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

Okay. Thank you, everybody, for joining us. This is Morgan Stanley's 23rd Global Healthcare Conference, and we're excited to bring interesting stories to you all. Before we get started today, there's going to be an important disclosure available on our research website. So if you go to www.morganstanley.com/researchdisclosures. And if you have any questions, please reach out to a Morgan Stanley representative. And with that out of our way, I'd like to turn it over to Jim to first introduce yourself and then let's start talking about AVITA, which is a very exciting and interesting company that I've had the pleasure of getting to know over the last few years. And this conversation will help, I think, level set the story where you are today and where you guys are headed.

Perfect. My name is Jim Corbett, and I'm CEO of AVITA Medical. We have a really exciting therapeutic acute wound care portfolio, which is headlined by a technology called RECELL, which I'm sure we'll talk about here in a moment.

Awesome. So maybe just to dive in, can you tell us how -- what is the RECELL platform itself? And how does that fit into the overall mission of AVITA?

Well, RECELL is really unique. And in a way, I'm going to describe it at the end. What it produces is a spray on skin graft. And when you think about that conceptually, it's like how does that happen? Well, what we do is we take a very small autologous from the patient biopsy, and we disaggregate it in an enzyme buffering solution and then deliver it as a spray onto the wound. Now these are for partial and full thickness wounds that often are 10, 20, 30 and more total body surface area. The benefits of the spray on skin are multiple. So first and foremost, it's a reduction in skin necessary to do the graft in the order of 97% less skin. So the biopsy you take for RECELL will expand 80:1 and to give you a dimension of it. So a 2x 2 square centimeters could cover the area of your back -- of your body. And for someone who says, how big is 10%, it's like your whole arm, right, as an example. So it's really quite extraordinary. And the second benefit is it heals very quickly because what you're doing is you're spraying the cells into the wound, they adhere to the revascularized wound and they proliferate and they proliferate faster, leave less scarring and that has a tremendous patient benefit in terms of the patient healing and getting home quicker.

Great. And for those in the room who are able to see our 36% stickers, you want to give them a little bit of background as to why we're wearing them?

Nice of you to ask. 36%. It's actually a really big thing happened last week, one of those transformational times, I think, for AVITA. Last week, at the European Burns Society meeting, a study was presented by Dr. Victoria Miles from the University Medical Center of New Orleans. And that study looked at, I think, 6,300 RECELL patients from the U.S. burn registry. It paired them in a 2:1 format with traditional full thickness skin grafts. And what it looked at was healing. And what the data showed in patients under 30% total body service area because that was the sample, and that actually represents the vast majority of full-thickness wounds in the burn world, a 36% reduction in length of stay. Now turn that into a couple of other metrics for you. That's about a 6-day improvement in the length of hospital stay, which depending on what your cost per day is, which varies in hospital to hospital, but it's $10,000 to $12,000 a day. So you can do the math on that rather quickly. And that the patient gets home sooner, which is like the ultimate. So it saves money. They're in the hospital for a shorter time and they get their home to their family in a sooner time.

That's great.

So 36%, remember that.

Yes. It matters. And so that's RECELL, but you also have Cohealyx and PermeaDerm. So you're building out a full suite and solution of therapeutic acute wound care solutions. How do you think about capturing value across the same patient, the same wound and the same hospital pathway?

Come on, you took that right from me. That is how we see it. So our salesperson today versus our salesperson a year or 2 years ago, we used to be organized with a high percentage of our field employees were clinical specialists. Now that's a very low number and therefore very specialized use because a full thickness 10% total body surface area wound is really a 2-stage procedure. And in the first stage, you clean the wound up and you put in a dermal matrix. And in this case, that would be Cohealyx. It's made of bovine collagen, and it revascularizes the wound. And that revascularization ultimately in stage 2 is the receiver of those skin cells from the spray on skin cells of RECELL. Now in both of those stages of procedure, the sales rep needs to be there to sell Cohealyx, then they're going to close that wound with PermeaDerm. And PermeaDerm is really unique in the sense that it's translucent, so you can see through it. That matters because when you're healing a skin graft, it's really sensitive. So instead of having to lift up the dressing to look, you can look right through it and see. At the same time, it's biosynthetic and it has a microporous, it stretches that make the pores larger, smaller. And the pores have a dual purpose. They let air in and they let exudate or the wound can express out through those same pores. n So you have stage 1, clean the wound, with Cohealyx, cover with PermeaDerm, Stage 2, treat with RECELL, cover with PermeaDerm. And in fact, 10 days later, after care, one more Cohealyx just in case as potential. So now we have selling activity that needs to occur throughout the procedure where before we wouldn't be in the first stage at all necessarily because we had no purpose there. And in the second stage, the clinical specialists would often cover the case to support the user with training and those types of things. But now that's a selling activity included. So quite a different model.

Right. Very different. And as we then pivot towards financial profile, you guys showed a solid year-on-year growth in Q2, but unfortunately, missed expectations. Can you walk us through what happened? And what gives you confidence as we look through the back half of 2025?

Yes, that's a terrific question because I think in Q2, 2 things happened as we came to a full understanding of why both Q1 and Q2 were short of expectations, which had to do with a new CPT code that went into effect January 1. And it went into effect in a unique manner. The code was specific to RECELL. As it was developed by AMA and the CPT committee, the CMS was not pleased with the outcome. They thought it was too complex. So on the one hand, they said to AMA CPT committee in a very detailed way, here's what we want you to fix, go fix it. Well, that's about a 2-year process. In the meantime, they said, you now have a code that you've created a specific, we want to assign that to contractor pricing. And for those of you who may or may not be familiar, the contractor pricing refers to Medicare administrative contractors, of which there are 7 that cover the United States that administer Medicare and Medicaid benefits. It's not completely uncommon for them to do contractor pricing, but it's not common either. And it takes them a while to get it organized and get harmony among them. They have an objective to handle technologies and claims and procedures commonly. And it took a few months before they got themselves organized and communicating. In the meantime, there was uncertainty around what and when the providers will be paid. That started manifesting itself right away in Q1. And that's something we wouldn't have natural visibility to. That's happening inside the billing department and claims were being delayed and in some cases, not paid correctly by the view of the provider. And then later in May, the 7 MACs had a common meeting with the society, and they came to an understanding about how to handle this. And then they started implementing it. What we've seen here in Q3 is we see all of that coming to resolution. Now it cost us about $10 million in revenue, we estimate in diminished demand by that uncertainty in Q1 and Q2. And that's reflective in our forward guidance that we reset. So in our new guidance, year-over-year, we still are going to grow about 24%, but that is a disappointment from where we started. At the same time, what we see is profitability coming in Q2, Q3 next year, and we've guided to that, Q2 crossover, Q3 [ GAP ]. And this issue will, we think, fully resolve by the end of this quarter, and we'll see it in this quarter and more fully in Q4.

Okay. Great. And gross margins also came down a bit in Q2. And you touched a little bit on time line to profitability obviously is a flow-through. But what was driving that compression in gross margins? And how do you think about where it's trending towards?

Yes. Gross margin is really an interesting concept. So our resale gross margin runs around 87%. Our gross margin for PermeaDerm is about 60% and for Cohealyx, 50%. So as our mix grows, our percent gross margin is going to go down. But let me play out a little bit how that really works. Let's take a single patient that is 10% total body surface area. That would be a $6,500 RECELL at 85%. So give or take, $5,500 of gross profit dollars. In the case of that same 2,000 square centimeters at market price for the Cohealyx at the competitive market price, that would be $30,000. At 50% gross profit, that would be 15,000 gross profit dollars, which would be 3x what we make for RECELL our proprietary home run product. And in the same case of PermeaDerm in which you might use -- let's imagine that you used $2,000 worth at 60%, you'd make -- you'd use it potentially as many as 2 or 3 times, you make $2,400 or $3,600 of gross profit dollars. So this all works under one other assumption, and that is that you're not increasing your SG&A, which we're not. So we don't foresee that for the next 2 years. We have -- we don't need to increase new accounts. We have -- there's about 120 burn accounts, and there's about 250 Level 1 and 2 trauma centers. So when you look at it through those eyes, our 82 headcount field team has, on average, 4 or 5 hospitals each, not too many. And they get that -- so we're a high touch still with less people than we used to have. And we have same wound, same patients, same doctor, same hospital. More dollars.

Yes. You've really sharpened up that commercial model, right? Fewer reps, higher productivity. And as you talked about with that broader portfolio, there's a lot of efficiency gains that are being generated. How do you think about this setup for the long term to fuel growth?

Well, I think for the long term, there are other adjacent same wound categories. For example, one we're working on right now is antimicrobial, where we would offer PermeaDerm and Cohealyx with and without antimicrobial agent in them as an example. Another example would be there are -- not anti-scarring, but reduced scarring technologies and treatments that we're studying and want to find a solution for that, in fact, improves the scarring outcome for these patients. So we think that we're wedded, so to speak, strategically to this adjacent market strategy for therapeutic versus chronic acute wound market and the adjacent needs for that patient and that doctor.

Yes. Great. And now with this leaner cost base and the recent raise that you all did, how do you think about cash runway and hitting breakeven by middle of '26?

Well, we feel quite good about it. Without -- I can give you one way to think about it. Our OpEx for example, per quarter is about $25 million. But of that, $2.5 million or so is noncash, $2.5 million to $3 million. So that puts to $22 million. So then you start thinking about at what revenue and what gross profit percentage. And that somewhere happens around $28 million. So with what we have in the pipeline, we see that the growth gets us there in Q2, Q3 next year. And of our current approximately $30 million in cash, we also carry that is not counting, of course, our accounts receivable and things like that. So we think we get to profitability very sufficiently with the cash we have. We think we start accumulating in the last half of next year. And we think that by the time the OrbiMed facility matures at the end of '27 that we'll be in a position to pay off that debt, which has always been the plan. We didn't want to -- we did the debt to diminish dilution, and we think we will ultimately do that.

Okay. Great. A big question within the space is always about reimbursement and adoption. So can you break down the value analysis committee process for Cohealyx? And once you're in, how quickly do accounts ramp?

So for Cohealyx, I think that's the big variable on the upside. And so value analysis committee submission is not a voluntary company choice. that is driven by physicians in the hospital who want it and a committee in the hospital accepts that submission. So that's the first hurdle that happens, right? So the next thing that happens is they have to calendar you for a meeting, the champion or champions need to show up and they have to prove it. Now we're offering a number of advantages that are unique. For example, it's a high-value inventory item. So that's a working capital issue for any hospital. And hospitals are notoriously -- they're low single-digit operating margin. So it matters. We are in a place where we have put an RFID marker on all of our inventory. Our reps all have an RFID reader, and we put the inventory in on consignment. Now that has a number of advantages beyond the obvious. The obvious is the working capital, right? But the secondary benefit is real staff related because when they do consignment manually, what has to happen, they don't just let a sales rep walk in and start crawling around where they store product, it occupies a person or more. And when they lose it, what do they have to do? They have to find it and then that occupies a person. With RFID, all that goes away. So the staff isn't necessarily in favor of consignment, notwithstanding it being good for the hospital. But under our model, they'll like it, right? So that's a secondary benefit. So the -- it also helps us with the value analysis committee approval because it's an advantage for them from a staff efficiency, economic efficiency. And they get a product that gets time to graft 7 to 14 days faster than anybody else's. So if you go back to my heart, 36%, if you're saving 36% of length of stay at 6 days and you get time to graft improvement of 7, that's 13, it's almost 2 weeks. Who wouldn't like that, right?

No, indeed. Sound's great. And maybe switching to reimbursement then. NTAP reimbursement for use of RECELL on non-burn trauma wounds kicks in October -- October 1. What kind of impact do you think that's going to have on the business? And how fast can hospitals move?

Well, yes, the NTAP is really targeted at nonthermal wounds and outpatient. And a lot of those patients, the hospital gets concerned about their costs and which is one reason they treat them outpatient. And this will give them an incentive to use RECELL, improve their margin and have them experience the length of stay result. It will manifest itself differently. The patients will heal faster when they get followed up. They'll have higher patient satisfaction scores. And recently, I learned that so many hospitals have a Chief Patient Experience Officer. And so this is the type of thing that would really affect that particular population. So the reimbursement will help us motivate hospitals to adopt -- because really, if you think about it in a different way, this 36%, the NTAP are changes in protocol, okay? We had one of our biggest customers recently enter into an agreement with us that involved a commitment that we would reduce their length of stay. Otherwise, there would be some later discount. And they did that. They changed their protocol because they had a protocol not to treat patients under a certain total body surface area with RECELL because they saw RECELL as a supply cost. When you see it as a protocol change, you're selling something different. You're selling 13 days. When you're selling 13 days...

Much more impactful.

Yes.

That's great. And then just sticking on RECELL, there's multiple MACs who are now reimbursing RECELL. How is that for rebuilding physician confidence and growing use of patients?

Yes. So the MAC in essence, are resolving themselves in a positive way. Getting that communicated and verified for the physicians is a task. It's a task that the societies involved undertake themselves, and it's a task that we also help with ourselves because we'll get some proof sources, some EOBs essentially, and we'll communicate those to the physicians so that they know. And it's reassuring and it's a communication element that we have to execute well.

Okay. Great. I mean RECELL GO mini just started commercialization. Where are you starting to see the strongest traction in the early days? And what are you hearing from the field?

Yes. So RECELL GO mini has its foundation in the original trauma, which we called full-thickness skin defects, which is an acronym that FDA uses, but no one else does. It means a nonthermal trauma wound. And in that study out of nearly 60 patients, 58, I believe, but close, the average size of wound was 400 square centimeters. That is 2.5% total body surface area versus standard RECELL which is 10%. So there's a -- and the reason I make that point is there was a certain resistance kind of a cognitive distance to solve a 2.5% problem with a 10% solution, right? It seemed wasteful. And I think that's a credible thought on the part of the physician. So we developed RECELL GO mini. It goes in the same RECELL GO device. So it doesn't require a separate processing device. It's just a different size cassette. Our response has been very positive towards those who look at it through the eyes of protocol. It's a different strategy for treating these patients in outpatient. And they have a lot of them. For example, you could have a surgical excision for a Mohs procedure. It's a perfect indication for RECELL GO mini because those are often smaller than 400 square centimeters and they need a skin graft. And so we're getting good success where protocol change is occurring. And that takes some time. But at the same time, we're able to do it. And one of the things we find that's really fascinating is we find other wounds that don't need a skin graft, but they need a dermal matrix. So it's the same physician with his or her same wound. And so you're in there. So we had a case in was probably the first Cohealyx case. And Ohio State did the case and they did their own press release. And they had a patient who needed Cohealyx but not RECELL. And in the article, the physician was quoted as saying, "This patient left the hospital fully closed at 14 days and normally would have taken 30" which was transformative in that particular physician's way of thinking about how to treat these patients.

Yes. And you mentioned on your Q2 earnings call that you got a $300,000 order in July from a top-tier center that I think points to this commercial momentum that you're seeing in Cohealyx.

Well, for sure. Now it wasn't really one order from the one account. They ordered several times during the month, which is actually better.

Yes. Repeat customer.

Well, it shows they're utilizing the product, right? You didn't just sell a stocking order, you [ sold absolute new order ]. To give me a kind of a way to think about the potential behind Cohealyx. We have validated through claims data in the 122 or so burn centers that they use $1 billion worth of dermal matrix a year. So you can do the math on that and know that a hospital uses $8 million to $10 million worth, right? And we aren't quite at halfway. We're nearly closing in on half of the burn centers have Cohealyx already in a VAC process submitted. Now you can do the math quickly on that. It's in the hundreds of millions of dollars of potential. Now you don't get all that at once because there's multiple physicians, there's competitors in the hospital already. But to have access to that market is really exciting, especially when you know that what you're bringing is so consistent with your fundamental theme, which is 36% length of stay, 7 days to graft, save 13 days, your patients are happier, your hospital is more profitable. You can use that bed. You know how many times more you can use the bed with the 36%? 13 more patients per year can occupy that bed.

That's a phenomenal stat. I mean you walked through a little bit of the TAM that you all have. But in reality, your TAM is $3.5 billion across trauma, surgery, outpatient. How do you think about those 3 sources of the TAM? What's scaling the fastest? Where do you see more of the longer-term opportunity?

Well, the longer-term opportunity is -- that's all the domestic potential, by the way. The way we're looking at this is through the eyes of our strength. So our strength, we're 5 years in the burn market, well established. So we are going there first. And by going there first, you build credibility, viability, revenue and margin. It's the whole stream. And you do it most efficiently. The expansion into the potential that exists in trauma and surgery will happen as an extension of that. So if, for example, on an extreme level, we spent the next 18 months just developing our portfolio within burns, it would be a great outcome by itself. With the additional things that we can do, at the same time, you create a ramp that doesn't have a need to be steep. It can be steep as well as an individual hospital can accommodate protocol change. This is really all about protocol. It's all about how the patient gets treated. You can treat the patient, so they get out of the hospital sooner, costs less to treat and you can use the bed more or you can treat them in a way that uses the bed less, costs more to treat and they go home later.

Suboptimal. And you mentioned that, that's the $3.5 billion is that is a U.S. opportunity, right? That's right. With CE Mark expected, how important is going to Europe and abroad? And can you leverage what you've built in the U.S. outside of the U.S.?

To answer that, first, there's a bigger question is where do you go internationally? So let me step back and describe what we're thinking. So we intend to go to markets that fit 3 criteria, okay? The first criteria is they have to have a medical system that can use the technology. So that's a filter. The second is they have to have the ability to pay for it. And the third, a population to make a business. So that's actually rather restrictive because, for example, you can find places, and I don't mind saying, for example, in the Middle East, where there is some very wealthy segments of society, but in fact, very small amount that are really able to build a market around. So the way we see that filter, it leads us to the European Union, which plus the U.K. And we think that we're starting from virtually 0. So we're going with local distribution partners because they bring us expertise in the local market on reimbursement, on physician relationships, on how business is conducted differently, say, in Germany versus Italy, right? So we're going there, but we're doing it with third-party partners for the next few years at least. And Japan, where we already have a burn approval, and we're working on a broader approval, but the and we do business there now. And Australia, and Australia is kind of a natural. It fits all 3 of those categories. It happens to also be where RECELL was invented. So there's some affinity there, which we care about.

Great. Look, we have about a minute left. What do you want folks who are in the room, folks who might be reading this transcript afterwards to take away about AVITA and where your profit is heading?

I think the best takeaway is that we did struggle with this reimbursement transition in the first half of the year and that it has passed us. The fundamentals of the business are in great shape. The products are in great shape. Quality is high. The portfolio is playing out the way we intended. And the structure of the company is at the place it needs to be for some time. So a lot of leverage ahead of us. And the reality is our future is quite bright. And I am completely motivated about it.

And 36%.

36%.

All right. Well, thank you so much for taking the time. It's always good to catch up, and congratulations on all the progress that you've made at the company.

Thank you very much.