Company Overview: Aroa Biosurgery Limited (ASX: ARX) was founded in 2008 and is engaged in developing, manufacturing, selling, and distributing medical and surgical products to enhance treatment in complicated wounds and soft tissue reconstruction. The company’s product is built from a proprietary Aroa ECM™ technology platform and have been utilised in over 4 million procedures to date.

ARX Details

ARX Rides on Clearance from US FDA: Aroa Biosurgery Limited (ASX: ARX) is a soft-tissue regeneration company that develops, manufactures, sells, and distribute medical and surgery products in complex wounds and soft tissue reconstruction. The company remains on track to bolster its US commercial team with three new fields, two medical science liaisons and two inside sales representatives. ARX further intends to add 10 more field sales representatives in FY22 in order to emphasise more on sales of Myriad™, which has a total projected market size of US$350 million worldwide. It is worth mentioning that recently, the company has received US FDA 510(k) clearance for Myriad Morcells™, which reveals positive clinical results for Myriad Matrix^TM used in surgical treatment of hidradenitis suppurativa, complicated injuries and unprotected vital forms. Notably, the morcellized format augments AROA ECM™ technology platform to boost the delivery of key ECM proteins. This FDA clearance marks a key milestone in the development of requests and commercial potential for the Myriad™ portfolio. Markedly, ARX has six commercial product families, which has been authorised for sale in the US based on its ECM technology. The company has regulatory clearance in over 44 countries globally. 

In December last year, the company received regulatory distribution authorisation for three products, namely (1) Myriad™, (2) Endoform® Natural and (3) Endoform® Antimicrobial based on its Aroa ECM platform. According to the company, the regulatory approval marks an exciting key milestone for the company, given the magnitude of patient demand in India. The company remains on track to strengthen its foothold in the international market (outside the US) in order to implement its global market expansion strategy and obtain new regulatory authorisations and enhance local suppliers. In the last six months, the company’s Myriad™ product has been authorised by regulatory authorities in Europe, Thailand, Malaysia, Israel, Jordan, and Saudi Arabia.  Endoform® product has been approved in Malaysia and Mexico. We opine that increased sales resources will permit the company with a deeper penetration within existing accounts to expand usage in more procedures. 

2HFY21 (Unaudited) & FY20 Key Highlights: During the period, the company’s product revenues increased 16% Y-o-Y on a constant currency basis and stood at NZ$13.8 million. This brought the FY21 product revenue to NZ$21.5 million, which was better-than-expected forecast of NZ$21 million. Despite forex headwinds and a COVID-19 led uncertainties in the United States in January, the company’s total revenue for FY21 came in at NZ$22.3 million. In February 2021, the company expanded its direct sales capability in the US market and dissolved its Appulse joint venture. Currently, the company has 20 fully dedicated field sales, and 8 inside sales representatives. The company had received its first FDA 510(k) clearance in June 2017 for Myriad Matrix™, which led to initial sales in early 2020. In late July 2020, the same was authorised for commercial use in the European Union by European notified body DEKRA Certification B.V. The below picture provides the following use of funds information by the company:

Key Highlights (Source: Company Reports)

Key Update:  On 4 May 2021, the company informed the market that it has issued 350,000 options to acquire shares in the company to certain employees at an exercise price of $1.15, subject to Aroa Biosurgery Share Option Plan Rules (‘Plan’) terms. 

Top 10 Shareholders: The top 10 shareholders together form around 41.26% of the total shareholdings, while the top 4 constitutes the maximum holding. Ward (Brian) is the entity holding maximum shares in the company at 11.02%. Movac Ltd is the second-largest shareholder, with a holding of 6.21%, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Key Metrics & Liquidity Position: In the March Quarter of 2021, the company recorded cash outflow from operations of ~NZ$0.7 million, which was in accordance with the company’s internal budget. Cash on hand at the end of 31 March 2021, came in at ~NZ$35.4 million. Cash receipts for the quarter came in at NZ$5.8 million, up slightly from NZ$5.2 million reported in 2QFY21, depicting the continued progress in sales over the path of the December and March quarters. At the end of 30 September 2020, the company’s cash balance stood at NZ$38.68 million, with total debt amounting to ~NZ$16.4 million.

In 1HFY21, current ratio of the company stood at 12.48x, higher than the industry median of 7.25x.  Quick ratio in the same time span stood at 11.48x, higher than the industry median of 6.32x.  

Growth and Margin Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: The company is in tissue engineering, which is a new way of treatment of disease and injury. It includes the concept of the technologies of molecular and cell biology, alongside advanced materials science, and processing. This places the company in the challenging product line along with some other aspects of regenerative medicine, including gene therapy. Additionally, competition from peers, and the global threat environment add to the woes. Further, lower investment in generating working capital requirement exposes the company to liquidity risk. The company also increased investment in R&D, to achieve its growth plan, which might weigh on margins, going forward. 

Outlook: The company remains on track to strengthen its foothold of its flagship products in both global and local markets. Further, robust local sales growth and accelerating momentum in international markets remain potential tailwinds for the company. Further, continuous development and commercialisation of the Myriad™ and other products, are expected to aid the financial performance, going forward. The company projects to deliver growth in FY22, based on its 2HFY21 (unaudited) product revenues run rate of greater than $25.0 million per annum. With continued improvement in access to hospitals, enhancing economic conditions and the advantage of the fast-paced US vaccine release, the company remains on growth trajectory.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Currently, the stock is trading slightly below the average of its 52-week’s high and low level of $1.745 and $0.97, respectively. The stock of the company went down by ~6.56% in the past three months. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer average, considering, increased investment in R&D, challenging global environment, stringent regulatory requirements, changing customer preference, and fluctuating workplace dynamics. For the purpose, we have taken the peer group - Clinuvel Pharmaceuticals Ltd (ASX: CUV), Telix Pharmaceuticals Ltd (ASX: TLX), to name a few. Considering decent performance in FY21, licensing agreement with cash management activities, decent long-term outlook, international expansion, robust product adoption and current trading levels, we recommend a “Buy” rating on the stock at the current market price of $1.135, down by ~2.576% as on 5 May 2021.

ARX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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