Yes rh8178  I saw the quarterly update and like you was left wondering at the severity of the sell off.  On the 26/11/24 ARX released guidance of Revenue NZ$80m - $87m and normalised EBITA NZ$2m-6m. Released yesterday were guidance figures of NZ$81m - $84 and NZ$2-$4m. Down, however you would not think a disaster, though these things are all about expectations.

Unfortunately there was a power outage in my area and I did not get to hear the conference call and so do not know if there were any clangers revealed there. In the absence of that taking place I can only think the 24% price drop and further 5% at the time of writing is telling as you indicated, just how jumpy the market is.   We have seen the same with NEU, with it rising 32% in the last 12 days on the back of no news that you would think would justify such a massive change in valuation. Remembering ARX has a market cap of only $270m, so it would not take much selling to push the price around. 

The albeit self-promoted Myriad study was also released yesterday, and showed the product to be both clinically and cost wise top of the (self selected) competitor pack.

I like the management at ARX and the financials appear to have stabilised with ARX having cash of $A20m. I see the main short term risk to ARX is the viability of its US sales partner Telabio.  Telabio accounting for almost half ARX sales and sales to them were down.   

 As to the ARX business I like to look at it like this: If you took away the top 10% and the bottom 10% of surgeons and compared their work over say 100 procedures then I suspect there would be very little difference in patient outcomes. All surgeons are egomaniacs.  So, if you can convince them a particular product is superior, and I think there is some justification that ARX products are, then they are unlikely to stop using them.  The uniqueness of the ARX sheep guts product and accompanying story, I suspect may feed into the surgeons own sense of self.   Only my subjective opinion. We will see what time brings.

(By way of context. Two weeks ago my wife had a bad case of appendicitis and post the operation the surgeon would do his rounds at about 7:00am each morning. I would be there, and on one occasion questioned him as to why the TAZOCIN IV antibiotic was being terminated after 3 days when the product sheet says:  “….. should be given for at least 5 days, and for 24 hrs after all signs of illness and fever have gone.”   

A reasonable person might have responded with something along the lines of:  “Well what you say is true, however when the CRP readings are below 100 and going down and you continue with a course of oral antibiotics straight after the IV dose, it will be just fine. This is standard practice, and have had no relapses in the last x years I have been doing this”.     Instead Napoleon chewed me out for having the temerity to question him. No wonder these guys get sued).

A big concern with ARX was the possibility their US partner TelaBio could go under.  Tela is responsible for around half of ARX’s sales.  This was put to Brian Ward in today’s SM  interview and he made the comment Tela had recently raised capital and when Tela sales hit $120m/yr this would be breakeven organisation for Tela (BW did not say if this was cash or profit breakeven).

Tela is listed on NASDAQ and of course all accounts are public.

SEC Filings | TELA Bio, Inc.

So the question is whether the above statement made by BW today is reasonable or not. Very roughly, very roughly and with a lot of assumptions the following can be figured out:

Tela reported revenue of $19.0 million (all figures US$) in the FY24 third quarter, representing growth of 26% over the prior year period

Tela reiterated full year 2024 revenue guidance of $74.5 million to $76.5 million, representing 27% to 31% year-over-year growth.

If Tela continues to grow around 30% in FY 25 they will have revenue of $97m.  At the same growth rate by sometime in Q3 FY26 they will have breakeven revenue of around $120m/yr.  

Or put another way, at current growth rates, it will take them around 8 quarters to reach breakeven.

Net loss was $10.4 million in the third quarter of 2024, compared to a net loss of $11.0 million in the same period in 2023.

Say average loss over the 8 quarters are around $5m/qtr then Tela will burn around $40m to get to breakeven.

As at 30/9/24 Tela had $17m cash in the bank. Tela last month undertook an underwritten public offering and raised a net $43m.  

Call it all up around $60m cash.

So it is not unrealistic to believe Tela will not have to raise capital again and is on its way to be on a reasonably sound financial footing. The fact they were able to raise the $43m says something.

Coming back to ARX itself, there is a lot to like:

i)      FY24 first half sales of $39m (all NZ$) up 27% on the previous half. Tracking to full year guidance of $80 - $87m. BW indicated today ARX would be EBITA & cash flow positive by end of second half.  (A point of caution: I suspect BW was talking operating cash flow. ARX are capitalising around $1m of cash flow and spending around $3m/yr on plant & equip)  

ii)         As at 26/11/24 has cash of $21m. No LT debt.

iii)       CEO BW founded the business and owns around 10%

iv)       BW on the SM interview today pointed out behind the scenes initiatives that include further statistical based data on the clinical and financial benefits of ARX product, a realigned sales force and bolstered medical affairs team. Doesn’t sound a big deal, but these things are central to the business and add up to a big deal.

v) Recall reading elsewhere they have NZ plant capacity for $200m of sales

vi)      Wound healing is a highly competitive market and many investors are familiar with two of the Australian companies operating in the market AVH and PNV. The likes of PNV may always have a cost advantage over biologics like ARX.   However it seems as though a large part of sales will be down to the personal preference of the surgeon. Hard to get sales, but likely very sticky once there.  

vi)     A confident and upbeat CEO.  Rising sales back up his optimism.

You can’t go near a Livewire article or similar fund manager forum without encountering gushing words about CU6 & TLX and to a lesser extent (now the share price has come off) NEU.   Likely ARX will never have the market beating power and market cap of those companies. However if ARX can get to cash flow positive next year, then if Mr Quiet Achiever Brian Ward can push it further along from there, ARX will look cheap at today’s market cap of $220m.  

Very good interview Strawman, as usual. My points were:

1. CEO Brian Ward (BW) indicate ARX are tracking to FY25 guidance. Later in interview said there was a 95% confidence that upper/lower guidance would be met.
2. BW indicated ARX would be both EBITA and cash flow positive in second half
3. Better Clinical Data.  BW indicated in the past clinical data was almost anecdotal often only being based on around 6 patients. This is getting better. Soon ARX will have a 120 patient lower limb study results, with preliminary results looking ‘fantastic”.
4. Capex. BW indicated ARX was past the worst of it. Said another $10m needed to get to $100m sales. From then on should track around 10% of sales.
5. Main focus of markets is the US. Will continue to concentrate in US as is biggest and most lucrative.
6. Competition.   BW stated general case for biologics -  more expensive however less complications, better wound healing, “biologics material recognised as self”, no rejection, less scaring, less infection. (presumably the clinical studies BW spoke of will further favourably prosecute the biologics and especially the ARX case). BW indicated ARX “now similarly priced to synthetics”.  Talked about hospital all up costs – with ARX needing only the one application + lower infection rates.   (I am not at all clear how this all squares off with PNV, AVH and the many other wound care products out there. Suspect in the end their will be a place for them all, with some hospitals / surgeons favouring one over the other, when they all do a pretty good job in their respective applications).  
7. Financial Stability of TelaBio. 

i)        BW acknowledged they had raised capital now for over 10 years and in the US investment market there was more of a “swing for the fences” mentality. Pointed to the November cap raise of US$41m and indicated Tela now well placed to get to the needed sales of $120m and break even.  

ii)     Also indicted the sales mix will in time tilt away from OviTex to the other ARX products ie less reliance on Tela.

iii)    BW indicated in the event of a Tela failure, they had a solid contract with them as far as retaining the OviTex rights.  Indicated the business had value in its own right particularly to a competitor in the hernia and breast areas and any commercial arrangement would survive.

8) Changes to Sales Team. Had promoted a successful regional manager to overall sales manager. More training to reps and rationalisation of sales Regions. ARX had invested further in the medical affairs team (currently 4 staff) to promote the study publications to surgeons.

9) Symphony. Indicated changes to reimbursement was afoot. Would mean for ARX to continue in this market would need to continue with further trials. Myriad would be the main growth driver.

10)  Envio.  Had been to FDA with product. Sleeve was the issue. Working with FDA now on the design of the study. Study would commence next calendar year.

11) Catalysts to Growth.  BW spoke of “the pieces coming together, really pleased at what we see” Said they should in time win “the whole of hospital”. Feels there is a disconnect between the market and what is happening internally.

12) Previous ARX stumbles.   Last year ARX missed guidance – this created uncertainty and was punished for this.   TelaBio performance & balance sheet was a ARX headwind.

13) Other BW comments: ARX now have a much better hospital financial case. Focus on total would care – ie the claim is ARX products need less applications and have less complications. ARX has/will have soon better clinical and financial data on all this.

Importantly BW did not appear frazelled as he should have at the end of a long outwardly crappy (share price wise) year.  BW was chipper and upbeat for the full 45 minutes. No outward signs of defeat in this CEO.

ARX may well have turned the corner and be on the way to being a $1+ share.

Some SM members are already familiar with ARX, some are not. In short ARX are a NZ based company that produces sheet wound products for hernias, chronic wounds, traumas etc. Product is made from the forestomach of sheep. It has a market cap of around $340m and they have been going for about 14 years and have been listed on the ASX for nearly 3 years.

 The CEO Brian Ward started the company and owns about 10%. Annual sales to the 31/3/23 were $62m. It lost $1.7m and had operating cash outflow of $3.7m. For the first time this year time some of the R&D was capitalised - $1.3m versus $10.6m that was expensed. Still very conservative accounting.

Looks highly likely will turn cash flow positive in the 2024 year. It has around $45m in cash, so is not going to go broke.

 The focus is on US sales so there are lots of issues in getting this happening around sales teams, surgeon acceptance, contracts with healthcare providers and product reimbursement.   There is a lot in the presentation material released on the 1/6/23 -  much of it you have to take their word for it, unless you are an industry insider.   

However a clearer picture of this company is emerging:

• Their product appeared superior in certain applications
• Their products are cheaper than the existing biologic mesh’s on the market. (It is a crowded market with pig and human tissue products, as well as fully synthetic products)
• The management all have their working lives and money locked into it and are pushing it very hard.  You cannot say they are not trying.
• They are not going to go broke

 What is further convincing however is if you take out their R&D for their new product Envio (a product that fills up dead space inside a wound cavity, a way off getting to market) they are $8.5m EBITA positive. So you could argue this is a medical device company is already profitable selling roughly on a PE of about 80. Still no one substantive (read sizable Fund Manager) at the present time will touch it.  All too scared.  Hence the current share price drift.   

The next 12 months will be critical, however it is not beyond possibility with demonstrated recurring sales and earnings growth ARX could well double in the next three years.  If not the downside should be limited, due to the established sales position, IP and earnings.   

I think the odds are currently in the investor’s favour, and it is a BUY