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

Good day, and thank you for standing by. Welcome to the AVITA Medical, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ben Atkins, Vice President of Investor Relations and Corporate Communications. Please go ahead.

Thank you, Operator. Welcome to AVITA Medical's second quarter 2026 earnings call. Joining me on today's call are Cary Vance, President and Chief Executive Officer, and David O’Toole, Chief Financial Officer. Today's earnings release and presentation are available on our website at www.avitamedical.com under the Investor Relations section. Before we begin, I'd like to remind you that this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward-looking statements. Please review our most recent filings with the SEC for comprehensive descriptions of the risk factors. Any forward-looking statements provided during this call are based on management's expectations as of today. I will now turn the call over to Cary.

Good afternoon in the U.S. and good morning in Australia. Thank you for joining us. As you saw in our press release today, we delivered strong revenue growth in the second quarter of $21.7 million, up 18% year-over-year and 13% sequentially. As AVITA continues to expand in the U.S. and build its presence in key international markets, our results reflect the growing utility of our acute wound care portfolio, led by RECELL and supported by Cohealyx and PermeaDerm. In the U.S., RECELL generated $18.5 million in revenue during the second quarter, growing approximately 13% sequentially from the prior quarter. This growth reflected physician utilization following physician reimbursement stabilization together with increasing adoption of RECELL GO mini, which continues expanding use in smaller wounds. I'll add a little more color on RECELL later in my remarks. Internationally, revenue from RECELL increased approximately 26% sequentially over the first quarter. We continue to commercialize RECELL GO following regulatory authorizations in Europe, the UK, Australia, and New Zealand. As adoption builds, clinicians are also beginning to share their early clinical experience. During the quarter, the British Burn Association Annual Meeting featured the first UK clinical experience with RECELL GO, reporting successful treatment of 17 patients while highlighting improved operating room workflow. While international revenue remains a smaller contributor today, these milestones continue building the foundation for long-term growth alongside our large U.S. opportunity. Cohealyx generated $1.7 million, representing approximately 16% sequential growth. We're encouraged by the steady progress we're seeing as hospitals complete their value analysis committee, or VAC, reviews and begin incorporating Cohealyx into clinical practice. We continue to maintain a healthy pipeline of approximately 55 active VAC reviews, with 10 to 15 reviews typically completed each quarter, driving a steady increase in ordering accounts. The interim Cohealyx I clinical data presented earlier this year supports those dynamics by providing hospitals and surgeons with comparative clinical evidence. The study demonstrated substantial faster time to skin graft readiness compared with leading dermal matrices, and later this year, we expect to submit the complete 6-month follow-up data set for publication, providing additional evidence of long-term durability. PermeaDerm generated $600,000 in revenue during the quarter. Commercial adoption remains in its early stages. We're encouraged by the initial response following our recent positioning of PermeaDerm as a wound temporizer, providing clinicians with an alternative to allograft to temporarily stabilize and protect the wound before definitive closure. To further support that positioning, we expect results from our PermeaDerm-I clinical study later this year. As a reminder, this post-market study evaluated PermeaDerm as a clinically comparable lower-cost alternative to allograft. Today, 25 hospitals have experience using all 3 AVITA products. Some are already regularly incorporating the full portfolio into clinical practice, while others are still evaluating where each product best fits within their treatment pathway. That's what we'd expect at this stage of adoption of our new products, and it gives us confidence in the opportunity to grow utilization of our full portfolio within our accounts. Since becoming CEO last October, my objective has been straightforward, to build a business that consistently delivers growth quarter-over-quarter, year-over-year, through disciplined commercial execution. Looking back over the first half of 2026, I believe we demonstrated that objective in action. We've delivered consecutive quarters of sequential growth, broadened adoption across our portfolio, and we continue to improve the financial profile of the company. That progress gives us greater confidence in where the business is headed, and today we're updating our outlook accordingly. First, we're raising our full-year 2026 revenue guidance to a range of $86 million to $89 million, representing growth of 20% to 24% over 2025. Second, we're introducing new guidance to achieve cash flow break-even and begin generating cash during the fourth quarter of 2026. Reaching that milestone is an important step in AVITA's evolution. It reflects not only stronger revenue growth, but also the operating discipline and cash generation that David will discuss in more detail.

Thank you, Cary. Good afternoon and in Australia, good morning. I will use my prepared remarks to look at how our strong commercial performance is flowing through the business, particularly across operating leverage, cash generation, and our path to cash flow break-even. Turning to the financials on Slide 4, let me start with revenue. As Cary indicated, revenue increased approximately 18% year-over-year and 13% sequentially from the first quarter to $21.7 million, crossing over $20 million in revenue for a quarter for the first time in our company history. With this sequential revenue growth for the second quarter and $41 million in revenue for the first 6 months of 2026, we are increasing our revenue guidance for 2026 from $80 million to $85 million to now $86 million to $89 million. This will represent growth for this year from the $71.6 million in revenue in 2025 in a range of approximately 20% to 24%. Turning to gross margin, gross margin increased to 81.9% compared to 81.2% in the prior year quarter and remained above 81% year-to-date despite continued growth in our newer products. As we've discussed previously, while changes in product mix modestly impact reported gross margin percentage, Cohealyx and PermeaDerm contribute incremental gross profit without a proportional increase in operating expenses. RECELL gross margin remained strong at approximately 86%. RECELL growth provides a tailwind for reported gross margin that offsets the impact of product mix as Cohealyx and PermeaDerm become a larger part of the business. Now looking at operating expenses. Operating expenses were $24.6 million, essentially no change to the first quarter, and approximately 6% lower than in the same period in 2025. Importantly, this demonstrates the benefit of the commercial operating structure we established during the second quarter of 2025, capable of supporting continued commercial growth without requiring a corresponding increase in operating expenses. Looking ahead for the rest of 2026, we continue to identify opportunities to further reduce operating expenses while continuing to support our commercial priorities. This quarter, operating loss and net loss improved to $6.9 million and $7.7 million, respectively, compared to $11.1 million and $9.9 million, respectively, in the same period last year. The second quarter operating and net loss showed significant improvements from the quarterly losses we have generated in the past. Turning to cash, which remains one of our highest priorities. As we discussed during our first quarter call, we expected cash use to improve significantly during the second quarter as seasonal payments normalized, collections improved, and revenue continued to scale. That's exactly what happened. Net cash use improved to approximately $3.2 million during the quarter, representing a major improvement from the first quarter and from the quarterly cash burn each quarter last year. We ended the quarter with approximately $11.1 million in cash, cash equivalents, and market securities. As I look at the trajectory of our numbers indicated in the green boxes on this slide, I see a financial model performing as expected and in alignment with our growing revenues. As Cary mentioned earlier, we are also introducing new guidance for our cash flow outlook. That confidence of reaching cash flow break-even is supported by 3 financial trends that are now working together, illustrated here on slide 5. First, revenue continues to scale. We've now delivered 2 consecutive quarters of meaningful sequential growth, 9.7% and 13% respectively, and we've raised our full-year revenue guidance. Second, we've maintained high gross margin above 81% while growing our portfolio over multiple quarters. Third, we've maintained disciplined control of operating expenses and optimized our cash conversion cycle. Essentially, we are spending less money to run the business and collecting cash faster from our operations. Taken together, those trends give us increasing confidence that AVITA is approaching an important financial inflection point. As the business continues to scale, we expect a further reduction in cash use during the third quarter before achieving cash flow break-even and beginning to generate cash during the fourth quarter of 2026. Turning to slide 6, our updated outlook reinforces our confidence that the balance sheet remains aligned with the next phase of the company's growth and funded through this transition to cash generation. We continue to operate well within the requirements of our credit facility, which was intentionally structured to support the business through this stage of commercial expansion. As revenue continues to build, the Perceptive debt facility also provides access to an additional $10 million tranche once trailing 12-month revenue reaches $85 million, providing additional financial flexibility as we transition towards cash generation. In summary, we're delivering commercial growth, maintaining strong gross margin, exercising control of operating expenses, and significantly reducing our use of cash. Together, those trends support our confidence in the increased revenue forecast we shared today and our path towards cash generation. Today's results also reflect the strong execution across the organization. Commercial, operations, and corporate teams have worked together exceptionally well to scale the business while maintaining financial discipline. I'd like to thank everyone across AVITA for their commitment and execution during the first half of the year. With that, I'll hand the call back to Cary.

Thanks, David. Before we open the line for questions, I'd like to spend a few minutes on RECELL. It's the foundation of our business, and we continue to see encouraging progress in both physician utilization and the reimbursement framework that will support future growth. Following the transition of reimbursement across all 7 Medicare Administrative Contractors, or MACs, physician utilization of RECELL continued to strengthen during the second quarter. Total U.S. RECELL volume increased more than 10% sequentially this quarter to over 2,600 units. We're also seeing a growth driver emerge through RECELL GO mini. As you can see on the right-hand side of the slide, 77% of RECELL GO mini procedures year-to-date were performed in wounds of 500 square centimeters or less. That's exactly what we designed RECELL GO mini to do, to expand RECELL into smaller burn and trauma wounds. We also view the increased volume in the second quarter as an encouraging indicator of the underlying physician demand for RECELL when reimbursement is stable and predictable. To that end, we are now entering the final stages of the transition to new Category I CPT codes for skin cell suspension autograft, or SCSA, the procedure term for RECELL. As a reminder, beginning January 1, 2027, the new Category I CPT code family for SCSA will replace today's multi-code structure. The current 8-code structure separates harvest, preparation, and application. This will be replaced by a simplified 4-code family based on anatomic location and wound size. In July, within its proposed 2027 Medicare payment updates, the Centers for Medicare and Medicaid Services or CMS proposed nationally published physician relative value units or RVUs for the new SCSA codes. We expect CMS to finalize the rule later this year. If adopted as proposed from this coming January, physician reimbursement would transition from today's regional MAC contractor price methodology to a nationally published RVU framework, improving transparency and consistency for providers. Over time, we expect this to simplify reimbursement discussions, allowing our commercial team and customers to focus less on coding complexity and more on clinical adoption and patient care. As I step back and look at the quarter, I'm incredibly encouraged by what we're seeing in our numbers. RECELL utilization is growing. Cohealyx and behind it, PermeaDerm, are gaining traction. Revenue continues to grow quarter after quarter, and we have a clear path to cash flow break-even by year-end. Those aren't isolated achievements. They're evidence that the business is operating the way we intended it to. As we look to the remainder of 2026, we'll continue executing with the same discipline that has brought us to this point. Our priorities are clear. Continue expanding RECELL utilization. Continue growing adoption of Cohealyx and PermeaDerm, and continue executing with commercial and financial discipline. As we continue to do those things effectively, we believe AVITA is well positioned to create long-term value for shareholders while helping more patients benefit from our technologies. Thank you for joining us today and for your continued support. Operator, we're now happy to take questions.

[Operator Instructions] Our first question comes from Frank Takkinen with Lake Street Capital Markets.

Congratulations on a really solid quarter. I was hoping to ask 2 questions. I'll ask them both up front and then hop back in queue to start on guidance, maybe walk through the key pieces behind the guidance increase. I heard the comments about RECELL GO mini doing well and recovery, maybe kind of parsing out which contributed more. And then secondly, as you think about reimbursement in 2027, how much of a challenge has the previous structure been, meaning maybe what portion of cases or adoption by site has been hung up because of the previous structure and maybe what do those new economics do to that?

Thanks, Frank. Thanks for joining today. First of all, regarding guidance, it's fairly straightforward and simple. We're on a growth trajectory. And when we set guidance at the beginning of the year, there were some things that we knew and some things that we didn't. We set some pretty responsible guidance based on the trajectory we thought we would follow and we're on a higher trajectory. And so that's very clear to us now. I think we have eyes on the rest of the year. All of our customers, we've become very predictable in our forecasting, and so we feel it's appropriate to raise it at this time to something that we believe we'll achieve. And then second, from a reimbursement standpoint, if you just take the numbers part aside, the biggest problem last year was confusion and the amount of time that it took from our salespeople and our customers to try and get a handle on if they were going to get paid, what they were going to get paid, and when. And so, we've resolved that as kind of a placeholder because that's what it was meant to be through the MACs over time by account. And so what this will do is it will simplify the codes, but it will also make it absolute nationwide. And so, as I said in my prepared remarks, it will move us from these clarifying more complex discussions with our customers to focus more on the clinical and economic benefits of the products. And so that will be very helpful to the efficiency and effectiveness of our sales team and I think our uptake on RECELL, which is still very under penetrated in the market.

Our next question comes from Ryan Zimmerman with U.S. Bancorp BTIG. Your line is open.

Hi, this is [ Jacqueline ] on for Ryan. I was just wondering with the proposed 2027 PFS, is there any risk of a transitional air pocket as providers move from the 8 legacy codes to the 4 new standardized codes? And what's the internal plan to get ahead of that educationally?