Ruh roh.

Wall Street appears to be significantly underestimating AVITA Medical's growth trajectory again. The last time that happened was in 2023. The stock ripped from less than $6 per share at the start of the year to frothy heights above $20 per share by summer.

To be fair, management did overpromise and underdeliver in 2024. Initial guidance called for $81.5 million in revenue, but a bumpy expansion of the sales team has knocked that down to just $69 million as the calendar nears its flipping point. That provides some cover for Wall Street analysts to take a "show me, don't tell me" approach to the business.

Annual revenue totals are misleading though. AVITA Medical expects to exit 2024 with an annualized revenue run rate of $93.2 million at the midpoint. The sudden return to eye-popping growth is being driven by the swift adoption of ReCell GO. More important, the new device is ushering in a new business model focused on high-margin consumables. Aye, there's the rub that Wall Street is very much overlooking.

Wall Street expects full-year 2025 revenue of $105 million, which would represent year-over-year growth of 52%. But it would represent growth of just 13% from this year's exit rate. By contrast, the company's smallest-ever gain from a prior year's exit rate was 22%. That occurred this year due to lower-than-expected productivity from the sales team expansion in the first half of 2024, which also occurred before ReCell GO launched.

My 2025 model expects full-year 2025 revenue of at least $145 million, representing year-over-year growth of 110%. That might seem silly compared to the consensus on Wall Street, but it aligns with management's expectation to achieve cash flow breakeven and profitability by the second half of next year.

By the Numbers

The most important thing to understand with the launch of ReCell GO is that it fundamentally changes the company's business model. AVITA Medical leases the devices, rather than selling them outright. Revenue is instead driven by the sale of the consumable kits needed to operate each device. Imagine if instead of buying a printer for your home office you just got one for free, with the understanding you needed to buy the ink.

Leasing devices generally increases adoption. Customers don't have to make large, upfront capital expenditures. They can simply adopt a pay-as-you-go model. Whether a customer needs one or eight devices, ReCell GO fits their individual needs. This makes perfect sense for the burn and wound care market, especially since the needs of large burn centers can vary wildly from smaller trauma centers or emergency departments.

Many businesses spend years trying to perfect their business model and never stumble upon the optimal fit. AVITA Medical has nailed it with ReCell GO.

It shows in the numbers so far.

Total revenue swelled to a quarterly record $19.9 million, up from the previous record of $15.2 million set in the second quarter of this year. Sales and marketing expense of $15.1 million was higher than the year-ago period, but lower than Q2 2024.

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The year-over-year comparisons for operating loss and operating cash burn hide the improvement within the long-term trajectory.

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What drove the rapid gains in revenue and operating leverage? ReCell GO, of course.

Investors need to familiarize themselves with several new terms, including:

• ReCell Ease of Use (EOU) means the prior-generation device.
• ReCell GO Processing Device (RPD) means the device itself, which can be used up to 200 times according to the label approved by the U.S. Food and Drug Administration (FDA).
• ReCell GO Preparation Kit (RPK) means the single-use consumable kit required to operate the device. This will be the primary source of revenue going forward.

AVITA Medical recorded $11.5 million in revenue from the prior-generation devices (EOU) and $7.6 million from ReCell GO consumables (RPK) in Q3 2024. That compares to $14.2 million and $0.6 million, respectively, in Q2 2024.

The breakdown of revenue does highlight some flaws.

For example, the business recorded only $0.27 million in PermeaDerm revenue during the third quarter, which is down from $0.33 million in the second quarter. Similarly, the business recorded no revenue from European distributors in the third quarter, compared to $0.154 million in the first half of the year. Sales in Japan, Australia, and the United Kingdom were flat from the second quarter.

On the one hand, investors want the majority of revenue to come from the United States, which is by far the largest healthcare market globally. On the other hand, international sales will be an important source of growth, and there's no need for 97% of revenue to be generated domestically.

Forecast & Modeling Insights

(Increased, introducing 2025 model.)

I'm penciling in the midpoint of Q4 2024 revenue guidance for the remainder of the year. For next year, I expect the rapid growth trajectory to continue fueled by consumables for ReCell GO and further expansion in wound care.

My 2025 model expects first half revenue of $62.5 million – nearly matching the full-year 2024 total – and second half revenue of $82.5 million. This aligns with account growth, a reasonable assumption for consumables pullthrough from ReCell GO devices, and management's expectation to achieve cash flow positive and GAAP profitable operations by the third quarter of 2025. AVITA Medical will need at least $40 million in quarterly revenue for that to be realistic. I think it is based on my interpretation of the new lease accounting for ReCell GO.

For transparency, my full-year 2025 model expects:

• Revenue of at least $145 million, an increase of 110% from 2024
• Gross profit of at least $116 million, an increase of 100% from 2024. The decrease in gross margin is driven by higher sales of lower-margin products such as PermeaDerm.
• Operating loss of $10.8 million, a decrease from $59.4 million in 2024. The business squeaks out an operating income of $0.3 million in Q3 2025.

Margin of Safety & Allocation

AVITA Medical is considered a Growth (Quality) position. The current modeled fair valuation for the company based on my 2025 model is below:

• Market close November 22: $13.34 per share
• Modeled Fair Valuation: $27.76 per share
• Allocation Range: Up to 15%

AVITA Medical reported 26.217 million shares outstanding as of November 4, 2024. The modeled fair valuation above assumes 30.150 million shares outstanding, which is equivalent to 15% dilution by the end of 2025.

Further Reading

• November 2024 press release announcing Q3 2024 operating results
• November 2024 regulatory filing (10-Q) detailing Q3 2024 operating results