AVITA Medical, Inc.

ASX:AVH

AVITA Medical, Inc.

ASX:AVH
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$1.065 (+0.5%)
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#170
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Pinned straw:
mikebrisy
Added 2 months ago

Regenerative medicine company $AVH has announced that CEO Jim Corbett is leaving his positions as CEO and Board Member, being replaced as CEO by Chair Cary Vance. The sting in this particular tail is that preliminary 3Q revenue will be approx. $US$17m.

ASX Announcement

My Assessment

No explanation is given, and there is no message from Jim. He is thanked for his service, in essence.

Let's just recap the last 4Qs of revenue: US$19.5m, US$18.4m, US$18.5m and US$18.4m.

Whatever contribution we have started to see from Permeaderm and CoHealyx, has presumably been swamped by the ongoing woes of the CMS coding debacle for ReCell.

I expressed some scepticism at management's statements last quarter that things were underway to correct this. And I pointed out that once hospitals take it off the order list (because they don't get paid), who's to say when it goes back on the list. And if it ain't on the list, doctors can't reorder it. And, as we know, there are plenty of alternative products with large sales teams and strong clinical data out there. Afterall, the likes of $ARX and $PNV are growing revenue nicely at 15% - 30% p.a., taking share in a category which is still probably growing at high single digits % p.a.

We're not told why Jim is leaving, but I'd speculate that the FALL in revenue is the final straw. At 3Q results guidance will be updated, and I expect it will be ugly.

Lenders OrbiMed are once more relaxing their revenue covenants and are "in discussions" about restructuring future covenants. So, there will be a price to pay for that, revenue growth get's pushed further out, and therefore the potential for needing new capital at some future stage increases. Hitting anything near the projections in my valuation cases seems to be moving ever further out into the future.

And so, while a CEO search is underway, shareholders now have the Chair of an underperforming Board step in as Interim CEO on $0.7m salary, with a guaranteed element of his cash bonus. Nice that for some the returns are guaranteed!

Then there's the ongoing legal investigation into whether Avita and certain of its officers and/or directors have engaged in securities fraud or other unlawful business practices. I know these are commonplace in the US and there is no indication that there has been any wrongdoing. But it just does add to the pile of potential issues we'll face in future.

Investment Decision

I took a modest RL speculative position in $AVH earlier this year (2.5% in RL, which I increased on SP weakness to 3.5%). At the time my intention was to signficantly increase the position if the "one stop shop" strategy showed early progress or "run for the hills" if it didn't.

I have stuck to my initial plan. Today, I have turned and run for the hills.

This business continues to make strategies and communicate plans that it cannot execute. I had to have a long think about this on my run this morning, because the CMS coding issue was genuinely something completely outside of the company's control or influence. And yes, once more today's SP probably represents a low point, and therefore a bad time to sell.

But I asked myself, what confidence do I have that the company can get back onto a strong revenue growth trajectory? And my asnwer was that I have no confidence, but at best hope. And hope is not a valid investment thesis. There are too many questions, and I have too many other places in my portfolio I'd rather put the capital in due course.

So, I exited my entire RL position at $1.35 this morning, a painful 23% loss. I should really know better by now!

Disc: Not held.
jcmleng
Added 2 months ago

I similarly exited my SM and IRL 2.40% position at $1.34, taking a 49.5% hit.

I more or less made up my mind when I read the announcement this morning, but then fought with myself to follow through. My track record with pin-pulling hasnt been great, so I challenged myself as to whether I was adding to this not-great record with AVH.

The catalysts to call this a thesis bust were:

  • Jim Corbett leaving - seems clear to me that he was fired - I liked his style and how he transformed AVH from a single product company to a multi-product company. With so much negativity, I did not relish having to build confidence with someone new
  • The 3Q revenue of $17m was what did it for me - thats below flat "baseline" RCEL quarterly revenue of ~$18m, so 3 scenarios were possible (1) either RCEL was fixed/back to normal which then means COHealyx and PermaDerm was not in a good spot (2) RCEL went backwards, CoHealyx/PermaDerm compensated (3) somewhere in between, which I suspect is the case. None of these scenario's are good ones.
  • The CMS issues have likely not gone away, and could be made worse by the US Govt shutdown, further delaying reimbursements, but CoHealyx and PermeaDerm have not fired to more than compensate
  • To meet FY25 revised down guidance of $76m, AVH needs $23.4m in 4Q - I can't see that happening with the drama's above, so another downgrade looks likely, which then brings in revenue covenant issues, potentially cashflow issues as well - too many issues to make this work


So, despite the turnaround ingredients being in place, the product that works and has so many economic benefits to hospitals and patients, the suite of products to expand the TAM, the turnaround is still not happening decisively and doesn't look like it will for at least another 2-3 quarters, if at all. Through the past few years, I maintained the conviction that "it would turn", but did not feel this conviction with any conviction (pun totally intended!) this morning.

You win some, lose some. The risk was mitigated by by a small position allocation. Never fun to lose, but it is what it is.

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