2023-07-20 12:07:52 ET
Summary
- AVITA Medical, a regenerative medicine company, is pioneering the RECELL System - a patient-specific skin cell solution aimed at revolutionizing skin restoration.
- The company saw a 40% increase in revenue in Q1 2023, demonstrating strong growth despite ongoing financial challenges, and displays robust fiscal resilience.
- The extensive training required for RECELL could limit market spread, but with FDA approval for expanded use, the potential for widespread adoption exists.
- Despite current financial challenges and market competition, AVITA's unique technology and potential growth make it a risk-tolerant investment with a 'Hold' recommendation for now.
Company Overview
AVITA Medical ( RCEL ) is a regenerative medicine company focused on creating autologous cellular therapies for skin restoration using its RECELL System. This patented technology generates a suspension of a patient's own skin cells, which is then sprayed onto the skin to promote natural healing. AVITA's strategic objectives include becoming a leading provider in the field of regenerative medicine, focusing on unmet medical needs related to burn injuries, trauma, and dermatological conditions like vitiligo. Their plans involve expansion in the U.S. burns industry, commercialization of the RECELL System for soft tissue repair and vitiligo treatment following FDA approval, and exploring other potential commercial applications. They are also committed to continuous system improvement and expanding their commercial activities globally.
Recent developments: AVITA Medical's RECELL System, initially approved for severe burns, received FDA approval for expanded use on full-thickness skin defects.
Financial Performance
In Q1 2023, AVITA Medical saw a 40% increase in commercial and total revenue, reaching $10.5 million and $10.6 million respectively, compared to the same period in 2022. Their gross profit margin rose by 8% to 84%. Operating expenses grew by 22% to $19.4 million due to field expansion and RECELL GO device development. The net loss decreased by 3% to $9.2 million, or $0.37 per share, while the Adjusted EBITDA loss stayed at $6.4 million. As of March 31, AVITA has $77.6 million in cash, cash equivalents, and marketable securities.
Stock Assessment
According to Seeking Alpha data, RCEL's earnings estimates project increasing sales but negative EPS for FY 2023 to FY 2025. However, there's a positive trend with reduced losses YoY, suggesting gradual financial improvement. Earnings revisions present a less optimistic picture, with five downward revisions and no upward revisions for FY1.
In terms of valuation, the price-to-book ratio stands at 6.60, with an EV/Sales ratio of 11.68. The lack of P/E ratio due to negative earnings indicates its current non-profitability.
The growth perspective is somewhat mixed. While the company experienced a substantial revenue CAGR of 215.70% over the last three years, the YoY revenue growth is at 17.71%. The lack of EPS and leveraged FCF growth is concerning.
Profitability indicators reflect RCEL's current financial challenges. With a high gross profit margin of 84.16%, the company is effective at controlling direct costs, but this is offset by negative net income and EBIT margins, and negative return on equity and assets.
Despite these financial struggles, the stock shows strong momentum, significantly outperforming the S&P 500 over 3, 6, and 9 months as well as one year.
Finally, RCEL's capital structure is relatively healthy. With a low total debt of $1.87M and cash reserves of $77.6M, it has a market cap of $514.26M and an enterprise value of $435M.
AVITA's RECELL System: Advancements, Benefits, and Market Expansion
RECELL is a device that uses the patient's skin to create an epidermal suspension, which is then directly applied to acute partial-thickness burn wounds or used in combination with meshed autografts. The typical treatment for these burns often involves dressings, and there are instances where RECELL is used alongside other dressings such as Suprathel, reportedly enhancing the healing process. However, according to UpToDate , current evidence does not conclusively show that this approach is superior to using dressings alone, but future research may shed more light on this.
AVITA Medical strongly supports its FDA-approved RECELL System for the treatment of second- and third-degree acute thermal burn injuries in adult and pediatric patients. AVITA shares that pivotal studies showed the RECELL System significantly reduces the amount of donor skin needed for treatment of second-degree burns by 97.5% and third-degree burns by 32%, compared to standard autografting. This reduction has no impact on healing or safety outcomes, and offers benefits such as decreased patient-reported pain, increased satisfaction, and improved scar outcomes.
AVITA also reports that the RECELL System necessitates fewer procedures for closure compared to conventional autografts. In terms of economic benefits, AVITA highlights a compelling cost-effectiveness model, which demonstrates significant treatment cost reductions when using the RECELL System. For instance, it reduces total treatment costs by an average of 26% for deep partial-thickness burns and 42% for full-thickness burns, leading to savings attributed to shorter hospital stays, fewer required procedures, and minimized donor site size and associated wound care.
According to AVITA, their goal is to make RECELL the standard of care for burn injuries requiring grafting in patients with a 5% total body surface area injury or greater. AVITA only provides the RECELL System to a provider after extensive training and certification. They have found that with continued use, surgeons gradually adopt RECELL for smaller, less severe burns and facial burns. AVITA also mentions existing reimbursement codes in the U.S. for the use of the RECELL System and a recent approval of a Transitional Pass-through Payment Application, which supports additional Medicare payment for its use. The new code is not specific to any indication, providing a base for growth in other indications beyond acute thermal burns.
Challenges Facing AVITA's RECELL System Market Expansion
In my view, AVITA's policy of providing the RECELL System only after a provider completes extensive training and certification could restrict its market spread. This limitation could result in fewer practitioners qualified to administer the treatment, leading to less patient accessibility. The additional time and resources required for such training might also discourage some potential users.
Moreover, the dynamic and innovative field of regenerative medicine is populated by numerous companies working on cutting-edge skin restoration technologies. Competitors could present treatments requiring less intensive training, or possibly more cost-effective or expedient solutions, leading to a divided market share and inhibiting RECELL's dominance.
Another potential limitation could be the cost of the RECELL System. If the system is perceived as too expensive, especially in comparison to competing products or traditional treatments, this could limit its adoption rate among healthcare providers and patients, despite its proven effectiveness and potential cost savings in the long run.
My Analysis & Recommendation
In conclusion, AVITA Medical, with its unique RECELL System, represents an innovative force in the field of regenerative medicine. Despite financial challenges and the need for extensive provider training, the company's technology holds significant potential for revolutionizing burn treatments and other skin restorative procedures.
As a prospective investor, one should consider the company's promising revenue growth and the FDA approval for expanded use of RECELL. The company's strategic objectives point towards an aggressive expansion in the U.S. burns industry and the exploration of additional clinical applications. However, investors must also acknowledge the current negative earnings per share, the competitive landscape, and the potential limitation posed by the need for extensive training and certification for providers.
The strong momentum of RCEL stock is encouraging, and their robust capital structure suggests fiscal resilience. However, the path forward for RECELL to optimize its use would involve addressing the challenges around extensive training requirements, making it more readily adoptable by providers, and continuing to demonstrate cost-effectiveness and superior patient outcomes to ensure market acceptance.
For biotechnology-focused investors, AVITA appears to be a risk-tolerant bet with potential upside, given the evolving nature of the regenerative medicine market and AVITA's unique position within it. Yet, the current financials and competitive environment suggest caution.
Therefore, at this stage, my recommendation would be to 'Hold' RCEL, pending further evidence of financial improvement and wider market adoption of the RECELL System. It will be key to monitor AVITA's progress in its strategic plans and the acceptance and adoption rate of RECELL in the U.S. and global markets.
For further details see:
AVITA's Balancing Act: RECELL System's Promise Amid Market Uncertainties