The ReCell System has earned its first U.S. approval outside of burn indications. That's surely good news – it increases the probability of success (POS) applied to soft tissue repair revenue from the mid 90% range to 100%.

Then again, there's not much difference from pricing in 94% or 100% of expected revenue. Our model already considered this regulatory decision a slam dunk.

Ironically, shares of AVITA Medical popped earlier this year on greatly increased full-year 2023 revenue guidance, which required the approval in soft tissue repair. That means the most recent approval was already priced into shares. That means the most recent surge in the share price introduces valuation risk and/or forces shareholders to pay up now for future growth.

To be clear, the latter scenario is acceptable. I consider my position in AVITA Medical, my second largest, to be on autopilot for the next 18 months at least. There's relatively little that will impede the growth trajectory. This could grow into a $40 per share stock in the next 36 months. I'm not entertaining the possibility of selling my stake, but I'm not prioritizing this for new money at this time.

Advantageously Broad Label

There's not much of a surprise on the regulatory approval from the U.S. Food and Drug Administration (FDA) for full-thickness skin defects. The ReCell System had earned global approvals for similarly broad indications in the past and the pivotal clinical trial in the United States recruited patients across various skin defects.

The most recent approval expands use into the following indications:

• Necrotizing fasciitis, a rare bacterial infection that eats flesh
• Gunshot wounds
• Degloving injuries, such as from a motorcycle accident
• Resection wounds, such as those from removing cancerous skin tumors (I have a large scar on my back from a close call with melanoma and could've benefitted from this)

Importantly, and to reiterate, the broad approval significantly increases the chances of securing a new procurement contract with the U.S. Biomedical Advanced Research and Development Authority (BARDA). The agency works with industry partners to financially support the development of innovative new technologies and manage the Strategic National Stockpile (SNS) of the United States. In the event of a mass casualty event from a terrorist attack, natural disaster, or act of war, then the SNS would be immediately distributed as aid.

The ReCell System was developed with the help of BARDA and is already stockpiled in the SNS, but specifically for burns. Of course, in an emergency, there's no such thing as label restrictions. Nonetheless, the expansion of formal regulatory approval increases the chances to increase the number of ReCell kits in the SNS. The quickly-advancing form factor – from first-generation kits currently in the SNS to third-generation automated devices up for approval now – also suggests AVITA Medical will be able to bring in a new procurement contract with BARDA.

This is crucially important. Solt DB Invest doesn't include a potential BARDA contract into 2024 or 2025 modeling, but it could add another $7.5 million to $15 million in revenue by the end of 2024. That would be in addition to our market-leading 2024 model expecting at least $82.8 million in full-year 2024 revenue from commercial customers at burn and trauma centers. For reference, Wall Street currently expects only $61.9 million in full-year 2024 revenue from all sources.

Forecast & Modeling Insights

(No change.)

We shared highlighted metrics from our 2023 and 2024 models in May 2023. These are reiterated below:

• Full-year 2023 revenue of approximately $51.78 million, gross margin of 84.0%, operating expenses of $85.9 million, and an operating loss of $42.5 million. Revenue includes:
• $48.28 million in commercial ReCell revenue in the United States (down from $51.08 million previously)
• $3.4 million in revenue sharing from COSMOTEC in Japan (up from $0.65 million previously)
• $0 in BARDA revenue
• Our 2023 model doesn't include the potential to sign a new procurement contract with BARDA. We expect an increased probability of such a scenario before the end of 2023, potentially adding $7.5 million to $15 million in revenue by the end of 2024.
• Full-year 2024 revenue of approximately $82.81 million (vs. $77.59 million previously), gross margin of 85.5%, operating expenses of $83.8 million, and an operating loss of $13.0 million.
• Revenue and gross margin are significantly higher than our previous model due to reduced uncertainty about the impact from ReCell Go.
• Our 2024 model doesn't include the impact of expanded international distribution deals. We expect AVITA Medical to provide an update on at least its international strategy on the third-quarter 2023 earnings call in November 2023.
• Our 2024 model doesn't include the potential to sign a new procurement contract with BARDA. We expect an increased probability of such a scenario before the end of 2023, potentially adding $7.5 million to $15 million in revenue by the end of 2024.

AVITA Medical provided new details on the third-generation, fully-automated device ReCell Go. A premarket approval (PMA) supplement for the device is expected to be submitted to the U.S. Food and Drug Administration (FDA) by the end of June 2023. The product candidate has Breakthrough Device designation, which means it could earn regulatory approval by the end of 2023 or early 2024. Approval is not guaranteed and might require an additional clinical trial (or more real-world data), which would negatively impact our 2024 model.

Nonetheless, the device is crucial for accelerating the growth trajectory.

• ReCell Go will be a small benchtop system that automates sample preparation. A skin sample will be placed onto the deck, which the device will then automatically disaggregate in an enzyme solution.
• A ReCell Go device will cost roughly $3,500 to manufacture. AVITA Medical expects each device can be used approximately 300 times before it needs to be replaced. That works out to roughly $15 per use, which would significantly lower the company's cost of goods sold and improve its overall unit economics.
• Each use of ReCell Go will require a cartridge, which will replace the kits used today. These cartridges will have the same average selling price (ASP) as today's kits, or roughly $6,500 apiece. Reimbursement codes will be the same, too.
• If each ReCell Go device can be used approximately 300 times and each use generates roughly $6,500 in revenue, then each device will have a lifetime value of $1.95 million on a revenue basis. AVITA Medical has over 125 accounts at burn centers across the United States. This number will increase to include trauma centers when ReCell launches in soft tissue repair in July 2023.
• Importantly, the convenience and lower training burden of ReCell Go is expected to significantly increase uptake and procedural volumes. If the device earns approval and launches on schedule, then AVITA Medical should easily surpass $100 million in annual revenue in 2025 without stable vitiligo.

Margin of Safety & Allocation

(Insignificant increase to 2024 model.)

AVITA Medical is considered a Growth (Quality) position. The current Margin of Safety range for the company based on our 2023 model is below:

• Current Price (market close June 9):  $17.12 per share
• Likely Undervalued:         <$8.77 per share
• Midpoint:                           $11.40 per share
• Likely Overvalued:            >$14.03 per share
• Allocation Range:              Up to 15%

The current Margin of Safety range for the company based on our 2024 model is below:

• Current Price (market close June 9): $17.12 per share
• Likely Undervalued:          <$14.18 per share
• Midpoint:                            $18.43 per share
• Likely Overvalued:            >$22.69 per share
• Allocation Range:              Up to 15%

AVITA Medical reported 25.328 million shares outstanding as of May 2, 2023. The Margin of Safety range above assumes 29.127 million shares outstanding, which prices in 15% dilution. We expect a public offering of common stock of $50 million immediately following FDA approval of the ReCell System in soft tissue repair and stable vitiligo in June 2023.

Further Reading

• June 2023 press release announcing FDA approval in full-thickness skin defects
• May 2023 research note analyzing first-quarter 2023 operating results
• August 2022 research note analyzing pivotal trial results in soft tissue repair

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