Dr Boreham’s Crucible: Aroa Biosurgery

Small Caps | 11:30 AM

By Tim Boreham

ASX code: ((ARX))

Shares on issue: 344,207,834

Market cap: $216.9m

Founder and chief executive officer: Dr Brian Ward

Board: James (Jim) McLean (chair), Dr Ward, Darla Hutton, Phil McCaw, John Pinion, John Diddams, Dr Catherine Mohr

Financials (year to March 31, 2024): revenue NZ$69.1m ($62.1m) (up 9%), reported net loss after tax -NZ$10.6m (previously -NZ$396,000 loss), cash of NZ$11,522,000

(Three months to June 30, 2024): receipts NZ$17,834,000 (up 17.7%), cash burn -NZ$3,645,000, cash NZ$23,889,000 (NZ$38,526,000 previously), 7.0 quarters cash.

Identifiable major holders: Dr Ward 9.7%, First Cape Group (Harbour Capital Management) 7.23%, Phil McCaw 5.75%, Acorn Capital 5%

While investor sentiment in the biotech sector continues to improve after valuations were hammered in the Great Post Pandemic Letdown of late 2021, some revenue-generating exponents are yet to feel the love.

Take the Auckland-based wound-care house Aroa Biosurgery, which the market values at a tad over $210m compared with $355 m when we last visited the company in September 2021.

Since then, revenues have trebled to just under NZ$70m, although profitability has proved elusive.

"I feel we are very undervalued at the moment but conditions have been tough for small caps generally," says Aroa founder and CEO Dr Brian Ward.

Of course, every CEO says the same thing, but Dr Ward has a point given the nearest ASX peer PolyNovo is valued at $1.7bn, having reported first-half revenue of $48m.

In the meantime, some pundits claim the company would be better off merging with its Nasdaq-listed US distribution partner, Tela Bio (see below).

About Aroa

Aroa develops and commercialises matrix-based wound healing products based on its proprietary ovine forestomach matrix (OFM) technology (a.k.a sheep guts).

The material promotes new tissue growth and blood supply and dissolves in the body after it has done its job.

"We get fast regrowth and very well revascularised tissue," Dr Ward says. "We don't seem to see the infection complications or adverse immune responses seen with other products."

To date, Aroa's products have been applied to more than six million wounds.

Aroa's first product, Endoform, has been used for non-healing wounds such as diabetic and venous foot ulcers.

Other iterations include Myriad Matrix and Myriad Morcells (soft tissue reconstruction and complex wounds), Ovitex (reinforced scaffold for abdominal wall reconstruction) and Ovitex PRS (plastic and reconstructive surgery - such as breast reconstruction).

The Ovitex scaffolds work as a surgical mesh to reinforce and/or repair soft tissue where weaknesses exist.

Then there's Symphony, a skin substitute for lower diabetic foot ulcers and venous leg ulcers.

The company claims its products are -20% to -60% cheaper than competing biologics-based products "while offering superior regenerative performance".

Biologics-based scaffolds tend to be more expensive than the synthetic ones - and they both have their place in the surgery

"For the high-load bearing products such as hernia, you need additional strength and synthetics provides that," Dr Ward says.

The story to date

With a keen interest in biologic materials and scaffolds for soft tissue regeneration, Kiwi veterinarian Dr Ward founded the company - then called Mesynthes - with NZ$1.5 m of seed capital in 2008.

Through his veterinary work he had found that the gut lining of ruminants was an ideal material, given its thick extracellular matrices and secondary signalling' molecules that promote cell growth.

Aroa listed on July 24, 2020, having raised $45m at 75 cents apiece. The company raised a further $47m at $1.165 a share in July 2021.