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

I'll do the intro, Jim. Good morning, and thank you for joining this AVITA Medical Quarterly Australian webinar. I am Rudi Michelson of Monsoon Communications. Joining us today are AVITA's CEO, Jim Corbett; and CFO, David O'Toole. David is in Australia for a Sydney-Melbourne Roadshow this week. This webinar has been arranged so Australian investors have the chance to be brief direct and ask questions on AVITA's progress. Now let me point out, you can submit questions using the Q&A function, and we'll get to them after the presentation. Now over to Jim to begin the presentation. Thanks.

Thank you, Rudi. And yes, this is a part of the quarter, which we reserve every quarter on -- with -- a road show in Australia and also, of course, the U.S. investors can also log on. But in any event, let me begin by introducing your next slide to the company, for those of you who don't know, slide again. One more. For those of you who are not familiar with the company, AVITA is a commercial stage company that is focused on regenerative medicine, transforming standard of care and wound care management. Our current products are RECELL, which is an autologous skin cell delivery system, and it's approved for thermal burn wounds and full-thickness skin defects as well as repigmentation of stable deep pigmented vitiligo. We recently added a new product to our portfolio called PermeaDerm. PermeaDerm is manufactured by a company named Stedical Medical. It's a biosynthetic wound metric applied to treat and heal a variety of wounds until healing has achieved. I will describe this in more detail as I go through the presentation here. Our current commercial team is -- has 58 sales territories with 29 clinical training specialists as well. Our sales force is looking to add over 200 new accounts during 2024 and that is rather core to our growth. Total market opportunity for full-thickness skin defects, which we received approval of during June of last year, has almost 400,000 eligible procedures and to add to the already 35,000 annual burn eligible procedures in the United States. Our commercial revenue growth in 2023 accelerated throughout the year, 40% in Q1, 42% in Q2, 51% in Q3, and 50% in Q4. We had a rather disappointing Q1 of 2024 growing at 6%, and we'll spend some time talking about that during my remarks. Next slide, please. From a indications point of view, RECELL is really broadly indicated. We now have the RECELL approvals for burns, as I mentioned earlier, full-thickness skin defects and vitiligo. We are pending approval of the RECELL GO device, which is set for approval on May 29, that is when the 180 days of a review period is expected to finish. The RECELL GO mini, which will also take some time line will be submitted during June 30, and I'll just give you an update on that as we go through. We also have some studies planned to publish in Q4. Next slide. So let me give you a technology overview for those of you who've not -- are not familiar with RECELL. What we do is we are a tissue-sparing autologous cell harvesting and suspension and delivery system. What happens is we take a very small sample biopsy of skin. We soak it in an enzyme with some additives to it and then disaggregate the cells into a spray on format to be used in combination with split-thickness skin grafts. And this all is done at bedside and covers -- about one RECELL kit covers approximately 10% total body surface area. And so you can get to this all at bedside with the patient. And we've been -- in the last 3, 4 years, we've treated well over nearly 20,000 patients. Next slide. This gives you a look at the device as it is today on your left. And on your right, you see the RECELL GO processing device. This is a device that disaggregates these and manages the soak time and the disaggregation pressure for the skin. Now to put -- again, put in perspective, I don't think I did that accurately is when you -- for example, if you had -- your whole back has a wound, let's say, a burn and you wanted to get enough skin to be able to cover the whole back, you would only need a biopsy about the size of a credit card. So it gives you an idea what a big advantage RECELL provides in terms of treating severe trauma, which includes burns. Now on the right, you see the disposable RECELL GO cartridge, and it has the 3 wells, as you can see on the right, which correspond to 3 wells on the -- to the current device on your left. Now both of these are in manufacturing today in Ventura. Next slide. And we sell them. So in this case, the RECELL Go -- RECELL device as it is today, sells for $6,500 approximately on average. In the case of RECELL GO, which is pending FDA approval, the processing device, we will loan to the hospital at no charge and they will buy the cartridge for $6,500. The processing device is good for 200 uses, and so that equates in terms of its cost to make it's about $17.50 per use. Next slide, please. We're really ready for this FDA approval. It's -- if you look here, this is us doing the burn-in of the boards for the RECELL GO processing device at our Ventura manufacturing operation, which is north of our headquarter offices in Valencia. We have ample inventory for immediate release and shipment and the sales team is trained and ready for launch. We expect to go to our top 28 accounts during the month of June. So that is, of course, pending FDA approval. Next slide, please. Let me spend a minute on PermeaDerm. This is really an amazing wound dressing. It's temporary, biosynthetic, which means it's breathing and it's compatible with the skin. And it does 2 things. It really lets air in and it lets the natural, for lack of a better word, oozing, that wound needs to do to breathe and heal well. Now it's features that make it quite different is that it's clear and then the course of treating a patient, for example, who has RECELL, you don't want to continuously have to lift the dressing to see the progress and the condition of the wound. So with PermeaDerm you can see through it. So it's stretchable and you can modify the porosity and the breathing of course, improves the healing. Now this is a product that can be used in every one of the RECELL cases applications. So whether it's a burn or full-thickness skin defects, it can be used on all of them. So really a tremendously large market. There's a range of sizes and also gloves because it turns out gloves -- hands are one of the common areas where burns occur. And of course, it's been proven effective for as long as 7 to 14 days. Next slide. From a market point of view, the key terms of the agreement. We signed the agreement with Stedical in January 10, and we're the exclusive distributor of PermeaDerm in the United States. We have an average selling price sharing arrangement where we will always get 50% of the average sale price. So this will be a 50% gross profit product for us. The term of the agreement is 5 years with an option to earn an additional 5-year term for -- so this is a very long-term and durable relationship. Next slide. This is also corresponding with our emerging strategic direction, where we're thinking about the patients who are treated with RECELL and the customers who are treating those patients, and all the other needs, those physicians and those patients need in terms of having their wounds treated, broadly speaking. So there is a continuum here and left to right, you could see where RECELL is, which is near the top end of it when there's a skin graft. But prior to that, there is wound bed hemostasis, you have to stop the bleeding. There's wound bed preparation, and that's a combination of antimicrobial treatments and debridement. So there's -- we're exploring opportunities in that field as well. And then often, the wound is so deep that you have put in, what's commonly referred to as a dermal scaffold to encourage granulation and in growth of the -- of cells. And then, of course, there's epidermal replacement, which is what RECELL does and then dressings, which you put on top. So when you think about this continuum, our sales organization is present during all of the use of these types of products. So it won't -- it will be a very strong leverage opportunity for us but also where we are providing a more full comprehensive solution for our customers. Next slide, please. This gives you a visual of how all this works together. And you can see in the wound bed preparation at the very base of the wound there's a need in many cases, to deliver antimicrobial protection. Then as I mentioned earlier, the dermal scaffolds in the green, and that provides a structure for skin cells to grow. And then, of course, there's RECELL plaster, a meshed split-thickness skin graft in the light blue, covered by PermeaDerm. So all in all, this creates a very thorough, broad solution for our customers and gives us a lot of opportunity to leverage our organization. So from a strategic point of view, this is a direction we're driving for the company. On the next slide, please. Let me take a little bit on the commercial side. Just some to give you a picture of the full-thickness skin defects. And this comes with just an enormous change in an unusual event. I've mentioned some of my past investor presentations. But on the left side, you see 127 annual eligible procedures. When we were originally submitting to the FDA, it was for a narrower group of skin graft applications. And it had the word acute in it. And the FDA removes that the word acute. And by doing so, added all the wounds that you see on the right, which is another 271,500 eligible procedures. So all in all, it just created a huge market opportunity for us. Now it creates some challenges for us, which I'll share with you here in the coming slides as well. But suffice to say, we don't have a direct competitor with RECELL. We have a tissue sparing and unique solution, and now we have a really huge opportunity to capitalize on. Next slide, please. This is one of the opportunities and challenges for us. And one of the things that, in fact, has slowed down our growth in Q1, which we're thinking we will recapture as we move through the year. But we have to submit to Value Analysis Committees, and these are committees that most of every hospital has. And most of every hospital would like to have control over what comes in their hospitals. So they have a set of requirements and they review and approve new products. And you can see that we have submitted Value Analysis Committee submissions to 178 hospitals. We've received approval in 73 who have bought on top of our burn portfolio of hospitals, which is about 140. We have 46 expected approvals during Q2. So really going to transform the rate of approval than what we have experienced in the first 9 months of submitting a Value Analysis Committee submissions. It has been taking us some number of months to get approval each -- at each hospital on average. And we're now learning how to shorten that time, and we're very focused on the execution of these. So during Q2, these 46 accounts are very important to us achieving our growth objectives. I get asked often, how often do you get turned down? And really, it's very rare. We've -- this #8 rejections has been 8 before, it's currently 8 and that 8 has gone back down to 5. So when we get rejected sometime, we've -- we get to come back and try again. So one of the issues, if you go back to the previous slide for a moment, that we did -- we underestimated is that when we go to a Value Analysis Committee, we are seeking approval to use RECELL on basically all of these procedures. And that includes multiple physician specialties. So it includes a trauma surgeon, a plastic surgeon, a general surgeon, not just a burn surgeon, which was our previous experience. And so the complexity of that approval process involves getting multiple physicians sponsors. It includes vetting the reimbursement in different indications to make sure that from a hospital point of view, that the RECELL -- the cost of RECELL will work for them economically. So along with this really great market opportunity, it became a more challenging lift off, so to speak, of converting the hospitals in the early stages. So if you go forward again. And -- so we've got big momentum here and we're submitting -- this is as of May 10. So these new accounts number is growing during the quarter. We're going to save it and not create additional disclosure requirements. But the 46 that we're pending on May 10, we expect to happen during May and June. Slide forward. Now commercializing RECELL globally, I've shared this concept before. But first of all, this is a gross operating margin upside for the company, not a cost to globalize. We're choosing to only go to markets that have a sophisticated enough health care system to use RECELL that have adequate reimbursement in their health care system to pay for it and a big enough population to make the market worthwhile. This really lowers the number of countries we might go to. So really, our market opportunities, Australia, European Union and Japan. We presently have approval for burns in Japan. And the European Union in Australia will be launching throughout the year. But in the current moment, we entered into an agreement with a company known as PolyMedics Innovations, that's in Germany, Austria and Switzerland. We expect there's a launch underway, it's in the early months. We did training in January and they are doing cases. And we plan to identify additional distribution partners in the EU countries and Australia during the remaining part of the year. I will say that RECELL GO is pending its CE mark under the medical -- under the MDR, which covers the European Union and Australia. So we are -- have finished our audit and we are -- we have submitted technical file, and we have been notified the technical files complete, and they are proceeding with their review. So we think during as early as September, we will get RECELL GO for the -- these additional markets, and we'll be launching RECELL GO into them. Next slide. We -- as many of you know, one of the applications of RECELL is the vitiligo treatment. So that's repigmenting stabilized vitiligo lesions. Now we got -- we received FDA approval in June. However, the study that we did for FDA approval was designed to be a comparative study on the same lesion on the same patient. So in fact, we didn't cure any of those patients. We've demonstrated under FDA safety and effectiveness. So post approval, we initiated a study called TONE, which is designed to treat affirmatively vitiligo lesions and restore pigment. Those patients were fully enrolled by early January with a total number of patients treated of 109. We hit the 6-month follow-up in July and expect in August to be able to share the 6-month results and of course, as you recall, in January, we've completed 109 patients enrolled. So that means in January '25, we'll be having the 1-year follow-up. Now to get approval for vitiligo really for broad use, you need to get commercial payer reimbursement policy and that is different in most medical products, which can start with Center for Medicare Services reimbursement. In this case, we will need to go to the commercial payers for one primary reason. The patient here is about 40 years old. And CMS is really a system designed for 65 and older. So the -- there's a combination here of the RECELL TONE study data at 6 months and 12 months, and a health care economic study that is underway, which will publish by year-end. And in that study, what we're looking at is a combination of the market claims data as well as the outcomes of our TONE study. What we found so far and have confirmed is that vitiligo patients utilize greater health care resources than the average person. And it is one of the heaviest drivers is mental health, depression and the like. So what we're following in the TONE study, is a number of indicators of the improvement in mental health after repigmentation of their vitiligo lesions. So that's a study that is dependent on the vitiligo TONE study data but also of external data, looking at patients who have vitiligo and what their cost of care is over time. So the case for coverage with a commercial payer is that treating the patient with RECELL for their vitiligo lesion as a result in improving your mental health and lowering their cost of care over the long term. So all of this is underway and in the future, we expect from a practical reality point of view that we have the opportunity to achieve regional commercial payer policy by Q4 '25, which really means that the vitiligo is a '26 revenue story for the company. Next slide, please. And on the financials, I'll have David take over for here for a little bit.

Thanks, Jim. So we've talked a little bit about this already. First quarter results were very disappointing for us with just $11.1 million of revenue, representing just 6% over the same period in 2023. There are a number of -- that we've done a number -- a lot of analysis on why that revenue missed the mark for the first quarter. And we can talk about a number of those reasons. One of the main drivers of that miss was what Jim talked about earlier around the VAC submissions. We had expected through the end of March, that we would have had somewhere in the range of 130 new accounts, and we only had 73. The VAC process did turn out to be more complicated than we expected. And so the new accounts that we had expected to drive the revenue growth in the first quarter just didn't happen. We have done a lot over the last few weeks to make sure that we're on target to get back to 15 new accounts per month as we indicated earlier, that is around 40, 46 for Q2. We have looked at some of the data around burns because burns was -- our burns business was softer than in previous quarters. And the data that we looked at indicated that the burn admissions for January over the last 3 years was down 20%. We don't necessarily know why that is, and we don't have data for February and March. But even if they were flat over the previous years, we would still be down for burns. And so it's been a combination of burns being softer and not having getting through the VAC process and getting new accounts ordering as quickly as what we thought was going to happen. Jim, I don't know if you wanted to add anything else to that commentary?

No, I think you done it quite right. The job 1 for us is to reinvigorate that approval process of the Value Analysis Committee and we see good progress on that through the quarter. And to -- and the burns market is -- appears to be returning. So both of those are encouraging. But I think you've described our Q1 well.

Yes. And the only thing else I will add is I am here in Australia and we are still committed to beating here in Australia every quarter. And Jim was planning to be here with me but he is in Los Angeles because we made some changes at the top of the commercial organization. And Jim now is in charge of the commercial organization and is managing that organization very effectively. We have put some new changes in place that we believe will drive significant revenue growth over this quarter plus the second half of the year. And so Jim has significant experience in running commercial organizations over his -- history. We are looking to replace the Senior Vice President of commercial but we're going to take our time and be very diligent about it and find an individual that is focused on execution and managing large sales organizations. Our sales team, complete commercial team is over 100 now, and we need to find the right person that has the experience managing those larger teams. We still had a great gross margin for the quarter, 86% -- 86.4%, which is right in line with where we expect our RECELL gross margin is going to be. Our gross margin, just -- it will decrease a little bit over the next few quarters. We do have PermeaDerm that we only get 50% gross margin on. So there will be a small degradation on our gross margin on that. And we will also have some cost of goods sold around -- hits around the RECELL GO implementation. But overall, we don't see a large decrease in the gross margin through the second half of the year. Cash at the end of March 31 was $68.2 million. We acknowledge that we did have a significant amount of use of cash in the first quarter. But a lot of that was from a onetime sort of expenditures that will not be reoccurring. The largest one was we incurred about $4 million worth of cost with our PermeaDerm Stedical Scientific Distribution agreement, $3.1 million of that was inventory that we will be selling over the next period of time. With a 50% gross margin, we would be looking at around $6 million of revenue from that $3.1 million of inventory. As far as guidance, Q2 of this year, we're looking at $14.3 million to $15.3 million. And for the entire year, we still reaffirm that we can be at the lower end of guidance, which is $78.5 million. And if -- when we achieve that $78.5 million, that will be a growth rate of 50 -- 57% over the full year 2023. And lastly, we still expect to achieve cash flow breakeven and GAAP profitability no later than the third quarter of 2025. As far as the debt facility, we have $40 million of debt that we drew down last year. There are 2 more tranches that we could take, 1 of them being at the end of this year, 12/31/2024, and then the other one would be June 30, 2025. We do not see the need for either one of those tranches at this point in time. We believe we have sufficient capital to meet our goals and reach profitability. Next slide. I've covered most of this. I don't think I need to comment any longer on this, except for the fact that with the exception of the first quarter, and that's the most recent. 2023 was a great year for us. We had an amazing growth at 40% in the first quarter, 42%. Overall, for the full year compared to 2022 was 46%. We have some work to do to get back on that trajectory but we have made the necessary changes in the commercial organization team, and we are managing the VAC process very carefully to make sure that we add those new accounts on a quarterly basis, which will drive our growth. Next slide. Jim, I don't know if you want to...

Yes, I'll take this. Our big focus here, this is the 2024 our agenda for the year. We're going to add 45 new accounts per quarter, that's our objective. We're on pace to do that in Q2. We're going to continue to penetrate adopt and grow our core burn centers. That is going to be really enhanced by the RECELL GO. One of the elements that drove the development of RECELL GO was a few things. First of all, RECELL in its present state requires an extra technician in the operator room or nurse dedicated to setting it up and helping the physician manage it. Second, to keep them trained with shift changes and turnover, it's a full-time activity just to train and keep that operating staff with technicians who are -- know how to manage the procedure. With RECELL GO, you don't need that extra person. A physician who's trained on it could direct somebody to execute the preparation of the spray on skin by him or herself with a nurse that had just moderate exposure. So the -- because it is incredibly easier. In fact, often between 1 and 2 RECELL kits are used on a burn patient, which means they have to do it consecutively. With RECELL GO, they'll be able to bring 2 RECELL durables into the operator room at the same time. And do that biopsy once and process enough for our 20% total body surface area all at the same time and be preparing -- why that's happening can prepare the patient to receive spray on skin with the split thickness draft. So it really changes the adoption kind of mechanism that physicians and the hospitals have to go through in burns. In full-thickness, we have the same training challenge with all these different indications, different physicians, different staff that will be similarly really reduced when we have RECELL GO, which, of course, we expect very shortly. So execution here with the combination of RECELL going to RECELL GO, we expect to get rapid adoption with RECELL GO. We expect it to be used more and we have PermeaDerm to sell with it. So as you look across our coming year, we are prepared. We have enough inventory for our launch in June for RECELL GO. We have enough inventory for PermeaDerm and we're going to achieve approval for the -- under the MDR for international markets sometime before the fourth quarter. So there's a lot for us that we have right before us in our control that we are going to be executing through the remainder of the year. So our objective here is to execute on our plan. And so throughout the rest of '24, we'll be keeping you updated on our progress here. Next slide. I think now -- we'll take some questions.

[Operator Instructions] I'll now hand over to Jessica Ekeberg, to run the Q&A.

Thank you, Rudi. Speaking to the RECELL technology, can you update us on the regulatory path point forward? Are there opportunities and hurdles as well as the technology versus competitors that can potentially come up in the market?

Okay. I think that's a question for RECELL GO with FDA and about competitors, right?

Correct.

So in the first instance, we are in the breakthrough device designation. And that means a real-time review except in the instance where they require additional testing. That did occur during the submission. And we submitted that data 90 days -- approximately 83 days ago. So we have approximately 7 days to go, okay? We currently have no open questions from the FDA. We will certainly get some over the next several days. But we -- they are required statutorily to respond by next Wednesday, U.S. time. So there isn't a lot ahead of us, we don't think. So we'll just have to wait and see if there's additional questions, and answer them within the time frame the FDA requires, which will be required before next Wednesday. So there'll be -- and Monday is a U.S. holiday. So it is soon. With respect to competitors, there's 2 kind of issues to think about. One is the regulatory approval and one is the intellectual property. So it happens that 2 issues. Of the PMA process requires a clinical study in the beginning, which we did one with burns, we did one with full-thickness, we did one with vitiligo. It then requires what's called a PMA supplement to modify it. So if we handed a competitor, the formula for the RECELL enzyme, for example, it would take them 2 sequences of a PMA, a feasibility in a clinical study to be able to come to market. And that would take 3 or 4 years. Secondarily, all of our future IP is encompassed in RECELL GO. So by the time someone could come to market and there's no one pending at the moment in our vision that we've seen. So they would have to get through that 3- or 4-year period. But by then, the market will be using the automated processing of RECELL GO. So they'll have to compete with that. So from a long-term competitive protection, we're quite strong and one reason we want to build around RECELL.

Thank you, and this is -- you basically just spoke about this but just how confident are you as it relates to RECELL GO approval?

Well, I'm confident in a few things. I'm confident that number one; the regulatory requirement to answer, the FDA will answer by Wednesday, that will next week. That is I'm quite confident about. Secondly, we have answered all of their questions and we have no outstanding questions. So therefore, with everything I know, I think we have a high reason for optimism. Obviously, you don't know till you know but in fact, there's no outstanding issues that we know about at this time.

Thank you. Let's look at for David. How should we think about operating expenses for the rest of the year?

Yes. Thanks, Jessica. So we added an additional sales reps and 9 new clinical tissue specialists in the first quarter of this year. All of those hires have been done and we are now standing at around 108 total in commercial team. The step-up for commercial will happen in the second quarter. We'll have a full quarter of those expenses. But then we do not see the rest of the year additional commercial expense step up. G&A will stay primarily relatively flat for the rest of the year. There may be a small step up. We don't have a lot of head count that we're going to be adding. And then R&D, we will stay relatively flat there also, unless we do a PMA, which we are planning but it's still -- we need to get the right set of products in place to do that PMA. And so if we do that, R&D may step up a little bit in the second half of the year, but again, we don't see operating expenses increasing significantly over the next 3 quarters. And or -- and just to state on the first quarter of 2024, that is usually a quarter that has a higher operating expenses because of a number of compensation expenses reset after the first -- after the less in the first quarter. And so those expenses are higher and then they taper off in the rest of the year. We also had a significant amount of recruiting expenses for our expansion of our sales team in the first quarter. So Q1 was -- did step up but we see that rationalizing normalizing over the rest of the year.

Thank you. This is for either of you, what do you think about the current share price?

Well, and this is Jim speaking, if you cannot see me. The current share price really reflects our Q4 and Q1 where we missed our guidance. So we missed on our execution and the share price reflects that. And the only way for us to get that back is to demonstrate and perform going forward. And one of the good news, that's sort of why the share price is where it is. That's on us, it's on the execution of the management team. On a go-forward basis, we are really well prepared. Our -- we're -- we've got the organization in place. We've got RECELL GO pending approval in less than 7 days. We've got PermeaDerm inventory. So we already have it. We have a very full pipeline of new accounts in our Value Analysis Committee. We will launch in the international markets, which will be an operating margin plus because we're not incurring much cost to do it. So we have a lot to recover with and we intend to make that become reality. So that's -- the share price is a reflection of our Q4 and Q1 performance as well we believe reflect going forward, our execution.

Thank you. Here's another question. I received a call from a proxy solicitor, why is it important that I vote?

So as you know -- as you may know, the company trades on both ASX and on NASDAQ. And so there's different rules on ASX and different rules on NASDAQ, which we have to comply with both. And as it turns out to have an effective AGM and to affect any resolution, there has to be a 50.1% -- 50% plus 1 quorum that votes. So I encourage you to vote. It helps the company achieved quorum, helps us govern the company. And so that's the reason. That's not required on ASX, that same quorum definition, just happens to be the NASDAQ one.

Thank you. And this one is for David. You briefly touched on this, can the company reach cash flow breakeven without any more dilution? Or do you plan to tap into OrbiMed debt?

Thanks, Jessica. Our operating plan for the next 5 quarters, indicates that we can reach cash flow breakeven by the third quarter of 2025. When we achieve the revenue projections at the lower end of guidance, $78.5 million for this year, we will be exiting 2024 and at a significant revenue run rate. We don't see that revenue run rate going down in the first quarter of 2025. We would only see it accelerating in the first and second quarter. With that acceleration, we will reach cash flow breakeven by the third quarter. With that, we don't see any need to tap into either of the tranches for OrbiMed. They're 25,000 -- $25 million each. The first one, as I indicated, needs to be drawn down by the end of this year. And if we don't draw down the first one, the second one is not available. And again, we don't see the need at this point in time to draw down either one of them.