VCEL - AVITA Medical's 'Better Mousetrap' Rapidly Gaining Traction In Skin Repair

2023-08-10 08:54:45 ET

Summary

• AVITA Medical: Innovative device to treat skin injuries gaining sales momentum.
• Recent FDA approvals of full-thickness skin defects and Vitiligo greatly expand addressable market.
• Expanded sales force positioned to capitalize.
• New automated version of RECELL device will drive growth further.

AVITA Medical (RCEL) reached an important milestone on June 7, 2023, when it received FDA approval for full-thickness skin defects (soft tissue), the second major indication related to its RECELL® Autologous Cell Harvesting Device in the United States. The company's first FDA approval, for acute thermal burn wounds, came in September 2018. This most recent approval will expand the addressable market for this device dramatically and immediately.

Background

I first covered AVITA Medical in a February 2019 article, AVITA Medical: A Better Mousetrap With FDA Approval To Treat Patient Burns , just a few months after their initial FDA approval for burns. The RECELL System device, shown below, is a kit that includes an enzyme and other tools that allows a surgeon to take a stamp sized sliver of the patient's skin and process that sample into a spray of various types of desegregated skin cells that allow for treatment of an area 80 times larger than the sample with excellent results . It is truly a better mousetrap.

Within a year of that initial article, the share price soared from about $10 (split adjusted) to $55 per share before the abrupt COVID related national hospital emergency tanked the market and put a big dent in the ability of the company to train burn surgeons and effectively launch its "spay on skin" device. As a result, sales growth ramped up slower than expected and the share price plummeted:

Shares have rebounded nicely off the lows and a new round of share price growth to the old highs could be in the cards. I urge readers to read my initial article on the company and my article in June 2021 that discussed FDA approval of expanded burn treatment labels.

Burn Treatment Revenue Growth has Recently Started to Accelerate

With the COVID emergency over, the growth rate of burn treatment related revenues has recently accelerated as the company seems to be on its way to becoming the standard of care for many types of burn wounds. The following frame from a recent company webinar , presented by CEO James Corbett, shows a 40% increase in 2023 first quarter commercial revenues along with other first quarter highlights:

Revenue Growth is Poised to Accelerate with Greatly Expanded Addressable Market

The company is now very well positioned to accelerate growth further due to a number of factors that include new market opportunities and the upcoming release of a new version of RECELL device that significantly automates the process of turning a small sample of skin into a spray of therapeutic regenerative cells. Based on the low normal trading volume, the shares seem to be underfollowed and these are the factors that lead me to believe this company could get much more attention from investors in the near future.

Full Thickness Wound Commercialization has Commenced

On June 7, 2023, the FDA approval of full-thickness skin defects significantly expanded the market for the RECELL device. Prior to that approval, according a recent Investor Webinar Briefing , the sales team had access to a market that included 25,000 burn patients per year as it focused solely on burn centers. The new FDA approval adds 110,000-120,000 soft tissue repair cases per year plus an additional 10,000 burn patient cases that are treated in the Level 1 and Level 2 trauma centers that handle major soft tissue trauma. So the addressable market has just expanded about 5 fold, from 25,000 cases to about 150,000 cases per year. Another synergistic element of soft tissue approval is that this indication uses the same insurance reimbursement codes as burn injuries so the insurance coverage for the procedure was available on day one of FDA approval. The sales synergies between the two indications are tremendous.

Sales Force Has Been Expanded to Capitalize

AVITA Medical has been proactive in setting the company up to capitalize on its new expanded opportunities. Since the beginning of 2023, the sales force has more than doubled in size from 30 to 70 strong and was expected to be fully trained and assigned to territories prior to soft tissue launch. This shows a level of confidence, not only in the FDA approval of soft tissue that is now in the rear view mirror, but also the expected market acceptance of a product with important advantages over the standard of care. The increased and motivated sales force and expanded markets should lead to rapid sales growth in the near and medium term.

New Automated RECELL Device Will Drastically Cut Training Time

While the RECELL device is a great advance over current standard of care, the desegregation of cells in the current version of the device involves a manual process. This manual process requires substantial training and it takes a substantial portion (about 50%) of sales force resources that could otherwise be used to reach new customers. The good news is that a new device called the RECELL GO is on the horizon. While the current version is a completely disposable battery operated kit, the new system will entail the razor / razor blade model.

The razor will be a durable AC powered multiuse device that is provided by AVITA to the health care provider at no charge. In this case, the "razor blade" includes a cassette, an enzyme and other disposables used for each procedure. The cassette and an enzyme are placed into RECELL GO base station and with the press of a button, the desegregation of the cells happens automatically within a short period of time. Once the cells are ready, the cassette with the desegregated skin cells is placed into the spraying device and is ready to use to treat the wound.

CEO James Corbett discussed the attractive economic model of the device on the company's 2023 1st quarter call :

We think it is going to cost us about $3,500 to make a RECELL GO instrument. The cassette will be replacing the current RECELL device, so that will be the disposable, but the instrument itself, that $3,500 we project will last approximately 300 uses.

And if you just do a little quick math, you would come to the conclusion that is about $15 per use on a $6500 product with an 83% gross profit. So the next thing you would come to the conclusion is that each time we place one, it is lifetime revenue is approximately $2 million. So the name of the game here is to make RECELL easy to use for customers to focus on adoption for more and more patients. And I think that is the way the revenue model will benefit.

In terms of the margin model, think about it this way, last year's gross profit for approximately 83%, half of that gross profit so our half of our cost is fixed overhead. So over the next year or more we will double volume and when we do that, our cost will fall 25%.

So 83% will go to something materially higher. So we see RECELL GO as the enabler of adoption, the enabler of greater profitability, and the enabler of helping more patients get treated with RECELL and live their lives in a more productive way.

On June 29 th AVITA Medical submitted an FDA PMA Supplement for the RECELL GO. Under the FDA's Breakthrough Device program, the submission will receive a prioritized, interactive review. Approval is expected in January 2024.

Sales in Japan for Burn Should Start to Ramp Up

In February 2022, approval was granted by the PMDA in Japan to market the RECELL® System. COSMOTEC, part of the M3 Group Company , is AVITA Medical's distribution partner in Japan. The M3 group is a large ($14.5 billion dollar market cap) health care provider in Japan and it recently placed its first stocking orders from AVITA Medical. The logical intent is for COSMOTEC to also seek further label expansion.

On the first quarter 2023 conference call CEO James Colbert stated,

… the original contract which was negotiated years ago was rather loosely framed in terms of a lot of the performance parameters and we are in the process of working with them to create our dependable forward business model, where expressing guidance will be more transparent to us, and therefore allow us to provide that to you. We do only have burns now.

FDA Approval for Vitiligo with Expected Commercial Launch in 2025

On June 16, 2023 AVITA announced the FDA approval of its treatment for stable vitiligo . For those unfamiliar with the condition, it is an autoimmune disease that destroys certain pigmentation cells resulting in a loss of natural skin color in certain areas of the body. A quick search for Vitiligo market size reveals a $1.6 billion dollar U.S. market in 2022.

Despite the recent FDA approval, AVITA does not plan to broadly market the treatment for vitiligo immediately. AVITA projects a full commercial launch in 2025 after it has had time to obtain insurance coverage and coding for this procedure.

Comparison to Vericel Corp.

AVITA Medical has built one of the few successful regenerative medicine platforms that has commenced commercial sales. Using the patient's own regenerative cells, its product is innovative and superior to the standard of care and is gaining market acceptance by burn and trauma surgeons.

Vericel ( VCEL ) is an interesting comparable to AVITA Medical in the regenerative medicine field that has had similar and earlier success in the sector. In 2014 it acquired the cell therapy and regenerative medicine business of Sanofi for a purchase price of just $6.5 million . The purchase included Carticel , an autologous knee cartilage repair therapy and Epicel, an autologous burn treatment that RECELL has been gaining ground on with its less expensive therapy and the advantages of bedside preparation and pigmentation maintenance. It took a few years for Vericel to begin to gain traction with these regenerative therapies but Vericel has now grown that $6.5 million investment into 12 month trailing revenues of $178 million and a market cap of $1,500,000,000 .

I look at AVITA Medical as an earlier version of Vericel in the regenerative medicine sector. AVITA currently has 12 month trailing revenues of $40.5 million and a market cap of about $446,000,000. AVITA Medical also has a healthy cash balance of $77.6 million at the end of the first quarter.

Conclusion

AVITA Medical has built a better mousetrap that will get better with the introduction of the automated RECELL GO. The platform has very attractive gross margins that should grow further with the new automation and growing revenues. The sales force has been expanded to hit the ground running. Early stage research is being undertaken in Epidermolysis Bullosa , Cosmetic Skin Rejuvenation and Chronic Wounds but these are more longer term opportunities.

There are risks inherent in all biotech companies, including AVITA Medical, but with the recent FDA approvals in Soft Tissue and Vitiligo, the biggest near term risks have been mitigated. The primary risks are now how quickly the company can gain market share and keep its advantages over competing products and, of course, the overall market risks to biotech stocks in general. Furthermore, the relatively low average daily volume of RCEL shares, in particular (10-day average daily volume is only 144,824 shares), makes the shares volatile on both the upside and the downside.

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