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

Good morning, and thank you all for joining us this week at the JPMorgan Healthcare Conference. My name is Andrew Lang, and I'm an associate here on the JPMorgan health care team. And it is my pleasure to introduce AVITA Medical. Joining us from the company is CEO, Jim Corbett. And as a reminder, following the presentation, we'll have a Q&A session. Jim, turn it over to you.

Thanks, Andrew. Good morning, and thanks for having us. I'm looking forward to sharing with you some of the latest developments with AVITA. And principally, what the message of this morning is to help you see our evolving strategy and what it means to our future because we we've evolved our strategy quite substantially, giving us much more ability to care for the patients that we serve and the physicians that we support and contribute to the healing of patients. So to describe AVITA of today, we're becoming a broad-based wound care company. However, in acute wounds, not in chronic wounds. We offer a wide range of solutions. And this creates a very different dynamic versus most medical device companies because our demand is essentially event-driven. So unfortunately, I'll give you 2 recent examples. The tragedy in New Orleans filled up one of our biggest customers, trauma center and burn center. And of course, you can't forecast that. And the situation in Southern California is doing the same. So it is a very -- on a macro basis, these kind of events happen in some consistent manner, but at the same time, they do have an unpredictable nature to them. So when you think about what we do in acute wounds, including burns and full-thickness skin defects and those full-thickness skin defects are all trauma wounds. So unlike disease-specific devices that where you build demand, then you have attrition, then you build some more demand on top and then some attrition, we have a different agenda. Our different agenda is to build the portfolio of products to help the physician treat the patient. This helps you see the breadth of technologies that are used to treat an acute wound patient that's either in the trauma center or a burn center. At the center of this is RECELL. And let me give a little bit of perspective on RECELL. RECELL and then RECELL GO in its current form, is the centerpiece. It's a one-in-category product. It is an only in-category product. It has a 5-year regulatory lead on any other direct copy and a 20-year lead in IP. So this is a dramatically protected space. Most of all, the clinical outcomes from it have shown it to be extraordinary. And the American Burn Association did a study of 3 years ago, that demonstrated patients with common total body surface area treated with RECELL and without had a 30% shorter hospital stay. Now that is so valuable for who? Well, the patient goes home sooner, that's valuable for them. The doctor can treat more patients, that's valuable for him or her. And the hospital makes more money, and that is valuable for them. So this is not a subtle or a small edge of competition. This is very central. Now it happens, these procedures all happen in a 2-stage procedure. There's a getting wound ready for grafting and then there is grafting in a second procedure. And so you can see along this continuum what happens with the treatment of this patient. The 2 biggest segments that adjoin RECELL GO is dermal matrices and dressings. And we're going to talk about those because we have very strong positions in both. The products as a wound bed temporizing dressing, PermeaDerm. Let me describe it for you in a feature benefit manner. It is clear. It has variable porosity and allows for the wound to breathe and allows it to exudate. That's a great word, but it means having the excess liquid goo of the wound come out, and that's very important to the healing process. Now in one level, you use that dressing even before the 2-stage process begins, where you temporize the wound, where you just try to stabilize it and determine what your course of treatment is. The next thing you do is you assess it for dermal matrix. And dermal matrix has some qualities that are very important. You want it to revascularize that wound and you wanted to absorb histologically into the wound and you wanted to get graft-ready. Graft-ready and then graft closure are the 2 key elements. When you put the dermal matrix in, the days to graft-ready is the key measure. When it is graft-ready is when you use RECELL GO spray-on skin with a 3:1 meshed autograft. When you complete that placement and you spray on the skin, you then would cover it with PermeaDerm a second time. Later, 7 to 10 days later, that wound needs care, after care and you change dressing, a third opportunity for PermeaDerm. So you can see as the patient is standing there, the physicians is standing there and our rep who is operating the cornerstone device has the opportunity to help the physician use these products. Let me spend a minute about RECELL GO. It is GO-time. We are automating this process of disaggregating skin, making it ready for spray-on matters, application. Now the conversion to RECELL GO is very well over 3/4 complete, nearly fully complete in our burn centers, in our trauma accounts over 70%, about 80% on a net basis and all new accounts go directly to it. It's made up of 2 components just for your reference. There's a RECELL processing device, which you can see in the lower right. And then there's a disposable kit, which replaces the ease-of-use device of RECELL. And so the RPK is a disposable. RPD is the RECELL GO processing device, and it's good for 200 uses. And so these are both manufactured in our manufacturing operation in Ventura. Now RECELL GO, you would use in up to 10% total body surface area mode. RECELL GO mini though, is really the trauma product. So many trauma wounds are actually under 480 square centimeters. Now that's about as big as a pie or a small pizza. That's about the size of it. And that 480 square centimeters compared is 2.5% total body surface area. There's a cognitive distance for the customer of using RECELL for a small wound because it treats 10%. It's kind of like using a sledgehammer to pound in a staple. So we've developed RECELL GO mini, and we received PMA approval for it on December 27. So we're launching it here in January. So very exciting time. Let me take a moment to describe the benefits of RECELL GO. These are 3 patients, one that was 20% or greater TBSA, one is 30 -- excuse me, 10% or greater, second one is 20% or greater and the third is 50%. Now what would be happening in the operating room is they would be taking these grafts and processing them sequentially. So once you have 2, you save about 35 minutes of operating room time because you would operate them at the same time simultaneously. You take the grafts, load them into RECELL GO and go about preparing the patient for their skin graft. When you have 3, you save a full 1 hour, 2.5 hours of operating room time. And go about why you load all 3, they operate at the same time while you prepare and debride their wound. In some cases, what you can see here, and this is at Wake Forest on the far right, they had 6 going at the same time. This is saving the hospital a little over 3.5 hours in the operating room. Now let me describe what that means. 3.5 hours in the operating room saved. What is the greatest threat to this patient's recovery? One of them is anesthesia time. So 3.5 hours less of anesthesia time is so valuable to the health of this patient. So that's the #1 thing. The #2 thing is the path to healing for the patient happens 3.5 hours faster. Unequivocally, a great thing. The third thing that happens in a burn OR, it's 98 degrees Fahrenheit. It's hot in there. It's hard work. And the staff, it's demanding. They get to perform this procedure 3.5 hours faster. Next, 3.5 hours of operating room time is worth hundreds of thousands of dollars to the hospital. And what we know is that patients treated with RECELL GO spray-on skin, combined with a 3:1 meshed autograft, get out of the hospital 30% faster. So fundamentally, this is transformational in the care of acute wounds. I wanted to give you a chance to really see the life reality for a patient. And the scarring issue is not subtle. Sometimes these burn patients live, and they feel very -- they get all kinds of psychological difficulties because of how they look. This woman, as you can see, on treatment day had a full facial burn. 9 days, 3 months, but look at her 12 months. She's living the life. She's living her best life. And this is what our technology RECELL does, and it's why it matters. Now moving on to our portfolio. PermeaDerm. This comes in many sizes. And again, it's used for multiple uses. Again, I'll describe, it's transparent, so you don't lift it up to see if the graft is okay, because what happens when you lift it up, you pull -- the dressing pulls away part of the skin graft. So you can look through it. The variable porosity allows you to control the amount of air it gets, and you can also -- the wound gets and the exits. So it's terrific dressing that offers real advantages, and we can sell it very price competitively, which is necessary in this market. Cohealyx, has been an 18-month project. There's -- for dermal matrix, there's a well-validated porcine model which one of our one scientist runs at Brigham's Hospital in Boston. And we've tested 18 different formulations on 10 different platforms to achieve the right characteristics. And what we were focused on, this is a collagen matrix is what it essentially is. And it's co-developed with us and a firm named, Geneity -- excuse me, Regenity Biosciences. In any event, Regenity was able to put together -- we actually tested 2 of their versions. The results of this are dramatic. And because what we're looking for is how fast to graft, how fast for integration from a histology point of view, and wound closure. That is the name of the game for dermal matrix. So we're in a post-market study now. We got approval in December. We're doing LMR, but really we're building clinical data and case studies and conducting the post-market study, which will be completed by March. And this has a very short follow-up because there's 2 elements here, which I'll share with you in the next slide why the study is very short. This is from the porcine study. And in the left column you'll see Cohealyx, and the 2 leading competitors in column A and column B. What you'll note is we are measuring time to graft-ready. And what we did is we did -- we've studied all of these multiple times. So the -- we did a force feed of saying, we're going to graft on day 7, period. In the Cohealyx arm that worked in 98% of the surface area, so there was one graft where there was an edge that was not quite ready. The market leader was at 85%, and the market #2 was down at 70%, meaning they can't do it. What happens when you close -- when you're graft-ready sooner? Back to the theme of AVITA, we're getting the patient treated sooner and faster and out of the hospital more quickly. So Cohealyx, we are now proving this clinically. This is preclinical data. We had our first implants in the last week, and we will be ready for full launch in -- by April 1. And one of the reason why we can get the study done so quickly is the statistical signal-to-noise ratio in the study. So we're using what's called an OPC design, objective performance criteria, where we've taken the published data of our competitors on time to graft and time to close, and we're holding Cohealyx to those standards. Well, it turns out Cohealyx closes at 7; competitor A closes 11 to 14; competitor B closes at 20 days. So we close so much faster. It doesn't take that many patients to prove it. And we're doing it in a post-market open study so that we can along the way, use the data from the podium to prepare for commercialization. So this has enormous potential, and we'll talk about the value to our portfolio right here. Now this helps you see -- and I'm going to talk about -- there's a market here that is burns and there is a market here that is trauma. Burns is a form of trauma, but let's just take burns. Burns is in 120 hospitals, and RECELL has -- the average case is 1.5, so that's $10,000 ASP per case. The revenue from PermeaDerm in that same 2,000 square centimeter case or 3,000, if it's 1.5, it's $2,000 to $4,000. The cost for Cohealyx, if we are 20% below the market price of the market leader in this example, is $20,000 to $40,000 per case. So this takes our business from a $6,500 to $13,000 TAM per case in 122 hospitals to $28,000 to $55,000. Now let me give you to you in more understandable and big terms. It's taken $450 million of TAM and turning it into $1.5 billion in our 120 biggest customers, where we have primacy by virtue of RECELL and RECELL GO. So this is transformational for the company. Now you would then apply these same math to all the trauma wound indications that we have received in our full-thickness skin defect PMA for traumatic wounds, acute wounds. And you'll see, we don't count the chronic wounds in this calculation, by the way. They're here, but -- and they're on indication rather interestingly, but it makes sense for us to not concentrate on them in a sense that chronic wounds are chronic for a reason, they're not chronic because they have a skin ulcer or a full-thickness skin defect. They have DFU or VLU, they have conditions that are not cured. So it adds $2 billion to our market TAM. So in the stroke of 2 quarters, we're taking our world from a $500 million TAM to a $3.5 billion, right, $2 billion plus the $1.5 billion in burns. So our opportunity has just grown exponentially. So we really are excited about 2025 because we think this is a foundational and an accelerant year for us. So looking at the future, we are also beginning our globalization. We're doing so through third-party distribution. We're doing that because we're starting from 0. We want to use our cash wisely. These -- and we're using a filter to choose the countries. So the countries have to have the technology capability to use RECELL, number one. Number two, they have to have the health care system to pay for it. Number three, they have to have a population that creates a business. So there's not that many when you get down to it. And so it's essentially, European Union, Japan, Australia, and U.S., and that's the market we're focused on. We'll get the MDR for the CE mark on GO. We expected this quarter. As many of you might have also experienced, the notified bodies are rather unpredictable. And they are past their deadline for which we reminded them that we paid a premium for that deadline, but of course, it hasn't come yet. Now from a '25 priorities point of view, this is about sales execution. We do not need to hire any. Our net headcount for the year is up under 10 people on a number of 250. So it is -- we're in place, we're ready to execute. Our product portfolio expansion, RECELL GO mini is approved and manufactured and in inventory. Same with PermeaDerm, and so is Cohealyx and the sizes that are large enough for Cohealyx and big wounds will be ready April 1. International expansion is underway, we'll launch GO as soon as it's ready, we've got them built in terms of the right electronics and such. Our financial guidance for the year is $100 million to $106 million, reflecting a growth rate of 55% to 64% over prior year. We expect to achieve cash flow profitability and GAAP profitability no later than Q4 2025 and may actually get cash flow profitability in Q3. Our long-term goals are to continue to establish our brand as a standard of care in acute wound management, strengthening our global reach and to transform patient outcomes. You will continue to see us expand our portfolio along that acute care continuum. From a revenue point of view, we've been growing steadily. One of the big challenges for us is in Q4, we were light, which was reflected really in -- if you recall, as I described, the acute care business, it's event-driven. And the revenue is stocked on the shelves. And when we were filling out Q4, there was just slow purchasing and no other issues. There wasn't a management issue. It wasn't a product issue or some other things we don't know about just a slower purchasing pattern, and we expect to return back to our growth trajectory here in Q1. Ready for questions.

Great. Thank you very much, Jim. At this point, we'll open it up to the audience for any questions.

Yes, just a question on what is the extent of your visibility into the inventory levels of the hospital systems that impacted your December period? If you could provide any color on that, whether they've -- no pun intended, burn through some of the inventory?

Yes. Actually, our visibility is pretty high. So actually, I knew the orders that we were expecting. And to be candid, just the way the calendar worked, the normal time to top off those inventories because they have a par level. So it was an excess inventory per se. It was par level inventory, happened between Christmas and New Year's, and it was a Wednesday to a Wednesday. It was just one of those, frankly, a little frustrating for us, times where we had the orders identified, and CFOs and CEOs sign off on those size orders, right? So not blaming them because I think I would do the same thing as I would go into the end of the calendar fiscal year. So we saw them. So we're not real concerned from a business viability or those types of issues. Does that help?

Maybe I'll ask one, Jim. I know you recently released your 2025 guidance and you touched on it briefly, but can you maybe describe and talk a little bit about what's driving that projected growth?

Well, sure. First of all, the guidance was $100 million to $106 million for the year. What's different than in our prior guidance is we didn't give quarter guidance. And that's reflective of this evolution of our business model and the recognition of the acute nature of it. And so where we expect the biggest impact is from our new products. We think RECELL GO mini, Cohealyx and PermeaDerm are going to contribute substantially to our revenue growth in the year.

Great. Thank you. And then maybe just as a follow-up to that, how is Cohealyx different from current dermal matrices on the market?

Yes. It's a very important question. So it is reconstituted collagen. And when it's reconstituted, it creates 2 things where it creates a lot of space for cellular ingrowth and it is irradiated in a manner that causes it to optimally absorb into the wound. So providing 2 things, places for cells to grow into and so to speak, it has to get absorbed. Histologically, you want to see at 7 days that ingrowth into the wound. So with others, you don't see the market leader, you'll see some histological absorption, but usually it has a substantial infection rate and has to be debrided. So it has a bit of a disadvantage. The #2 doesn't integrate well into the wound, which is why it takes 20 days to become graft-ready. So this has some real valuable technical differences that we can demonstrate preclinical and that we will translate and believe we'll have human data that demonstrate the key measures, right? It's real simple, close the wound, get out of the hospital. It's like not complicated when you look at it that way.