2023-10-21 04:10:10 ET
Summary
- Regulatory setbacks for RECELL GO add uncertainty, potentially providing competitors room to maneuver while awaiting FDA approval.
- Despite the FDA's demand for additional data, AVITA’s balance sheet is fortified with a $40M debt infusion, extending the cash runway to 36 months.
- Investment Recommendation: Maintain a "Hold" on AVITA due to strong fundamentals but lingering regulatory and operational risks.
At a Glance
Building on my previous analysis of AVITA Medical ( RCEL ), this quarter's financials offer updated insights. While the company maintains its clinical promise and financial resilience, new variables have entered the equation. The FDA's recent request for additional data on the Recell Go device notably adds a layer of regulatory risk, a development that wasn't a focal point in my prior assessment. Meanwhile, operational costs have surged, driven by a significant uptick in sales and marketing expenses. These fresh elements layer additional complexity onto AVITA's already intricate profile—a medley of robust revenue growth and high gross margins, counterbalanced by increased operational and now heightened regulatory challenges. This revised landscape sets the stage for the investment thesis that follows.
Q2 Earnings
To begin my analysis, AVITA's Q2 2023 report showcased a 41% YoY revenue jump to $11.8M, offset by escalating operating expenses, particularly a near doubling in sales and marketing costs to $10M. Operating loss swelled 75% YoY to $11.2M. Share dilution was marginal, with shares increasing to 25.2M from 24.9M, diluting value by roughly 1%.
Notably, preliminary figures for Q3 2023 indicate further robustness with a 50% YoY revenue increase to $13.5M and an impressive 84.5% gross margin. Despite escalating costs, the full-year 2023 revenue guidance remains unchanged at $51-53M, suggesting internal confidence in the growth trajectory.
Financial Health
Turning to AVITA's balance sheet , the company recently secured a $40M debt infusion from OrbiMed, providing an immediate boost to its liquidity. Including this new debt, the liquid assets now total $108.8M—$37.5M in cash and cash equivalents and $31.3M in marketable securities. The current ratio, recalculated to include this debt, stands at 5.6, still signaling solid short-term financial resilience. When juxtaposed against total liabilities, which now include the $40M loan, amounting to $56.5M, the asset-to-liability ratio remains favorable.
In terms of operational cash flow, the company burned through $18.2M over the past six months, averaging a monthly cash burn rate of $3M. With the newly augmented assets, the company's cash runway extends to approximately 36 months. Note that these calculations are based on historical data and may not be indicative of future performance.
Despite the new debt structure, which offers an additional $50M in two optional tranches contingent on revenue milestones, and the issuance of warrants to OrbiMed, the odds of AVITA requiring further financing within the next 12 months remain low. The strong current ratio, extended cash runway, and conditional future tranches suggest a robust financial position, minimizing immediate capital risks.
Market Sentiment
According to Seeking Alpha data, AVITA sports a market capitalization of $257.04M, indicating moderate market confidence despite recent FDA hurdles for its Recell Go device. The firm's projected FY 2023 and FY 2024 revenues of $51.45M and $72.57M, respectively, underscore substantive growth prospects. The stock shows mixed momentum, underperforming the S&P 500 ( SPY ) in the short term (-51.50% 3M vs. SPY's -5.28%) but outpacing it year-over-year (+107.45% vs. SPY's +15.98%).
Regarding stock technicals , RCEL exhibits a pronounced downtrend, trading below MA(50) and MA(200). RSI at 24.30 signals an oversold condition, which might indicate a short-term relief rally. However, the MACD remains below the signal line, suggesting sustained bearishness. Immediate resistance lies around MA(50). Caution advised; watch for potential RSI reversal.
Short interest sits at 3.68%, generally indicative of moderate bearishness but not an immediate concern.
Institutional ownership is 29.81% with new positions from 22 institutions totaling 698,376 shares and 17 institutions selling out 403,068 shares. Notable holders include BlackRock and Vanguard, evidencing institutional faith. Insider trades over the past 12 months amount to a net negative activity of 38,039 shares, possibly indicating cautious internal sentiment but not drastically alarming.
AVITA Slips On Regulatory Setback
On October 2, 2023, AVITA experienced a sharp 24% decline in its stock value following an FDA request for additional data related to its Recell Go device . The company had initially submitted the PMA supplement for Recell Go in June 2023, targeting FDA approval by January 2024 under the Breakthrough Device designation. However, the FDA's request has shifted the projected launch window to between May 1 and July 1, 2024, contingent upon the resumption of the FDA's 180-day review process.
This regulatory setback is emblematic of the rigorous scrutiny that medical device companies like AVITA must navigate. It has immediate and far-reaching implications for the company's market valuation and product deployment timelines. The delay also provides a strategic opening for competitors in the skin regeneration and wound care market. Companies like Mallinckrodt with its StrataGraft, MiMedx's ( MDXG ) EpiFix, Vericel's ( VCEL ) Epicel, and Organogenesis' ( ORGO ) Dermagraft could capitalize on this delay to solidify their market positions or accelerate their own regulatory approvals.
Moreover, this situation amplifies the inherent volatility and risk associated with the biotechnology sector, particularly for companies that are on the brink of significant regulatory milestones. It serves as a cautionary tale for investors, emphasizing the critical importance of regulatory diligence and comprehensive documentation in the approval process. These factors hold substantial sway over investor confidence and, by extension, stock performance.
Enhanced Capabilities of Recell Go
Recell Go , AVITA's latest offering, represents a paradigm shift from its manually operated predecessor, the Recell System, particularly in terms of automation and clinical versatility. Here's an analysis of its key differentiators:
Streamlined Operational Efficiency:
- The automated workflow in Recell Go is a game-changer, especially in the context of reducing manual manipulation of skin samples. This is not merely a convenience but a strategic move that could standardize the preparation and delivery of regenerative cell suspensions, thereby mitigating variability in clinical outcomes.
Enhanced Precision in Sample Management:
- The automation in Recell Go isn't just about speed; it's about accuracy. In the delicate arena of skin restoration, where sample management is paramount, the reduced need for manual intervention could translate to fewer errors and, consequently, improved therapeutic results. This is particularly relevant given the increasing complexity of skin grafting procedures and the growing demand for precision medicine.
Broadening Clinical Utility:
- The original Recell system had its limitations, primarily being approved for severe burns and skin defects. Recell Go, with its automated features, has the potential to be a more versatile tool, extending its reach to diverse clinical settings such as inpatient and outpatient facilities. This could open up new revenue streams and partnership opportunities for AVITA.
Catalyst for Market Adoption:
- Automation often serves as a catalyst for technology adoption in healthcare settings, where time and resource allocation are always under scrutiny. Recell Go's ability to minimize manual handling could expedite its adoption rate, offering a compelling value proposition for healthcare providers weighing the cost-benefit analysis of new technologies.
The automation and enhanced functionalities of Recell Go not only signify a substantial step forward from the manually operated Recell device but also reflect AVITA's continuous endeavor to advance regenerative medicine technologies and provide better treatment solutions for patients with skin defects.
My Analysis & Recommendation
As AVITA's Q2 2023 financials elucidate, the company is on a positive revenue trajectory, albeit with escalating SG&A costs which have overshadowed the revenue uptick on a percentage basis YoY. The 84.5% gross margin remains a strong point, emphasizing operational efficiency, yet the nearly doubled sales and marketing spend to $10M indicates a strategic push towards market penetration. This is a double-edged sword; while necessary for growth, it exacerbates the operating loss, now at $11.2M, a 75% YoY surge. Nonetheless, the company's financial health appears robust with a solid current ratio of 5.6, even after factoring in the recent $40M debt infusion. This bolsters the short-term financial resilience, crucial as AVITA navigates through regulatory pathways for its Recell Go device amid FDA hurdles.
Market dynamics indicate a mixed sentiment towards AVITA. Despite a pronounced downtrend in stock technicals, the YoY stock performance outpaces the broader market, hinting at underlying investor confidence in the firm's long-term prospects. The delay in FDA approval for Recell Go, however, casts a short-term cloud, underscoring the importance of regulatory milestones in this competitive landscape. The delay doesn't just shift timelines, it potentially gives competitors room to maneuver, a risk investors should weigh seriously.
Investors should keep a keen eye on how AVITA manages its SG&A expenses in the coming quarters while advancing its clinical focus. The promising automation and efficiency Recell Go offers could be a significant market differentiator, pending regulatory green light. It's prudent for investors to also monitor how the regulatory pathway unfolds for Recell Go, as this could significantly affect AVITA's market position and financial forecast.
In light of the above analysis, a cautious approach would be prudent. The recommendation is to maintain a "Hold" position on AVITA, although I believe RCEL is slightly likely to underperform in the near-to-intermediate term. The fundamentals are strong but the regulatory uncertainties coupled with increasing operational expenses call for a balanced view. This stance permits investors to await clearer signals from both financial and regulatory fronts, aligning with a risk-mitigated strategy while keeping an eye on the long-term potential AVITA holds in the regenerative medicine arena.
Risks to Thesis
An analysis of AVITA would not be complete without also discussing the inherent risks associated with microcap investing, a factor crucial to a well-rounded investment thesis, particularly for a company with a market capitalization of $257.04M.
Firstly, microcap stocks like AVITA typically exhibit higher volatility and lower liquidity compared to their larger-cap counterparts. This volatility was underscored by the 24% stock value decline following the FDA's request for additional data on the Recell Go device. Investors should be wary of these abrupt price movements, which could exacerbate losses in an unfavorable market scenario.
Secondly, the escalating operational costs, particularly in sales and marketing, demand a closer examination. While these expenses underline a growth strategy, they also pose questions on the cost-effectiveness and potential strain on profitability, common challenges microcap companies face in their expansion phase.
Lastly, the assessment of stock technicals, institutional ownership, and short interest was somewhat cursory. A more data-driven and comparative analysis over time, aligned with microcap investing risks such as lower trading volumes and potentially less transparent financial reporting, could have offered a broader market perspective and highlighted the speculative nature of investing in microcap stocks like AVITA.
For further details see:
AVITA Medical's Recell Go Hits A Stoplight