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

My name is Matt O'Brien. I cover medtech here at Piper Sandler. Very excited to have AVITA here with us. From the company, we've got Jim who's the CEO, David's down in the audience as well as the CFO of the company. Jim, thanks so much for being here. Appreciate it.

Thanks, my pleasure.

So we were talking about this earlier, lots of changes going on with your go-to-market strategy since -- with expanding the RECELL indication and including soft tissue. So can you just kind of talk to us about how the company has evolved since you started or you took over the role of CEO to the point that we're at now? And then what are you thinking about in terms of the business going forward?

Sure. That's a great question. Probably the most pivotal directional change has been the development of the RECELL GO platform for the automated preparation of the RECELL spray on skin. That has changed virtually everything. And let me knock off a couple of them. It is a reusable device that's reusable 200 times and the disposable is a cassette that processes the skin biopsy, and this is what we sell. And what it does is it reduces the work in the hospital for the staff, the surgeon and it allows for the preparation of -- I have examples of as many as 6, 10% total body surface area units at the same time. And what that does is it shortens OR time, shortens work time for the staff, shortens anesthesia time for the patient, gets the patient out to healing faster. So just transformational. Now we launched that in June into both burns and to the trauma centers. So trauma centers is where we refer to the full-thickness indication, which is principally trauma driven. So our business is always not disease, but really event-driven. And the change of that has created, this is our fourth PMA surrounding RECELL. So we have a regulatory boundary that is really competitively substantial. With the RECELL GO automation, we now have rebuilt our whole IP platform around it. So now, we have a very long runway where, as I described it sometimes, RECELL is the castle surrounded by the moat. And what I've now done with that, which is the change is we've gotten the burn indication, and we get the full-thickness indication. We had the vitiligo indication, a little bit more about that later because that's a longer-term issue and a little bit separate from this strategy, is that when you look at the other technologies that are used to treat the patient, their wound being cared for by the doctor who's using RECELL at the same time, right, our sales rep has a very proprietary position there. And so what we've been doing is we have examined what I'd call adjacent market opportunities. Two of them have come to fruition, and both of them will become meaningful parts of our business in the coming year. One of them is a dressing. It's a biosynthetic. It's transparent. It has a microporosity, where you can adjust the breathability of the dressing and allow the exudate to exit. And since it's clear, you don't have to lift it and disturb that wound. The big one, of course, is the dermal matrix, Cohealyx, which we co-developed with Regenity Biosciences. We expect approval for it in June. But what it does, it optimizes the time to graft. In our preclinical work, it's called graft take, how long does it take before the wound vascularizes to develop graft take. We ran a study against 2 of the bigger competitors, porcine model, preclinical. And we assume we could get there in our goal in 7 days 100% of the time. The next closest 85%, next closest 65%. What that is back to the principal value builder of RECELL is the patients heal faster and they heal faster with RECELL in a split-thickness skin graft. You take time out on the graft, you take more days out of the hospital stay, and you're really making a big change. So to answer your question very broadly, we are transforming the RECELL spray on skin into a broader-based wound -- acute wound care company.

Got it. Okay. Well, that's really helpful, Jim, appreciate that. I know GO is somewhat new. What have you seen early days? And is it being used for larger burns, smaller burns or all kinds of -- kind of all comers?

Essentially, it's all comers. As the hospital converts to it, they'll use it on most or all of their cases as the staff gets comfortable using it. It's something very different because something that they used to do and lay out on the table. They now put in a machine and press a button and there's interaction with software, and so it's different. But to give you an idea about it, we had a goal in third quarter to -- we had -- we were over 75% of our revenue base since June is converted to it, and we expect it to be over 90% by year-end. So really a substantial conversion to it in all wound types. And what we find -- for example, our largest customer has 8 burn-ORs and operate all the time. They had 3 rotating staff that would support RECELL cases. After the first week, they were one of our first users, they asked us to put 2 RECELL processing devices in each OR, 16, and those 3 people could support the use of RECELL in all 8 ORs at the same time. So what we, of course, saw was an increase in utilization, and I think that's what we're going to see going forward.

Got it. Okay. That's fantastic. What about the margin profile of that product specifically versus the traditional system?

Well, it's still a really very strong margin profile. We expect margins to maintain. We've had, what you logically talk of a new product transition, a couple of point dip during the last quarter, from 85 to 83, something like that. And we expect to be in the 85 to 88 place GP going forward. And one thing that's really unique, the RECELL processing device costs us $3,500 to make. We only place it under our ownership, and its use is 200 times. So it's $17.50. So it's actually less costly than shipping the disposable. So we, of course, amortize it. But it facilitates so much use and that still allows us to have that same margin.

Got it. Okay. Excellent. So let's talk about soft tissue a little bit. Can you help us understand your experience to the VACs. I know that's an area that came up a little bit short in Q3. How are things kind of trending there? I guess, what was the gating factor in Q3? And then how are things trending in Q4?

Yes. So in Q3, we made an overt decision to look at RECELL GO conversions as our primary activity. So that took more time. And the consequence of that, value analysis committees, they just take time, right? And taking the sales team away from that diminished the number of new -- and remember, all new accounts are all trauma accounts. Now, that will recover significantly here in Q4 in terms of number of new accounts. That said, our experience with this, we've added about -- in excess of 175 accounts in the last 12 months that are trauma centers. Now, let's look at that in another way because I'd like to reset how we talk about this. There's trauma centers account and some that don't account so much. They're not equal. And we are -- we had fairly -- from a quality point of view, let the sales reps have a little bit too much latitude, I think, and choosing which ones to go to. And so we went to a lot of them that were really big, some in the middle and some are small. There are 700 of them. And it's -- there is an 80-20 rule here. And so we're going to focus more on the bigger ones over the next couple of quarters to make sure we not only convert them through the VAC but get the multiple physician specialties, whether it's trauma or plastics, general surgeons who do skin grafting, get them all adopting it in the same hospital. So we'll probably try to find a different metric to share versus just pure accounts because account A is not equal to account B, right?

And Jim, I'm not as familiar with this trauma market as I probably should be. But are you talking about level 1 trauma centers, 2, 3s? And then are you focusing on the level ones?

You just said it exactly correct.

And the level 1 trauma centers that you go to, you said they're big, obviously, but they're doing everything, right?

They do everything.

So they're going to see the type of patients that you could be treating and then they'll think to pull RECELL off the shelf versus the other things that they're doing with broken legs or whatever else it may be?

That's right. There's level 1 through 4. There's about 750 of them. The top 250 or 300 have everything from burns to gunshot wounds, necrotizing bacteria excisions. They get the worst of the worst, and that's the place where we need to plant ourselves. Interestingly, the TAM of our company has changed dramatically with this strategy, and it's worth spending a moment on that. The dermal matrix market itself in the PermeaDerm specialty dressing, and I'm just going to use the burns market for this example. There's 35,000, 10% or greater total body surface area burns in the United States. We call those RECELL eligible. And there's about -- that's about, give or take, a $400 million TAM, okay? When you add PermeaDerm to it, it adds $100 million to the TAM. When you add the dermal matrix to it, it adds over $1 billion to that TAM of those 122 hospitals. So in just the next few months, the AVITA TAM, which has historically been about $400 million to $450 million, just in burns becomes $1.5 billion and you apply the same math to the full-thickness skin defect graft market for trauma centers only, not counting anything in chronic wounds, you add another $2 billion in TAM between RECELL and PermeaDerm and Cohealyx. So this is transformational for us. And in the coming year, we are not going to be adding virtually 0 heads. We're going to get full leverage on this portfolio. The Cohealyx won't launch until -- fully until Q2. But we're thinking that we get ourselves profitable on a full GAAP basis by Q3. And now you get there by selling this broader portfolio and you get there, of course, by not expanding your expense base.

Can you talk about Cohealyx and PermeaDerm? And who are you competing with there? And who are you displacing?

There's -- in PermeaDerm, it's a little bit difficult because there's not a direct exact. SUPRATHEL would be one, for example. There is so many different dressings, but they don't all have the common feature benefit profile. That said, it's a very competitive market. In the dermal matrix market, the companies are like Integra and Kerecis and PolyNovo and those types of products.

Okay. And then just the uniqueness of these products versus what's out in the market because to get to this profitability, you need pretty good traction of those products. So just displacing even an Integra or some of the others could be challenging?

Well, back to this point about our preclinical work and what we're going to do with humans in January, graft taking 7 days. If everyone else is taking 5 and 10 days longer, that is an unbelievably valuable contribution to the healing of that patient. It gets them out of the hospital the equivalent number of days because of wound closure. So we're talking about products that are going to be less expensive. They are going to be products that actually perform better and bring more value to the patient.

Got it. Okay. That makes a ton of sense. Back to Q4 for a second here. The guide is another pretty meaningful step-up, right, to get to the Q4 number that you put out there. What's that baking in in terms of your burn growth and then your soft tissue growth?

Well, for sure, our guidance for Q4, which is 22.3% to 24.3% is really all about the expansion of RECELL GO and the expansion of use when the conversions happen. We're getting meaningful PermeaDerm contribution during Q4. And not yet, it does not yet include our international CE marking because we've not yet received it. We expect that to be a Q1 contribution, but it's not affecting the quarter. So really, it's very much about the continued expansion. We think actually with the benefits that are created by the RECELL GO platform, we see us doubling our share of the RECELL eligible patients over the next 1 to 2 years. So a lot of growth.

Okay, sounds good. You mentioned that CE mark delay. What was the real driver of that delay for RECELL GO?

You know, very simply, the notified bodies are working their process and you're somewhat, for lack of a better word, a victim of their time schedule. And we've had very good experience with the one we're particularly using because we did change to a new one. At the same time, they haven't met their schedule. And the schedule we're on now suggests a January, February type approval. We're down to the last review, which only takes 2 or 3 days. There's only a small detail, which is the calendar.

Which days?

You know which days.

All right. So how do you think about the European opportunity for RECELL GO? Are you starting to work with distributors already, starting to get ready to sell them there? And then how big can that product be over a multiyear period?

Well, we're with a total of 14 countries covered in Europe with third-party distribution. The one exception site right in the middle would be France. We don't have anything happening in France at the moment and don't have an urgency to do so because it has a very unique reimbursement challenge ahead of it. I think in the case of Europe, it will be modest in '25 -- at least '25, right?

Yes, I know.

You know, it will be modest. But I think it will grow into a meaningful contributor in the coming years. And because remember, there's 2 reasons where really we've got a filter here that we're applying to our international strategy. We want to have health care systems that can use the RECELL technology that are sophisticated enough to it. They also have to have the ability to pay for it, and they also have to have the population to make it, so there can be a business. When you put those 3 filters on, you miss a lot of countries. Australia is in. But for example, we're not planning to go to Canada as an example.

Got it. Okay. All right. It's another good contributor. What about mini?

Mini is exciting for us. So mini, standard RECELL treats 10% total body surface area. In our study PMA for full thickness, 100% of the patients were under 480 square centimeters. And what we found is the doctors -- it wasn't so much a price issue because the price decline difference isn't going to be very meaningful, we're still going to have an 80% plus margin, is that they have a cognitive problem treating a 2.5% wound with a 10% hammer, so to speak. And so Mini is in its final days of approval. We've had a great interaction. We passed through the -- we waived the 100-day meeting and passed through the 90-day test because it's essentially the identical testing we did for RECELL GO because it's just a different cassette with smaller well size that will treat a smaller wound and go into the same RECELL processing device.

Got it. Okay. What about margin profile for that one, too?

It will be over 80%. So it will be sold a little bit less than the standard RECELL GO, but not near -- it turned out from a physician point of view -- a natural person, including me, my natural thought was this was a pricing problem. It wasn't. It was a waste problem. Like when you send out the third-party market research to do the work, they say, it's not the price, it's the waste, and it really bothers them. So it's a very, very interesting exercise.

Interesting. Okay. So as I think about everything you're talking about here, Jim, I mean, there's a lot of growth drivers coming down the pike. How do we think about how that all translates into the growth algo for AVITA over the next couple of years?

Well, let's talk about next year simply. We haven't given guidance yet other than one thing, that's profitability Q3. Our growth rate is going to be at such a growth rate that if we were going to make a trade-off of spend versus profit -- in other words, revenue versus profit, we're going to make the trade-off in favor of profit. Because we almost can't avoid growing 40%, 50%, 60%. So that's very sufficient growth. What we really need to do is get ourselves profitable and have to be sustainable. So that's a big focus. And with these additional product portfolio expansions because we really have 3, Mini, PermeaDerm and Cohealyx, the ramp of '25 into '26 is going to give us a lot of terrific momentum.

Got it. Okay. And what kind of -- are there any areas of potential that, I guess, levers of upside just because there's been a couple of fits and starts, right, with some of these VACs and getting delayed in terms of getting RECELL GO out, things like that. Are there any things like that, that, well, if that happens, we're not going to grow at that rate? Or do you have just so much built in on the conservative side that there could be upside to even some of these figures you're talking about?

Well, I think for us, it is a -- number one, facts are going to continue to always be a challenge. They just are when you're doing something [Technical Difficulty] and you're displacing other things, that I'm now accepting that more as a business process we have to become more effective at, but they'll still be there, right? I think for us, the uptake of Cohealyx will have a high variability. We're planning conservatively about it. It has the chance to be many times bigger than we're planning for it next year, for example. I think we'll get the momentum by '26 to have it be a meaningful part of our business. But we're sitting right now where RECELL is 99% of our business. We would like -- RECELL, the product, we would like that to be something more in the order of 80% to 85% within a year, right? So we'd like to see us develop our portfolio and that will be a challenge, a new skill for our team.

Yes. Got it. All right. Fingers crossed. Last one here in the last minute or so. And you'd mentioned this to start with, but vitiligo. Can you just talk about that initiative? I don't watch much TV, but I see the drugs that are out there for vitiligo. It seems like they work pretty well. Anything diminished in terms of that opportunity for you guys going forward?

Well, I think one thing, first of all, we have the FDA approval for vitiligo. What we don't have is reimbursement approval. And to get there, we ran a post-market study, TONE, 109 patients. It will publish anytime in the next couple of months. That's a necessary foundation for getting reimbursement. The second is we did a health care economic study, which also is going to publish -- it's going to submission on the 15th. What we have to get is commercial payer policy. So this is not a MAC. This is not a CMS thing. The target patient population is plus or minus -- they're 40 years old. So we think that this is a longer-term build. The RECELL GO device is designed to also be able to sit in the dermatologist's office. That said, we don't have site of service approval there. They can treat vitiligo on indication in a hospital outpatient or hospital. And so we'll probably confine it to there during the next 12 to 18 months. As we get approval by the payers, that will change. So it's -- it will become a good contributor in the long run.

Got it. Okay. All right. Well, as I look at the time, and we're just about out of it. So we'll go ahead and cap it there. I know we're keeping everybody from lunch as well. So Jim, really appreciate all the feedback. Thank you.

My pleasure. Thanks, Matt.