Company Reports

We keep our AUD 5.40 fair value for no-moat Avita Medical. Second-quarter 2024 commercial revenue of USD 15.1 million rebounded sharply, up 37% on the first quarter, driven by new hospital accounts for the use of RECELL for full-thickness skin defects. The firm opened 37 new accounts in the second quarter, up from 22 accounts in the first. The pipeline of new accounts remains strong with 52 in the evaluation phase and a further 37 in the decision phase. This outlook along with a strong start to the quarter underscores management’s third-quarter 2024 commercial revenue guidance of USD 19 million-USD 20 million. The midpoint implies strong sequential growth of 29% on the second quarter.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

No-moat Avita Medical has made a distribution agreement with Regenity Biosciences to exclusively sell its collagen-based dermal matrix product. We expect the product to receive regulatory approval in the fourth quarter of 2024, and factor Avita spending USD 5 million in milestone payments and sharing 50% of revenue for the first two years of sales, and 60% after that. Our gross profit forecasts increase by 1% on average but we maintain our AUD 5.40 fair value estimate. While there is an opportunity for Avita to cross-sell products, as it currently does with Stedical Scientific’s PermeaDerm wound product, the additional marketing expense makes profit upside marginal. We think these products complement Avita’s RECELL product for treating wounds but are relatively minor in their earnings contribution.

As expected, no-moat Avita Medical received regulatory approval for an updated version of its current RECELL device that simplifies the user interface. The timing is no surprise, as Avita had flagged that the updated device should launch on May 30, 2024. As such, we make no changes to our earnings estimates, and our AUD 5.40 fair value estimate remains intact.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

We maintain our AUD 5.40 per share fair value estimate for no-moat Avita Medical. First-quarter 2024 net loss was USD 18.7 million versus a USD 7.1 million loss in the fourth quarter of 2023. First-quarter 2024 commercial revenue of USD 11.1 million fell 22% on the fourth quarter of 2023. As previously flagged, this was largely due to hospital approvals taking longer than anticipated, slowing the uptake of RECELL for full-thickness skin defects. However, we do not foresee this affecting Avita’s long-term opportunity. Operating expenses rose 8% sequentially on the fourth quarter of 2023, largely due to increased sales and marketing costs. However, this was also largely as we expected, with the firm previously outlining its plan to expand its US sales team to 108 from 70 in the first quarter of 2024.

No-moat Avita Medical downgraded its first-quarter 2024 commercial revenue guidance by 27% to USD 11 million. It now expects to hit the bottom of its unchanged full-year guidance of USD 78.5 million to USD 84.5 million. The guidance implies that first-quarter 2024 commercial revenue will decline 21% on fourth quarter 2023. We have decreased our 2024 revenue forecast by 4% to USD 79 million, expecting an acceleration of commercial revenue growth to 57% from 46% in 2023. Our forecast five-year revenue compound annual growth rate of 27% is broadly unchanged. We maintain our AUD 5.40 fair value estimate with time value of money and a stronger US dollar offsetting our near-term earnings downgrades.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

Fourth-quarter 2023 commercial revenue of USD 14.1 million was up a relatively soft 4% on the third quarter, but in line with our forecast. This was due to longer hospital approval timelines for certain customers that were previously flagged, and we still do not foresee this affecting Avita’s long-term opportunity.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

No-moat Avita Medical has made a distribution agreement with Stedical Scientific to exclusively sell its PermeaDerm products in the United States for the next five years with the option to renew thereafter. Avita will share 50% of the revenue. We increase our gross profit forecasts by 3% on average over the next nine years, but we maintain our AUD 5.40 fair value estimate largely due to the weaker U.S. dollar. While there is an opportunity for Avita to cross-sell products, we expect additional marketing expenses are also required. PermeaDerm first received regulatory approval in 2016 and is a biosynthetic matrix that complements Avita’s RECELL product for the treatment of wounds.

We decrease our fair value estimate for no-moat Avita Medical by 4% to AUD 5.40. This is largely due to the weaker U.S. dollar. We have also cut our fiscal 2023 revenue forecast by 4% to USD 50 million and now expect a net loss of USD 39 million from a loss of USD 38 million prior. However, we leave our long-term estimates unchanged.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

We maintain our AUD 5.60 fair value estimate for no-moat Avita Medical. Third-quarter net loss was USD 9 million versus a USD 10 million loss in the second quarter. Key news was Avita enlisting distribution partner, PolyMedics, to lead its expansion into Germany, Austria, and Switzerland, with a plan to launch in these regions from January 2024. In addition, Avita is planning to actively identify new international distributor partnerships for Australia and more European regions over the next six to 12 months. However, no quantitative details were provided, and like its existing relationship with Cosmotec in Japan where Avita shares 40% of revenue, we expect these regions to contribute a fairly immaterial amount relative to its main U.S. market. Japan contributed just 4% of third-quarter sales and launched in third quarter 2022.

We expect Avita’s RECELL to pose a significant challenge to the standard of care for larger burns, currently a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.

We maintain our AUD 5.60 fair value estimate for no-moat Avita Medical. Third-quarter 2023 commercial revenue grew 16% on the second quarter to USD 13.5 million, in line with our forecast and prior guidance. Gross margin also expanded to 84.5% versus 81% in the second quarter, largely tracking in line with our unchanged 83% full-year forecast. The firm reiterated its 2023 commercial revenue guidance of USD 51 million to USD 53 million, versus our unchanged USD 52 million forecast.

We expect the standard of care for treatment of burns to change and Avita’s RECELL to gain significant share in this market. There are a number of emerging treatments in burn and wound care set to challenge the current standard which is a skin graft sourced from elsewhere on the patient’s body. We believe Avita will be successful based on the product’s clinical performance, ease of use and relative price point. RECELL creates Spray-on Skin within 30 minutes from a small skin sample, typically less than 5% of the size required in a graft. It has been clinically demonstrated to heal the burn site as effectively as a skin graft without creating a large donor site wound.