AVITA Medical has executed well growing ReCell commercial volume from a small base and within a limited market opportunity.

The serviceable addressable market (SAM) opportunity, or the total addressable market (TAM) opportunity that can be realistically captured, in the U.S. burn market is only $260 million. However, that includes both inpatient and outpatient treatment settings. An inpatient procedure requires a lengthy stay at a trauma center, whereas an outpatient procedure requires a brief stay or allows the patient to return home after treatment. The company has regulatory approvals and reimbursement for both, but has only focused on inpatient procedures to date.

It's important to remember why the adjective "commercial" is necessary for revenue. In previous years AVITA Medical earned revenue from the U.S. Biomedical Advanced Research and Development Authority (BARDA) for supplying the ReCell System to the strategic national stockpile (SNS). It's basically Uncle Sam's emergency preparedness inventory in the event of a terrorist attack, mass casualty event, or pandemic #oops. The company fulfilled substantially all of the contract in 2021, which means it generated near-zero revenue from SNS supply in 2022. It also makes total revenue growth appear stagnant.

‍Data Source: SEC filings.

AVITA Medical has expertly balanced growth and expenses. The company received BARDA funding for its clinical trial in soft tissue repair, which helped to offset $2.1 million, or 5%, of operating expenses during the first nine months of 2022. That could also signal a second procurement contract with BARDA is on the horizon (discussed below).

Investors should prepare for meaningful growth in operating expenses in 2023 and 2024. The business needs to invest in an expanded commercial footprint, primarily a larger salesforce, as it expands into outpatient treatment settings for the burns and soft tissue indications. It's important to remember that relationships with burn and trauma centers can be leveraged for both indications. Management estimates there's a roughly 50% overlap in accounts, suggesting excellent potential to rapidly ramp revenue from soft tissue repair indications upon launch in July 2023.

The soft tissue repair indication has a SAM of $450 million according to previous estimates, although CEO Jim Corbett kept referring to a 3x opportunity compared to burns. That doesn't square up with market numbers I use in my modeling, but a wide range can be applied to outpatient treatment estimates. The company could be working with updated modeling. Here's what I'm working with:

• Burns have a SAM of $260 million and a TAM of $600 million.
• Soft tissue repair has a SAM of $450 million and a TAM of $1 billion.
• Stable vitiligo has a SAM of $750 million and a TAM of $5.2 billion. The SAM will increase over time as Opzelura from Incyte Corporation helps increase the patient population achieving stability.

The company has yet to publish an investor presentation since Mr. Corbett took over and tweaked the near-term strategy. Investors can expect more detailed projections for market sizes and growth rates on the full-year 2022 earnings conference call in February 2023.

Development, Regulatory, & Commercial Updates

This was a crucial year for AVITA Medical – and it's delivered. The business has successfully cleared each de-risking event on the calendar in 2022 as of this writing. The most important now will be filing regulatory submissions for each soft tissue repair and stable vitiligo by the end of the year.

• Soft tissue repair study: A pivotal clinical trial evaluating the ReCell System in soft tissue repair met both co-primary endpoints measured against standard of care: statistically significant donor sparing ("using less skin") and statistical non-inferiority for healing. The latter endpoint was not met at the time the results were announced, but doctors discovered two errors during post-study data review. One patient's data were simply entered incorrectly at first, while another should've been excluded due to having a surgical wound within the ReCell treated area. Those two changes increased the statistical significance from p<0.05 to p<0.025, meeting the predetermined criteria for non-inferiority.
• Stable vitiligo study: A pivotal clinical trial evaluating the ReCell System in stable vitiligo achieved its primary endpoint measured against standard of care. At 24 weeks, 36% of areas treated with ReCell achieved at least 80% repigmentation, compared to 0% for standard of care. At 24 weeks, 56% of areas treated with ReCell achieved at least 50% repigmentation, compared to 12% for standard of care. These also compare favorably to Opzelura.
• FDA submissions: The company plans to file regulatory submissions for both soft tissue repair and stable vitiligo by the end of 2022. Both indications received U.S. Breakthrough Device designation that comes with priority review, which means both are expected to earn FDA approval by June 2023.
• Japan launch: The company years ago licensed rights to the ReCell system in Japan to COSMOTEC and will receive 40% of revenue generated. The partner recently received reimbursement for burns that's equivalent to levels earned in the United States. The burn market in Japan is significantly smaller, but the duo can expand into soft tissue repair and stable vitiligo once FDA approval is achieved. It received $555,000 in revenue during the third quarter from COSMOTEC.
• Next-generation devices: The company is still ramping shipments of a second-generation ReCell device that reduces the number of steps by 33% and requires only one set of hands to operate. The ease-of-use improvements can help drive further adoption and utilization with existing accounts, especially as many burn and trauma centers experience nursing shortages. A fully automated third-generation device is in development. Previously prioritized for the stable vitiligo indication, it's now expected to debut in the burn and soft tissue repair indications. Don't expect the fully-automated device to launch until 2024 at the earliest.
• Core strategy: The company intends to drive growth with burns and soft tissue repair in 2023 and 2024. There's an immediate opportunity that can be leveraged with existing commercial infrastructure built for burns and reimbursement for both is already in place.
• Vitiligo strategy: The company intends to fully launch the ReCell System in stable vitiligo in January 2025. It still expects approval in June 2023. The 18 months in between will be used to earn reimbursement coverage, build a new sales force for dermatology markets, and conduct additional clinical studies to better understand how patients should be selected. It makes sense to deprioritize this indication due to the significant additional expenses for building new commercial infrastructure. Solt DB Invest previously expected a launch in mid-2024 at the earliest, not at the time of approval, so no change is required for our overall forecast.

Forecast & Modeling

AVITA Medical now expects full-year 2022 revenue of $33.5 million at the midpoint. Solt DB Invest forecasts are below.

• Full-year 2022 operating expenses of roughly $61 million and an operating loss of roughly $33.5 million.
• Full-year 2023 revenue of approximately $50.9 million, including:
• $50.25 million in commercial ReCell revenue in the United States
• $0.65 million in revenue sharing from COSMOTEC in Japan
• $0 in BARDA revenue
• Full-year 2024 revenue of approximately $76.35 million, including:
• $75.375 million in commercial ReCell revenue in the United States
• $0.975 million in revenue sharing from COSMOTEC in Japan
• $0 in BARDA revenue
• Full-year 2023 operating loss of approximately $42.5 million, followed by full-year 2024 operating loss of approximately $51.7 million. Operating margins improve each year due to higher revenue. This implies the company has a cash runway through the end of 2024.

These revenue forecasts assume a successful entry into outpatient procedures for both burns and soft tissue repair indications in 2023 and a significant ramp in 2024.

• Growth in 2023 will be driven by investments in commercial infrastructure as well as the launch of the soft tissue repair indication. Gross margin decreases to below 75% as outpatient treatment volumes increase in the second half of the year.
• Growth in 2024 will be driven more prominently by the third-generation automated ReCell device, leveraging the outpatient distribution agreement with Premier, and execution of the overall strategy. Commercial revenue in 2024 represents roughly 10% of the combined SAM in burns and soft tissue repair. Gross margin decreases to nearly 70% as outpatient treatment volumes increase, although it could decrease more depending on Premier's share of outpatient sales volume.

In addition to financial outcomes, certain events can be forecasted. These are not included in the revenue modeling above, but represent significant additional upside:

• AVITA Medical could find a commercialization partner for the stable vitiligo indication. This seems more likely given the deprioritization and need to raise additional cash by early 2024 (to maintain a cash runway of roughly 12 months). A commercial collaboration could provide an immediate non-dilutive cash infusion of over $100 million, increasing in value should the company secure reimbursement and generate additional clinical data.
• AVITA Medical could announce a new contract with BARDA to increase inventory levels of the ReCell System with the SNS. The government purchased 5,614 units of product intended for burns for roughly $9.2 million. FDA approvals for specific indications don't matter much during an emergency (devices in inventory today would certainly be used for soft tissue repair if needed), but there's a high likelihood for a second procurement contract following the approval in soft tissue repair and/or with second- and third-generation devices. A second procurement contract with BARDA could lead to an additional $10 million to $20 million in combined revenue during 2023 and 2024. Investors could expect such an announcement in the second half of 2023.
• AVITA Medical will not break out revenue from Japan. The modeling above only includes burn indications and assumes 10% penetration in 2023 and 15% penetration in 2024.

Margin of Safety & Allocation

(Increased due to lower share count.)

AVITA Medical is considered a Growth (Quality) position. The current margin of safety range for the company is based on the full-year 2023 revenue forecast:

• Current Price (market close November 10):  $6.12 per share
• Likely Undervalued:          <$8.72 per share
• Midpoint:                           $11.33 per share
• Likely Overvalued:            >$13.93 per share
• Allocation Range:              Up to 10%

AVITA Medical reported 25.031 million shares outstanding as of November 7, 2022. This is lower than the 25.664 million shares outstanding reported during the summer due to forfeited options. The margin of safety range above assumes 28.786 million shares outstanding, which prices in 15% dilution from the next public offering of common stock. As a result, each price above increased by about $0.25 per share compared to the previous margin of safety range.

Further Reading

• November 2022 press release discussing third-quarter 2022 operating results
• November 2022 SEC filing (10-Q) discussing third-quarter 2022 operating results
• November 2022 company update discussing Breakthrough Device designation
• September 2022 company update discussing new CEO
• September 2022 company update discussing stable vitiligo study results
• August 2022 company update discussing soft tissue repair study results and second-quarter 2022 operating results

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