The complexity of the U.S. healthcare system strikes again.

Hospitals and healthcare systems must analyze the value proposition of new technologies and products before adopting them. Whether software or hardware, no tools are spared from the bureaucratic eyes of a Value Analysis Committee (VAC). The procedural review is intended to remove biases from the decision-making process and ensure patients are better off.

Of course, the irony is most hospitals and healthcare systems happily bankrupt patients with overpriced and ineffective care. But hey, at least it passed through a VAC.

Moving through the process can take up to a year. Despite having existing relationships with customers already using the ReCell System for treating burns, AVITA Medical has found itself ensnarled by VACs insisting the expanded use in full-thickness wounds ("soft tissue repair") requires new review.

As a result, management reduced full-year 2023 revenue guidance from a midpoint of $52 million to a new midpoint of $50 million.

• The new midpoint represents growth of 47% from 2022, which marks the fastest annual rate since the business established ReCell commercially.
• The new midpoint represents incremental revenue of $16 million from 2022 to 2023, which marks the largest annual increase in commercial revenue in the company's history. In fact, it's nearly double recent growth of $8.8 million added from 2021 to 2022 and $7.4 million added from 2020 to 2021.

Solt DB Invest expects revenue delayed by procedural reviews in the VACs of customers to be pushed into 2024. The purchases might be delayed, but they haven't disappeared.

Judging from the year-to-date growth in commercial revenue, slower-than-expected VAC reviews don't appear to have impacted many accounts. There are just a few slowpokes. AVITA Medical didn't elaborate on whether these are existing accounts or new accounts, but the growth trajectory suggests most are from new customers without prior experience using the ReCell System. It will be important to launch into new accounts, then ramp them to drive growth, but the delay isn't enough to alter the company's growth trajectory.

Additionally, there's no reason to be concerned the ReCell System might not pass through a VAC review. During the pivotal study conducted in 2022, the medical kit demonstrated statistically significant reduction in donor skin required and non-inferiority on healing, both compared to the standard of care, in full-thickness wounds.

Forecast & Modeling Insights

(No change.)

Solt DB Invest's current model for AVITA Medical values the business based on expected 2024 performance, which expects:

• Full-year 2024 commercial revenue of $77.59 million
• GAAP gross margin of 84.5%

Our 2024 model doesn't include a few sources of potential upside, including:

• No contribution from international expansion in Europe. Although the business announced its first distribution agreement on the continent on November 9, 2023, we don't have enough information to accurately model the impact at this time. This will provide additional upside to our model in 2024.
• On October 2, 2023, we removed from the model efficiency contributions expected from ReCell Go, the company's automated third-generation device. The expected approval in 2024 will likely provide additional upside.
• No contribution from a potential new supply agreement with the U.S. Biomedical Advanced Research and Development Authority (BARDA), which may stockpile additional ReCell units following the approval in soft tissue repair. This would be accounted for as non-commercial revenue.

Margin of Safety & Allocation

AVITA Medical is considered a Growth (Quality) position. The current modeled fair valuation for the company based on our 2023 model is below:

• Price at 2:30pm ET on November 21: $10.30 per share
• Modeled Fair Valuation: $16.90 per share
• Allocation Range: Up to 15%

AVITA Medical reported 25.551 million shares outstanding as of November 6, 2023. The modeled fair valuation above assumes 29.383 million shares outstanding, which accounts for 15% dilution expected as a result of the OrbiMed financing.

Further Reading

• November 2023 press release announcing reduced full-year 2023 revenue guidance
• October 2023 research note analyzing the credit agreement with OrbiMed
• October 2023 research note analyzing the regulatory delay for ReCell Go