Aroa Biosurgery Limited 

ARX Details

U.S. FDA 510(k) Clearance Received for Myriad Morcells^TM: Aroa Biosurgery Limited (ASX: ARX) is a New Zealand-based soft-tissue regeneration company which is engaged in distribution and manufacturing of medical and surgical products in complex wounds and soft tissue reconstruction. 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 clearance further cushions the applications and commercial potential for the Myriad^TM products supported by positive clinical results for Myriad Matrix^TM.

Financial Highlights of FY21: During the period, total revenue declined to ~NZ$22.34 million from ~NZ$25.08 million in FY20, down by 11% on YoY basis, primarily driven by one-off license fees from TELA Bio and decline in product sales. Gross margins declined from 71% in FY20 to 68% in FY20 as a result of lower product sales and higher fixed indirect costs. ARX engaged in increased investments in the US sales operations as reflected by 18% incline in normalised selling and administrative expenses. The company has increased workforce on pipeline products as represented by 27% increase in research and development (R&D) expenses. Although product sales were down by 2% on YoY basis (FY21: NZ$21.6 million), they were up by 5% on YoY basis (FY21: NZ$23.1 million) on constant currency basis. The surge of COVID-19 pandemic and significant currency headwinds in the US, drained product sales in H1FY21 by 10% (YoY), while recovery was witnessed in H2FY21 by 6% (YoY) increase. Cash position remains strong at ~NZ$35.38 million, which is attributed to equity and debt issuance.

Product Sales (Source: Company Report)

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.

Key Risks: ARX may face challenges in regulatory approvals of specific tissue regeneration solutions which places ARX in a challenging spot. With significant operations in US markets, ARX is susceptible to currency headwinds. With heavy investments in R&D operations (sunk costs), ARX’s investment risk is high.

Outlook: For FY22, ARX forecasts product sales of NZ$30 – 33 million (39% - 53% YoY growth), largely attributed to uptrend in US medical procedure numbers. ARX is considerably augmenting direct sales capacity and capability to simplify sales structure and deliver better market reach in the US. In H2FY22, Myriad products are expected to float in the US markets. High margins in these products shall dampen currency impact on gross margins.

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

Stock Recommendation: Over the last month, the stock of ARX went down by ~4.85%. The stock made a 52-weeks’ low and high of $0.970 and $1.745, respectively. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock might trade at a slight premium as compared to its peer average EV/Sale (NTM trading multiple) 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 increasing product revenue expectations, rising industry requirements and regulatory approvals, partially offset by high regulatory risk and currency risk, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.080, up by ~0.934% as on 11 June 2021.

ARX Daily Technical Chart, Data Source: REFINITIV

Oncosil Medical Limited

OSL Details

TGA Regulatory Update: 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 11 January 2021, OSL submitted additional data to their application filed with the Therapeutic Goods Administration (TGA) in Australia which was consequently revoked by OSL on 2 June 2021, to seek an opportunity to strengthen the data. 

OSL Receives Regulatory Approval from Hong Kong: Consequent to an announcement of 4 May 2021, OSL received regulatory clearance to market the OncoSil^TM device in Hong Kong (HK) to treat locally advanced pancreatic cancer (LAPC). 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: During Q3FY21, 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). OSL reported a cash balance of ~$15.26 million as of 31 March 2021.

Consolidated Statement of Cash Flows (Source: Company Report)

Key Risks: Regulatory risk, high R&D expenditures and competitive environment may add further uncertainties. With international operations in place, the company is also subject to high currency risk.

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. 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) 

Stock Recommendation: Over the last month, the stock of OSL went down by ~23.81%. The stock made a 52-weeks’ low and high of $0.061 and $0.180, respectively. We have valued the stock using the EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). We believe that the stock might trade at some discount as compared to its peer median EV/Sale (NTM trading multiple) considering its application withdrawal from TGA, regulatory risks attached 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 strong device validation, supporting economics of HK approval, and expected device roll-out in Europe and UK, partially offset by high regulatory risk and heightened competition, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.064 as on 11 June 2021.

OSL Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

• Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

• Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

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