2023-03-17 10:29:34 ET
Summary
- After recovering from a long slide, Avita is no longer an obvious bargain.
- Avita's two upcoming FDA decisions could boost revenues as early as 07/2023, with a second stage boost in 01/2025.
- Avita carries significant risk and is only suitable for experienced investors with high tolerance for risk of loss.
AVITA Medical (RCEL) is an intriguing micro-cap regenerative medicine biotech that I have covered from time to time in recent years. My last Avita article, 12/2022's "Avita: Micro-Cap With Big Time Approvals On Near Horizon" (" Horizon "), positioned RCEL as a buy. Subsequent to Horizon Avita has gained significant ground on its share price following a long slide.
In this article I discuss its prospects going forward.
Avita's shares have had a nice run to date in 2023
As described in Horizon, Avita is all about its developing franchise based upon its Autologous Cell Harvesting Device (RECELL Device). The RECELL Device was initially approved in 2018 to treat severe thermal burns in patients 18 years and older.
In 06/2021 Avita got the following supplemental PMA from the FDA for:
...RECELL in combination with meshed autografting for the treatment of acute full-thickness thermal burn wounds 1) in patients 18 years of age and older, and with>50% of total body surface area ((TBSA)), and 2) in patients between 28 days and 17 years of age.
In 02/2022 Avita received a supplemental PMA for an improved RECELL Device. The new system is a refinement of the initial system. It cuts set-up steps by approximately one-third enabling use of the RECELL Device with reduced support personnel.
As Avita works to build and establish its RECELL Device, its shares have ebbed and flowed over the years. Its shareholders endured a 1 for 5 reverse stock split on 06/30/2020. Such splits are a numbers game reducing the count, but not a shareholder's percentage ownership.
Reverse splits often have negative connotations. Avita's split may have been viewed in such a light, if so it created a buying opportunity. Avita's split was part of its redomiciliation from an Australian to a US company. The details and rationale for this are explained in detail at page 2 of Avita's 2023 10-K .
This redomiciliation based split in itself should not have had negative linkage.
Whatever the cause, Avita was trading ~$30.00 in late June 2020 and dropped to single digits on a split adjusted basis. It started the new year of 2023 <$7:00. So far it has trended reliably higher all year. As I write on 03/15/2023 it trades >$13.00.
Its fundamentals point to the potential of its trading higher in the near term with favorable FDA decisions on its pending supplemental RECELL applications.
FDA decisions expected midyear 2023 will provide two very different and exciting revenue trajectories.
Avita has been slowly and deliberately building the market for its RECELL Device. This has included:
- Getting multiple FDA approvals for the system and its use by in diverse populations for burn treatment.
- Introducing the system to appropriate practitioners and establishing its usefulness in journal publications.
- Securing system approval from Level 1 & 2 burn centers.
- Training hospital personnel in use of the system.
- Obtaining payer reimbursement for the device.
This process has been drawn out over years. Consider the following Q3, 2020 earnings call report from former CEO Perry:
...we have made great progress during the September quarter with 30 percent growth and resell systems, sales and strong progress towards our goal of making the use of the resell system the standard of care in the inpatient hospital burn setting.
Despite the happy rhetoric, Avita reported scant revenues of $5.06 million for Q3, 2020. Fast forward to Q4, 2023 and the revenue picture is still muted. It reported revenues of $9.4 million during its Q4, 2023 earnings call (the Call"). New CEO Corbett, who took over from CEO Perry in 09/2022, was equally enthusiastic as his predecessor about Avita's latest revenues.
He characterized Q4, 2023's $9.4 million as a "strong top line commercial revenue performance". Perhaps it was; it counted as solid beat with its $9.4 million beating by $0.63M. Yet for investors hoping for revenues approaching expenses during Avita's now full three+ years after launch, it was a disappointment.
Operating expenses for Q4. 2022 came in at $15 million, $5.6 million in excess of revenues. Avita clearly needs a revenue boost. Shareholders rejoice, there is just such potential right around the corner. As described in the Call Avita filed PMA's:
- for soft tissue on 12/09/2022 and
- for vitiligo on the 12/16/2022.
Both have breakthrough therapy designations and both should process within the FDA's 180 day review cycle. Accordingly Avita is preparing for FDA decisions in early to mid June 2023, now just a few months away as I write on 03/15/2023.
Given the RECELL Device's stately pace pf revenue uptake, one might be tempted to yawn at the prospect of just one more approval. However,, there are reasons to be optimistic about the near term prospects for Avita's soft tissue indication.
For one thing the market opportunity is huge. In its latest 10-K (p. 6), Avita pegs the total annual addressable U.S. market for RECELL in soft tissue repair at approximately $1 billion. Its soft tissue strategy upon approval is to
...leverag[e] its existing and future resources while also creating synergies with the burns market. As of February 23, 2023, approximately 50% of the U.S. burn centers are classified as Level 1 and Level 2 trauma centers. Those Level 1 and Level 2 trauma centers currently utilizing RECELL should be able to use RECELL to repair soft tissue immediately following FDA approval as these centers have already approved RECELL through their respective VACs. Further, we will be expanding our burn market opportunity by virtue of our soft tissue launch as we will be extending our reach to include trauma centers.
There can be little doubt that approval for Avita's soft tissue repair indication will greatly expand the RECELL system's near term revenue potential. Vitiligo offers an equal potential for growth, but it will be delayed. During the Call CEO Corbett advised that Avita does not expect to have sufficient reimbursement in place for this indication, even if it is timely approved, until 01/2025. Accordingly it has put off its vitiligo launch at best until then.
With its upcoming catalysts, Avita is high risk
As reported above Avita's RECELL Device has generated significant FDA support in terms of existing approvals. It has also generated U.S. government BARDA funding because of its potential use in a mass casualty or other emergency situations.
Its current level of BARDA funding is valued at ~$53 million according to its 10-K. of which it has received ~$38 million. This BARDA funding certainly gives credibility to its potential but is not a predictable source of ongoing revenues.
The Call provided guidance for 2023 revenue as follows:
Our annual revenue guidance for 2023 is expected to be in the range of $49 million to $51 million, which would be at midpoint of guidance, 47% growth over 2022. For the first quarter of 2023, we expect commercial revenues to be between $10 million and $11 million. At the midpoint of this guidance, we would be up over 40% over the prior year.
Accordingly in terms of guidance, the company seems to be tempering 2023 expectations for soft tissue revenues despite its optimistic potential as noted in the Call. Unfortunately Avita did not hazard any expense guidance. Assuming all goes as expected, which in terms of FDA approval is far from certain, it will have 2023 midpoint revenues of $50 million.
If its expenses have a $15 million quarterly run rate, they would reach $60 million for the year. These may go higher, given its plans to increase its sales force. This implies an annual deficit of >$10 million.
The market likely expects Avita to score approvals from the FDA this summer. If it instead got one or more rejections its likely reaction would be severely negative with significant downdrafts. This is particularly the case insofar as Avita is a one-trick pony; the RECELL Device being its one trick.
Conclusion
Avita is an obvious hold. It is a quintessentially risky micro-cap biotech with a one dimensional portfolio. It stands at a crossroads with its fate heavily dependent on the FDA in two upcoming decisions. I'm reducing by rating from Buy to Hold.
For further details see:
AVITA Medical: At A Crossroads