AVITA Medical, Inc. (NASDAQ:RCEL) Q2 2023 Earnings Call Transcript

AVITA Medical, Inc. (NASDAQ:RCEL) Q2 2023 Earnings Call Transcript August 10, 2023

AVITA Medical, Inc. misses on earnings expectations. Reported EPS is $-0.41 EPS, expectations were $-0.34.

Operator: Good day and thank you for standing by. Welcome to the AVITA Medical Inc. Second Quarter 2023 Earnings Call. At this time all participants are in a listen-only mode. After the speaker’s presentation, there will be a question and answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would not like to turn the conference over to your host today, Jessica Ekeberg, Director of Investor Relations. Please go ahead.

Jessica Ekeberg: Thank you, operator. Welcome to AVITA Medical’s second quarter 2023 earnings call. Before we begin, let me remind you that this call will include 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 statement. Please review AVITA Medical’s most recent filings with the SEC, specifically the risk factors described within Form 10-Q for the quarter ended June 30, 2023 for additional information. Any forward-looking statements provided during this call, are based on management’s expectations as of today.

AVITA Medical’s press release for second quarter 2023 results is available on our website, www.avitamedical.com under the Investors section. A recording of today’s call will be available on website by 5:00 PM Pacific Time today. Joining me on today’s call are Jim Corbett, Chief Executive Officer; and David O’Toole, Chief Financial Officer. I will now turn the call over to Jim for his comments.

James Corbett: Good afternoon, and thank you for joining us today. I will begin today’s call by discussing highlights of the second quarter, followed by an update on 2023 priorities. Following this update, you will hear commentary on our financial performance from our new CFO, David O’Toole. David is an accomplished financial executive with extensive experience in both public company operations and capital markets. David most recently served as a CFO of Opiant Pharmaceuticals, a biopharmaceutical company developing treatments for addiction and drug overdose, which was acquired by Indivior in March of 2023. Please join me in welcoming David. Now, turning to the quarter, we had an extraordinary second quarter with two landmark FDA approvals and a pivotal FDA submission.

These approvals and submission are critical to advancing our platform and will continue to enable us to unlock the growth potential of AVITA Medical. I will discuss these in more detail later on this call. In addition to our FDA successes, we continue to deliver strong financial results with commercial revenues of $11.7 million, which is a 42% increase over the same period in 2022, and was at the top end of our guidance of $10.7 million to $11.7 million. This 42% growth is an acceleration of our first quarter year-over-year growth of 40%, which itself was an acceleration of our fourth quarter year-over-year growth of 37%. We have accomplished this with virtually no new burn center accounts, indicating increased adoption within our existing accounts.

Photo by National Cancer Institute on Unsplash

As mentioned on prior calls, our commercial revenue is comprised of two components, U.S. revenue and foreign revenue. Japan represents a majority of the foreign revenue line item. With that overview of our recent performance, let’s now move on to our 2023 priorities and activities that continue to transform our business. On June 7, we achieved a major milestone as we received FDA approval for the use of RECELL to treat full-thickness skin defects. Although we had a high level of confidence in the FDA’s approval of the initial scope of the PMA supplement, which was based on our pivotal study for soft tissue repair and reconstruction, the FDA’s approval represents a significantly broader label for RECELL than what we initially anticipated. This label further validates the effectiveness of RECELL and opens up new treatment options.

To fully appreciate the indication for full-thickness skin defects, we need to take a look back at the original soft tissue repair market. When we submitted our PMA supplement for soft tissue repair and reconstruction, we expected the approval to cover traumatic wounds like degloving and surgical wounds such as fasciotomy and necrotizing fasciitis. These wounds represent approximately 127,000 eligible procedures across the U.S. trauma centers. The expansion into trauma centers allows our commercial team to capture the remaining portion of the burn market that exists outside of our existing burn center served market. Thus, our initial target market of approximately 127,000 eligible soft tissue repair procedures and 35,000 eligible burn procedures represents a TAM of over $1.2 billion.

As a reminder, this represents a six times increase of our existing burn center served market. The FDA approval for full-thickness skin defects includes these 127,000 eligible procedures plus traumatic wounds like gunshot wounds and traumatic hematomas, surgical wounds such as muscle-only flaps, laparotomies, chronic wounds that cover DFU and VLU, non-pressure ulcers and pressure ulcers, and surgical excisions of cancer. These wounds represent at least 264,000 eligible procedures. It is important to note that this market size is derived from third-party claims and internal analysis based on skin graft CPT codes tied to diagnosis codes of specific wound types. Further, as a soft tissue repair indication uses the same reimbursement codes as burns, so does the broadened label of full-thickness skin defects.

In other words, our new FDA approval, our expanded indication has in-hospital reimbursement through a DRG and outpatient reimbursement through a transitional pass-through code. Consequently, on June 8, the day after we received FDA approval, we initiated the commercial launch of full-thickness skin defects and the additional eligible burn procedures with our expanded U.S. commercial organization. To those new to the AVITA Medical story, in the second quarter of 2023, we initiated the expansion plan of our commercial organization, which would more than double our original team of 30 to 70. As previously noted, this will result in a peak operating expense as a percent of revenue in Q3 2023. However, I emphasize that our contribution margin on a new commercial professional is breakeven with approximately five resale kits sold per month per individual.

Prior to this quarter, the average productivity of a direct rep exceeds 20 kits per month. Last quarter, I called this weaponizing our gross profit to enhance market adoption and penetration where the sales force pays for itself quickly. Turning to the additional 264,000 eligible procedures related to full-thickness skin defects that I mentioned, we have analyzed third-party claims reports and conducted an internal analysis of these eligible procedures. Consequently, we are currently developing our strategic plans to pursue this significantly larger market. Similar to full-thickness skin defects, we expected a June FDA approval for vitiligo. In line with the 180-day review period through the Breakthrough Device Program, we received approval of resale for the repigmentation of stable, depigmented vitiligo lesions on June 16th.

This approval represents a first-in-class treatment of repigmentation through the delivery of normal, healthy skin cells. The approval was based on our pivotal trial for vitiligo, which met both safety and efficacy primary endpoints. However, the study did not evaluate the mental health benefits and the reduction of derivative healthcare costs associated with the treatment of vitiligo. While vitiligo is not contagious, nor is it fatal, it is an autoimmune disease. Patients with the highly visible chronic condition have a high prevalence of psychiatric issues, including body dysmorphia. The mental health conditions and the derivative costs of treatment are often high and without a cure and recur throughout the patient’s lifetime. For these reasons, we are conducting a post-market study of 100 patients called TONE, where we will seek to demonstrate both the repigmentation and mental health benefits of vitiligo treatment by resale and the reduction of associated healthcare costs.

Following the completion of the six-month study analysis, we will pursue a commercial payer policy. To do this, we plan to combine the TONE data with third-party broadly developed economic costs of treating vitiligo, which focus on the cascade of mental health issues to demonstrate that treating vitiligo with resale greatly reduces the lifetime healthcare costs of vitiligo. It is our goal to secure reimbursement in 2025. Now, an update on RECELL GO. As previously promised, on June 30th, we submitted a PMA supplement for RECELL GO, which maintains the FDA breakthrough device designation. RECELL GO revolutionizes the current manually operated RECELL device by eliminating the need for manual disaggregation of the autologous samples. Automating the process of cell disaggregation will substantially reduce training requirements, allowing us to leverage selling time more effectively.

Additionally, it will ease the burden of additional training required by physicians and operating room staff to manually perform disaggregation, which we predict will lead to an increased adoption across our indications, further amplifying our impact and transforming of the lives of patients. Moreover, RECELL GO is a critical component of our international strategy, which we will be discussing in more detail on our third quarter call. As such, RECELL GO is arguably the most significant enabler for our platform, which we believe will greatly accelerate our growth. Lastly, given our June 30th submission under the Breakthrough Device Program, the submission will receive prioritized interactive review with an expected December 27th approval and subsequent launch on January 2nd, 2024.

With respect to 2023 guidance, for the third quarter of 2023, we expect commercial revenues to be between $13 million and $14 million. At midpoint of this guidance, this reflects a growth rate of approximately 50% over the prior year. To that end, we are increasing our 2023 annual revenue guidance from $49 million to $51 million, to $51 million to $53 million, which at midpoint of guidance would reflect a 53% growth over 2022. Looking ahead, our intent is to provide 2024 guidance on our fourth quarter call in February 2024. In closing, we continue to execute the 2023 priorities. We have laid out and remain committed to delivering strong results. With that, I’d like to turn the call over to Dave.

David O’Toole: Thank you, Jim. It is a pleasure to be here and be part of the AVITA Medical team. In the three months ended June 30th, 2023, our commercial revenue increased by 42% to $11.7 million, compared to $8.2 million in the same period in 2022. The increase in commercial revenue was largely driven by broader surgeon usage, as well as deeper penetration, particularly within smaller burn procedures, along with commercial sales with our partner, COSMOTEC in Japan. Although our expanded commercial team was in place for the launch of full-thickness skin defects on June 8, there was no meaningful revenue attributable to the commercial expansion in the quarter. We expect the expanded commercial team will begin to have an impact in the third quarter.

Gross profit margin was 81%, compared to 83% in the same period in 2022. The decline was primarily attributable to a decrease in product production in one month of the quarter, caused by the need to qualify new vendors for certain manufacturing components. However, throughout the process of strengthening our supply chain, we maintained our perfect service level. Since then, we have resumed manufacturing volume to keep pace with our expected third and fourth quarter sales growth. As we have emphasized previously, approximately 50% of our product costs are fixed, attributable to the manufacturing facility, which means our gross margin will increase as product volume increases. Further, I would like to note that the decrease in gross margin for this quarter was unusual, and we fully expect our third quarter margin to show an increase compared to the gross margin in the third quarter of last year.

Total operating expenses for the quarter were $21.2 million compared to $13.9 million in the same period in 2022. The increase in operating expenses was primarily due to the cost related to the significant increase of our commercial organization in preparation of the full-thickness skin defect launch during the quarter. The additional sales and marketing costs included approximately $2.9 million in employee related expenses including wages, commissions, and benefits, $1.4 million in seminars, promotional costs, and travel expenses for both the existing and expanded commercial team, and $400,000 in recruiting expenses. In addition to the increased sales and marketing expenses noted, research and development expenses increased by approximately $2 million due to the ongoing development of RECELL GO and costs associated with our Medical Science Liaison team.

As Jim noted previously, the expansion of our Salesforce team will result in peak operating expenses as a percentage of revenue in Q3 2023. Net loss in the quarter was $10.4 million or a loss of $0.41 per share compared to a net loss of $6.3 million or a loss of $0.25 per share in the same period in 2022. As of June 30th, we had cash, cash equivalents, and marketable securities of approximately $68.8 million compared to $86.3 million as of December 31st, 2022. Before we open the line up for questions, I’d like to emphasize our increased revenue guidance for 2023. For the third quarter, we expect commercial revenues to be between $13 and $14 million. Additionally, we are increasing by $2 million our annual revenue guidance for 2023 to now be in the range of $51 million to $53 million.

With that, we thank you for your time. And now I will turn the call back to the operator for your questions.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from a line of Joshua Jennings with TD Cowen.

Joshua Jennings: Hi. Good afternoon. Thanks, Jim and Dave. It’s great to see the FDA approvals come in and the strong 2Q results, and Dave, congratulations on the CFO seat at AVITA.

David O’Toole: Thank you, Joshua.

Joshua Jennings: Absolutely. I wanted to start off and just, I think, Jim, you talked about the broader label that you secured for the soft-tissue data, fantastic outcome, and I think you mentioned that you’re potentially rethinking the commercial organization structure with many more indications opened up. Anything you can build on that — out on that, just to help us understand how you’re thinking?

James Corbett: Yes. I think that’s a terrific question because it was — the label indication is significantly broader than what we anticipated. So, what we’re doing, I think, first and foremost, is staying focused. The previous understanding that — under what we believe was the soft-tissue repair and reconstruction, which is 127,000 procedure expansion. For the time being, we’re staying right focused on that, because there’s plenty there for us to grow and get the momentum we want and build the underlying adoption. On the other hand, there is a number of applications that come under full-thickness skin defects that create a much bigger opportunity for us. So rather than rush into that, because we have no need to, we’re going to spend some time assessing the — so to speak, low-hanging fruit, in lack of a better word, and conduct some clinical research on some of these spots’ indications.

We have some that’s anecdotal, so we’re bringing that all together. And I think by the time Q4, which really is Q3, the November call comes around, we’ll have some of these new indications circled, and we’ll have a strategy about how to go about them. So it’s really just great news. It just fills our pipeline. We stay focused. I think for us to try to adjust at the final moment before launch might cause us to defocus and be less effective. And right now, we’ve been rewarded by being a very focused organization about how we go about doing things. So look forward to some more insight as Q4, really Q3, call comes around.

Joshua Jennings: Understood. Thanks for that. And just, I guess, a strategy question, I mean, just noticing you’re moving from focus on burn centers to now incorporating hospitals, trauma centers, outpatient setting is on the list and also potential physician office setting. I mean, is there an opportunity, not in the near term, we have a lot in front of you here in the short term, but over time to kind of build out the portfolio and look at some external business development opportunities? Thanks for taking the questions.

James Corbett: Yes, Josh, there certainly is. We’re expanding immediately into the trauma center world, and that incorporates the burn centers. As you know, half of the burn centers are already level one trauma centers. So it helps us get off to a fast start. But it is in our gun sites, so to speak, that there is technologies that are used with RECELL, that are used before and after RECELL, that are very important to the physicians who are treating the patients that RECELL is applicable to. We have — I would describe, a significant effort underway to identify some technologies that fit that category, and we have some work underway to choose them. And again, I think that will show some fruits of that labor by the November call.

So it is a focus, because we are a very consultative sales force, and as such, the physicians interact with our sales team. For our sales team to have some other technologies that are applicable to their patients is very common sense from a portfolio business model point of view, and it will basically cost very little to execute in terms of cost of sales, because it will be our same sales team. So I think your insight there is right on the money.