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”

Super pleased that in the just concluded AVH Q2 Investor Webinar, my question on how AVH views PNV's NovoSorb, whether it was a direct or indirect competitor and if a competitor, how was it addressing that competition, was the first question, was read in full and I think, answered in full ... it was about 42 mins in.

This was my first crack at asking management a direct question as a super-small-fry retail investor outside of SM management sessions, so am still digesting the fact that I CAN ask questions and get answers ....!

I need to re-listen the recording as Jeff went into some medical explanation which I could not comprehend quicky enough but immediate points I picked up:

1. NovoSorb is a very good product (with no hesitation)
2. Does not do what Recell does, sounds like it is more in the space of what the new product Regenity does, at the Dermal Matrix level per diagram below
3. It is used in indications which do not use collagen matrix as part of the treatment vs Reginitywhich is a collagen-based dermal matrix
4. It is "more synergistic and addresses different indications" - Jeff talked about a Venn diagram which overlaps to a small extent where it does "compete", then there is a much wider area of the diagram where it treats different indications.

For me, this means that I can look at PNV as a standalone and different product to Recell, but operating in the same burns/trauma centre space, same customers etc.

Discl: AVH held IRL and in SM, evaluating PNV as a side-by-side addition

Worked through AVH's announcement last Thurs on the new addition to its wound care portfolio, Regenity. The more I understand this, the more AVH's strategy makes sense. Have re-organised the points in the press release to make better sense of the deal. Have to say that my enthusiasm and conviction in AVH might just have gone up another notch.

Discl: Held IRL and in SM

THOUGHTS

This is another way for AVH to win, targeted for 2025

End game objective is to define a new standard of care for FSTD wounds by using both Regenity and Recell in a single procedure, from the current 2-step procedure.

Each one of these adjacent bolt-on products not only expands AVH revenue opportunities, but it also changes the scope of, and tightens AVH’s moat around (1) RECELL and (2) AVH’s customers in the Burns Treatment world as it strives to define the new standard of care for burns wounds using a multi-product approach strategy

I am thus thinking that AVH's moat is rapidly morphing into (1) Defining the new standard of care using a suite of wound-care products across the full skin thickness (2) establishing the synergies and benefits of using the products in conjunction with other other, rather than a single product (3) monopolising the rights to market, sell and distribute the wound care products suite. which make up the new standard of care.

This is a significantly more robust go-to-market strategy vs a single Recell product approach, which only solves one of the many problems in a burns wound.

Overview of the Regenity Deal

• Exclusive multi-year development and distribution agreement with Regenity Biosciences (“Regenity”), a leading regenerative medical product developer and manufacturer of bioresorbable technologies. 
• As part of the exclusive development and distribution agreement, Regenity expects to secure 510(k) clearance for a collagen-based dermal matrix developed in collaboration with AVITA Medical in the fourth quarter of 2024. 
• Following 510(k) by the FDA, AVITA Medical will hold the exclusive marketing, sales and distribution rights to a unique collagen-based dermal matrix, which will be manufactured by Regenity.
• Once 510(k) clearance is obtained, Regenity will manufacture and supply this product to AVITA Medical. 
• AVITA Medical will then hold its exclusive rights to market, sell, and distribute the product, including any future enhancements or modifications, under the AVITA Medical brand name within the U.S., and potentially in countries in the European Union, as well as in Australia and Japan. 

Defining the New Standard of Care Using Regenity and RECEL in a Single Procedure Instead of The Current 2-Step Procedure

• Alongside the use of RECELL for the treatment of thermal burn wounds and full-thickness skin defects, our new product will generate a dermal-like tissue in full-thickness wounds through rapid cell repopulation and revascularization of the dermal collagen matrix. “We believe we also have the potential to establish a new standard of care with a one-stage closure, thereby improving patient outcomes.” 
• Immediately following 510(k) clearance and commercialization, AVITA Medical plans to initiate multiple clinical studies to establish the unique synergies between the new dermal matrix and RECELL. 
• These studies will include the evaluation of the new dermal matrix and other commercially available dermal matrices in full-thickness wounds, followed by delayed treatment with a split-thickness skin graft plus RECELL in a two-stage procedure (the current standard of care), to demonstrate improved time to grafting and wound closure. 
• Additional clinical studies will evaluate the use of the new dermal matrix in full-thickness wounds with immediate grafting together with RECELL in a single procedure, aiming to establish a new standard of care. 
• AVITA Medical anticipates completing these studies in 2025 

Commercial Terms

• The initial term of the exclusive development and distribution agreement is five years, with an automatic extension of an additional five years, contingent upon meeting certain criteria. 
• AVITA Medical will make a $2.0 million payment upon receipt of 510(k) clearance by Regenity. 
• AVITA Medical has a further obligation to make up to an additional $3.0 million payment on or before January 4, 2026, to support manufacturing capacity, contingent on the positive results of the clinical studies related to the new dermal matrix. 
• The first two years of revenue sharing from sales of the product is expected to be equal to 50% of its average sales price. 
• In subsequent years, AVITA Medical’s share of revenue will increase to 60% of the product’s average sales price. 

Did a more detailed review of the AVH Q2 results. The AVH price in the US spiked 20% on Fri, which has not happened for quite some time. Looking forward to Monday for a change!

Discl: Held IRL and in SM

TLDR SUMMARY

Very pleasing result - very encouraging signs that short term challenges of slow increase in new accounts is being overcome with a tangible increase in New Accounts (31) and VAC Approved accounts (6).

QoQ Revenue up 36.8%, direct costs up 39.5% but Gross Profit was an impressive 36.4% - encouraging signs of operational leverage perhaps.

Flagged increase in Sales cost has kicked in with a 29% increase, but impact was softened by falls in G&A and R&D, leading to a 7.1% overall cost increase.

FY24 Revenue guidance has been reduced from between $78.8m to $84.5m to between $68.0m to $70m - not great, but this will mostly be from the poor 1Q result. Happy to let this go if positive Q2 momentum is sustained throughout 2HFY24.

Have increasing confidence in management credibility as things have panned out as they have explained and guided in this result - continued confidence will need to be continually earned!

Other pipeline projects - RecellGo Mini FDA certification, Vitiligo studies progressing as planned.

Key for Q3 is continued evidence of sustained momentum in (1) New Accounts (2) Revenue, including expansion of non-US revenue (3) overall operating cost containment to absorb higher S&M expenses.

THOUGHT PROCESS

I am focused almost exclusively on understanding QoQ changes.

PcP changes are good to know, but significantly less important, as my view is that AVH has made step changes in the last 6M due to (1) RecellGo FDA certification (2) made clear moves in its transformation into a broad-based wound care company (distribution of Perma Derm, Regenity products alongside RecellGo) (3) upcoming RecellGO Mini FDA certification etc, which makes it a very different organisation than what it was in FY2023.

I am now thinking of AVH as not a single product, RecellGO-driven company, but as a broad-based wound care Company, which focuses on addressing all wound treatment issue around a central burn wound which is primarily treated by RecellGO - this pivot in thinking has been important to make sense of all the recent AVH moves and what is ahead.

I am desperately wanting to have clarity on where PNV’s NovoSorb sits in both this Continuum of Wound Care and Product Compatibility diagrams to understand how much of a competitor it is to AVH’s market position and strategy and/or whether it makes sense to open a position in PNV to ride on the NovSorb opportunity ahead - have asked the question for the AVH Investor Seminar next week.

Updated Continuum to Include Regenity

THE GOOD IN Q2

Tangible increase in New Accounts for RecellGo Full Thickness Skin Defects - the lack of progress in securing VAC approval for new accounts caused the 1QFY24 results to dive, expectations were reset, and there is now a tangible uptick in New Accounts and VAC approval. Q3 looks promising in terms of extending this new account momentum.

Revenue rose 36.8% QoQ to US$15.1m, at the top end of Q2 guidance of “between $14.3m to $15.3m”.

While from a very low base, good to see revenue increases in non-US markets as AVH focuses on expanding its RecellGo global footprint.

Cost of sales corresponding rose 39.5%, but Gross Profit rose 36.4%, which hints at improving operational leverage as the revenue increase was almost fully sustained through to gross profit margins. Need more evidence that this is sustainable but this is a really encouraging sign. It also lends credence to management’s explanation that the slowdown in 1Q revenue was primarily due to the challenges of navigating the VAC process in hospitals, which AVH had to learn from and fine-tune its approach to expedite the process.

Operating Expenses rose 7.1% QoQ, despite a clearly prior-flagged increase in Sales & Marketing expense of 29% as G&A and R&D expenses fell 16.1% and 5.9% respectively, to compensate for the increased sales cost. This is also encouraging as AVH appears to containing overall cost increase despite the sharp increase in Sales & Marketing expenses.

Cash balance increased $0.5m, or 3% and appears that operations now has a good cash-flow cadence. This augurs well for (1) the AVH objective of being cash flow positive no later than 3QFY25 (2) is likely to further improve as revenue momentum increases in the coming quarters and (3) keeps the risk of a operations-driven cash raise risk, low.

Other projects appear to be going well and on track (1) RecellGO Mini FDA approval (2) Vitiligo study.

THE NOT GREAT in Q2

Full Year revenue guidance has now dropped to between $68.0 and $70.0m from the initial FY24 guidance of $78.5m to $84.5m, but still a very respectable YoY growth of 37% to 41% over FY23 - much of this will be due to the poor 1Q result. 

This is not great, but I am happy to let this go IF there is continued 2HFY24 momentum in (1) New Accounts (2) QoQ revenue and (3) improving non-US revenue contribution, as this blip will likely only be temporary. All bets will be off if 2HFY24 momentum falters!

EXPECTATIONS FOR Q3

• Meet or achieve New Accounts and VAC Approved Accounts - I view this to be more important than meeting revenue guidance as this is the driver of future revenue growth
• Management guidance is for Q3 revenue to be in the range of $19.0 to $20.0m
• Continued step increases in non-US revenue, particularly the EU where AVH is focused on growing its presence
• Sustaining of margins as sales of other wound-care products increasingly contribute to revenue
• Modest rise in Operating Expenses to demonstrate continued containment of costs
• Sustained Cash balance

THESIS UPDATE

• Thesis remains very much intact - the operational outlook of this thesis has improved with this result.
• Moving AVH to a medium-conviction holding in my portfolio.
• Will progressively top up if price weakens again to the ~$2.35 to ~$2.50 range to move the current 2.2% holding to between 3.0% and 3.5% over the coming weeks.

Am working through the AVH's 2QFY24 results, which at first glance, looks good. The market certainly liked it!

It is a much-welcomed change from the recent bash-almost-everything-I-am-also-hurting mood across the market which I am desperately trying to tune out of ...

The AVH 2Q pcp improvement looks good, but what I am more focused on is tangible QoQ improvement to gauge sales momentum ...

In signing up for the Investor Webinar next week, I have asked the following question:

Could you please provide insights on how AVH view's PolyNovo's NovoSorb product. Where does NovoSorb sit in the AVH Wound Care Continuum? Does it compete with RecellGo, directly or indirectly, and if so, how is this competition being addressed? 

Hoping AVH will pick up the question and provide some insights, that I will share.

Discl: Held IRL and in SM

Very impressed with the planning and prep, deployment and execution of the RECELL GO. FDA approval was received on Thu 30 May 24, so 1st use was the day after.

The Joseph M. Still Burn Center at Doctors Hospital of Augusta is the first U.S. burn center to treat a patient using its RECELL GO™ System

• RECELL GO introduces enhanced features that streamline the preparation of Spray-On Skin™Cells. 
• This next-generation device significantly reduces the training burden on medical staff, improves workflow efficiency in the operating room, and controls the RECELL Enzyme™ incubation time to ensure optimal cell yield and viability. 
• These advancements simplify the user interface, enabling medical teams to provide quality care readily and consistently to their patients. 

A much-expected-but-good-to-finally-see-it FDA approval for RECELL GO was received by AVH overnight. AVH has been all set to launch to market the day it got FDA approval. This could well be the turning point for the rough past 6M.

• U.S. Food and Drug Administration (FDA) has approved its premarket approval (PMA) supplement for the RECELL GO™ System, its next-generation autologous cell harvesting device that harnesses the regenerative properties of a patient’s own skin to treat thermal burn wounds and full-thickness skin defects. 
• RECELL GO introduces enhanced features that streamline the preparation of Spray-On Skin™ Cells. This next-generation device significantly reduces the training burden on medical staff, improves workflow efficiency in the operating room, and controls the RECELL Enzyme™ incubation time to ensure optimal cell yield and viability. These advancements simplify the user interface, enabling medical teams to provide quality care readily and consistently to their patients. 
• "FDA approval of RECELL GO marks a paradigm shift in the treatment of partial-thickness and full-thickness wounds,” said Jim Corbett, Chief Executive Officer of AVITA Medical. “By streamlining processes and enhancing operational efficiency with the use of RECELL GO, clinicians can now treat a greater number of patients and more broadly experience the proven benefits of RECELL technology. We believe that this transformative shift will empower more clinicians to achieve optimal outcomes for their patients, driving greater adoption, and fundamentally redefining wound care management. It's GO time for a new era in wound care." 

In the United States, the Company will launch RECELL GO in its top burn treatment centers in June, and other existing accounts will be converted to RECELL GO throughout the year. New accounts will receive RECELL GO with their first order, eliminating the need for conversion. 

My notes on AVH's 1QFY24 earnings and earnings call.

Discl: Held IRL and in SM

KEY TAKEAWAYS

• Not a great quarter at all
• AVH continues to battle the complex Value Analysis Committee (VAC) approval process at trauma centres - a key insight learnt was this is the first period that AVH has had to front the VAC process, so they are very much learning on their feet in terms of how best to successfully navigate this process
• With Q2 revenue being guided to US14.3m to US$15.3m, essentially 4QFY23 revenue, the back-ending of revenue to meet the lower end of revenue guidance of between US$78.5m and $84.5m, particularly in 3Q and 4Q, is very steep 
• The ingredients to achieving revenue momentum are very much in place, it is now a matter of executing the delivery - (1) RECELL GO FDA approval end-May (2) significant leanings applied into the VAC process to increase velocity and success rate (3) increased sales force is in place (4) PermeaDerm contribution to start flowing through (5) RECELL Mini approval end-2024 (6) ongoing hunt for synergistic burns wound products to complement RECELL treatment (7) overseas approvals and expansion.
• Management appears to be actively managing the issues, have appeared transparent in their communication of the challenges and resolution steps, and appear to have well managed all things within their control (Recell Go inventory, increasing sales force, applying VAC leanings, looking for synergistic products etc)
• Strategic Transition to the Continuum of Burns Wound Care in and around the RECELL technology makes good sense - management has thus far appear disciplined in how they are working against this strategy
• Will need patience for the full effects of all of these to kick in before any meaningful re-rating occurs - likely to only be late CY2024/early CY2025, price will be choppy and event-driven in the meantime

Risks

• Bog down in VAC process continues deep into FY2024 - Medium
• Slower uptake of PermaDerm will dent revenue - Medium
• FY2024 revenue guidance not met as planets do not align - Medium/High
• Overseas expansion and then ramp up does not occur as quickly as planned for there to be meaningful revenue contribution - Medium

Outlook

• Much of the risks are timing rather than permanent issues - the need for burns wound care is an ongoing, critical need and the cost benefits from RECELL are significant
• Once ironed out, growth momentum will take off as AVH has many ways to win, on an ongoing basis

Action

• Continue to hold 
• Add to current position up to max of 2%, only on price weakness
• 
  

NOTES FROM EARNINGS CALL

• Disappointing quarter - short of expectations and 1st quarter since Jim arrived that sequential quarterly growth was not achieved
• Burns core business was slower than normal:
• Burns cases are predictable and typically flat
• Jan 2024 saw an abnormal 20% reduction in burns admissions from the last 3 January’s
• Feb and Mar 2024 and current admissions appear flat vs prior years, back to normal
• Pipeline of VAC approvals remain strong - 46 are due for approval in 2QFY24 - there are precise dates for these in Q2, not expecting any rejections
• AVH has not had to go through the VAC process prior to the approval for the expanded scope of Full Thickness Skin Defect (FTSD) indications, and the approval process is complex - feeling much better on this front as significant leanings have occurred, and AVH’s approach to the VAC process has been fine-tuned
• Strategy now in place for sales team to spend 60% of their time on site to educate, train and sell
• RECELL GO inventory is already on hand and AVH is ready to go as soon as FDA approval is received end-May 2024
• On the 8 rejections in the VAC approval process, no clear pattern for these rejections and has occurred randomly - rejections are not expected to have a material impact on guidance
• Tone study for Vitiligo indications will commence in June, ending in July 2024, preliminary insights will be provided in the August 2024 call
• Overseas expansion - good progress
• Submitted technical documentation to EU for CE certification, confirmation that documents provided is OK
• European launch is expected to be post northern summer to coincide with RECELL GO approval and EU certification, expected in Sep 2024

Financials

• Gross Profit improved to 86.4% vs FY23 FY23’s 84.5% - expecting margin dilution rest of FY2024 as lower margin (50%) PermeaDerm revenue increasingly kicks in 
• $4.0m of expenses are not recurring - purchase of PermeaDerm inventory, other Stedical-related costs, as startup costs for PermeaDerm - of this, $3.1m is product inventory
• Increase of Sales & Marketing cost is due to the expansion of the Sales Team, the ramp up occurred in 1QFY24 - will continue to rise in the next Quarter as the full quarter impact is felt from the staff uplift
• G&A and R&D costs vs pcp and prior Quarters were mostly due to increased employee costs - G&A expected to be stable to lower and R&D costs expected to be stable going forward
• BARDA income has stopped as the BARDA Agreement has expired - AVH is only obligated to provide BARDA with 1st priority to purchase a max of 1,000 units, which AVH owns in the event of a national disaster
• Increased cash use this Quarter is not a concern and does not impact the goal to achieve cash flow break even and GAAP profitability no later than 3QFY2025
• Impact of expanding Sales & Marketing force has not had a significant impact on sales:
• changeover of reps has occurred across accounts but evidence suggests that accounts with changed Sales reps has performed slightly better than accounts with unchanged reps
• the sales force expansion is not a cause of the current challenges
• Post VAC approval, the 1st customer order is typically placed quickly, then time is required to train, educate and assist the trauma centre in the use of RECELL - AVH medical scientist staff are key to this diagnose and how-to-treat phase

Guidance for 2QFY24

• Revenue 2QFY24 to be between $14.3m to $15.3m
• Reiterate FY24 guidance to be at the lower end of $78.5m to $84.5m, including PermeaDerm revenue - acknowledged that the backend ramp in 3Q and 4Q revenues is very steep
• Expecting 2Q to recapture sales momentum as AVH overcomes the VAC approval process challenges
• PermeaDerm will start to meaningfully contribute - extent and timing is uncertain at this stage, but will become clearer in 2QFY24 - no significant additional expense required to sell PermeaDerm as it complements the Recell treatment
• Significant boost expected from RECELL GO approval
• New Accounts do not seem to be waiting for RECELL GO approval before committing
• Great sense of anticipation from existing, bigger customers on RECEL GO - AVH is expecting a significant boost in uptake from RECELL GO as there are significant benefits in terms of (1) reduction of 1 person currently required to prepare/treat burns (2) reduces operating theatre time and expense, for FTSD indications, as it is a step improvement in terms of being easier to learn and use
• As AVH is confident with the steep ramp up, if the lower end of guidance is met, AVH will burn less cash and will be very close to cash flow break even 

Have started building a small position in AVH.

PROBLEM THAT AVH IS TRYING TO SOLVE

• Split-Thickness Skin Grafts (STSG), where donor skin is harvested from a healthy area of a patient’s skin, has been the standard treatment for more than 50 years - associated with significant pain, itching, infection, dyschromia, dyspigmentation, delayed healing, and hypertrophic scarring of the donor site.
• Lack of healthy donor skin in patients prevents immediate and complete treatment of the entire burn injury - must wait for the donor sites have healed to enable re-harvest - delays in treatment, requiring multiple procedures and extending hospital stay
• Overall cost of STSG treatment is expensive - eg. 40% mixed-depth burn could cost $579k and 59.4 days in hospital

INVESTMENT CASE

• Essentially a monopoly for burns wound management via the RECELL Platform
• No known competitor in this space
• Barriers to entry is high - FDA approvals required etc
• Challenges in penetrating hospitals once approvals are obtained
• Multiple ways to win with RECELL Platform:
• Core Usage:
• Core business of burns wound management - ~35,000 procedures per year - are not elective surgeries, they arise from significant skin defects or burns - recession should not impact AVH significantly 
• Full Skin Thickness Skin Defects - adds 10x eligible procedures over and above, a further ~400,000 annual eligible FTSD procedures
• Vitiligo - further expansion of use of RECELL in FY2025
• Definitive steps to expand footprint into Europe FY2024 via distributorships
• Platform:
• RECELL GO - May 2024, improved process/procedure, higher % that are viable and ready to cling on to the wound
• RECELL MINI - Dec 2024, for skin treatments up to 500 sq cm vs 1,920 sq cm for the primary device
• Adjacent Distributorships
• PermeaDerm, a biosynthetic wound dressing, same sales force, pure revenue upside in FY2024
• Financials
• On clear path to cash flow breakeven and GAPP profitability no later than 3QFY2025
• Gross profit margins ~84.5%
• Use of debt funding starting to slow
• Ingredients are in place to penetrate, expand and grow
• Share price has fallen significantly from its Feb 2020 peak of $17.20, to a low of $2.60, despite there being now significantly more clarity on the path and opportunity forward

RISKS

• Medium: Slower than anticipated penetration into Trauma Centres and Hospitals - FTSD FDA Approval unexpectedly increased the scope of the initial approval request, resulting in expanded scope of required physician specialist approvals prior to Value Analysis Committee (VAC) approvals being obtained. This is the current key obstacle to expanding the hospital footprint where RECELL can be used. This will impact revenue in the short term, but expect AVH sales to get smarter in how it works through the approval process
• Medium: Studies in Vitiligo do not show enough non-medical benefit for treatments using Vitiligo to be insurance-reimbursible, impacting the expansion of RECELL usage to treat Vitiligo. Still early days in the ongoing studies. Need to monitor
• Low: Delays in FDA Approval for RECELL GO device - but things appear to be on track for approvals

WHEN TO EXIT

• Clear signs that there is no traction in penetration of hospitals and trauma centres
• Vitiligo studies do not pan out as expected
• Series of negative patient impact incidents with use of RECELL

POSITION SIZE

• 2%

Discl: Held IRL and in SM

My notes for the earnings call:

I’ll do a separate post in the analysis of the results and will redo my valuation then.

Highlights:

• They reiterated the contract with Stedical Scientific to sell PermeaDerm to Burns/Trauma centres in the US.
•  Launch is in March so expect an update in the next quarterly report.
• They are open to offering other complementary products needed for the same customer set as RECELL. Actively looking to find a dermal matrix product partner (Polynovo??)

• Partnering with PolyMedics as to be their 3^rd party reseller to start delivering to Germany, Austria, and Switzerland
• Expecting to sign more 3rd party resellers and have all countries in Europe covered in the next 6 to 12 months.
• Sales will be slow initially but should build throughout the year (I hope they start breaking out sales by region so we can see progress)
• Can’t recall any mention of the progress in Japan.

·        

• Manufacturing of the next gen machine, RECELL GO, to be done in house.
•  The machine will be offered free of charge to customers. Revenue to come from the high margin consumables.
•  Expecting RECELL GO US approval in May; Q3 for Europe.
• Additional product RECELL GO Mini to be used for small use cases, < 500 sq cm. Expect to apply for FDA approval at the end of the year

• Vitiligo – Expect TONE study to be complete at the end of 2024 and to start roll out by the end of 2025.

·        

• Financials and Guidance:
• Debt funding received $40m USD with $50m more available if they hit certain financial milestones.  
• Expecting profitability by Q3 2025 and not need any additional capital to get there.
• Expecting growth to accelerate with revenue up 55-70 % in 2024 over 2023. This comes from a backlog of over 100 hospitals in the VAC process. The increased indications (from burns to other wounds) have 4 times the use cases but increases the time to approval within hospitals.
• Sales team will expand from 70 to 108 people by the end of March – But the implication here was staff growth will slow from this point.
• They also implied R&D expenses should reduces as the TONE study finishes.

What I liked:

• Good growth in the quarter.
• Clear guidance to profitability, expansion strategy, and product road map. There is a lot to hold them accountable to in future earnings calls.

What I didn’t like:

• Taking on debt while being unprofitable. At this stage is seems like debt was the smart choice for shareholders – however it means they are more fragile than I would like; it only takes a speed bump, and then they must raise capital at a less favourable time.
• Giving the RECEL GO away for free – I’m sure they have done the commercials for this, and it makes sense – but I thought you’d at least sell it at cost.

ASX Announcement

Dermal repair company $AVH has received the setback of a delay on FDA approval for their RECELL-GO device, which was under FDA review under the breathrough device 180-day review process, stopping the clock for 4-6 months while the company considers its response.

The SP has reacted sharply and is still down 19% at time of writing, taking it back to levels last seen prior to the approvals for full-thickness skins defects and vitiligo treatment earlier this year.

The RECELL-GO device, which operates with single use cartrdiges, promises to significantly expand adoption of RECELL in the US market.

$AVH have recently significantly expanded their sales and marketing footprint following the FDA approvals, hence most recent financial performance is not too great (a bit like $PNV), however, market consensus is for strong revenue growth in FY23 of $80m up from $51m in FY22, putting it on a similar trajectory to $PNV.

Given the sales momentum and the investment in sales force, as well as the likely temporary nature of the setback, there's probably a good short term trade to be done on this news. However, I'm not a trader, so its not for me.

Disc: I've held $AVH in the past, but my preferred stock in the rapidly growing dermal repair segment is $PNV. However a pullback like this is tempting, as its likely overdone.

AVITA Medical Announces FDA Approval of RECELL for Treatment of FullThickness Skin Defects 

This is another biotech name that has surged off its lows of just a few months ago, catalysed by a change in management primarily. With two pending FDA approvals expected soon that expands its TAM for burns treatment, the price has carved out a new 52w high today.

It is getting close to a zone of resistance now, but the momentum and price action it has demonstrated thus far has been very healthy, and the upcoming catalysts could well see it breach the wall of resistance it will be running into soon.

One to watch.

Disc. : Small position held IRL.

It looks like the shake up has begun.

I'm taking it as a positive that they have removed a middle manager (the COO) and have those teams now report to the CEO.

The fact that the CFO has left at short notice (perhaps as a protest, perhaps he was pushed) is unsettling...

In total I'm just gonna wait an see what happens from here (while still holding onto my bag)

DISC:HELD (for now)

About time Dr. Perry was shown the door given the woeful underperformance of the business for multiple years from a shareholder return perspective and unjustifiable board and management compensation, though the timing is abrupt.

New CEO announced, seems to be out of the blue (unless I missed something).

Wondering if it was Dr Perry wanting to step down or the board booting him for under performance...

The new guy seems to have the chops - lets hope he makes this happen!

DISC: Held

AVITA Medical Reports Full Second Quarter 2021 Financial Results

Second Quarter Highlights

~ Reported U.S based RECELL® revenue of $5.0 million in the second quarter of 2021 ended December 31, 2020, a 62% increase over the same quarter in the prior year

~ Reported total global revenue of $5.1 million in the second quarter of 2021 ended ~ecember 31, 2020, a 57% increase over the same quarter in the prior year

~Commercial metrics: o Procedural volumes were 487 in the second quarter of 2021 versus 496 in the prior quarter ended September 30, 2020 o Added 7 new accounts in the second quarter 2021 for a total of 93 accounts

~ Enrolled nine patients in the pivotal study assessing the use of the RECELL® System to treat stable vitiligo

15-June-2020:  Redomiciliation Scheme Meeting - Chair's Address

AVITA Medical Limited proposed redomiciliation to the USA (to have their primary listing on the NASDAQ and a secondary listing on the ASX) Chair’s address to Scheme Meeting - click on the link above for the Chairman's script for today's meeting which explains the company's rationale for the move.

02-Jun-2020:  AVITA Files IDE with FDA for Vitiligo Pivotal Study

AVITA Medical Limited (ASX:AVH, NASDAQ:RCEL), a regenerative medicine company with a technology platform positioned to address unmet medical needs in therapeutic skin restoration, today announced that it has submitted an Investigational Device Exemption (IDE) supplement with the U.S. Food and Drug Administration (FDA) for the initiation of a pivotal clinical trial to investigate the RECELL® System for the treatment of vitiligo. 
 
“We are very pleased to have filed the supplement and look forward to advancing the RECELL® System into the clinic for treatment of vitiligo following acceptance of the application,” said Andrew Quick, Chief Technology Officer of AVITA Medical. “The data from the pivotal trial will form the basis of the FDA submission for consideration to expand use of the RECELL® System for repigmentation of depigmented lesions associated with stable vitiligo. In parallel, and as previously announced, we are also conducting a complementary and more scientifically-oriented feasibility study.” 
 
“Globally, the RECELL® System is approved for additional skin applications, including vitiligo, which is supported by a substantive body of clinical evidence with patients internationally and in peer-reviewed publications, providing us with valuable experience and confidence in pursuing expanded labelling in the U.S.,” said Dr. Mike Perry, Chief Executive Officer of AVITA Medical. “The submission of this pivotal IDE is an important milestone as we continue to explore opportunities to expand the patient populations who can benefit from treatment with the RECELL® System platform.” 
 
About Vitiligo 
 
Vitiligo affects approximately 6.5 million people in the United States, rivalling the prevalence of psoriasis; however, there are limited treatment options available to patients to permanently restore skin pigmentation.

Vitiligo is a disease resulting in loss of color, or pigmentation, in patches of skin that impacts the quality of life for those living with the condition.  There is currently no cure for vitiligo, nor a universally accepted method for limiting the spread of the disease.  Although many treatments are being used for the management of vitiligo, they are often temporary with a high rate of recurrence.  
 
Authorized for release by the Chief Financial Officer of AVITA Medical Limited. 
 
--- end of announcement ---
 
ABOUT AVITA MEDICAL LIMITED:  AVITA Medical is a regenerative medicine company with a technology platform positioned to address unmet medical needs in burns, chronic wounds, and aesthetics indications.  AVITA Medical’s patented and proprietary collection and application technology provides innovative treatment solutions derived from the regenerative properties of a patient’s own skin.  The medical devices work by preparing a RES® REGENERATIVE EPIDERMAL SUSPENSION, an autologous suspension comprised of the patient’s skin cells necessary to regenerate natural healthy epidermis.  This autologous suspension is then sprayed onto the areas of the patient requiring treatment. AVITA Medical’s first U.S. product, the RECELL® System, was approved by the U.S. Food and Drug Administration (FDA) in September 2018.  The RECELL System is indicated for use in the treatment of acute thermal burns in patients 18 years and older.  The RECELL System is used to prepare Spray-On Skin™ Cells using a small amount of a patient’s own skin, providing a new way to treat severe burns, while significantly reducing the amount of donor skin required.  The RECELL System is designed to be used at the point of care alone or in combination with autografts depending on the depth of the burn injury.  Compelling data from randomized, controlled clinical trials conducted at major U.S. burn centers and real-world use in more than 8,000 patients globally, reinforce that the RECELL System is a significant advancement over the current standard of care for burn patients and offers benefits in clinical outcomes and cost savings. Healthcare professionals should read the INSTRUCTIONS FOR USE - RECELL® Autologous Cell Harvesting Device (https://recellsystem.com/) for a full description of indications for use and important safety information including contraindications, warnings and precautions. In international markets, our products are marketed under the RECELL System brand to promote skin healing in a wide range of applications including burns, chronic wounds and aesthetics.  The RECELL System is TGA-registered in Australia and received CE-mark approval in Europe. To learn more, visit www.avitamedical.com. 

--- click on link at the top for more, including their "Cautionary Note regarding Forward Looking Statements" and their contact details ---

Disclosure:  I don't current hold AVH shares, due to the fact that they are in the process of moving their primary listing to the NASDAQ and making their ASX listing their secondary listing.  AVITA Medical are already a US-based company soon to have a primary US-listing, despite being originally formed here in Australia.  I tend to avoid those companies personally, not because they don't make good investments, but just because I prefer to invest in Australian based companies directly, and leave my US and other global exposure to my LICs and LITs such as MGG & WQG (and PAI for Asian exposure) or via ETFs. 

That's just a personal preference and is in no way supposed to infer that I don't think AVITA will do OK.  They have wonderful tech (and IP) and I both hope and expect that they will do very well, particularly after they move their primary listing to the US (via the NASDAQ) and get onto the radar of so many more investors and fund managers.  To give some context, I also like Resmed (ASX: RMD), but I likewise don't hold RMD shares directly because their primary listing is in the US, and they are headquartered in the US, with a secondary listing on the ASX, despite originally being an Australian company when they first started out.  That doesn't mean they won't do well either.  They've done pretty well so far.  But you can't pat all the fluffy dogs, and it's a personal preference for me to invest directly only in ASX-listed companies and to gain exposure to other companies via ASX-listed LICs and LITs (listed investment companies/trusts) - or ETFs.

23-Apr-2020: 7:43pm:  Just to answer some of @Hackenbacker's questions in relation to AVH's intention to move their primary listing to the NASDAQ and have a secondary listing on the ASX.  Reading through their documentation - like pages 2 to 4 of this announcement - it sounds like the Australian listing will be not shares but CDIs - which are explained here and here.

CHESS Depository Interests (CDI's) are shares of international companies traded on the Australian exchange markets.  This allows investors to receive the same ownership in foreign companies as holding them on the international exchange, but instead these CDI's are traded here in Australia on the ASX.  Companies which are incorporated overseas cannot transfer their shares through to the ASX.  CDI's open up more opportunities for Australian investors as they can access products which are not available in the local market.  For example, News Corp (NWS) is incorporated in the US and only trades in the US.  However Australian investors can own shares in NWS via CDI's.  My understanding is that Resmed (RMD) "shares" on the ASX are also CDI's.  These are often scaled differently to the shares listed on the primary market (Resmed and News Corp both have primary market listings in the USA).  RMD CDI's on the ASX are scaled 10:1, so ten of our RMD CDIs are worth one NASDAQ: RMD.

There are some differences between CDI’s and ordinary shares.  You can not vote at a company meeting like you would with ordinary shares unless laws from the country where the company is domiciled allow you to.

Initially you would receive 5 Avita US CDIs for every 100 AVH.ASX shares that you currently own, and these should, all things being equal, be worth roughly 20 times what they were trading at here, so if it happened today, theoretically, if you held 1,000 AVH shares currently trading at $0.44 (44 cents each), you would instead own 50 Avita US CDI's which would still trade on the ASX, but at about $8.80 each.  Currently, AVH has a secondary listing on the NASDAQ under the code RCEL - these are ADS's (American Depositary Shares which are foreign stock issued in the US and registered in the ADR system - the American Depositary Receipt system) - their equivalent to our CDI's - which are currently trading at around $6.12.

AVH have proposed a way for those people who currently hold NASDAQ-listed RCEL ADS's to have those swapped for Avita US shares, and they say:

"Therefore, shareholders in eligible jurisdictions and ADS holders (on the Record Date), upon receiving Avita US CDIs or Avita US Shares, will hold an equivalent proportional interest in Avita US as they held in the Company prior to implementation of the Redomiciliation."

In other words, nobody will be better off or worse off, regardless of whether they owned ADH shares on the ASX or RCEL ADS on the NASDAQ before the reorganisation.

In local terms, you'll own one twentieth of the number of shares you held before, but they'll be worth around 20 times as much, so the value will be unchanged.

In reality, it depends on the local sentiment.  When News Corp did this - moved from a primary listing on the ASX to a primary listing in the USA, their share price went down, but they were a big company and some fund managers here were not allowed to continue to hold them (because they were no longer an Australian-domiciled company) and so had to sell.  That would not be such an issue for AVH, I would think.  However, there still might be shareholders who would rather own shares in companies whose primary listing is here in Australia on the ASX rather than the listing being a secondary listing here for a US-domiciled company.

Liquidity:  AVH are a reasonably liquid company here, with over 12 millions shares (over $5m worth) being traded most days, and often up to 60 million shares ($25 m) or more traded on a busy day.  That may change, but they're already dual listed; they're just proposing to change their NASDAQ listing into their primary listing and their ASX listing into their secondary listing.  I would expect that would increase the liquidity on the NASDAQ, but it's hard to say if less Avita US shares would trade here on the ASX.  Liquidity could well reduce, but it would be unlikely to dry up altogether.  Resmed has their primary listing on the NASDAQ and their secondary listing on the ASX and it hasn't hurt their liquidity.  They are clearly a lot bigger, but Avita is no minnow.  At 44 cents/share Avita are a one billion dollar company.

This is not advice, but if I held AVH shares, and I currently don't, I would not see this as a reason to sell them.  I think the opportunity remains the same, regardless of where they choose to be domiciled and where their primary sharemarket listing is.  As a US domiciled company with a primary listing on the NASDAQ, I imagine that, like RMD, they will attract a lot more investor attention globally, particularly in the USA, and that will be good for the company - and ultimately for their share price.

20-Apr-2020:  7:30pm:  AVITA Announces Intention to Redomicile to the USA

AVITA Medical Announces Intention to Redomicile to the United States of America

Intention to establish primary listing on NASDAQ with continued (secondary) listing on ASX 

Valencia, Calif., USA, and Melbourne, Australia, 20 April 2020:  AVITA Medical Limited (Company) (ASX: AVH, NASDAQ: RCEL), a regenerative medicine company with a technology platform positioned to address unmet medical needs in therapeutic skin restoration, announced today its intention to redomicile the Company and its subsidiaries (Avita Group) from Australia to the United States of America by way of a scheme of arrangement under Part 5.1 of the Corporations Act 2001 (Cth) (Redomiciliation).

To implement the Redomiciliation, the Company has entered into a Scheme Implementation Agreement dated 20 April 2020 with AVITA Therapeutics, Inc. (Avita US), a newly-formed company incorporated in Delaware in the United States.  A copy of the Scheme Implementation Agreement is attached and will be available on the Company’s website.

If the Redomiciliation is implemented:

• Avita US will become the new holding company of the Avita Group;
• shareholders will effectively exchange their shares in the Company for equivalent securities in Avita US; and
• the existing listing of the Company on the Australian Securities Exchange (ASX) (being the Company’s current primary listing) and on the NASDAQ Stock Market (NASDAQ) (being the Company’s current secondary listing) will be inverted and replaced with a new listing of Avita US on NASDAQ (as its future primary listing) and on the ASX (as its future secondary listing).

The Redomiciliation is subject to regulatory and court approvals, as well as approval by the Company’s shareholders at an extraordinary general meeting which will be convened to address the Redomiciliation (Scheme Meeting).

Reasons for the Redomiciliation

After carefully considering the advantages, disadvantages and risks of the Redomiciliation, the directors of the Company (Board) are of the unanimous view that the advantages of the Redomiciliation materially outweigh its disadvantages and risks.  In particular, the Board believes that the Redomiciliation will:
 

• substantially reduce the costs, burden, resourcing and risks associated with dual financial reporting and related compliance obligations that the Company has become subject to in both the United States and Australia (since 31 December 2019), which is expected to save approximately A$400,000 per annum in external professional costs alone;

• create a “local” share listing on the NASDAQ exchange in the United States, the largest market for the treatment for burns, and where the Board’s immediate strategy is to further grow the Avita Group’s visibility and presence;

• increase the attractiveness of the Avita Group to a broader range of investors in the United States capital market, the largest in the world in terms of market capitalisation and trading volume; and

• better align the Avita Group’s corporate structure with its business operations in the United States, which is where nearly all of the Avita Group’s employees are located.  The Company derives virtually all of its revenue from the United States, has no physical presence outside of the United States, and a significant majority of its issued share capital (taking into account its American Depositary Shares (ADSs), which are traded exclusively on NASDAQ) is currently held by investors in the United States.

--- click on link above for more ---