AVITA Medical, Inc. (RCEL) Earnings Call Transcript & Summary

All right. Thank you very much for joining us, and I'm going to start off with the normal research disclosure. So you can see it on the Morgan Stanley website at www.morganstanley.com/researchdisclosures. If you have any questions at all, please reach out to the Morgan Stanley sales rep. And with that out of the way, I want to welcome Jim Corbett from AVITA and welcome you to the conference today. Excited to hear more about the story and the progress that you've made and how you see the opportunity is going. But I guess, maybe I'll take a step back. And you're nearing your 1-year anniversary with the company. So what made you attracted to join and lead management there?

Well, it's actually a great question. September 29, so it's almost here. But in fact, I was on the Board for the year previous, and I had a chance to really get to know the technology in the company. And what I saw was something really rather extraordinary. And it was this whole concept of how wound healing happens and AVITA invented this technology called RECELL, which commonly known as Spray-On Skin. And what we do, if you think skin graft, we disaggregate the cells. We suspend them in an enzyme. We prepare the wound and we spray them on. And it's amazing. It has less tissue that's required for the graft. It heals more evenly, less scarring, and the patients got out of hospital 30% faster. So this is like one of those rare new technologies that comes along that actually all the constituents benefit from. So really, I was so excited to have the opportunity and to take that opportunity.

Awesome. You had an extraordinary June with 2 FDA approvals. Can you tell us a little bit about these approvals? And what do they mean for your business over the medium- and long-term?

Sure. And previously, we had done a PMA for use of RECELL in burns. And of course, that's really the result of starting at the worst possible wound. We're really a wound care business, burns is our first indication. But it has a market opportunity of about 35,000 cases a year in burn centers, which are 145 hospitals. The approval we got on June 7 is for full-thickness skin defects and it is being extraordinarily broad label. It increases those 35,000 to something in order of 321,000. So the market opportunity for RECELL really expanded and the place where those grafts occur are in level 1, 2 and 3 trauma centers. So that expansion of our TAM and we have reimbursement in the hospital through a DRG and through a transitional pass-through code really supercharge the company's ability to grow. The second approval is for the treatment of vitiligo, which is actually not a wound treatment, although you create one to use it, you do a dermabrasion, you're essentially doing a pigment transplant. Same exact procedure, you take a biopsy, disaggregate it, but what you're spraying on that dermabrasion are melanocytes. Now, vitiligo is a different case because the study we did was for essentially safety and efficacy. And what the payers need is the -- also the benefit -- the quality-of-life benefit. And vitiligo, it's not -- it doesn't kill you, it's not infectious, but it really contributes to a spoiler of mental health problems of disfiguring. And so we are running a post-market study for that technology for -- of 100 patients to improve that quality-of-life. So it's probably a '25 launch for us. In the meantime, we've got everything we can imagine to grow the company with these 2. We also, just for whatever -- it matters in June, submitted under a Breakthrough Device designation, the automation program for disaggregating those cells with an automated device called RECELL GO, and we've submitted that June 30. So June was a really big month.

Fairly big month. And I guess, as you reflect upon your success within burn, kind of where you guys started, what are the key reasons why you've had so much success with that? And how does that kind of translate as you think about this expansion that you have underway and are starting on that journey?

Well, first and foremost, what we did is we invested in the underlying clinical research. And part of that is the culture of the company. We sell using science. We sell using clinical literature that has been developed by -- with RECELL. We sell with case studies. And so one of the reasons I think that we got the adoption that we have, I think we are somewhere in the order of 20% to 25% of burn cases in burn centers today is that consultative approach added credibility to what we're doing. We helped physicians think about how to treat their patients differently. And when you translate that to full-thickness, we have that same philosophy of bringing that consultative approach to this really fabulous Spray-On Skin, it gets people's attention all the time.

Yes. And I mean, there's a lot of trust that you have, right, with the physicians themselves and your sales reps are there kind of side by side, shoulder by shoulder. So how do you think about expanding your sales rep force over time and how you see their productivity evolving?

Well, it's an important thought. So we expanded our sales force. Our field team was 30 when we exited Q1. And my intent and what we did, we expanded it to 70 during Q2 ahead of approval. Over time, it's essential that you keep -- we are going through a very high growth phase. Our last 3 -- we ended last year to 34% over prior year and then 40% up in Q1, 42% in Q3 -- Q2, and we're guiding to 50% in Q3. So we're expanding. Keeping that sales force with small sales territories with both geographically and by revenue with incentive focused on growth. That is an essential part of keeping that growth engine going. They have to meet our standards on the clinical selling. But that is -- so I expect we'll expand again next year. And as we grow in sales forces -- the sales force average reaches a certain level.

Got you. Okay. I mean, you touched on this a little bit. Over the next 12 to 18 months, how do you expect that growth trajectory to evolve?

Well, let me say it this way. We haven't given guidance for '24, but I just gave you the 40%, 42% to 50%. Our implied guidance for Q4 is an exit growth rate of about 86% over prior year. So I think we will grow well in excess of 50% next year without giving guidance. And so that momentum will carry us through because that will fuel another sales force expansion, and we have additional products in our portfolio that we're developing that will again fuel that same growth.

Okay. Great. And last quarter, your gross margins were 81%. You gave guidance of 83% to 85%. Can you unpack a little bit of how Q2 gross margin shook out? And where are the areas you can see that limelight to the expansion?

Yes. It's a great question. So what happened last quarter is something rather simple. We were qualifying a number of our components for second source to protect our supply chain. The consequence of that is we had lower finished good production during the month -- during the quarter. Now, to unpack our cost of goods at 5,000 units a year, which was last year, half of our cost is fixed. So that means when we double, we cut that in half, we improved -- we lower our cost by 25%. When we double organic growth, it cuts it by another 12.5%. So we are right now in a place where we are very confident that we're going to continue growing and absorb that fixed overhead and continue improving our gross margin, getting us up into the upper 80s is where we expect to be next year.

Got it. And how do you think about the product launches in terms of any investments you need to make on the manufacturing, on the supply chain side? Are you kind of ready to go on that front?

Well, we are ready to go. One of the things we've done is we looked at our manufacturing operations, and we have 5 different biologic tests that occur during the production process. So moving it not a really great idea. And we had a couple of events happened in the last year that freed up space, and the consequence of that is we're redesigning our physical layout of our manufacturing in order to accommodate 10x our volume of next year. So we think 100,000-plus will allow us to stay in that facility for a long time.

Okay. Great. Look, you -- as you mentioned, you gave guidance, you raised it in Q2. What led you to do that raise?

Well, 2 things. First of all, when we went through the expansion, we wanted to have it all in place by July 1. In fact, we were fully in place by May. And we, therefore, reconfigured ahead of schedule and ahead of the approval. So the sales force was fully in place and fully trained. Then the indication came in from the FDA on schedule June 7 broader than we had anticipated by a significant amount, by about 3x. So with that combination of things, we felt very comfortable moving up our guidance about 4%.

Okay. Great. You obviously had a lot of exciting new products that were approved. I guess, if you could give us a little bit of how should we think about the evolution of the company, future product indications, product portfolio overall, where you want to go and take it a bit of guidance around that would be helpful.

Yes. There's probably 3 big things. In the near-term, we've been guiding that we're going to roll out our international expansion strategy in the Q3 call, which will be in November. So that is a growth driver that's not anybody's accommodated to this moment because we haven't given information to do so. So that is one. Number 2 is how we prepare and ultimately launch vitiligo. Right now, for the next 5 years, we, so to speak, are not dependent on the revenue of it, and yet the market opportunity of it is bigger than our current TAM. So it's a big opportunity. And the third is products commonly known as scaffolds, extracellular matrix dressings, they all are intended to perform the purpose of advanced granulation for cells prior to applying RECELL on a skin graft. We're investing in some of those programs, and we expect that to be able to bring them to market in the coming year. So those will bring us into a market that all of our customers need, all the patients we serve need and we're going to do it with a product that we think will fulfill the needs even better. So a number of growth drivers still ahead for us.

Okay. Great. I'd love to unpack one of them. You just -- you mentioned a little bit about international expansion. You have your partner in Japan. Curious how you guys are thinking about blocking and tackling Japan expansion and international kind of broadly.

Yes. Let's talk about international broadly. I think that's -- there's a few filters. The filters for RECELL is that, first and foremost, you have to go where there's adequate population, an adequate health care system and the ability to pay. This is not a product you can just basically ship out and people will learn to use it and use it properly and make it worthwhile for patients. It just requires more than that. When we apply those filters, that puts us on focus for Australia, Japan and a good part of Western Europe. And so that's kind of the initial layer of the strategy. Given all that we have momentum-wise and all that we have in our pipeline because, remember, RECELL GO comes in January, the automation. And so that's going to transform our business, but it also enables the international business. Today, 70% of our selling time is training. And we have to do it, hospital staffs, they turn over, different shifts. It's a constant event. A physician without having the -- whoever supporting him or her, have training, could direct them with RECELL GO by himself or herself, like it's simple. And when we go international, either we or our partner would have to provide that support. So we are timing international to coincide with -- we are MDR-compliant. So by the time, RECELL GO is ready for international, it'll be midyear, and so we'll be expanding into those Western European markets, Australia, with RECELL GO during that time.

Okay. Great. And I mean, give us a little bit more on RECELL GO. How much time does it take? It sounds like it's super automated. So even somebody without any health care training such as myself, could use it, hopefully.

For sure, you could do it.

Okay, great.

For sure. So let's talk about what is in present state. Present state is the biopsy is taken and then the physician spends about 30 minutes scraping the skin and just aggregating the cells into a capture plate. And once you capture it, you mix it into the buffering enzyme, where it was then loaded into the Spray-On applicator. That scraping time is not the highest value of that physician that these patients are ill. They've got things. The physician can add so much more value for that. So with RECELL GO, what happens is the -- there's a cassette that will come as the disposable as reservoirs, you'll pull in the enzyme, you open a little lid, the same biopsies taken, physician puts it in. They put it into RECELL GO, they close the door, they press go. Yes.

And how long does the machine need to...

31 minutes.

31 minutes. Okay. So that's -- I mean...

So imagine being in a burn operating room, okay? In the burn operating room, whether a bruise, might be doing 2 or 3 RECELL procedures because the patient has 40% total body surface area. What temperature do you guess it is in operating room?

Really hot.

It's really hot. They lose their ability to regulate their body. So we'll get cold. So it's 98.6% or better. So instead of sequentially doing that, the physician can take all 3 biopsies, bring in the durable device, RECELL GO machine, 3 of them, take 3 and do them all simultaneously. In the meantime, staff with the physician can get the patient ready and they're already spray away and greatly reduce all our time. So this is like...

Game changing.

Totally game changing.

Yes. No, I mean, in a time when everyone talks about workflow solutions, staffing shortages, physician fatigue, et cetera, these are all huge, huge things that our overall health care system is facing issues around, and you found a real interesting way to solve this problem. And frankly, it keeps the patient out of the OR for a very long time, right? I mean, the procedure time has probably come down materially in the example that you just gave.

For sure, it will. It's rather exciting. You know who really gets excited. It gets excited our customer, our employees. And when you get those 2, the shareholders get happy, right? That's the way it is.

Yes. I guess, if you think about your time as -- and you're coming up on your 1-year anniversary, as we mentioned, what are the parts of the story that you feel investors don't have their heads around that you think they should really kind of think about a bit more or look to understand a bit better?

Well, actually, overall, I have high regard for investors. So I think they're seeing what we're doing. And what I think they see is that we're creating a very accountable message. We communicate what we're going to do and then we do it. And we're highly precise about it. This idea of we're going to get approval in the second half and see how it goes is translated into we're going to get approval on June 7, we're going to build up the sales force beforehand, and we're going to launch. That's a very different culture for our company to project and for our company to be. Shareholders and potential investors all want to gain confidence. And that's something we have to earn. And so I think they see it. The questions I receive are insightful. The level of and the rate of growth that we're having is something they're not accustomed to. So 3 quarters is not enough, 10, 12, 14, 16 quarters, so that'll be fine then they believe. So I think those are things that we keep our game plan, keep the strategy focused on the patient, make sure we make a difference for our customer and physician, keep delivering that high-quality interaction between our organization and the health care practitioner. Those are the elements that will make us a great company and a great investment.

Yes. Okay. Great. I think you guys are doing a great job blocking and tackling. You mentioned the employees and the positive lives that they have and the excitement they have around the technology. So that's one part. But the other part is also making sure they have a good kind of strategy that they're following from a commercialization standpoint. So you actually increased the number of sales territories recently, as you said, to kind of make it more manageable for them to go deeper within locations. How has that strategy changed, or I should say, evolution kind of panned out?

Well, so far, it's panning out really quite well. We are in the early days of the launch where you have to go through Value Analysis Committees, engage physicians and start new cases and new indications in new hospitals. What I found particularly positive in August, which is really you've probably had time to get through a VAC. Without getting through the number of cases we did, which were double the prior month, we did it in 7 different indications, right? We've been operating in one indication since the company was commercial. 7 different indications in a month was -- it describes is the conversations that are happening are consultative, they're clinical, they're scientific, and they're about the patient. Those are things that make us different, and it's working.

Great. And as you -- I mean, you've expanded your sales force, how long does it typically take for a new rep who's coming online to get fully up to speed on -- within their territory that they're serving?

Well, let me comment that question in a couple of different ways. The first is, when are they ready, so to speak, to fly solo support a case in the OR. We had them all certified before the end of May. The 14 additional, all of them. Okay? So they were ready to fly alone on that time. We then have a mentor program where each rep is assigned an experienced mentor who travels with them regularly to help them develop their engagement with physicians, how do you get into the clinical conversation? How do you help them solve the problems they're facing different? And kind of a simple one, it's so easy. You walk into the OR, you have a big whiteboard, and they have cases. And the sales reps should show up there. And you have to teach this sometimes. And you can see the case and say, that is a candidate for RECELL. And you have to be able to go and have that conversation and that takes -- it takes a little time, but they're doing it now judging by August.

Okay. Well, that's phenomenal. I mean, look, I think part of it is having a great technology and also having that reputation within the marketplace that they can then utilize to their benefit and go off and have these conversations with folks. So it's all a bit of an ecosystem that you're building up. And now with the new indications and the new approvals that you have, that really does create for a lot of positive momentum. I guess, if there is anything that you'd like to leave us in terms of messaging, things to focus on as we continue to track the progress of the story. What are the few takeaways?

I think the takeaways is, what the -- I think the outside world has seen, they're seeing a transformation of culture. And that translates into really execution. Our culture is one of accountability. It's what we care about. We don't -- no one ever says it's a joke. If somebody says it's in June, they know that means June 1, right? And that culture is what we're bringing also in our messaging to investors. And I think what investors should expect from us is strong execution. And God help me, one of these days, we're going to miss one of these. And I can tell you, we won't be talking about it being a pandemic or the hurricane or any of that stuff, they'll be on us. And so I think investors should be capturing not just the uniqueness of this technology, which brings really big value to the patient, to the physician, economically to a hospital is unique. It's paid for, right? That is an unusual combination. And what we're bringing to it is a culture of execution to make that realizable, intangible. So investors should hold us to that standard. And that's what I'd like to leave them with.

Okay. Yes. No, I mean, you serve an important market, right? These are burns that are life changing. That's something that's a very scary thing for patients. And I think having that kind of stoic approach and real accountability is important for technology. I think it's what also physicians probably value when they have conversations with your clinical team and your commercial team.

I'd like to leave you with one. We had a patient about several months back, and she worked for a brewery in Virginia, and she had 85% total body surface area burn. And her husband was told, with luck, we can keep our alive for a year in the ICU. In 6 months, she walked out of the ICU. She's been treated by RECELL over her whole body and she quit her job to create a burn patient recovery foundation.

Wow. That is, I mean -- that's impressive.

I got a letter from a patient yesterday, 2 days ago, who had been treated full-thickness skin defect for tumor excisions in her scalp, and that's in general. And she described her experience healing so fast, and she was just ecstatic. You can probably find her on TikTok. And she was telling her story. And so when you think about what we do, where we do, we build companies and technologies to try and make a difference, right? These are real people, and these are what differentiate what we do from other companies and the way we do it and the way we care about it. So our employees, this drives their moment every day. And that, I think, is going to carry our future. That's also what potential investors should think about us.

Okay. Perfect. Well, look, I think that summarizes it well and leaves us a lot to be excited about the story. So thank you so much for taking the time today and walking us through that.

Thank you for having me.