Aurora Spine Is Now A Game Changer (OTCMKTS:ASAPF)

Game Changing Ideas

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Aurora Spine (OTCQB:ASAPF) (TSXV:ASG:CA), is a minimally invasive spinal implant technology company that I introduced to Seeking Alpha in this article. The stock price is lower by about 40% since that article was published in May 2021, but the stock price is rebounding and has gained 30% since my previous update published in June. The initial price drop was in concert with adverse market conditions relative to microcap growth stocks and the recent uptrend is reflective of the progress Aurora has made in its transformation from being a third-party reseller to an organic game-changing product company.

Investment Thesis

The record revenues reported in Q1 were the first time that the company reported higher sales from organic products than from third-party sales. Since then, the company has gained FDA 510(k) clearance for two products, a second DEXA platform product and an advanced sacroiliac joint (“SI joint”) device. The DEXA platform and the SI joint device are game changers, with a strong backbone provided by the company’s two other main products, SIP and SILO.

DEXA Platform

Aurora’s patented DEXA technology is used to determine a patient’s bone density, which is then matched in implant devise material to improve fixation and promote healthy bone growth, as described in this study. It is important to note that doctors are very familiar with DEXA, but Aurora has acquired the patent and is the only company that offers bone matching implantable devices.

The company received FDA 510(k) clearance for DEXA-C, a cervical cage, in August 2022. DEXA-C was introduced on a limited basis with just two doctors involved. The product introduction is now in beta rollout with ten doctors participating and will go into the full commercial stage this month.

The company’s second DEXA technology product, DEXA-L, a lumbar interbody spinal fusion system, received FDA 510(k) clearance in June. Each Aurora device requires a kit necessary for device preparation and installation. Aurora reported that it now has 40 DEXA-C kits ready for delivery, with the first DEXA-C procedure scheduled in December.

I expect that DEXA-L will receive a similar market reaction as DEXA-C received when it was first introduced, quickly gaining 8% of total Aurora sales. The company plans to add additional products employing the DEXA technology, as well as to license the technology to third parties for uses outside of its spine surgery core competency, such as for dental and knee replacement devices. I believe that the DEXA platform will be the lead product for Aurora and serve to cross-sell its other products.

SILO TFX

Aurora’s non-allograft titanium device named SILO TFX gained FDA 510(k) clearance last month. SI-Bone (SIBN) is the current market share leader in minimally invasive sacroiliac joint (“SI joint”) devices. The SI-Bone device requires three incisions and three devices. The SILO TFX is a game-changer as it requires just one incision and one device. Fewer incisions lower the cost, complication and time of the surgery.

SI joint fusion is in the nascent stages of being established as a preferred treatment alternative to invasive surgery for back pain caused by SI joint disruption. SILO TFX patients are seen on an outpatient basis for a procedure that lasts about an hour. The patient is able to walk immediately after the procedure.

The TFX will have a slower rollout than the DEXA products, as doctors are familiar with DEXA technology and do not need training. Aurora conducts doctor education programs every month for its ZIP and Silo products and will now add TFX training. A DEXA version of the TFX device is expected to be introduced next year.

Sales of the TFX will benefit from a new code for insurance reimbursement that requires transfixing of the SI joint. This will eliminate many competing SI joint devices that do not meet this requirement. An explanation of how Aurora’s devices meet the requirement is included in this recent interview (around the 8-minute mark) with Aurora’s CEO Trent Northcutt.

ZIP

Aurora’s first organic product, ZIP, gained FDA 510(k) clearance in 2013 and became commercially available in 2014. ZIP is a minimally invasive device, requiring no medical screws and just one incision. For further description of the Zip devices please refer to my previous articles or the company website.

ZIP has been Aurora’s leading product, accounting for almost 31% of total sales in the second quarter. Aurora recently increased the total addressable market for ZIP by obtaining additional FDA clearance for the ZIP device, allowing physicians to treat Lumbar Spinal Stenosis patients with the ZIP implant device. ZIP sales are also being supported by strong early results from an ongoing clinical study that demonstrated ZIP was effective in pain relief for 64% of patients that received the device, exceeding the 50% threshold for success.

SILO

It is likely that TFX will cannibalize sales for and eventually replace Aurora’s SILO-C, an allograft device that fuses the pelvis to the joint, requiring no screws. The TFX provides better fixation because it utilizes two screws and titanium is longer lasting than allograft material. SILO-C accounted for almost 24% of total sales in the second quarter.

BUZZ

In the interview cited above Aurora’s CEO, Trent Northcutt disclosed that there was interest in his company’s products from the industry giants that tend to acquire small companies with disruptive products, as well as interest from a couple of analysts. There’s also a lot of buzz on social media. Do a search on LinkedIn on Aurora Spine and you will find endorsements from doctors who have attended an Aurora training session, gone back home, became customers, and endorsed Aurora Spine on LinkedIn.

The buzz is being generated because Aurora is offering superior products in a nascent industry. Aurora received the Best Spine Technology Award for its DEXA technology at last week’s North American Spine Society’s annual event. The benefits from non-invasive benefits include less procedure time, less pain, fewer patient side effects and quicker patient recovery time are translating into the growth of surgery centers in the U.S. There are now about the same amount of surgery centers as there are hospitals. Aurora Spine has already captured the largest pain surgery center in the U.S., National Spine & Pain, as a customer.

I included this section because where there is smoke, there is usually fire. Aurora is capturing the attention of important circles for its product success as well as stock price success.

Financials

There are about 67 million shares outstanding. The market cap is about $27 million. The company most recently reported about $1 million in cash and $3 million in debt resulting in an EV of $29 million. There is about $4 million in accounts receivable reported at the end of the second quarter.

The company reported about $4 million in revenue for the second quarter and almost broke even. Expenses will now be reduced as the company currently doesn’t have any products going through the regulatory approval process and kits for its newest DEXA product have already been paid for. Extending the commercialization of the two DEXA products and the TFX product should easily propel the company into profitability and in my estimation, should at least double revenue over the next 12 months, which results in a forward price-to-sales ratio of just over 1X ($32 million revenue/ $29 million market cap).

Risks

The company has experienced delays due to supply chain issues, similar to many other companies. The supply chain bottleneck seems to be less prevalent, but the company may have a titanium supply problem in the future as almost half of the world’s titanium originates from war torn Russia and Ukraine. The company has bought titanium ahead of its need in order to avoid a future supply problem, but there isn’t any way of knowing how long the conflict between the two nations will go on.

Collection turnaround time is a huge concern for a company with as little cash as Aurora. The reported AR is large and worth keeping an eye on to see if the AR is reduced going forward. At this point, it isn’t a large consideration because Aurora hasn’t reported any unpaid accounts and because hospitals are notorious for stretching out payments due to the low-profit margins of the hospital industry.

Conclusion

Aurora has reported record revenues before the two DEXA products and the new TFX product have gone into full commercial rollout. The investment thesis of this article is that these three new products are game changers. The company is close to achieving profitability. The stock is selling at a modest valuation and should rerate as sales of the new products ramp up.

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