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An article from Wilsons Healthcare assessing Aroa's outlook

Aroa Biosurgery (ARX) - Price Target: $1.75 per share

Surgical reopening, SYMPHONY launch and MYRIAD traction drives growth for Aroa

MYRIAD salesforce formed; CY22 key commercial ramp year. Aroa now have a MYRIAD-focused US direct sales force of >20 reps to drive MYRIAD adoption and have the product/s on formulary with several key GPOs. The growth expected from the MYRIAD franchise is supported by the newly added Morcells™ product approved in April 2021, to complement the MYRIAD Matrix sheet product. We have already seen excellent traction with Morcells and expect it to continue to contribute positively to ARX’s gross margin given it is a product manufactured from the ‘scrap’ or waste matrix sheeting (>95% GM). As a reminder, >50% of ACell’s business (prior to Integra acquisition) was from their particle product (MicroMatrix® akin to Aroa’s Morcells™) (see Figure 2). A dearth of these types of products in the inpatient wound market gives Aroa an excellent platform for sales traction and adoption.

Figure 2. MicroMatrix accounts for ~50% total ACell revenues

Source: ACell, Wilsons.

SYMPHONY launch in 1Q’22 expands into new market for Aroa. The launch of Aroa’s new skin substitute product, SYMPHONY, which received FDA clearance in July 2020, is due in 1Q’22. The delay was initially to accommodate potential changes to CMS reimbursement in outpatient wound care which did not eventuate, which may have guided Aroa in pricing determination. Nevertheless, Aroa can proceed with the knowledge that SYMPHONY is a product that can/will be used in preference to biologics such as Epifix®, AlloDerm® and Integra® due to pricing benefits. We anticipate Aroa can offer SYMPHONY at a ~40-50% discount to existing biologic skin substitutes which typically retail at US$6,000-US$10,000 per device. Aroa estimates a SYMPHONY TAM of US$1B with a focus on hard to heal wounds in patients with comorbidities (i.e. diabetic foot ulcers, venous leg ulcers). This is an area of wound care responsible for the most CMS spending, with diabetic foot ulcers alone estimated to cost CMS >US$6.2B/yr to manage. There is potential for SYMPHONY to expand the adoption of Endoform product use also given product complementarity. We model material SYMPHONY contribution from FY24.

TELA traction with GPOs likely to continue and expand. We view TELA Bio’s ability to snag additional GPO accounts (i.e. Vizient, Ascension) as likely given the traction they have seen with their existing GPO wins (HealthTrust, Premier) and the tenacity of their sales team/management. As a reminder, TELA continue to average 137% of quarterly revenues per HealthTrust GPO account versus others (Figure 3) which makes for an effective use of sales & marketing resources.

Figure 3. TELA Bio account revenue split estimates between HealthTrust GPO (HPD) and other/IDN accounts

Source: Wilsons estimates, TELA Bio.

OviTex portfolio continues to ride robotic trend in hernia. The Ovitex LPR product range is uniquely positioned in the hernia market in that it is a biological material that has the strength to be used in laproscopic and robotically-assisted surgical repairs. Other biologics in this category do not have the strength or flexibility to be used in this setting to this degree. We expect incremental launches in the OviTex LPR range to increase robotics share in hernia.

R&D pipeline well funded and has found a home. Aroa’s dead space management product currently under development (~CY23 launch expected) is now well capitalised to ensure the clinical studies can be conducted swiftly and in full. Further, TELA Bio have committed to taking ownership of the new system, pending FDA approval, to add it to their existing OviTex product portfolio. We have not done extensive market evaluation of this product but understand there is a sizable opportunity in the area of surgical complication management (e.g. surgical wound dehiscence in plastics, orthopaedics, obstetrics).

Valuation. Our price target of $1.75 per share implies a ~13.2x FY23e EV/Revenue. Aroa currently trades at 7.5x FY23e EV/Revenue which is a material discount to ASX wound care peer PolyNovo (PNV) at 15.8x on the same metric.