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Aroa Biosurgery - Revenue Up 44%

Aroa Biosurgery (ARX: $0.86) continues to outperform. Revenue for its first half (ending 30 September) was up 44% on the PCP to NZ$29 million. Surprisingly it has also delivered a positive EBITDA for the half year, ahead of expectations. Aroa is forecasting to be EBITDA neutral for the full year.


The company sells biologic products that deliver rapid formation of well vascularised tissue used in a range of wound healing applications, including hernia and breast reconstruction and skin ulcers.

Its cash receipts were NZ$11 million for the quarter down from NZ$13.9 million in the previous quarter, although this was affected by the timing of payments from its distributor in the US, TelaBio, for the Ovitex products. Ovitex sales now make up 59% of total revenue.

Aroa currently sells two other product categories. These are Endoform, which is a low growth and lower margin product, and Myriad, which is a new product range used in general surgery and after tumour removal.

The number of sales staff selling the Myriad products in the US is 35, and this is expected to grow to 41 by the end of March.

The company's gross margins have increased from 77% to 84% for three reasons. The first is the strengthening of the US dollar (NZ/USD has fallen from 0.62 to 0.57 over the quarter), improvements in production efficiencies, and the sale of more higher margin products.

Myriad product sales were NZ$5.6 million, up 242% on the PCP. Future growth will come from increased Ovitex sales from TelaBio, and new product categories. TelaBio expects sales this calendar year of US$42 - US$45 million, up 43% - 53%. Aroa receives 27% of TelaBio sales. Studies with these products in hernia procedures shows a recurrence rate of between 1.9% - 2.6% after 24 months, compared to between 10% - 30% for existing products according to Aroa CEO Brian Ward.

The Symphony product line, which combines the core ECM product with hyaluronic acid, will be formally launched in the US in April next year following a soft product launch through Veterans Affairs hospitals which has commenced. It is used for the treatment of chronic wounds such as diabetic foot ulcers. The launch has gone well according to Ward with good clinical outcomes. Proposed reimbursement changes to be introduced next year will be very favourable for this product said Ward, with coverage so far from three of the seven Medicare Administrative Contractors.

The other new product line will be Enivo, which combines the core technology with a vacuum device to manage post-surgical dead space. In a preclinical study, almost complete dead space removal was achieved. Aroa intends to file this product for approval with the FDA this month with a potential launch next year. Ward said there are no similar products that have been approved.
The same Myriad sales force will be used to sell the Symphony and Enivo products, which will allow its sales reps to generate deeper sales penetration, focusing on fewer accounts. With its new product lines, the company expects to be competing in a sector that has a total addressable market of US$2.7 billion.

Aroa is very well funded, expecting a cash balance at the end of March of around NZ$50 million. In the next six months a US$1 million licence fee is due from TelaBio. Its US sales team currently makes up around 40% of total costs.

Aroa Biosurgery is capitalised at $295 million.

Bioshares recommendation: Speculative Buy Class A


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