Kiwi biotech makes its mark in ASX debut

Brian Ward is the CEO of Aroa Biosurgery, which is an Auckland-based soft tissue regeneration company that recently listed on the ASX.

Aroa uses its proprietary Endoform technology, which is derived from sheep’s fore-stomach, to make medical products that improve the healing in complex wounds and soft tissue reconstruction. They've already got five commercial products approved for sale in the US which is their main market. But as Brian explains to me, they are looking to slowly expand into Europe.

It's an interesting company and one of the few brave enough to IPO during COVID and Brian explains to me how that's been.

So here is Brian Ward, the CEO of Aroa Biosurgery.

Table of contents:
IPO
Company description
Endoform technology
Regulatory approval
Addressable market
Expansion beyond the US
Distribution of products
Competition
COVID impact on business
Pipeline 

Thanks for joining us Brian, in a time where IPOs are quite rare, Aroa has just recently completed one on the ASX. Could you tell us a bit about the IPO? Was there ever any doubt about the timing given everything happening with COVID?

Yeah, look, we signalled that we were going to do an IPO this year and certainly up until March, we were pushing pretty hard to get that done. March, everything kind of changed around us, so we sort of paused just to sort of see what would happen in the market. And I think from the non-deal roadshow we'd done in March, we had really good strong institutional investment. I think when it sort of came later, sort of by May, we saw our confidence had really improved so we decided that we'd go back and do it. I think once COVID struck, we were a little bit uncertain there for a period of time, but I think just based on the strong institutional interest we decided to push ahead and get it done.

And you raised $45 million at 75 cents per share. Could you explain a bit about what the fresh capital you raised is being used for?

Yeah, so Aroa has been around since, well for the last 11 years, and over that time, we've built this really strong platform. Development, manufacturing and initial sales in the US and we're at a stage now where we are beginning to really expand what we're doing in the US. We have one partner there TELA Bio that's selling in hernia arrest. We're now building out our commercial operation there. Most of the funds from this capital raising will go towards expansion of our commercial team, and that's our commercial team in the US.

We're also seeing increasing demand for product generally and so on the back of that, we're increasing our manufacturing capabilities. With the existing facility, we have capacity for about $30 million in sales, we’ll invest another $4-5 million in the next year, and that will then take that capacity to about $90 million in sales. We're at a point now where that makes sense for us.

I just want to turn our attention to what Aroa actually does, you describe yourselves as a soft tissue regeneration company. Your products are aiming to make the healing process faster and better quality for these soft tissue injuries. Would that be a good way of explaining it?

Yeah, that’s absolutely right. We deal with wounds and soft tissue injuries that are very hard to heal in people, and typically they’re at the more complex end. Our technology is an animal-derived scaffold. It's a scaffold that's both an architecture that cells can move into, but it also includes a number of signals that are really important in the healing process. And so this material is processed and then fabricated into a range of different devices. Our simplest devices are for diabetic and venous ulcers. Typically hard to heal wounds in elderly people. And then our more complex devices are combinations of this biological material and synthetics and that's in both hernia repair and breast reconstruction. There's quite a different array of products. There’s five commercial products in the US currently. But yeah, they are really about healing, soft tissue that's really hard to heal in patients

And the products, I understand, are based around and built from the central platform called Endoform. Could you tell us a bit about how that works in terms of healing? I understand Endoform is actually derived from sheep’s fore-stomach, which is a very New Zealand story!

It's a very New Zealand story. Yeah, and so what we do is that we isolate a very specific layer from the fore-stomach of sheep, and it's a layer which is comprised of something called extracellular matrix. And what's unique about the fore-stomach, it has a very thick layer of this material that's very rich in biological molecules. Not only is there this collagen architecture, but we've identified over 151 other signalling molecules that are associated with that matrix. It allows cells to move into that scaffold and then lay down new tissue and that happens very rapidly and the quality of that new tissue is very good. You get very little scarring associated with this, and it's very conducive to rapid tissue formation.

The other thing that's very unique about the fore-stomach matrix tissue is that it's a tissue that's full of blood vessels and so when it's purified, you end up with these vascular channels through this material, and that allows new blood vessels to be established when it's implanted and rapidly revascularize this material and blood flow and blood supply is really important to tissue regeneration. You sort of have the best of both worlds. You have the scaffold that has a great structure. You have these signalling molecules, and then you have this dense network of vascular channels that enables blood vessels to re-establish really quickly. That material then just becomes a building block for a range of different devices.

As you said earlier, you've got five commercial products already approved for sale in the US based on that Endoform technology. Does every single product target a different type of injury or surgery?

Yeah, that's the beauty of this platform. We were able to use this technology for very specific use cases. We started off in diabetic and venous ulcers, which was really the simplest place to start, and then over time we've developed more complex products depending on the different needs and the different anatomical sites. The diabetic and venous ulcer product is just a single sheet of the material. The hernia product is a product that is a multi sheet product that's either combined with either permanent or resorbable synthetic fibres. They're all based on that platform, but the design is very specific for the particular use case.

What sort of regulatory approval have you received from these products and whereabouts? Because as you said, your main market is the US.

We really, from day one, we've been focused on the US and the reason for that was that they have a very good regulatory regime there and the standard’s very high. We wanted to make sure that our products were judged against that standard. We have almost over 10 regulatory approvals in the US now for our products. They've all been cleared by the FDA and subject to rigorous review through those processes. You know, there's a number of different regulatory pathways for medical devices there, our products that have been approved through the 510(k) pathway clearance process.

What's the addressable market for all of your products in the US at the moment?

When we did the IPO, it was $1.5 billion in the US alone and subsequent to the IPO, and we announced this last week, or the week before, we now have a further product, Symphony, which has been approved, and that adds another billion dollars to the market opportunity. In total now, the total addressable market is in excess of $2.5 billion.

Just on that Symphony product, your announcement recently was that it received FDA clearance. When is that being launched, because that seems to be the big driver of your revenue going forward, given it's such a large addressable market?

Yeah. The launch of that requires that we gain an individual reimbursement code for that product. We expect to receive that by the end of this year, and that would allow us to launch Symphony next year. We're targeting initial commercial sales in calendar year 2021.

And assuming you are selling to hospitals being the main customer, what have your sales figures been like so far?

Look, we've had good year on year growth. Three years ago we were doing $8.5 million, the following year, $18.5, and then $22 million last year, so we've had good growth. You know, when you look at that growth that doesn't necessarily reflect the true underlying growth as well, because we have two different channels by which we sell. We sell directly ourselves, but then we also have a partnership with a company called TELA Bio in hernia. And so over the last year or so we've been building up stock for our partner in the US, and that’s meant that as a result of that early stock build, last year was a little bit flat, but the underlying growth rate for them was very strong.

They grew almost by, I think it was 86 per cent last year, so we saw strong growth from them. We expect our sales to come in line with their sales over the next 12, 18 months and to continue that strong growth trajectory.

As you said, you've been looking into the US for a while, but are there plans to expand beyond the US, where else are you looking?

Yeah, absolutely. Most of our focus is the US and I think that's going to remain the case. There's a large opportunity for us there and we're only really beginning to penetrate that market, so we don't want to take our eye off the ball there. Having said that, we do have regulatory approvals and clearances coming through in other parts of the world.

And so we now have clearances for 37 countries. Most of those being in the EU. Outside of the US, the way we're commercialising our products is working with local distributors. In Europe now, we have distributors in Germany, Austria, Switzerland. We have some distributors in the Middle East and also Southeast Asia. So we're very early in that process. In the last year or so we've done just over $1 million ex US, so very early in that process, but there's a large opportunity for us there and I think that's going to contribute more and more over time.

With that expansion, or just in general with the US, are you still looking at also introducing new products too? Or is the focus solely on your existing ones?

We're early in commercialisation of the products that are there, so there's a large growth opportunity just with those products. Apart from that, we have a large development program internally that's about generating new products. In that area, we have a development program focused on combining our Endoform technology with negative pressure wound therapy. We don't expect to commercialise the first product from that technology platform until 2023, so that's some time away. Having said that, we have plenty of opportunities to deal with in the short term with our existing products,

You briefly touched on it before, but where are you at with your distribution agreements? Because you manufacture and make all these products yourselves. How much of the distribution is happening through your company and then how much are other companies helping you out?

Fifty per cent of our sales come through our own efforts and that's really through a direct sales team in the US. That's a partnership or a joint venture between ourselves and a company called Hydrofera. That's in the wound and soft tissue repair segment. Outside of that, the other 50 per cent of our revenue comes from a partnership with a company called TELA Bio. We license them the rights to commercialise our hernia and breast product. The first product was launched in July, 2016, and that's a product that's now seeing really strong growth. As we look forward we expect that 50 per cent of our revenue will come from the Aroa direct business and then 50 per cent of our revenue will come from our partnership with TELA Bio.

Right, and are you happy with the amount of money the IPO raised in terms of what's happening now and the expansion, are you in a comfortable position cash-wise?

Yeah, look we are. We're at a comfortable position in terms of our plans over the next couple of years. We were thrilled with how the IPO did, we had a great response from institutions we've been really pleased with health share price has tracked. It really sets us up very well for the next 24 months.

As you said, your first day of trading on the ASX was July 24th and the share price closed at $1.35, so up 80 per cent. Were you expecting that sort of demand from new and existing shareholders straight away?

It was difficult to gauge. Just because of the uncertainty of the sort of COVID period, it was a little bit difficult to gauge how pricing would go. We expected a little bit of an uplift, we were surprised to see the level of uplift that we got, but obviously delighted with how that went. But you know, I think it was the first sort of significant IPO post-COVID on the ASX. So we didn't really have any good benchmarks to know how things would go in this period, really pleased with how it worked out.

I was just scrolling through your most recent presentation as well and in there it says Aroa’s products are between 20 to 60 per cent less expensive than competitors. What sort of competition do you have out there and how have you managed to keep your price lower than them?

Yeah. When you think about biologics that are used in soft tissue regeneration, they’re typically used in the most complex cases, and they're typically very expensive. And so what that means is that they've been very limited to only the most complex patients. What we're doing is we've been able to develop a very high-quality biologic at a very affordable price point. And so what that means is that we're able to open up access for many more patients to benefit from this technology. That's a game-changer. That means that many patients that for whatever reason, whether it be the cost of the products or just limited access, they're now able to benefit from these types of products. That combination of both efficacy, functionality and value is really attractive. We think certainly with the changing sort of healthcare environment we're very well positioned versus other products in this market. We think that's really going to drive the uptake of these products.

I'm just trying to get a grasp of who you're competing with. Are there other large biotech companies in the same area, or are you the only one in this specific space?

Typically the companies that we compete against are smaller, more innovative biotech companies. They're not the very large multinationals, they are typically smaller companies. Some examples would be MiMedx, Organogenesis, two US-based examples, Integra to a lesser extent. We're very well positioned to compete against those companies.

Just looking at your profit and loss summaries from the past three years in that presentation, your net loss has been increasing year on year for financial year 20. It was around $6 million. Are you expecting that number to increase again next financial year? And when are you anticipating you might become profitable?

Yeah, look, we’ve been EBITDA positive for the last couple of years. We’re now moving to a phase where we're going to invest more in sales and marketing to grow the top line. As a consequence of that, we'd expect to be EBITDA negative for at least the next two years and then return back to profitability. We’d expect to make moderate EBITDA losses at the sort of $5 million level over the next couple of years, and then to trend back towards being profitable. But our focus is really on growing the top line and taking advantage of the opportunity that's in front of us.

I guess it would probably be remiss of me not to ask about how COVID has actually impacted directly the business. Has there been any negative effects on the company or distributional things like that, or has it, in fact, provided any opportunity?

Yeah, look, I think from a manufacturing supply distribution perspective things have gone very well, so we've been able to maintain supply chains, make sure that patients have access to product. So we've done well there. When you look at sort of top line sales, I think we're very similar to most other companies in the medical technology industry. April was a very soft month for us and that really came off the back of elective procedures being delayed, outpatient wound centres closing. What we've seen since April is things start to trend back upwards. Certainly, the first quarter of this year has been soft. What we are seeing is that hospitals in the US now are opening, they're not opening and operating at the same level of same level of capacity that they had pre-COVID, but certainly, they are they are performing procedures.

The positive thing about our industry is that the patients don't go away and they can only be postponed for a relatively short period of time. Our procedures typically have a relatively short period of time that they can be postponed for. We are seeing that come back, we're seeing a trend up. We'd expect that to continue through to the end of the year. To a degree it is a little bit up and down state by state just particularly in the US, we're seeing quite a lot of variance across the state, just depending on the impacts of COVID in that particular area.

That's sort of what I was alluding to because I'm in Victoria at the moment, and I know in Melbourne, they're only doing certain levels of elective surgery. In America, is that a similar case across states, they're doing different levels of elective surgery?

Yeah, it absolutely is and so that has an impact on every medical technology company. And I think that's a short term phenomenon. I think everyone understands that at some stage things will get more back to a more normal state. This is a medium to long term business and so I think people looking to invest in Aroa understand that and understand there's a large opportunity there for the future.

Just before I let you go, Brian, I just wanted to ask what investors should be looking out for in the next year or so with the Aroa, what's in the pipeline in the next year?

We're thrilled to have the Symphony clearance under our belt, so that's a key milestone for us. We will continue to expand our sales team over the next 12 to 24 months. Commercial launch of Symphony next year is going to be important and then ongoing clinical data and that's clinical data both from ourselves with our wound care soft tissue repair products, but also from the Bravo Study, which has been run by TELA Bio. The outcomes from the Bravo Study look very good, and we think that's going to continue to drive good sales into next year.

Great to chat, Brian, thanks for your time.

Great. Thanks very much.

That was Brian Ward, the CEO of Aroa Biosurgery.