AVITA Medical, Inc. (NASDAQ:RCEL) Q1 2024 Earnings Call Transcript

AVITA Medical, Inc. (NASDAQ:RCEL) Q1 2024 Earnings Call Transcript May 14, 2024

Operator: Good day, and thank you for standing by, and welcome to the AVITA Medical, Inc. First Quarter 2021 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jessica Ekeberg, Director of Investor Relations. Please go ahead.

Jessica Ekeberg: Thank you, operator. Welcome to AVITA Medical’s first quarter 2024 earnings call. Joining me on today’s call are Jim Corbett, Chief Executive Officer; and David O’Toole, Chief Financial Officer. Today’s earnings release and presentation are available on our website, www.avitamedical.com under the Investor Relations section. Before we begin, I’d like to remind you that this call includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are neither promises nor guarantees and involve known and unknown risks and uncertainties that could cause actual results to differ materially from any expectations expressed or implied by the forward-looking statements.

Please review our most recent filings with the SEC for comprehensive descriptions of the risk factors. Any forward-looking statements provided during this call are based on management’s expectations as of today. I will now turn the call over to Jim for his comments.

James Corbett: Thank you, Jessica. Good afternoon, and thank you for joining us today. I will begin today’s call by discussing our financial and business results of the first quarter followed by our priorities and outlook for 2024. Following this update, I will turn the call over to David, who will provide commentary on our financial performance for the quarter before opening the call to Q&A. This was a disappointing quarter for us. Our first quarter commercial revenue of $11.1 million not only felt short of our expectations but it also marked the first time since my arrival that we did not achieve sequential quarterly growth. While we are encouraged by certain aspects of our business, such as our distribution agreement with Stedical in early January, it’s important to address the challenges we encountered in meeting our revenue targets.

Let me begin by providing more color on the revenue guidance announcement made on April 10th. At the time of this announcement, we were faced with several challenges that hindered our ability to provide comprehensive insights into our performance. And I understand the frustration this may have caused our investors. Not to justify or minimize our performance, it’s important to note that under ASX rules, we had to promptly issue the market announcement despite not having financial statements completed for the quarter, nor having analyzed external data. Accordingly, we believe it was prudent to release what we could and to refrain from speculations, instead gather more information to provide an accurate assessment, which I provide in this call.

First, as previously announced, we experienced a slower-than-expected conversion rate of new accounts for our expanded level of full-thickness skin defects. Since the launch of full-thickness skin defects in June 2023 through March 31, 2024, we only added a total of 73 new accounts of which 22 accounts were closed in the first quarter. However, we had expected an average of 15 new accounts per month for a total of 135 new accounts at the end of the first quarter. While the broadened scope of full-thickness skin defects presents the opportunity to pursue multiple indications for RECELL, navigating the value analysis committee known as VAC approval process across the various medical specialties, including plastics, trauma and general surgeons and managing multiple reimbursement scenarios within a single facility, have complicated the sales process beyond our initial expectations.

Despite initially underestimating these complexities, we believe we will continue to become more efficient in closing new accounts. Looking at our current account standing on Slide 3, from launch to May 10, we have had a total of 178 submissions to VACs for full-thickness skin defects. Of this, we have only had eight rejections. In the second quarter, we expect 46 accounts to be approved. We look forward to updating you on our progress on our next quarterly call. In addition to our account conversion rate, our burns business was significantly below our historical expectations in the quarter. To determine whether this was due to a decline in burn wound admissions or device utilization, we rely on external claims data. However, as many of you are aware, a data breach at the largest U.S. clearinghouse for insurance billing and claims, a unit of UnitedHealth Group, disrupted the data feed to our claims data provider.

Despite this disruption, which happened in February, our data provider was able to secure claims data for January. Burn admissions are typically predictable and flat. However, the January data revealed a 20% lower admission rate for burn wounds compared to the three previous Januaries. Although current estimates from our data providers suggest that we will not receive February and March data until September, if admissions for these two months were flat compared to prior years, the overall admissions rate would reflect 7% quarterly decline. While we cannot accurately pinpoint the causes of our below expectation performance for the quarter, we have initiated an enhanced coverage strategy. To supplement our understanding of burn accounts, our team of 29 clinical training specialists will be physically present at our burn account sites, dedicating at least 60% of their time in burn centers.

We believe that this approach will reinvigorate our burns business. Additionally, RECELL GO is nearing the end of its 180-day interactive review by the FDA. The 180-day period will end on May 30, 2024. Assuming approval, our top 28 burn accounts will be prioritized for conversion to RECELL GO in June. We are ready to go. See Slide 4. Now let’s turn our attention to our growth trajectory. We remain dedicated to establishing RECELL as a standard of care for the treatment of burns, now extending its application to encompass full-thickness skin defects. Furthermore, we are equally committed to transforming AVITA Medical from the single product focus of RECELL to a broad wound care management company. As part of this commitment, we’re actively exploring wound bed preparation and dermal replacement products to identify the ideal partners and products.

By expanding our portfolio to address the full spectrum of clinical needs, we believe we can improve accessibility and reach more patients. To better understand this strategic transformation, let’s turn to Slide 5. Referring to the slide, there’s a broad continuum of clinical needs in burn, surgical, traumatic and chronic wound care. Today, our portfolio includes RECELL for epidermal replacement and our co-branded dressing PermeaDerm, which we launched in the U.S. on March 23. PermeaDerm and the additional products we are exploring are all compatible with RECELL and each other and all can be used alongside the treatment of many of our burn and full-thickness skin defect cases to further aid in healing. Collectively, these products align with our vision to build a broad-based wound care company.

See Slide 6 of our presentation, which illustrates the complementary nature of RECELL and PermeaDerm and the other potential additions to our portfolio. Here is an example of a full-thickness skin defect with concern for infection. In this instance, the dark blue layer represents dressings for wound bed preparation, a current focus. This product serves as a protective antimicrobial layer in the base of the wound bed to maintain an optimal healing environment. This layer can be used in every single patient. The green layer represents dermal scaffolds, our other focus area. Scaffolds aimed to generate vascularized tissue further supporting definitive closure. The light blue layer represents RECELL plus a meshed split thickness skin graft. As you are aware, this procedure provides definitive closure using significantly less skin compared to traditional autografting.

Lastly is the purple layer, which is the transparent PermeaDerm dressing optimized for protection and moisture management. By looking at the broader landscape of wound care management and focusing on the ability to provide this continuum of wound care products, we strengthened our core business while addressing multiple needs of our customers and patients. Additionally, integrating these products into a cohesive and comprehensive portfolio allows us to leverage our large RECELL-oriented sales organization effectively, ensuring widespread coverage across major cases. Moving on to our international expansion strategy. We’re making progress in our efforts to expand into Australia and most of the European Union through third-party distribution partnerships.

We expect to execute distributor agreements in major EU countries and Australia during the remaining part of the year. As part of our European Union efforts, we have been working with an EU notified body to obtain a CE mark for RECELL GO under the new medical device regulation, also known as MDR. During the quarter, we passed two major MDR conformity assessment audits and subsequently submitted the RECELL GO technical document for review. I’m pleased to report that on April 22, 2024, the notified body confirmed that the technical document completeness check identified that all required information has been provided, and they are proceeding with a dedicated review of the submission. With this timeline, we expect to receive CE mark for RECELL GO between September and December.

Additionally, we are in the validation testing stage of RECELL GO mini. As a reminder, RECELL GO mini is designed to address small wounds of 480 square centimeters or less, which represents approximately 2.5% or less total body surface area. This device will have the same reusable durable as RECELL GO but will have a different cartridge that accommodates smaller donor skin samples. Following the completion of validation testing, we are preparing to submit a PMA supplement for RECELL GO mini in June. This submission will receive the same Breakthrough Device designation that the current RECELL device was granted. Now turning to the vitiligo initiative. Our initial six month follow-up assessments of our patients in TONE, which is our post-market study evaluating repigmentation and its impact on the quality of life for vitiligo patients are scheduled to begin in June and conclude by the end of July.

With this timing, we expect we will be able to provide preliminary insights from the data during our second quarter earnings call in August. By this time, we will also have submitted the PMA supplement for RECELL GO mini, which will be the cartridge for treatment with vitiligo patients. As I have indicated, we plan to submit the TONE study and our separate health economic study for publication by the end of 2024, positioning us to begin commercial payer coverage discussions during the second quarter of 2025. As previously discussed, we anticipate a phased rollout of commercial coverage on a regional basis with the initial phase likely to begin in the fourth quarter of 2025. Our commitment to innovation and growth continues. We are steadfast in our efforts to expand our reach, drive increased adoption and sustained growth within our indications as well as expanding our portfolio all with the goal of delivering value to our shareholders.

Before turning the call over to David, I have an organizational update. We have retained an executive search firm to find a replacement for our Senior Vice President of Global Sales, who is no longer with the company. During this interim period, our two VPs of sales for the East and the West will report directly to me. In addition, I will be directly engaged daily with the entire commercial sales team. With that, I’d like to turn the call over to David.

David O’Toole: Thank you, Jim. For the three months ended March 31, 2024, our commercial revenue was $11.1 million, which was approximately 5.8% more than the same period in 2023. However, as Jim has mentioned, this was significantly below our expectations and previous revenue guidance range. We believe we have taken the necessary steps to improve our commercial process including VAC submissions and return to the significant revenue growth we have demonstrated in previous quarters. Beginning this quarter, with the expansion of our product portfolio, we are now reporting revenue in two categories: RECELL, which will include all versions of RECELL; and wound care products, which will be all other products such as PermeaDerm. Since the launch of PermeaDerm in the last week of March, our wound care revenue is less than 1%.

However, we expect this value to increase as we add new products and our sales team gains experience selling the new products. Gross profit margin for the quarter was 86.4% compared to 84.2% in the same period in 2023. This increase is directionally where we expected it to be for 2024 with our RECELL products. Total operating expenses for the quarter were $26.8 million compared to $19.4 million in the same period in 2023. The increase in operating expense is primarily attributable to an increase of $6.1 million in sales and marketing expenses due to employee-related costs, including salaries and benefits, commissions and travel expenses, all collectively as a result of expansion of the commercial sales organization in the second quarter of 2023 to support our growing commercial operations.

G&A expenses increased by $0.7 million as a result of higher salaries and benefits, partially offset by lower stock compensation. Additionally, we incurred an increase of $0.6 million in R&D cost, which was primarily due to employee compensation cost of the medical science liaison teams. Other net income expense increased by $0.8 million of expense as we recognized $0.4 million and $0.9 million for noncash charges related to the change in fair value of our debt and warrant liabilities, respectively, offset by an increase of approximately $0.5 million in income related to our investment activities and other income. Net loss for the first quarter was $18.7 million or a loss of $0.73 per share compared to a net loss of $9.2 million or a loss of $0.37 per share in the same period in 2023.

As of March 31, we had cash, cash equivalents and marketable securities of $68.1 million compared to $89.1 million as of December 31, 2023. We acknowledge the significant use of cash during this quarter. It’s important to note that this was attributable to a number of nonrecurring items, including expenses totaling approximately $4 million for inventory purchases and other costs as part of our distribution agreement with Stedical. Of this total amount, we have approximately $3.1 million in inventory that we will recover through future product sales. Recall that our distribution agreement with Stedical provides for a 50% gross margin, which means that gross sales for this inventory will be in the range of $6 million with no significant additional expense.

As we indicated, we used more cash than anticipated this quarter. However, this is not a long-term concern of ours and should not affect our ability to reach cash flow breakeven and GAAP profitability no later than the third quarter of 2025. Turning now to our 2024 revenue guidance. For the second quarter of 2024, commercial revenues to be in the range of $14.3 million to $15.3 million. For the full year 2024, we continue to reaffirm the lower end of our previously provided guidance range of $78.5 million to $84.5 million, reflecting growth of approximately 57% at the lower end of the range over the full year 2023. Note that our annual revenue guidance now includes revenue from PermeaDerm. With that, we thank you for joining us. And now I will turn the call back to the operator for your questions

Operator: Thank you. [Operator Instructions] And our first question comes from Brooks O’Neil from Lake Street Capital Markets. Your line is now open.

Q&A Session

Brooks O’Neil: Thank you and good afternoon, everyone. I have a few questions. I’ll try to limit a little bit. But would you say, David, you expect that $6 million of Stedical revenue to occur in the second half of 2024 or is it more likely that that would extend into 2025?

David O’Toole: So Brooks, nice to talk with you. Thank you for the question. Thanks for attending. We haven’t given any guidance on that specifically. We are still in the early days of selling PermeaDerm. I think our sales team is having some traction, but it’s hard at this point in time to say how quickly that uptake is going to be. We will be able to give more guidance in August of what that PermeaDerm revenue will be for this year.

Brooks O’Neil: Great. Let me ask you a second question. I’m curious, you didn’t mention it specifically in the prepared remarks, but do you see any evidence that accounts are waiting for the approval for RECELL GO before ordering product? Or do you think that was not much of a factor in results in Q1 and your early looking Q2.

James Corbett: Brooks, this is Jim. It’s a good question. And I did thoroughly look at that. And I don’t think so. I don’t think there’s accounts that are waiting for that. That said, there is strong anticipation for it in many of our larger accounts.

Brooks O’Neil: Sure. That makes total sense. Okay. I’ll ask the last one and then I’ll turn it over. Obviously, you expanded the size of the sales organization in anticipation of the launch for full-thickness, and I’m just curious if you would assess whether there was significant disruption among your entire sales organization related to that expansion, or do you think that wasn’t much of a factor in the results this quarter?

James Corbett: So answer first and then the analysis. That’s a great question because I studied that. One of my possible things that I wanted to understand better. When you look backwards, you would take the burn accounts that existed prior to June, which then some of them kept the same rep and some of them changed reps, right, a good majority. And in the group — and the group that actually went with a new rep performed over the last nine months, actually slightly better than the legacy group that had stayed with their accounts. So that didn’t turn out to be a cause of our challenge.

Brooks O’Neil: Okay. So you really say if I’m listening, and I apologize for sneaking in one last little tidbit, you would say the issue really relates to the time it’s taking to get through the back committees and at this point, you’re optimistic about your ability to begin to make real progress on that process as we move into the back part of the year.

James Corbett: Simply stated, yes. We feel better about it. We’ve had to learn how to do something that — this is, of course, not a good reason, but the fact is we had not submitted to a VAC committee in the virtually the previous two years organizationally. And so when you — when full-thickness came, it is more complex, and we had a lot of them. And so we had to basically learn and develop new capabilities and skills. So we do feel better about that. We’re expecting to have a very significant quarter in approvals here in Q2. So we shall see because we’ll be disclosing that.

Brooks O’Neil: Absolutely. Thank you for taking my questions.

Operator: Thank you. One moment for our next question. Our next question comes from Josh Jennings from TD Cowen. Your line is now open.

Eric Anderson: Hi, this is Eric on for Josh. Thanks for taking the question. I appreciate the commentary around guidance for 2Q. With that in mind, how would you have us think about the ramp in the back half of the year to ultimately reach that full year guidance range? What do you think the sequential steps up in 3Q and 4Q could look like?

James Corbett: Well, ultimately — well, they do get pretty — they do get steeper, of course. We had a light first quarter. Our second quarter we’re recapturing our momentum. I think when we look at Q3 and Q4, we have committed to the lower end of our guidance, $78.5 million. And so you’re correct in identifying that. But what comes with that, of course, is we’ll have RECELL GO launch, which will undoubtedly give us some additional growth energy. We’ll also have — be in full launch with the PermeaDerm wound dressing. So we have some good additions coming aboard that will add a lot during the second half. But we haven’t guided specifically to the ramp, yes.

Eric Anderson: Understood. And then on the topic of VAC approvals, just out of curiosity, once the VAC committees in your customer accounts grants approval for the expanded label, how quickly are those accounts ramping RECELL utilization? Is that something that happens within a few weeks, or is that something that happens right away? Just curious.

James Corbett: Once you get approval, then there is a process of training and uptake and selling to additional positions. So the — this is a new first-in-category product. And these trauma centers are seeing it for the first time, contrary to the burns who’ve been using it for a few years. So there is a process where we get initial order relatively quickly. But then, of course, the real selling starts to happen with the different specialties and helping the physicians identify the appropriate patients. And that’s where our medical science liaisons actually have a big impact because their role is pure education and helping physicians think about how to treat their patients with RECELL and how they can get the results that we’ve seen in burns. So there is a process in terms of expanding adoption over time.

Eric Anderson: Okay, understood. Thank you for taking the questions.

Operator: Thank you. One moment for our next question. And our next question comes from Ryan Zimmerman from BTIG. Your line is now open.

Ryan Zimmerman: Good afternoon. Thanks for taking the questions. Jim, I appreciate all the color on the components, particularly in the back half of the year. You’re including PermeaDerm. I think I’m wondering, first, can you just elaborate on kind of maybe the contributions from RECELL GO, what you’re assuming for full-thickness skin defects in the back half of the year? Are you going to pick up accounts at a faster pace in the back half of the year. Just help us understand kind of your confidence in this ramp in the back half of the year. And then I think also if you throw in some of the international distributor agreements that could certainly help offset some of this ramp. That’s kind of the first question. And then you’re talking about becoming a wound care company more, Jim. And so do you need more salespeople? Are you directing your current sales force to pursue new call points? Just help us understand how you’re thinking about those initiatives as well.

James Corbett: Okay. Let me try and make sure I get them all. If I don’t, come back at me. It is a compound question. So first of all, let me just kind of start at the end. Our vision of being a broad wound care company; a, we don’t anticipate needing additional salespeople. So that’s first issue. The second is all of the product areas, as I illustrated in that particular slide, they actually go with the treatment of these type of wounds. So while our RECELL salesperson is sitting there, they can get into wound preparation, they can get into scaffolding, and they can get into a sophisticated dressing like PermeaDerm. That’s all on the same patient, same doctor at the same time, same wound. So that is a pure leverage and portfolio expansion around our existing treatment sites and physician sites.

So it’s synergistic to be sure. In terms of the ramp in the back half, let me comment on a few things, we don’t — we haven’t broken it out in terms of how we’re giving guidance yet. We will, as we gain a little bit more experience. But suffice to say that you can intuit that there’s going to be a meaningful contribution from PermeaDerm, first of all. Second of all, RECELL GO, and this is again the 180 days ends May 30. So we are actually — have built inventory and are prepared for a positive news. And that has a lot of energy for the second half of the year because of two things. Let me differentiate them for you. In the burns world, it is a — it is often we use between — it’s often that between one and two RECELL kits are used for patients.

So that means somewhere greater than 10% TBSA, as much as 20%. And so they often have to use them in sequence, and that is a process, right? You take a biopsy, you process it in the manual method and then you spray it on. And then you take another biopsy and go through the same process for the second kit. Particularly, for the burns surgeons, they’re imagining bringing two RECELL GO instruments into the room and processing simultaneously and cutting OR time by a material amount. So they’re really quite motivated by the prospect of RECELL GO. Secondly, what goes with that is also same benefit for full-thickness because in burns case, they will use less manpower doing it because it takes a technician to assist the physician — an extra technician or nurse to help the physician prepare the current version.

You don’t need that extra person in the case of RECELL GO. So it has a double effect. It helps in — as you can imagine, the burns making case shorter and less work for less people. And also in the full-thickness, you don’t need that extra technician and decreases the training requirements really significantly. So we have an expectation that we get an upsurge of adoption as a consequence of it being simply easier to do. So that’s what we’re believing is going to happen. So does that — did I get them all? Ryan?

Ryan Zimmerman: I think so. It was — there’s a lot of questions in there, Jim. Thank you for knocking them out. And then just lastly for me, and I’ll hop back in queue, David. With the introduction of PermeaDerm. what are you expecting for your gross margins? I would imagine there’s a little bit of pressure on the gross margin line in the back half of the year as PermeaDerm ramps up.

David O’Toole: Yes. As you know, the agreement calls for 50% gross margin for us in RECELL. So it’s going to be contributing less than our core business. So — but there has to be a degradation of our gross margin over the last half of the year. And as I indicated with Brooks, we’re going to be giving more guidance around what that revenue looks like from PermeaDerm for the second half of the year in August on our second quarter earnings call.

Ryan Zimmerman: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Matthew O’Brien from Piper Sandler. Your line is now open.

Matthew O’Brien: Hi, thanks for taking the questions. I guess the guide for Q2 is predicated on you guys getting back to kind of 15 new center ads per month versus kind of seven. is what he did in Q1. Are you seeing that so far in April and maybe early days of May?

James Corbett: Could you repeat — are you talking about the new additions of — what we have is the — without disclosing sort of the month by month, in the quarter, we have specific dates for all 46 of those expected approvals of when they meet and when we expect them to be approved. So that’s a [Multiple Speakers]

Matthew O’Brien: What you expected? Are you expecting all 22, or are you expecting 25 and got half?

James Corbett: Well, the — we wanted more than 22. 22 is what we got. But they didn’t come to committee. So that was a different problem. It wasn’t a turndown where we went to committee and got turned down. So we’ve been rarely turned down. So these 46, we expect to happen because we have [Multiple Speakers]

Matthew O’Brien: Got it. And then the back half ramp, it’s just big. I don’t know how to say it. I mean, what is it that gives you guys the confidence, I don’t know if it’s PermeaDerm maybe you get all $6 million in the back half, but it’s just even to the low end of the range is a massive ramp. And there’s going to be skepticism about your ability to get there. So just how can you help just calm some of those fears that you can get there? And then I do have one more quick question for David.

James Corbett: Sure. Well, first of all, PermeaDerm pays a role, but RECELL GO plays a bigger role. We’ll get — RECELL GO is going to transform our business model very fundamentally. RECELL as it sits today, you have to constantly train and always be present almost from most cases. So that hurts you in utilization in burn accounts relative to having RECELL GO. I mean so to speak, slows down the adoption of full-thickness. Both of those will get significant energy from having the work being done and the process of creating the RECELL spray on skin in a way that doesn’t require a person. So that will make a big difference. The market is quite huge. So getting a product that is easier to learn, easier to use will make a ton of difference.

Matthew O’Brien: Okay. And that launch is late Q3, is that right?

James Corbett: No. It is — we expect approval May 30, and we have inventory.

Matthew O’Brien: Okay, okay. So second half should benefit right away. Okay. And then David, the commentary on SG&A is all understandable with the sales force you had in Q2, but there was a big sequential step-up from Q4 to Q1 on the sales and marketing side. What was that? And then do we expect spending in this range going forward? And if that’s the case, I mean, why would you feel comfortable that the cash you have on hand is enough to get you through to profitability? Thanks.

David O’Toole: Yes. So it’s — thanks for the question. The one answer kind of the last one first because I was thinking about this also as you were asking, Jim, about the last half of the year. The ramp is significant for the last half of the year. When we achieve that through the initiatives that we’ve talked about, that is going to start to get to a point where our cash burn is not very significant with that ramp-up in revenue. And so we believe in the lower end of our guidance and when we achieve that, we’ll be heading into 2025 with a significant run rate for revenue. And so we’ve talked about getting to cash flow breakeven by the middle of next year. And as we enter 2025 with the revenue we believe we’re going to be achieving that cash flow breakeven GAAP profitability is — can be done.

You asked the question about our expenses going forward, SG&A. I think we’ve — I think we have indicated that we increased our sales force as of the end of Q3 — or Q1, I’m sorry. And so as far as the sales and marketing expense, it will step up from Q1. SG&A — the other side of it, G&A is going to stay relatively flat, if not decrease. And R&D expenses, we don’t see any major step-up in that also. So I think I’ve covered all three of them. We do see, again, sales and marketing increasing because we’ll have a full quarter of the expanded sales team that we underwent in Q1.

Matthew O’Brien: Got it. Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from Chris Kallos from MST Access. Your line is now open.

Chris Kallos: Thank you for taking my questions. Jim, I just wanted to ask about a little more color around the international expansion, in particular, the CE mark and your plans of launching the products into Europe?

James Corbett: Yes. Well, first of all, the — one of the — as we’ve been evaluating our different distributor choices, one of the things, of course, is we’ve done some tests — not test, the wrong word. We’ve done some cases with some distributors that we have not signed as a way for them to get familiar with the technology. And of course, what’s happening is we’re about to head into summertime, which is not the perfect time to launch into Europe. And then it will coincide with the readiness of RECELL GO for with under the MDR sometime in September, October. One reason we’ve given a broad window is, clearly, a couple of the distributors we’re talking about have identified that they prefer to launch with RECELL GO then switch after two or three months. So that’s one of the factors. But our goal is to get that done this year. And the same is true — and you may know, Australia recognizes the MDR this year. So we’ll be doing the same with Australia.

Chris Kallos: Great. And also, understand that the disappointing quarter was largely due to a lower burn rate in January, if I heard correctly. What was the reason for that? And has that now normalized? Are you comfortable that’s going to return to historical norms going forward?

James Corbett: It seems so, Chris. It seems like that is — the only one we had facts on, if you recall, was January. February and March, we don’t have facts on. But January by itself was down enough that you can see it right away. And we’re not seeing that same effect currently.

Chris Kallos: Great. I guess I’m just echoing everything the other questions have come around the aggressive growth rate in the back half of the year. How much of that is going to be driven by traditional burns accounts versus the new accounts in full skin thickness defects?

James Corbett: Well, through this year, burns will remain the bigger part of our business. The faster growth part of it will be full-thickness. But through this year, burns is going to grow still and still will be the majority, more than half our sales even in the fourth quarter. But the fastest-growing part is the biggest market, which is full-thickness.

Chris Kallos: Right. That’s all I had. Thank you, Jim.

James Corbett: Thank you, Chris.

Operator: Thank you. One moment for our next question. And our next question comes from Madeleine Williams from Wilsons. Your line is now open.

Madeleine Williams: Hi, Jim and David. I’m just wanting to understand in regards to things of putting up the — a little bit more color to the VAC submissions. In regards to rejections, I just wondered if the hospitals or trauma centers that have rejected RECELL if they have certain characteristics or you can notice a certain trend in those that do reject and whether or not you can kind of get color on the approvals going forward?

James Corbett: Madeleine, thanks for the question. There’s — it’s eight out of almost 178 submissions, and they didn’t seem to fit any pattern to be candid. There were reasons here and there. Sometimes it was related to how they perceive their patient load that was a case, for example. Another case was whether they thought for the indications that particular trauma center saw, whether it was going to be economic or not for them to use it. But they were all — there was no trend or a pattern because it’s a very small sample to try and detect a pattern unless it was for all the same reason, which they weren’t.

Madeleine Williams: Okay. And I guess more broadly, just thinking about do you have in mind the kind of rate at which you think rejections will continue to occur, assuming that some centers will reject and whether or not that’s included in how you’re thinking about the forecast for the rest of the year?

James Corbett: Yes. We think they occur almost randomly. So they don’t happen at a high rate. So we don’t think the amount of rejections will have a material effect on our ability to reach our guidance.

Madeleine Williams: Thanks for that.

Operator: Thank you. One moment for our next question. And our next question comes from Hannah Mitchell from Bank of America. Your line is now open.

Hannah Mitchell: Jim and David, this is Hannah Mitchell on for Ron Harrison. Thanks for taking my question. Just wondering if you can provide any more color on the BARDA National Preparedness arrangement, including what quantities BARDA might be considering and over what time frame? Thank you.

James Corbett: Yes. So we’ve entered into a — or in the process or — let me speak in all over. Our fundamental BARDA agreement is over. It has expired. What we’re entering into is a first call on an amount of inventory that they would get on first call up to a certain maximum, which we haven’t — we have made public, right? And it’s 1,000 units. And so the — in the event of a national disaster, BARDA has a call to purchase 1,000 units and — as a first priority. So we’re managing our own inventory. They don’t own any of it, and this would only occur in the event of a national disaster where they needed to call upon that inventory.

Hannah Mitchell: Okay. Thank you.

Operator: Thank you. And I am showing no further questions. I would now like to turn the call back over to Jim Corbett for closing remarks.

James Corbett: I’d like to thank all of you for listening and getting the latest update from AVITA. We look forward to talking with you again next quarter. And thank you again. Buh-bye.

Operator: This concludes today’s conference call. Thank you for participating. You may now disconnect.