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