$ARX announced their 4C this morning.

4C Report

While no longer a holder, because I have a significant holding in $PNV I continue to follow $ARX for insights on the other firms working in the dermal repair space. (Also $IART) But to clarify, for many indications these firms are not direct competitors, but they are playing in the same general space.

Their Highlights (I've selected only the more significant, as its a LONG list)

Financial Highlights

• Strong ~20% increase in quarter-on-quarter cash receipts from customers, to NZ$17.7 million.

• Continued quarter-on-quarter progress towards breakeven operational cashflows, with net cash outflows from operations decreasing to NZ$1.7 million from $3.2 million in the prior quarter.

• Net cash outflows from investing activities of NZ$1.1 million for the quarter, reflecting further investment into additional manufacturing plant & equipment capacity.

• Strong cash balance of NZ$30.5 million as at 31 December 2023, and the Company is debtfree.

Updated FY24 Full-Year Guidance

• Guidance reduced to NZ$67-70 million total revenue, NZ$66-69 million product revenue, 85% product gross margin and a normalised EBITDA1 loss of NZ$1-3 million.

• One-off (H2 FY24) decrease in expected revenue from TELA Bio, Inc. (‘TELA Bio’) due to a previous overestimation of AROA’s revenue share (non-cash) on inventory supplied to TELA Bio and a delay to a joint product development project. OviTex™3 and OviTex PRS remain on a strong growth trajectory.

• Robust Myriad™ sales performance, with 10% growth in Myriad active accounts from Q2 to Q3, comparable field sales productivity and a revised forecast of 70-85% year-on-year growth (full-year).

Operational Highlights

• US FDA (‘FDA’) 510(k) clearance received for a new product, a resorbable dental barrier developed and manufactured from the Company’s proprietary AROA ECM™ platform technology. The Company is actively pursuing a new partnership to commercialise this product.

• The FDA has reviewed AROA’s 510(k) application for Myriad Flow™, a new soft tissue regeneration product that could be commercialised in combination with Enivo™, and requested additional pre-clinical and clinical data to support a clearance. Both studies appear to be less complex than anticipated with regulatory clearances expected within 24 months.

• To date, six patients (n=10) enrolled in the pilot clinical study for Enivo, AROA’s new tissue apposition platform technology, have undergone a unilateral mastectomy and completed followup care, with no clinically relevant seroma or complications reported.

• 36 patients enrolled in AROA’s Myriad Augmented Soft Tissue Regeneration Registry (‘MASTRR’) during the quarter, taking the total number of participants to 268 (n=300). 

•Enrolments in AROA’s multi-center Symphony™ randomised control trial approximately doubled during the quarter, with a total of 86 participants enrolled to date (n=120).

My Analysis

I'll keep it brief, with the cash flow trend analysis below telling its own story.

From my perspective, my thesis that this is not looking like an investible business is continuing to be supported with each quarter.

While you might think an 85% gross margin gives you a lot to play with on the expense side, the fact is that medical devices and pharma is a tough gig. The high costs of sales and marketing together with the ongoing and necessary burn of development expenditure quickly eats up the profit.

Despite the management key messages, there is no discernible trend towards operating or free cash generation. In 24 months we've seen cash shrink from $65m to $35m, with the last Q burning about $3.5m.

$ARX has some good technology, and they are using it to develop multiple platforms with many indications, evidenced by their continuing clinical program. However, the fact appears to be that none is making material headway into the ostensibly large addressible market.

Perhaps management are taking a longer term view? However, your view cannot be too long term. Competitor innovation means that products necessarily have a finite life cycle. At some point, you have to have a product that generates serious cash, and I can't see where this is coming from at $ARX. And if they continue to burn cash at the current rate, in about another 2 years time they'll be raising again. Its not an imminent issue, but with the trend it may be unavoidable unless something changes.

$ARX is playing in a competitive market. 20% top line annual growth won't cut it, and it highlights just how strong $PNV is with >90% GM and >60% topline growth now pushing $100m, enabled by a more focused product suite.

Disc: Not held in RL or SM