Aroa Biosurgery Limited

ARX Details

Onset of New Issue of Employee Share Option Plan: Aroa Biosurgery Limited (ASX: ARX) is a New Zealand-based soft-tissue regeneration company, which is engaged in the distribution and manufacturing of medical and surgical products in complex wounds and soft tissue reconstruction. As per the announcement on 4 May 2021, ARX issued 350,000 option warrants to certain employees at a strike price of $1.15 under Share Option Plan Rules.

U.S. FDA 510(k) Clearance Received for Myriad Morcells^TM: On 6 April 2021, ARX gained U.S. FDA 510(k) clearance for Myriad Morcells^TM, which is a powder form of Myriad Matrix^TM. Myriad Matrix^TM is a multi-layered extracellular matrix (ECM) graft, which enables rapid vascularization and helps in tissue regeneration. The global market size of Myriad Matrix^TM was US$350 million in early 2020, post-clearance in July 2017, which may justify significant growth potential for Myriad Morcells^TM. The clearance further augments the applications and commercial potential for the Myriad^TM product portfolio supported by positive clinical results for Myriad Matrix^TM.

Key Financial Highlights of Q4FY21, H2FY21 and FY21: During H2FY21, reported product revenue stood at ~NZ$13.8 million and grew by 16% Y-o-Y on a constant currency basis. Unaudited product revenue in FY21 stood at ~NZ$21.5 million, exceeding the FY21 forecast of ~NZ$21.0 million. Cash receipts for Q4FY21 amounted to ~NZ$5.8 million compared to ~NZ$5.2 million in Q3FY21, and Cash receipts for FY21 stood at ~NZ$21.12 million. Estimated cash available for future operating activities stood at ~NZ$37.06 million as of 31 March 2021. For FY21, net operating cash outflow came in at ~NZ$4.75 million.

Product Revenue (Source: Company Reports, Thomson Reuters, Refinitiv)

Pilot Study Stipulates Positive Results of Myriad Matrix^TM on Chronic Wounds: On 16 February 2021, ARX announced successful validation of Myriad Matrix^TM via a pilot study that indicated reduced surgical complications while reconstructing non-healing chronic wounds. The study warrants the high efficacy of Myriad^TM in the surgical treatment of Hidradenitis Suppurativa (HS), and exposed vital structures.

Corporate Developments During Q3FY21: On 2 February 2021, ARX announced its Appulse joint venture's dissolution and pursued a direct sales expansion strategy in the US market. As of 28 April 2021, ARX has a team of twenty field sales and eight inside sales representatives.

Key Risks: ARX is in tissue regenerating solutions which is a unique practice in itself. The high possibilities of disapproval from the healthcare industry can place ARX’ product line in a challenging spot. Moreover, bringing a medical device to the market is not a fast process and may incur delay costs. The company has to undergo several procedures with a risk of disapproval. With international operations in place, the company is also subject to high currency risk.

Outlook: Despite currency headwinds and the COVID-19 pandemic scenario, ARX outperformed its FY21 product revenue forecast of ~NZ$21.0 million. As per H2FY21 results, the run rate on product revenue is greater than ~NZ$25.0 million per annum. Thus, ARX may assume high growth expectations given the prior trend and recent developments in FDA clearance, positive results of the pilot study and establishing direct sales capabilities. However, recent pandemic turmoil may turn the tide against ARX and inherent uncertainties.

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: Over the last month, the stock of ARX went down by ~7.46%. The stock made a 52-weeks’ low and high of $0.970 and $1.745, respectively. The stock has a support level of ~$1.057 and a resistance level of ~$1.284. Considering the above-aforementioned facts, we have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of high double-digit (in percentage terms). We believe that the company can trade at a slight premium compared to its peer’s average considering its unique product lines, FDA approvals, direct sales strategy and favorable pilot studies. We have taken peers like Mesoblast Ltd (ASX: MSB), CSL Ltd (ASX: CSL), Clinuvel Pharmaceuticals Ltd (ASX: CUV), to name a few.  Considering the current trading levels, increasing product revenue expectations, rising industry requirements and regulatory approvals, valuation and associated risks of the COVID-19 situation, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.110, up by ~3.738% as on 19 May 2021.

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

Oncosil Medical Limited

OSL Details

 OSL Receives Regulatory Approval from Hong Kong: Oncosil Medical Limited (ASX: OSL) is engaged in the manufacturing and distribution of medical equipment. The OncoSil^TM device treats patients suffering from bile duct cancer and locally advanced pancreatic cancer. On 4 May 2021, OSL received regulatory clearance to market the OncoSil^TM device in Hong Kong (HK) to treat locally advanced pancreatic cancer (LAPC). The HK clearance was a breakthrough of OSL’s ASEAN commercial strategy. HK’s concentrated LAPC treatment within selective hospitals coupled with high healthcare spending per capita relative to other Asian countries serves a lucrative market opportunity for OSL.

Key Financial Highlights for Q3FY21: OSL reported a cash balance of ~$15.26 million as of 31 March 2021. During the quarter, the company’s operating cash outflow stood at ~$2.7 million, primarily attributed to staff cost (~$1.25 million), R&D investment (~$0.63 million) and administration & corporate cost (~$0.53 million).

Consolidated Statement of Cash Flows (Source: Company Report)

Key Management Updates in Q3FY21: During the period, OSL restructured its leadership positions by appointing Nigel Lange as the CEO and Managing Director, followed by the appointment of CMO, Head of Medical Affairs and other leadership positions. Under the 28 July 2020 announcement of filing the Humanitarian Device Exemption (HDE) application with the U.S. FDA, OSL is finalizing the data package to support the HDE application for bile duct cancer treatment. OSL continued to progress activities and approvals to roll out their device in Europe and UK. OSL is working along nine hospitals in Greater London with approvals and activities.

Key Risks: Considering that hospitals are running on high capacities under the COVID-19 scenario, OSL may face delays in the commercial launch of its device. With international operations in place, the company is also subject to foreign currency risk. Moreover, regulatory risk, high staff and R&D expenditures and a competitive environment may add further uncertainties.

Outlook: With the onset of the first sale of the OncoSilTM device in New Zealand, announced on 22 October 2020, OSL has achieved further deals in the region. This warrants the strong validation of their device. On 11 January 2021, OSL submitted additional data to their application filed with the Therapeutic Goods Administration (TGA) in Australia. OSL’s expansion strategy to HK, Europe and UK, coupled with strong device validation in New Zealand, suggests high growth prospects.

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

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

Stock Recommendation: Over the last month, the stock of OSL went down by ~17.71%. The stock made a 52-weeks’ low and high of $0.970 and $1.745, respectively. The stock of OSL has a support level of ~$0.071 and a resistance level of ~$0.140. Considering the above-aforementioned facts, we have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of an upside of high double-digit (in percentage terms). We believe that the company can trade at some discount compared to its peers, considering its pending approval from TGA, regulatory hurdles and COVID-19 uncertainties. We have taken peers like AVITA Medical Inc (ASX: AVH), Mesoblast Ltd (ASX: MSB), Hexima Ltd (ASX: HXL), to name a few. Considering the current trading levels, strong device validation, underlying economics of HK and, expected device roll-out in Europe and UK, valuation and associated key risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.079 as on 19 May 2021.

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

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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