that the balance sheet to take the company forward and new objectives, and what we achieved with each part of the party businesses within RUA material is a platform technology. We're going to highlight here that has not been exploited in half year. We've had some interest for other people looking at license the heart valves. We then -- remains potential strategic [indiscernible] within structural heart with a disruptive comps and material. We've got agreements with the other parties to test our material [indiscernible] work at the heart valve, and which could ultimately go over to licenses or commercial arrangements and our expectations in the part of the business is that within developed in the short term that we turn this into something that is at least catching [indiscernible] not cash. RUA Vascular, it's sort of up and ready to be taken to the next stage, the products there. We can produce it like the vascular has achieved, but just sort of looking at our off-balance sheet finances to take it to the next stage. And we're saying contract manufacturing, we need to complete with the work the customers with the cost to do in the new product that the new development, taking contracts on, converting them into the supply contracts. So in summary, before I open up to any questions, look maybe fundraising has been completed. So more than 50% of the market cap is in cash to go up on this. The valuation comes very much underpinned by just the cash generative businesses, the RUA Biomaterials and RUA contract manufacturer. We have had some real good technological breakthrough within the heart valve business, which is provided partly commercialization much, much quicker than the business and the previous plan for developing heart valve, which is available. And then within the RUA Vascular, the upside in that business is very well positioned in commercial. The business model works well and the [indiscernible] agreed. We just now look into bringing third-party financing to share that future burden to get it to the next stage. But as I said here, the balance sheet is strong. It allows to undertake the management activities to create value within the group. The benefits of having that strong balance sheet is we've already had a couple of contracts from large companies see well done on the fund raise, which means that, yes, we think it was great that we managed it and we achieved it, but also sent the message that they have been launching our financial position. And certainly, we're seeing developments to be in a stronger position. So that's a pretty much the presentation and Hannah, if we have any questions from the audience [indiscernible] at least try our best to [indiscernible].

Let's make a start. Do your assumptions on the pathway to group profitability include payments from licensing partners from the heart valve or vascular graft products? Or does it just refer to your revenue-generating business segments?

The -- the model has been put together on a quite consent basis. I mean so we're making the assumption. But what we think will happen in biomaterials and what we think will happen in the contract manufacturing will come to fruition, because it's pretty good understanding of what was having there. Within the heart valve part of the business, the assumption is that we get a minimum level of license fees or whatever that basically covers the costs that we can cover in that part of the business. And just to be in a worst-case scenario, we have made no assumption of adding a successful partnership in the past on the side of the business. So we get there on basically what kind of the here cost being covered, but the profitability is coming from the 2 parts of the company on kind of cash generation. That's the assumptions in the model. There's no guarantee to the future ever.

Best laid plan. No. Right. Thank you. Onwards, on the heart valve division, this is a long question, so bear with me. The company has said it expects to shortly formalize an agreement to provide composite material to a large heart valve company for its own testing. And now that's an attractive data pack that's available, we intend to broaden this further through the industry. The questions that follow are, can you say what it means to supply a company with material for its own testing? Is it simply about supply? Or is this a licensing agreement? And if it is licensing? Yes. So take it in part. Go with that bit.

So I'll take in parts. So what does it mean? So we've [indiscernible] to see some people that we've been -- we're not in the industry, we have at the industry been able to perform [indiscernible] doing. Back in June, I think, there's a trading update that in the middle of it, had some chat about the heart valve of the composite material, maybe coincidental or maybe that people would want to -- what we announced what we see, but we had an approach from one of the people that we talked to say, "Oh, this sounds interesting, can we have a lot." So we presented to them. We took them through under the data from our testing results. And the response on that was pretty much like a wow, this sounds really good, but they don't want to take much for it, they want to test themselves. They'll have their own testing protocols. They will know how one material performs against other materials that they have tested. So the -- we'll allow people to take our material, undertake specific testing and if it gets the results that we've had ourselves, that will open and then go on to have a discussion about do you want to do some of it? Do you want a license by material protocol or whatever. So that sounds kind of the core side to it. But despite what we see anybody, any big company will want to do the test itself to make sure that it meets the overcome on the [indiscernible].

Okay. Can you offer any guidance on how long testing might take?

The testing -- I'm not going to discuss what testing regimes that they are doing. Some of the testing itself shouldn't take that long, something that may take slightly longer. But similarly, I'm not going to stop speculating putting time scales on when we'll get responses from companies that are substantially larger than us. But one of the benefits we have as a small company is the ability to do things relatively quickly. Something that we might say take us a month might be multiple months for companies because of the processes and procedures in the company. So I'll speculate myself on those speculate in public.

Thank you. Okay. And perhaps for those not say, with data packs, what does it mean in terms of timing and protection of IP?