Pinned straw:
Notes on today's AVH 2QFY24 Investor Webinar, and then I think I am done with AVH for this Q!
TLDR SUMMARY
Nothing new as most of the content was released as part of the 2QFY24 results last week
What was very useful, however, was the detailed insights and colour to (1) the step change introduced by the RecellGo devices and the impact of this (2) the position behind the New Account numbers - a bigger than run-rate jump is expected in Q3 (3) approach to the globalisation strategy (4) positioning of Regnity in the Continuum of Wound Care strategy and the product selection process and (5) update on how profitability will play out.
Clear reiteration that with the current growth trajectory with RecellGo, there is sufficient cash to get to profitability without having to draw down on $25m of upcoming debt tranches.
Even if AVH meets the lower end of revenue growth guidance it still expects to reach the break-even goals as AVH is now setup for sequential QoQ growth.
Very apparent that Jeff and David are still very sore with the drop in the 1QFY24 results and the impact this will have on FY2024 - declaring that it really was “self-inflicted” and they have owned that. But AVH is now poised for growth and “is in a good place to make this happen”.
My thesis is absolutely playing out and am very bullish as the various pieces for sustainable growth previously discussed are now in place. It is now all about delivering against the playing field that AVH has created in the coming quarters ....
Discl: Topped up this morning in both SM (assuming closed) and IRL (to 3%) to move AVH into a medium conviction holding in my portfolio. Intend to top up another 1 to 1.5% if the price weakens from here.
THE SIGNIFICANT IMPROVEMENT OF RECELLGO
I think I finally grasped the step change that RecellGO brings over Recell v1.0. This table is my layman's summary based on the pictures above:
NEW ACCOUNTS UPDATE
Q2 internal target was 46 units to new accounts which includes orders - landed short at 31 New Accounts + 6 VAC approved but no orders yet
Expect further improvement in Q3 as AVH has fine-tuned the new account process - 89 is in the pipeline vs 50-70 if maintained current run rate
Sales organisation is full staffed now, from 30 previously to 100 today
One of the early challenges was that some of the new accounts were seeing RecellGo for the first time and being positioned as the 1st in class in trauma centres causing process bottlenecks as most wanted to see trials being conducted first etc - have modified approach to overcome this.
GLOBAL COMMERCIALISATION STRATEGY
Countries on AVH’s radar met 3 internal criteria (1) Health Care systems must be able to leverage the Recell technology (2) have the ability to pay (3) has sufficient population size
Current new-country approach of expanding via local 3rd parties is to leverage off the partner’s knowledge of the local healthcare system
At the last step for CE mark certification in 3Q FY2024.
WOUND CARE STRATEGY
Reiterated that Recell has no competitor - if AVH gave away the IP to someone, it would take 2 PMA cycles over 4-5 years to get the requisite approvals from scratch - this is the lead time runway that AVH has to embed Recell as the standard of care for burns and FSTD indications.
Reiterated that the AVH strategy is to define and sell the suite of products across the full Continuum of Wound Care around the Recell spray-on.
There are many products in the Dermal Matrix space, but AVH had 3 specific criteria, which Regenity met the best:
- Needs to help speed up the process of getting the graft ready - Regenity is 40% faster, leading to rapid closure of the wound - this will the subject of the 1st planned clinical study
- Need to help speed up graft uptake to begin the healing process
- Enable rapid closure of the wound
Deal ensures that AVH gets more rights and improved margins as each clinical study gets approved - this is good skin in the game without having to develop a product from scratch
AVH is very excited at the prospect of a Regenity-Recell combination enabling AVH to define a 1-step standard of care/procedure vs the current 2-step approach of stabilising the wound in the Dermal Matrix followed by the Skin Graft procedure - this will be the focus in the planned clinical trials after PMA approval for Reginity has been obtained
FINANCIALS
Enough cash to get to profitability given current revenue growth trajectory.
AVH will not be eligible to draw down $25m tranche of debt which will become available as will not meet FY24 revenue threshold of $75m, this also means the 2nd tranche of $25m in FY25 will lapse - not an issue as AVH never expected to have to draw down these 2 tranches anyway - these is sufficient cash
Comments around profitability:
- Sales Org structure is now fully in place and no change is expected to be required for the next 2 years
- R&D expenses are expected to be stable
- G&A expenses have fallen and continued to fall as process for AVH to scale are in place and AVH has capacity to increase production by 10x. Insourcing of RecellGO manufacturing has allowed better quality control etc
- AVH expects profitability to rise as revenue rises and expenses remain stable/flatten
This confirms my commentary in the 2Q results that operational leverage could already be in play
David explained the rationale for the downward guidance in FY24 revenue - need to re-listen the webinar recording to capture the detail of this comment
David also said that even if AVH meets the lower end of revenue growth guidance, it still expects to reach the break-even goals as AVH is now setup for sequential QoQ growth
Very apparent that Jeff and David are still very sore with the drop in the 1QFY24 results and the impact this will have on FY2024 - declaring that it really was “self-inflicted” and they have owned that. But AVH is now poised for growth and “is in a good place to make this happen”
@jcmleng I monitor $AVH as part of tracking the dermal repair sector, given my interest in $PNV. As you write, the launch of ReCELL GO is the gamechanger shareholders have been waiting for. And I think the trend charts I've shown below help explain the story about why $AVH have had such a difficult job convincing the market.
Financial Trends
As you write, the automation and consistency brought about by ReCELL Go and Go-mini, are key to overcoming the challenge that individual account sales have to date not been strong enough to cover the relatively high sales and marketing support cost. We know from $PNV that account management in dermal repair is a high contact activity (compared with many other healthcare product sales).
As Figure 1 clearly shows, although the product has a decent % Gross Margin for a medical device (85-87%), opex growth has significantly outpaced revenue growth. While I've not broken it out, the growth in opex is dominated by the ramp up in sales and marketing. Not unusual in the sector, but ideally, sales quickly grow to cover and exceed costs for an account over 1-2 years. $AVH have been unable to demonstrate this prior to the arrival of ReCELL Go.
Your straw clearly highlights the productivity issues (and consistency) of the manual ReCELL process, and I think what we've observed is that each account cannot achieve the productivity required to cover its direct overhead.
The 3Q24 forecast revenue number is a clear signal of intent from management, based on the account conversions to ReCELL GO they are getting. The proof will be to what extent the established salesforce can support that revenue growth so that we start to get operating leverage. Indeed, looking at Figure 2, it might be that we can start to see this emerging in the latest report, as %Opex/Revenue stepped back to historical levels, recognising - as you've highlighted - the self-inflicted wound of the 1Q result. The 1Q result muddies the waters.
The issue of high sales and marketing costs-to-revenue I think also explains why management are seeking to build out a broader portfolio of dermal repair offerings, by licensing in other products. More offerings per sale rep. will drive revenue per account.
Market Reaction
I haven't read any of the analyst reports yet on $AVH. And I cant give my usual analysis of analysts estimates because I don't trust the data in my feed. Due to its dual listing, I think macrketscreener.com might be mixing price targets based on the US shares and those on the ASX. Suffice it to say, since the result, the SP initially jumped from $2.50 to around $3.00 (on the improving picture?) but has since fallen back to $2.69 at time of writing. I wonder if this is in part due to $AVH having had several false starts over the years, so that ultimately the market is taking more of a "show me" stance?
My Key TakeAways
With FDA approvals in 2023 for its Full Thickness Burns and Vitiligo indications, a developing product porfolio via distributorship/licensing deal, and the prospect of greater adoption of ReCELL due to increase clinical productivity via GO, it is possible that the stars are starting to align for $AVH, and things could start changing very quickly.
Having pre-invested in the salesforce, it should now be possbile to grow account revenues while growing costs at a MUCH slower pace. If so, we may indeed see operating leverage develop. (In fact, I would have thought it was highly in the interests of management to control this in the next 1-3 quarters - it is entirely in their gift!)
For investors willing to take the risk, entry now could prove to be very well-rewarded if management's forecast on the uptick in sales materialises and a new growth trajectory can be established.
I don't have any conviction that this will happen. This is not the same as saying I don't think it will happen, I just don't have a view on it, as I haven't been close enough to what management and clinicans are saying about the product. And because of the storied history, I don't have a view on the operating economics. Because of that, I am not investing in $AVH and my bets in the sector remain with $PNV. (But if what I've written hear pans out to be true, then this might be one decision I look back on in 12 months with some regret!)
ReCELL is a unique, innovative product which is on track to achieve A$90-100+m sales this year. After several false starts, the time for $AVH may well be near, and any re-rating could materially move the dial!
Disc: Not held
Figure 1:
Figure 2:
@mikebrisy firstly, a huge upfront thanks for this helpful background information on AVH. Your comments helped me do 2 things (1) reflect on my investment approach/style and (2) revisit my AVH thesis and re-evaluate my bullishness. I gained very valuable personal insights on both fronts, as a result. So thank you again!
Investment Style/Approach
I seem to:
- gravitate towards companies who have been beaten up and are in turnaround mode - think this has to be work-experience driven. I seem to perpetually be in “problematic situations” and then enjoying the challenge to get out of them, and this has carried into how and what I invest in ... I did not initially put AVH in this “turnaround” category (more CAT, EOS, EML), but your notes has made me think about AVH in this light now
- Back turnarounds only when the right ingredients are in place and planets feel like they are aligning
- Take a position early, when the turnaround looks like it is about to happen or has just happened, and I am prepared to be wrong before being right vs waiting for full evidence before fully committing
- Focus on the company’s financial history no more than 18-24M prior - while I did not start with this reason in mind, I think I have done this so that I can evaluate the turnaround purely on its future merits, rather than be influenced by the past troubles
- Ensure that my entry point is more on the historical lows-end instead of at historical high’s to minimise my potential losses if the company did not turn as I anticipated
Based on this, it is now clearer to me that I have looked at AVH with a purely “what’s ahead” lens, with very little/no understanding of the past issues.
This can both be a good thing (no anchor bias on the history, look at the opportunity on its current merit) and bad thing (ignorance of history is not wise, not going with eyes totally wide open etc). So far, ignoring the history has probably led to a more decisive decision, has helped me avoid analysis paralysis and inaction, and the outcomes have been much more positive than negative. But nothing to say that won’t bite me back down the road at all!
AVH Thesis Revisit
In terms of AVH, I took an early position in April 2024, entry price $4.84 now looks very poor, but have since averaged down following the 1Q fallout to ~$3.20. Have thus missed all the historical challenges you flag with Recell 1.0, the increasing sales cost and the struggle for sales traction with Recell 1.0.
My almost completely forward-looking thesis of AVH is thus:
Resumption of sales growth having learnt the lessons of the VAC process in 1Q and RecellGo - the increase in New Accounts in Q2 and the anticipated higher run rate of New Accounts in Q3 are both encouraging evidence of this issue turning - it will be fully confirmed if Q3 new accounts exceed Q2.
The significant step change in RecellGo vs the historical Recell 1.0 challenges only fully crystallised for me when I saw the photo’s in the 2Q investor preso and listening to Jeff’s commentary
The expansion of the sales force, and the corresponding increase in the sales cost made sense given what was ahead - I have directly experienced the sub-optimal outcomes that come with the unreasonable/short-sightedness/stupidity of constraining resources. I thus do not view step increases in cost as a bad thing, by default - so long as the rationale for increased cost makes sense, and the return on that increased cost can be reasonably seen, I actually see increased cost as a good, sensible thing (eg. C79, AVH, but not ALC!)
I am very bullish on AVH’s multi-product strategy in their Wound Care Continuum and how they have positioned it.I see the strategy as a very smart (1) low-risk (product development to approval was done by someone else) (2) low investment (the PermaDerm and Reginity deals have required minimal/no Capex), (3) earnings accretive (~50% margins at least) (4) smart zero cost leveraging of the expanded sales force (already in place, no further cost expected) and (5) a moat enhancing strategy (anchored by the use of Recell/RecellGo in the middle of it all) by management.
Based on more internalising of the thesis this week, my conviction went up a clear notch.
In terms of the market needing more evidence of the growth, my view is that the market has already beaten the crap out of AVH from its high of ~$17+. AVH is now not too far from its all-time lows of ~$1.50 to $1.80.
Chart-wise, any downside from these levels will likely be market volatility-riven rather company specific issues and is likely be capped and temporary. I view $2.50, $2.35 and if there is complete meltdown, ~$2.00 or slightly below, as great buying opportunities as I am still short by about 1.0 to 1.5% of my ideal AVH portfolio allocation.
As a company guiding to hit US$80m in FY24, which I think is very achievable given current trajectory, I actually feel the risk reward is probably close, if not at, its highest level now.
If it goes south, taking the hit from a rapid bailout of AVH will still be within reasonable loss levels.
Like all else, whether this is right or wrong will be revealed in the fullness of time!
Discl: Held IRL and in SM