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