Aroa Biosurgery [ASX: ARX]
Healthcare & Biotechnology
An emerging regenerative healing player
We initiate coverage on Aroa Biosurgery (AROA) with a fair valuation of A$1.05, representing a 116% expected upside from the current share price of A$0.49. AROA is a New Zealand-based biotechnology company that specialises in medical products used for complete wound closure and soft tissue regeneration, utilising its proprietary extracellular matrix (ECM) technology platform. The company’s superior biomaterial is used in a portfolio of disruptive products, including Myriad, Symphony, OviTex, and Endoform. With its scalable, modular, and high-margin manufacturing process, AROA offers relatively low-cost products that facilitate quick healing. The exclusive technical capabilities are expected to enhance the usability of its product family, providing distinct value to users and increasing commercial leverage for investors.
ECM provides disruptive biological value to patients
Based on its unique ECM platform, AROA offers a product portfolio that supports complete wound closure for both acute and chronic wounds. The technically advanced products, designed for complex regenerative healing procedures, result in higher healing rates, relatively fewer complications, and infection-resistant outcomes. ECM technology challenges the currently prevalent products based on human acellular dermal matrices (HADMs), which are expensive, have longer healing times, and are prone to significant stretching (e.g., hernia repair). As AROA expands its sales force in the US and ventures into new geographies, including Taiwan (recently received FDA approval for Myriad), Switzerland, Chile, and South Africa, aggressive revenue growth is expected to support a financial turnaround for the stock.
Clinically superior products have multi-dimensional end markets
AROA’s structurally and biologically superior products have demonstrated their effectiveness across a range of procedures, including difficult-to-heal complex wounds (such as diabetic foot ulcers and venous ulcers) and soft tissue reconstruction procedures (such as lower limb salvage, traumatic wounds, hernia repair, abdominal dehiscence, and breast surgery). The US wound care market is expected to reach US$13.1bn by 2034 and the global soft tissue repair market is projected to reach US$18.8bn by 2029 (growing at a CAGR of c.5%). AROA’s scientifically superior products are well-positioned to target a larger market opportunity.
Valuation range of A$0.98–1.11 per share
To arrive at our fair valuation of AROA, we have utilised the DCF methodology. We have valued AROA at A$0.98 per share in a base-case scenario and A$1.11 per share in a bull-case scenario. We have maintained conservatism for each pivotal assumption and formulated an attractive investment thesis for AROA. We believe that a strong disruptive product portfolio, unique technical capabilities, efficient sales force, and entry into new geographies will support shareholder value creation in medium term. Main risks to our target price include operational (Tela Bio), regulatory and clinical.