And Ol' Maxxie can finally exhale.

AVITA Medical (NASDAQ: RCEL) reported topline data from the pivotal study evaluating ReCell as a treatment for stable vitiligo. The press release only provided two data points from the clinical trial. Although the lack of communication remains frustrating, the provided endpoints suggest a relatively smooth path to U.S. Food and Drug Administration (FDA) approval in the second half of 2023.

Topline Data, Explained

To recap, the clinical trial compared skin areas treated with the standard of care (the control arm) or ReCell plus standard of care (the ReCell arm). Standard of care in this setting is narrowband ultra-violet B (NB-UVB) therapy. All individuals and treated skin areas were tracked for 24 weeks after the initial procedure.

An independent central review committee (CRC) assessed treated skin areas and found the following:

• The primary endpoint measured differences in responses from the control arm and the ReCell arm. A response was defined as achieving at least 80% repigmentation.
• An estimated 36% of skin areas treated with ReCell achieved the response threshold vs. 0% of skin areas treated with standard of care alone. (p value < 0.025 threshold)
• Multiple secondary endpoints measured differences in responses at various levels of repigmentation. An estimated 56% of skin areas treated with ReCell achieved at least 50% repigmentation vs. 12% of skin areas treated with standard of care alone.

These data are actually well ahead of what I expected.

Whereas the current clinical trial used a 1:20 expansion (a 5% concentration of healthy cells) and defined a response as 80% repigmentation, previous studies of ReCell in stable vitiligo used higher concentrations of healthy cells (10% to 15%) and lower benchmarks for success (75% or less repigmentation). The latest data outperform all prior studies.

The positive surprise could be due to more standardized care and a more rigorous study design. For example, several prior studies were evaluating whether using CO2 laser ablation (how skin areas are prepared for ReCell) made a difference. Some didn't use NB-UVB therapy.

Ironically, for the past year I had entertained the idea this clinical trial would be the first negative surprise for AVITA Medical.

These data aren't just better than prior uses of ReCell, but also compare favorably to Incyte Corporation's topical cream Opzelura at the same timepoint. The two treatments are used differently – one for stable vitiligo and one for helping individuals achieve and maintain stability. Nonetheless, consider the apples-to-oranges comparison:

• A one-time treatment with ReCell helped 36% of treated skin areas across the body achieve at least 80% repigmentation at Week 24.
• Twice-daily applications of Opzelura helped 30% of treated skin areas on the face achieve at least 75% repigmentation at Week 24.
• A one-time treatment with ReCell helped 56% of treated skin areas across the body achieve at least 50% repigmentation at Week 24.
• A longer-duration study of Opzelura found roughly 33% of treated skin areas across the body achieved at least 50% repigmentation at Week 52.

(If only Ko‑fi would let me use tables... Is it time for our official launch yet?)

A twice-daily topical cream is pretty damn convenient. A one-time procedure at a dermatology practice is even better. Only individuals who have stable vitiligo would be eligible for treatment with ReCell, but the availability of Opzelura helps to expand the eligible patient population. Many individuals might be eager to graduate from the relative inconvenience of twice-daily topical applications.

There are many additional data points and secondary endpoints that require public disclosure, but the primary endpoint and lone secondary endpoint published in the press release suggest a smooth ride ahead.

What's Next in Stable Vitiligo?

AVITA Medical expects to submit the paperwork for approval in stable vitiligo by the end of 2022. Nerds in lab coats call this a premarket approval (PMA) supplement. It's called "supplemental" because ReCell has already earned FDA approval in a prior indication.

If the company sticks to that submission timeline, then the FDA could approve the medical device in stable vitiligo in the second half of 2023. The supplemental aspect generally hints at a standard 10-month review process, although regulators could take longer considering this submission is requesting approval for a therapeutic indication – a first for the device and the company. I'm not sure if regulators will consider the initial approval in an emergency treatment setting (burns) distinct from this upcoming submission.

Regardless, investors will need to draw distinctions. The recent successful clinical trial in soft tissue repair will follow a nearly identical regulatory timeline for submission, review, and approval. It will launch almost immediately following approval. Stable vitiligo will not.

AVITA Medical needs to build completely new commercial infrastructure – sales, marketing, relationships with dermatology accounts, and the like – before it launches in stable vitiligo (assuming approval). It needs to navigate and earn reimbursement with insurance companies, too. There are also soft signals the company will wait to launch in this indication until a third-generation, fully-automated device earns regulatory approval.

Therefore, investors may not see ReCell launch in stable vitiligo until mid-2024 at the earliest. That's another two years from this writing. The daunting challenges ahead strongly point to partnering this indication as the best way to optimize commercial success. That's especially true considering the business lacks the financial resources to pursue a go-it-alone strategy as of this writing.

Those are challenges (and opportunities) for another day. Right now, AVITA Medical appears to have the clinical data required to entertain all possible futures.

Price Targets

(No change.)

The current risk/reward for adding new shares of AVITA Medical is considered favorable. This is considered an investment-grade Growth (Speculative) position. Current entry targets for the company are as follows:

• Current valuation (market close September 12): $155 million / $6.20 per share
• Attractive Near: $300 million / ~$10.00 per share
• Prioritize Under: <$250 million / ~$8.33 per share
• Caution Above: $400 million / ~$13.33 per share

The business reported 25.0 million shares outstanding as of August 2, 2022. The valuation estimates above are based on 30 million shares outstanding, which accounts for a public stock offering resulting in 20% dilution.

Price Targets Rationale

This one is a little too easy.

AVITA Medical has built a solid foundation by positioning ReCell as the new standard of care for the treatment of burns. The company has built commercial infrastructure, created awareness among physicians, and executed an intentional growth strategy. As a result, the business expects to generate $30 million in full-year 2022 product revenue at nearly 80% gross margin.

Slow and steady execution will pay dividends for the company's upcoming inflection point. The same commercial infrastructure built for burn indications can be leveraged for soft tissue repair, which represents an economic opportunity that's twice as large. It'll ramp sales and generate significant revenue immediately after FDA approval.

The economic opportunity in stable vitiligo is twice as large as burns and soft tissue repair combined. It'll require significant new investment in a different kind of commercial infrastructure. AVITA Medical will almost certainly need help from a larger partner to maximize success. But exiting clinical development with a win puts all possible futures in play.

If investors only consider burns and soft tissue repair indications, then AVITA Medical could generate between $40 million and $50 million in full-year 2023 revenue and up to $100 million in full-year 2024 revenue. It depends on how quickly the business extends existing commercial infrastructure to outpatient treatment settings, which will power a multi-year growth runway for both emergency indications.

Although the macroeconomic backdrop is unfavorable and deteriorating, AVITA Medical will eventually be viewed as a premium growth stock. Similar trajectories were enjoyed by Vericel (five-year return = 484%), Shockwave Medical (five-year return = 840%), Novocure (five-year return – 339%), and other medical device innovators that seemingly came out of nowhere. That included frustrating beginnings until Wall Street caught on to each platform's high-margin growth potential.

Based on estimated full-year 2023 revenue alone, AVITA Medical could reasonably be valued at $300 million right now. I'd probably argue that's a "fair" valuation for September 2022 – and it's nearly twice the current market cap.

As the commercial plans for stable vitiligo (don't expect it to launch until mid-2024 at the earliest) and progress in emergency indications come into focus, the company will earn an even higher valuation. AVITA Medical could reasonably grow revenue to a level that would earn a market valuation of $1.5 billion by 2025 – a 10x increase from the current market cap. Of course, share dilution in that span would chip away at the expected returns, but I'd be happy with return of "only" 500% in the next 39.5 months.

Further Reading

• September 2022 company update outlining expectations for stable vitiligo study
• September 2022 press release announcing positive topline results in stable vitiligo study

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