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

Thank you. I'd like to welcome you to the results presentation for RUA Life Sciences for the year ended 31 March 2022. I'm joined by Caroline Stretton, our Group MD. I would like to give a quick introduction to the group, the people involved in running the group now, our financials and the projects that the group is working on. RUA is focused on developing our own range of cardiovascular devices, particularly blood contacting devices. And those devices are enabled by our in-house technology called Elast-Eon, which we believe to be the world's leading long-term implantable polyurethane. So as well as developing our own devices, we're also continuing to enjoy license revenues and royalty revenues from licensing those materials to third parties, other medical device companies. A brief introduction to the executive team. I'm Bill Brown, Chairman of the company. I have been involved in RUA or its predecessor company since about 2011. The other members of the executive management team are John McKenna, who looks after marketing. John has been involved in cardiothoracic marketing and cardiovascular devices for well over 30 years. We've got 2 new members to the Board and the management team in Lachlan Smith and Iain Anthony. Lachlan joined us in December last year as our Chief Financial Officer and joined the Board, I think, on the last day of the financial year. And Lachlan comes from high-tech businesses, high-growth businesses. The other new member of the team Iain Anthony is in charge of clinical and regulatory and comes very important time as we are progressing the regulatory path of the business. And last but not least, it's Caroline Stretton, who took over as Group MD on the retiral of David Richmond from the Board at last year's AGM. So if I can hand over to Caroline, who will give a bit more detail on the group.

Thank you, Bill. It was in 2020 that the IP licensing business of AirTech International merged with the owner-managed contract manufacturing business of RUA medical devices to create the RUA Life Sciences group as well as making key appointments in the executive team, as Bill mentioned earlier, we have also recruited into the wider management team, and that's enabled us to transform the business from that of the original contract manufacturer into a fully fledged medical device manufacturer. We have 4 businesses within the group, all exploiting the group's polymer technology, and I'll cover that in more detail on the next slide. But we operate out of 3 sites in [ Airstar ] near Glasgow, the third of these sites was purchased in November last year, and we now have 28,500 square footage of research, office and manufacturing space, and that includes 4 ISO Class 7 and 8 clean rooms. So plenty of capacity available for future growth and all of our production facilities are ISO 13485 FDA and PDMA registered, allowing us to sell into many global territories. And since the creation of the group, we've actually doubled the workforce and our current employee base is now 43 and growing. Next slide, please. Of the 4 business units within the group, 2 are mature revenue generating and highly profitable businesses. RUA Biomaterials is a licensing business, which owns the Elast-Eon IP. Annual revenues of GBP 500,000 comes from license fees and royalty payments from sales of Elast-Eon by Biomerics, our manufacturing partner. So it's only outgoing cautiously to patent renewal fees and is the Canton annuity business. RUA Medical Devices undertakes contract manufacturing for third parties as well as being the center of excellence of processing of Elast-Eon based medical device and this is the engine room for development and manufacture of all of the group's products. Annual revenue just over GBP 1 million. So both of these highly profitable business units are funding the overheads for the medical device developments within RUA Vascular and RUA Structural Heart. So it's a key growth driver for the group is exploitation of Elast-Eon as an enabling technology. RUA Vascular is involved in the development and launch of a vascular graft pipeline, and this is targeting the $1 million surgical thoracic aortic market and value will be maximized by growing scrap business to achieve attractive levels of profitability. And a 10% market share is predicted with the route to market being through distribution agreements. RUA Structural Heart is positioning itself to disrupt the $8 billion surgical and TAVI heart valve market. The innovative polymeric heart valves technology platform could be a game changer since there's a real unmet need with existing treatments for aortic heart valve disorders. There is no solution that currently exists that addresses the durability of the heart valves without significant compromises having to need by the patient such as life-long anticoagulate use. They proposed it to market for RUA Structural Heart is either via a partnership, licensing or sale to a major player in the industry at a point where we have significantly derisked the technology and increased the value of the business and made it an attractive proposition prior to clinical trial or launch. Back to you, Bill.

If I can just quickly look at the results of the year to March 2022. All of the numbers are actually pretty good with 6% growth in revenue, which is all volume-driven. There was no price increase behind that. We managed to increase our gross margins despite some inflationary pressures, and they've increased to 84% over the course of the year. The Biomaterials business, not just having great gross margins, it's got fantastic net margins as well, which are actually running at over 90%, which demonstrates that annuity business type that Caroline mentioned earlier. And within our contract manufacturing business, it achieved a net margin of 47% during the course of the financial year that we're reporting on. So in excess of a GBP 500,000 net margin from that contract manufacturing business. We continue to invest in the overall RUA group, over GBP 900,000 being put into the R&D projects and a further GBP 900,000 into the capital structure and infrastructure of the company. Cash was well managed at the year-end, we closed with the -- just short GBP 3 million in cash. The operating highlights, which is what's driving the business. We were undertaking the transformation from being a contract manufacturing business and a polymer licensing business into a fully fledged medical device manufacturer. And it's not an easy task, a lot starting to change, but we're looking great progress has been made in that. As Caroline mentioned earlier, we've been building strength and depth in the 4 key departments at present, which is quality; regulatory; R&D; and finance and within those areas, 2 new executive directors appointed in Lachlan and Iain. One of the keys to the success of the company is making sure that our people are fully aligned with the corporate objectives and some great systems and procedures have been put in place to make sure that not only our people aligned in the node to do so that we can achieve our objectives, but if anything is going to off track, we can pick up on that and take corrective action earlier. So there's some really good systems and processes being implemented. Along with that, we're developing the manufacturing process for the grafts, so as that when they are launched on approval that we're able to meet the anticipated demand that we will have for the products. And part of that regulatory process despite the disappointment we have with the 510(k) process, we are currently in a very constructive dialogue with the FDA on that regulatory pathway, and we'll discuss more of that later in the presentation. So just looking at the profit and loss account, the Biomaterials business, which turned over GBP 487,000, about GBP 20,000 the previous year is down because of some timing differences with a -- with one particular licensee, just the way that that contract was accounted for. We had more than 12 months, the revenue recognized in the previous 12 months and just 12 months in the current year. So actually, overall, volumes were up, but just held back by that royalty cap issue and currency conversion. The contract manufacturing business saw really nice growth, up 11%. And the gross margins have increased from 82% to 84% without any price increase issues within that. All of the R&D has been expensed to the profit and loss account, GBP 903,000 this year against GBP 541,000 last year. And within the overall admin cost, there's a GBP 450,000, GBP 460,000 of that is noncash items and amortization, share-based payments, et cetera. So as I said earlier, the cash cost are [indiscernible]. On to the balance sheet. We've invested from the GBP 900,000 in fixed assets. One of the main issues within the balance sheet was from what we're doing on negotiating the contract with the principal customer. That customer had previously been on a working capital cycle where they were prepaying for products and in exchange of the prepayment they we're getting a very attractive discount on the list price of the products. That post -- that's a kind of working capital prepayment issue. It was -- made it very difficult to then look at the prices charged to the customer. So it's been changed now. They've gone on to regular credit terms, so we're no longer getting that discount, and it's also enabled us to put through a quite a substantial price increase over the course of the next 12 months, which comes through in a quarter-by-quarter basis. So without any further volume increase, we should see an increase in the revenues from the contract manufacturing business. But the volumes are looking to continue to be improving from the pre -- the COVID impact. And the balance sheet is strong with good cash on the balance sheet, the only borrowing's related to effectively a mortgage or loan that was taken out on one of the properties. And from cash management, the big difference in the current liabilities was the payment of the deferred consideration on the acquisition of RUA Medical. So just moving on.

Yes, as well as our technological advancements, we are making really good progress in our approach to ESG. We have aligned our business practices with the UN 2030 sustainable development goals. We believe these are key to achieving a much more sustainable future and also improving staff engagement. Included within our environmental targets is achievement of ISO 14001 Environmental Management System Certification which will improve our environmental performance. And we have taken advantage of energy efficiency assessment to access grants to improve our infrastructure and to support employee conversion to electric vehicles. All employees have access to an EV salary sacrifice scheme and EV chargers are also in place at all sites. Being in the manufacturing and engineering sector, we are very cognizant of diversity and in quality, and we promote an inclusive workplace around 1/3 of our staff are females, and this ratio also extends to the operational leadership team. Our employee satisfaction service score remains high at 85%, and this demonstrates that employee engagement remains consistent and positive and we remain a living wage employer. So even though the workforce has doubled in the last 2 years, all employees continue to have personal development and upscaling plans to ensure they reach the full capabilities. And now 10% of our employees are undertaking either modern or graduate apprenticeship schemes. And we were really pleased this year to reiterate our student intern program after it had been on hold for 2 years due to COVID. Next slide, please.

So just briefly, the business is based on the platform technology of Elast-Eon. What is Elast-Eon? Elast-Eon is a copolymer of polyurethane and silicon. It has the mechanical properties of polyurethane and the biostability of silicon. The key issue with it is that this is a clinically proven product. It's been in the market for 15 years. It's been in human use for 15 years. There's well over 8 million very long-term implants. So it's a material that is proven in the body, recognized by the FDA and under the [indiscernible] has been suitable for long-term human implant. So the suitability is down to being biocompatible, which anything going into the body needs to be, but it is in the long-term biostability and the effective, the material being effectively inert. So it doesn't calcify. It doesn't throw a thrombus. Our licensees are continuing to grow their businesses on the back of good performance from the Elast-Eon polymer, and they're seen in pacing leads from Abbott rescue stent for a BIOTRONIK and [indiscernible] stent. In the -- some of the world's leading ECMO catheters from -- so by Getinge. So the business is growing. There's a good steady kind of growth prospect on that. And it is the material that all of our new devices that we'll be bringing to the market is being built upon. We can move on to the next slide.

We mentioned earlier, our key growth driver for the group is the exploitation of Elast-Eon as enabling technology and RUA Vascular are working towards the launch of an Elast-Eon-sealed vascular graft pipeline. The total market for open surgical graft is $1 billion. We are targeting the thoracic aortic market, and that's a specialty area of heart surgeons rather than cardiologists and the thoracic aorta is that part of the aorta above the abdomen, so the aortic arch and the ascending and descending aorta, it's a niche space. We believe our target of our 10% market share is actually very conservative. And the market leaders Terumo and Maquet are still using nearly 40-year-old technology, which all contain animal-derived tissue. So our initial launches from the graft pipeline are the large bore roots and straight grafts. We have average selling prices ranging from GBP 700 to over GBP 2,000. And we're also planning to launch a more complex graft called Frozen Elephant Trunk, and that can sell for up to GBP 80,000 in the U.S. market. Next slide, please. So why are the market leaders using nearly 40-year-old technology. Well, there just simply has been very little innovation at all in surgical grafts over the last 70 years. In the early 1950s, the first PBC grafts were hand sewn together and implanted in dogs to replace damaged aortas. And in the late 50s, the DeBakey graft was a breakthrough. It was the first knitted Dacron graft in humans, but it was unsealed so it needed to be pre-coated with the patient's own blood to prevent leakage. Then came the Terumo Vascutek and Maquet graft in 1987. And they are still the market leaders today for large bore. There have been some reported leakage issues with these products due to issues with consistency of manufacturing processes, search and handling. They have a risk of continuity of supply of collagen and gelatin, and only 2 countries in the world have the capability to supply this BAC free tissue which makes it very expensive and highly regulated. And it has become effective with BAC, the supply will stop. And what's really gathering remains over the last few years is if a patient doesn't want a graft containing animal-derived material due to religious, ethical, moral, dietary reasons, then there is no alternative in the market. So there are some countries already who have made it mandatory that if a known animal-derived alternative is available, then it must be stocked in hospitals and use for patients. And of course, in a post-COVID world, the risk of cross-species contamination will almost certainly drive regulators to reconsider the use of devices containing animal tissue at some point in the future. The Maquet Vascutek graft, they command a very high gross margin. So the only real innovation has been with a hybrid surgical and endovascular Frozen Elephant Trunk device. It was launched in 2004. It's a stent graft that does have limitations, including leakage and thrombosis. So with our graft pipeline offering the non-biogenic technology, free from animal-derived tissue and also addressing the limitations of the market-leading grafts, we believe we do have the potential to be a leading player in the graft market. Next slide, please. Just touching on the progress that we have made with the vascular graft development. We have completed all the necessary testing required for FDA regulatory submission. We completed a 6-month animal trial, and we had really favorable results when compared to Terumo's Gelweave products. But of course, with all medical device submissions, that is an inherent risk regulators disagree with our strategy or ask for more data. Historically, the FDA has always approved large progress by the 510(k) route without clinical data. But since our annual study showed a difference in external graft healing properties, the FDA had essentially 2 options available to them. They could determine that our device was not substantially equivalent, which would have put us down the PME route and it's an order of magnitude more complex in terms of time and cost. But instead, they offer to continue with the less onerous 510(k) process on the proviso that we submitted clinical data to support safety of the graft. So of course, we accepted that offer, and we are going to be conducting a relatively small clinical trial and manage the delay to the U.S. launch rather than in [ CAR 4 ]would have been an extended delay if we went down the PME path. The clinical study that we're planning to perform that will enable us to look closely at graft performance versus predicate devices. There was a difference in healing seen in the animal trial and that was the external fibrous decapsulation of the graft. There was also less inflammation noted and less leakage noticed. So our graft could really have huge advantages of quicker healing, less time and [indiscernible], meaning quicker discharge from hospital, so less costs being incurred and also allowing reoperations. To be a leading player in the graft market, we need to get the distribution strategy right. So our route to market, we believe, will be much more efficient through a distribution route. We will leverage existing and experienced sales teams. Two options are being progressed at the moment. The first through regional distributors. They are normally owner managed, they are entrepreneurial, who use local networks; and secondly, through distributors who have a more global reach. They already sell complementary products to heart surgeons, so they have an excellent sales network already in place. The latter probably be more advantageous in the medium to long term. Next slide, please. So in terms of timing, we plan to start the clinical trial this fiscal year with primary endpoint being early 2024. We are continuing on a very low-risk regulatory pathway. So it's a case of when rather than if we get 510 (k) clearance to market in the future. And this is expected towards the end of 2024 with first sales in the U.S. very soon after. The clinical trial was always required to support regulatory approval in Europe and also to support uptake of the graft in the U.S. by the wider surgical community, and that would enable sales in the U.S. to slowly gain traction. Since we will now have clinical data ahead of the U.S. launch, we will see a much faster ramp up in sales in the U.S. and the time to maximum market penetration is relatively unchanged. And we will also use this clinical data to support global regulatory approvals, other grafts within the vascular pipeline from 2026 onwards. The Frozen Elephant Trunk device will need its own separate clinical study and launches of this device are estimated in 2027. Next slide, please.

Thanks, Caroline. To the question that I think can be asked and this is why the patients need an alternative to the current technology that's in the market. And there's 2 real drivers of that. One is the current market technology results in a patient compromise. And the other is that there is a huge unmet need in the developing world where the current technology isn't really suitable and particularly the price points that haven't been sold at the price points of manufacturer makes it very difficult for the demand for devices within the developing world to be met. So the compromises that I mentioned affect both the mechanical valves and the biological valves that are in the market. A mechanical valve will last pretty much forever. They're exceptionally well-engineered. Good pieces of engineering technology. But those devices, they are noisy. Study suggests that up to 50% of patients who have a mechanical valve would prefer to have one that didn't make any noise and would actually contemplate a re-op on that. But -- so they're noisy and the patient also requires to be on long-term anticoagulation treatment. It's because the valves are tending to be thrombogenic. So the valve thrombogenic with patients used to be a blood thinner but there's too much blood thinner, the patient then runs the risk of a major bleed. So quite a compromise to be balanced here. The biological valves, they don't require long-term anticoagulation treatment. They don't have a clicking noise. But they are expected to degenerate and eventually fail, and there's actually a clinical term, part of which is called Structural Valve Deterioration, which all of the biological valves start to suffer from. So valves have been designed using that -- a biological material, which is a bovine pericardium. They are now actually being designed for failure where the frames can be expanded, where other valves can be put in the place. So there's big compromises there. And there's currently no polymeric valve on the market. A company Foldax has -- is doing early-stage clinical trials. And at the point of forecasting into that, their business was valued by the investors at USD 150 million. So what is RUA's solution to the compromises that patients need to face. One is the benefits of the Elast-Eon material. It is in the most biostable of a long-term plant will be polyurethanes and doesn't have the problems of all the materials. And in addition to that, we've got what we think is an exceptionally good design that has limited the level of stresses that are on the heart valve leaflets. We've fully eliminated the use of animal byproducts by having a valve that's more like the natural valve. The patient shouldn't require long-term anticoagulation treatments, which are required from mechanical valves. And because Elast-Eon is completely non-calcific, it shouldn't have the problems that are associated with the biological valves with calcification. The calcification is the route to failure. Elast-Eon itself is readily processable which can lead to significant reductions in the manufacturing cost of heart valves, which opens up the potential of treating the patients in the developing world in India, in particular, where the constraint is the fact that the current prices that they're able to afford are not dissimilar to the actual underlying manufacturing costs of the valves that are in the market just now. So moving on to the next slide. Where are we in the process? We had an interesting issue came up when we were looking at the material that have been created for the graft project. Within that, we realized it would create a composite material that might just be a step change and improvement in the potential for polymeric valves. One of the risks that any heart valves got to look at is the potential for catastrophic failure. There are devices that are made out of polymers in medical use that can -- every now and again, has got a catastrophic failure. And we need to make sure that any valve that we take to the market has got that risk absolutely minimized and eliminated as best as possible. And so that's why we spend a lot of time on the manufacturing trials, looking to improve the quality and the durability and the repeatability of manufacturing, which has gone well. But we're currently working in sort of 2 parallel programs just now, which is the 100% polymeric leaflet and about using the same underlying design, but using a much, much stronger composite material that's been created through a combination of our textiles technology and the application of Elast-Eon to the devices. The proof of concept has shown that the design works. It's got very low ingredients. Works hydrodynamically, it's actually well. Where we're looking at taking the projects is to get during the course of this calendar year is to decide which one has got the greatest chance of creating a valve that's going to be far best for the patient, can be commercially exploited on that basis. So bringing up broadly the same phase, compare one to the other and then push forward on the various trials that are required. And so we'll be hoping that in the calendar year 2023, that we'll be taking the first of our valves into animal testing. We recognize that this is an industry that's dominated by big players, heart valve clinical trials are hugely expensive. And so looking to all the work that we do on regulatory, it will be of the standard that's required by these bigger corporations to ensure that we've got the best chance of any future partnership or license transactions with them. So moving on just to the summary of the group, Caroline touched on this earlier where the group businesses are. So RUA Biomaterials was described as an annuity business there's close to -- there's around about GBP 0.5 million of annual income from that. Any annuity business on that kind of basis is going to be, in my view, worth the sort of minimum of GBP 5 million, which is not far off our market cap when you adjusted the year-end cash. RUA Medical Devices, the contract manufacturing business, growing strongly, will continue to grow, and it has been the recipient of some really good investment in that area. Again, broadly 50% gross margin business in the year just past, generated about GBP 0.5 million of net contribution to the group. Contract manufacturing businesses have been changing hands on 10x to 20x EBITDA. So that would value our business on that matrix somewhere between $5 million and $10 million. RUA Vascular will be a game changer in the large bore vascular graft area, particularly those devices focused on the heart surgeon and it serves a $1 billion market. And as Caroline said, it's a question of when, not if, that we get these grafts to the market, and we certainly believe that the benefits that we think are going to come through from the clinical trial that achieving a minimum of 10% market share on that should certainly be the minimum target that we're setting ourselves and our future partners in there. And then the Structural Heart development polymeric heart valve. We've already seen what these programs or polymeric valve program at the point of going into human trials have been valued at. We're looking to take what we believe will be an improvement on even that into trials along with partners in the future. So that's the summary of the group's activities. And I hope that it's been able to give a better view of what what's been achieved over the course of the last 12 months, and we would expect the business to be going over the next year. So thank you very much.

To you both, back in February, Caroline said that one of the key players in heart valves was listing them that day. How did it go and have relationships being maintained since?

I think the visit went exceptionally well. We have -- with people in looking at really sort of 2 or 3 different project opportunities, but kind of all really around textiles and what we're doing in grafts and [indiscernible]. And I think the -- I think if anybody from that company [indiscernible] are we pretty impressed on -- so the OEM opportunity, that's progressing exceptionally well and project management teams [indiscernible] what we get on the [indiscernible]. From my perspective is that discussions at a sort of operational level have also moved into more of the corporate level. We're having -- exploring to see there's any touch points within the 2 businesses that we can work together in the future. So we haven't achieved anything yet, but yes, we are still talking in -- yes, I think it was a huge amount of the respect of what has achieved from some of that's pretty been clear in the industry.

Thank you. And what is the company's strategy to ensure it has sufficient funds to progress the 510(k) clinical study, bearing in mind current low market cap?

I don't think that's necessarily something appropriate to answer at this point, but we do recognize that the clinical study is going to be paid for. We do -- we've said in the annual report [indiscernible] capital statement like things that's funding issue will arrive. But I'm not going to speculate on a plan or how much or when that kick off. I think the key thing would be is to get the agreements with the FDA out of the way first, so that we know exactly what is that's required then we're going to speculate. We've got a view of what it will be but the project that you're actually [indiscernible] being too pessimistic, we need to do X number of patients rather than the Y you suggested. I think we got visibility on that.

Okay. Your last 2 announcements mentioned 2 prototype aortic heart valves, why 2?

It's the 2 different materials. So it's been driven by -- we think we've got an exceptionally good design that has reduced the level of stresses on the heart valve. We were really excited by the 100% polymer, the advances that have been made in the manufacture. We've just taken a -- not step back that some of the stuff that's come out of the graft area has been so exciting as a potential material that we're willing to get this working and trying the early prototypes are looking really, really exciting. Very low pressure agreements require to open them, durability [indiscernible] quite exciting as well. So it's something that really came out of left field from the -- out of the graft project. And we haven't still created this composite material. I hope. And think it's going to be pretty unburstable, but still maintain with the blood contacting properties and lasting.

And what is your stance on the business development interactions on your products and the orders from existing and new customers in RUA's contract manufacturing business and on the direction of the recovery from the pandemic by the medical device sector?