Aroa Biosurgery (ARX: 0.76) has achieved its fourth consecutive positive cashflow quarter from operations.
Cash receipts were up 18% to NZ$23.5 million over the PCP. Cashflow from operations was NZ$2.1 million, up from -NZ$1.2 m in the PCP. Including cashflow from investing activities (which includes IP, and plant and equipment), the net cashflow was NZ$1.5 million.
For the financial year (ending March 2026), the company is forecasting sales of between NZ$92 - NZ$100 million, which equates to a growth of between 10%-20%. Aroa is forecasting normalised EBITDA of NZ$5-NZ$8 million.
Pleasing for the company has been the success of its Myriad products, which are now tracking at an annualised sales of NZ$40.8 million. The first Myriad product was launched just at the start of 2020. It has a significantly higher margin than Aroa's first wound healing product, Endoform ECM.
In the September quarter the first Integrated Delivery Network (which is responsible for several hospitals and clinics) adopted the Myriad products. These products are used in the hospital setting for soft tissue reconstruction, including the treatment of trauma wounds and plastic surgery.
CEO Brian Ward said he is very optimistic about the year ahead, commenting "It feels like we are just getting started."
New Reimbursement Pricing to Benefit Aroa
Next month CMS is expected to announce whether proposed changes to reimbursement for wound healing products in the outpatient setting will be changed. If the change does occur, it has the potential to substantially benefit Aroa's Symphony product.
The proposed change is for the price of all skin substitute products to be limited to US$125/cm2. Many current biologics sell for multiples of this price which has made it difficult for Aroa to compete with, paradoxically, with its lower price alternative that sells for around US$70cm2. This is because the higher priced biologics have become entrenched in the market.
The proposed changes may also see a requirement for evidence of efficacy from a randomised controlled trial (RCT). The last patient in Aroa's RCT in 120 patients with non-healing, diabetic foot ulcers is expected to end treatment next month. It is very good timing for the company.
In a statement from CMS earlier this year, it stated: "Medicare spending on skin substitutes has had unprecedented growth, rising from $256 million in 2019 to over $10 billion in 2024, according to Medicare Part B claims data. This dramatic spending increase is largely attributed to abusive pricing practices in the sector, including the use of products with limited evidence of clinical value." Robert F. Kennedy Jr. believes that this pricing abuse has been the result powerful interest groups that have targeted independent medical practises.
Current skin substitute products sell for as much as US$310/cm2 (US$2,000 per square inch). CMS is seeking to reduce the spending on these products by as much as 90%. The new pricing, if approved, is expected to come into effect in January.
Aroa CFO James Agnew expects many skin substitute products will fall out of this market as it will no longer be a viable business for them. Agnew said that CMS has unsuccessfully been trying to make these changes for many years.
Aroa's Myriad product sells for around US$10/cm2 and its Endoform product sells for just US$0.50/cm2.
Aroa Biosurgery is capitalised at $262 million with NZ$23.5 million in cash at the end of last month.
Bioshares recommendation: Accumulate
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