Aroa Biosurgery targets sales growth and operations cash flow positivity in FY25

Aroa Biosurgery focuses on transitioning operations to cashflow positive in FY25
US distribution partner TELA Bio reports strong growth to flow through to Aroa
Biotech making strong progress on clinical trials and new product lines

Soft tissue repair company Aroa Biosurgery is focused on increasing sales of its existing products and delivering strong topline growth, becoming profitable and transitioning its operations to be cashflow positive in FY25.

Aroa Biosurgery (ASX:ARX) says it is confident of being cashflow positive in 2025 as it looks to synchronise growth with its US distribution partner TELA Bio, expand product lines and capitalise on growing opportunities in the wound care market.

ARX’s share price lifted more than 7% on Friday after NASDAQ-listed TELA Bio reported a strong FY23 result with revenue of US$58.5m, up 41% on FY22 which was in line with consensus and guidance of US$57-60m.

TELA provided FY24 revenue guidance of US$74-76m, with growth of 27-30%.

ARX produces its patented OviTex products for TELA Bio, which boasts a team of 80 specialised sales representatives in the US focused on breast reconstruction and hernia surgery.

ARX CEO Brian Ward says additional lines of its products for hernia repair and breast reconstruction will be released for TELA Bio over the next 12 months.

“It’s pleasing to see TELA report such positive results, with demand for OviTex products continuing to grow.”

‘Growing at a similar rate’ with TELA BIO

ARX took a hit to its share price upon release of its Q3 FY24 results at the end of January, where it downgraded its full year revenue guidance by ~8% to NZ$67-$70m, up 8% on the previous year.

It is now expecting an EBITDA loss of NZ$1-$3m, from previous guidance of positive EBITDA of NZ $1-2m.

The downgrade was attributed to overestimated revenue from TELO Bio along with a delay to a joint product development project with the company and slower than anticipated sales of its Myriad product range.

Ward says ARX’s OviTex and OviTex PRS remain on a strong growth trajectory. He says TELA BIO have held higher levels of stock over the last two to three years as they were getting started with their sales.

“They have now learned which SKUs are needed, which are fast and slow moving, and trimmed stock holdings to minimise obsolescence due to product shelf-life,” he says.

“They are now at a stage where they’ve had enough experience selling these products to operate with lower stock levels to support sales growth,” he says.

Ward says implications over the past 12 months for ARX has been that the company has not supplied TELA Bio with the same level of orders to the previous year despite Tela growing at over 40% on the previous year.

“Now that TELA BIO is into a new operating mode, we will be more synchronised.

“We would anticipate as move forward that our Ovitex sales we will be growing at a similar rate to TELA Bio which will have a big effect on our business and is a positive as we look forward to FY25.”

Change of focus for Myriad for ‘better return’

ARX’s primary market is the US, where 95% of its sales occur. The medtech employs a direct sales team of ~50, which had been budgeted to double their sales of the Myriad product range in FY24.

“We are going to end up growing between 70-80%, so less than we expected but still very strong growth,” he says.

“We fell short of doubling Myriad sales, partly due to switching from selling into a mix of specialities to a much stronger focus on targeting trauma centres.

“There has been a realignment of our sales effort which we are confident will give us a better return over the medium term.”

Ward says Myriad continues to gain momentum in sales and it is looking to further expand its sales team in H2 FY25.

ARX last week announced it had appointed US-based seasoned life sciences commercial strategist Darla Hutton as an independent non-executive director to help guide growth.

Upcoming growth opportunities

Headquartered in New Zealand, ARX’s proprietary ECM biomaterial, serves as the foundation for its range of soft tissue repair products, comprising a scaffold and complex mix of biological molecules known to be important in tissue regeneration.

ARX was found in 2008 by Ward, also a trained veterinarian, after discovering that the extracellular matrix (ECM) in the forestomach of sheep closely resembles human tissue and contains over 150 essential proteins for healing.

In 2023 ARX received FDA 510 clearance for a resorbable dental product using its ECM platform. ECM-based barriers are used for treating oral soft tissue defects, including guided tissue regeneration. The global dental barrier membrane market is valued at more than US$400 million.

ARX also has several upcoming catalysts, including its randomised control trial for Symphony, for treating diabetic foot ulcers.

“We expect an interim readout of that trial by October with the final results by March or April 2025 so it’s potentially a great catalyst for that product,” Ward says.

“We’re scaling up our commercial activities for Symphony and we will shortly begin selling into outpatient wound care centres where reimbursement is established.”

Ward says ARX’s largest prospective study to date, MASTRR, examining Myriad Matrix and Myriad Morcells across various surgical specialties and procedures to evaluate both short and long-term healing outcomes, is also making progress.

“We have now nine centres operational, and 268 patients recruited out of a target of 300 and we expect this to lead to at least one further publication this year,” he says.

ARX’s first clinical study of its Enivo system for the management of dead space after a mastectomy is expected to be finalised over the next couple of months with results published towards the end of 2024.

Positive results from the study, which began in New Zealand in August 2023, have been emerging with the Enivo system showing promise in the all-important management of dead space.

“We will have more clarity on the regulatory pathway for Enivo by the middle of the year,” Ward says.

Forecasting for growth to lift

Ward says sales are growing and FY25 should see growth lift further.

“Our sentiment about the opportunity in front of the company and our ability to build a really successful business in the sector over the next four to five years has not changed,” he says.

“There will be quarterly volatility just because we are in the early stages of scaling a fast-growing business.

“Operationally, within the business we feel really good about the prospects in front of us and we will do better in some quarters and worse in other quarters, but it will even itself out. Annually we will be delivering consistent growth year-on-year.”

Cashflow positive operations in 2025

Ward says ARX is aiming to be cashflow for operations in FY25.

“There are three goals for this this year, delivering strong topline growth, becoming profitable and transitioning to being cashflow positive for operations,” he says.

Broker Morgans has 12-month target price of $1.20 on ARX and an add rating, believing compared to its peers the company is trading at attractive levels.

Senior healthcare and life sciences analyst Scott Power says TELA’s latest result gives confidence in the growth of ARX moving forward.

“TELA BIO has provided guidance for CY24 of 27% to 30% revenue growth which is line with consensus forecast,” he says.

“All this works well for Aroa with TELA Bio being its US marketing partner and the company receiving 27 cents in the dollar of sales.

“We expect a positive share price reaction for Aroa on the back of this result.”