AVITA Medical (NASDAQ: RCEL) announced second-quarter 2022 operating results. It also announced successful topline data from the pivotal clinical trial evaluating the ReCell System in soft tissue repair that supports a regulatory filing and U.S. Food and Drug Administration (FDA) approval. Let's dig in for a brief update.

Operating Results

A few highlights from Q2 2022 for the most important metrics driving the business, with discussion below:

• The business delivered record commercial revenue in Q2 2022 of $8.24 million, representing a 23% increase from the year-ago period.
• Gross margin increased to 83.4% in Q2 2022, compared to 80.1% in the year-ago period and 76.4% in the first three months of 2022.
• Operating loss improved to $6.36 million, compared to $9.49 million in Q1 2022. This was driven by operating expenses (excluding cost of product revenue) that were 13.3% lower in the most recent three-month period and higher gross margin.
• Cash used in operations was $3.5 million, marking the second-lowest quarterly total in years. It will surely increase in the coming years, but always better to preserve cash given the backdrop of tightening financial conditions. Every quarter of operating efficiency buys more time.

Some additional thoughts and details on the above:

• Revenue: AVITA Medical generated $15.69 million in first-half 2022 revenue. However, management maintained full-year 2022 revenue guidance of $30 million. There's some seasonality to when burns occur, so sticking to prior guidance makes sense, but the business is well positioned to meet or exceed its own expectations.
• Gross margin: The business expects to maintain gross margin in the low 80% range for the foreseeable future, which is an upgrade from prior comments. Nonetheless, gross margin could be lower when the company moves into outpatient treatment settings.
• Operating loss, cash flow, and cash: AVITA Medical ended June 2022 with about $84 million in cash. That won't provide enough breathing room to launch and scale new indications in 2023 and 2024, but there's time to raise additional capital through a stock or debt offering.

Management provided a handful of commercial updates that don't show up on financial statements, including:

• AVITA Medical has shipped second-generation devices to about 25% of accounts to date. The newer devices make significant ease-of-use improvements, including being operable with one set of hands and reducing the number of process steps by one third.
• The easier-to-use device is expected to provide durable advantages, especially given ongoing nursing "shortages" in burn centers and hospitals. Additionally, the business found it easier to access customers in Q2 than in previous quarters due to loosening pandemic restrictions. That allowed the commercial team to provide 300 training sessions per month, compared to only 200 per month in Q1. It's an additional way to address staffing issues in burn centers and hospitals -- just in time.
• AVITA Medical and Cosmotec are awaiting reimbursement decisions on the ReCell System in Japan before launching commercially. The medical device earned approvals in burns earlier this year. The company has already begun shipping products to the island nation, and its partner has already begun training doctors and nurses there ahead of launch.

Topline Data Readout

AVITA Medical announced positive clinical trial results in soft tissue reconstruction. There were two primary endpoints for the study. One endpoint was missed, but it was also missed in the pivotal study for second-degree burns and didn't impact FDA approval. Let's come back to that in a moment.

The study evaluated the ReCell System in 65 individuals with a broad range of eligible skin injuries, ranging from lacerations to bacterial infections to gun shot wounds. Individuals served as their own control group, which helped the relatively small study reach the proper statistical power.

• One wound / area received treatment with widely-meshed grafting and ReCell.
• One wound / area received treatment with conventional skin grafting.

Widely-meshed skin grafting is commonly used in an attempt to reduce the area of donor skin required for grafting, but can suffer poor results with relatively low expansion ratios. The expansion ratio is how much donor skin is required relative to the wound area.

For example, a conventional skin graft (split-thickness skin graft, or STSG) typically requires a 1:1 expansion ratio. Widely-meshed skin grafts can utilize a 3:1 or 4:1 expansion ratio, depending on the body area, available donor skin, and other factors. However, meshed skin grafts are often rejected by the body and can require multiple procedures to achieve full wound closure, similar to STSG.

The study had co-primary endpoints:

• One hypothesis was that using the ReCell System would result in significantly less donor skin required during grafting procedures ("superiority") compared to conventional treatment. Donor skin requirements were measured across all procedures needed to treat the wounded area.
• One hypothesis was that using the ReCell System would result in comparable healing ("non-inferiority") to conventional treatment. Healing was defined as achieving complete wound closure across multiple follow-up appointments.

Preliminary data (not yet published) showed:

• The ReCell System proved superior in reducing the amount of donor skin required for grafting. The p value was less than 0.001, which means the difference was statistically significant -- a no-doubter, really. Then again, this is kind of the main purpose of the product.
• The ReCell System did not reach statistical significance on the non-inferiority endpoint for healing. The p value was 0.048.

Now, we often accept a p value of 0.05 or less to mean statistical significance, but that's actually an arbitrary cutoff. Statistical significance should be determined on a case-by-case basis, but most people slept through statistics, so we lazily go along with 0.05. (Ronald Fisher, the guy who suggested we use 0.05 as the general cutoff of significance in 1925, never intended for it to be a fixed number.)

AVITA Medical and the FDA agreed that statistical significance for this endpoint would be a p value of 0.025 prior to enrolling patients.

Will the missed endpoint impact FDA submission or approval? AVITA Medical doesn't seem to think so. There are solid reasons to be confident in that assertion:

• The most important unmet need in soft tissue repair is the amount of donor skin required during grafting. It impacts everything from the number of procedures required, length of stay in hospitals, costs to patients and medical systems, scarring, pain, and (yes) healing.
• The use of widely-meshed grafts could have impacted healing rates, as more were used in the ReCell group than the control group. This seems dumb, but was required to account for procedural differences.
• The ReCell System met non-inferiority for healing compared to conventional treatments in the pivotal trial for third-degree burns. It did not meet the endpoint in the pivotal trial for second-degree burns. The FDA didn't care.
• Similarly, "soft tissue reconstruction" is a broad term encompassing skin injuries ranging from lacerations to bacterial infections to gun shot wounds. Each individual type of injury has unique biomolecular conditions that could have impacted the observed healing rates in a purposely-broad study. For example, immune cells would play a central role in healing for bacterial infections, while inflammation would be more important for gun shot wounds.

Nonetheless, the missed endpoint introduces a little more uncertainty into the upcoming supplemental premarket approval (sPMA) submission before the end of 2022 and potential FDA approval in the second half of 2023. It will be important to keep an eye on secondary outcomes announced at upcoming medical conferences, such as scar assessments and treatment preference ranked by both patients and investigators.

To be clear, I don't think missing non-inferiority on healing will make a difference for approval odds.

What's Next?

AVITA Medical expects to announce topline results from the clinical trial in stable vitiligo in the coming weeks. Management said the study has been completed and data are being compiled. Updates in clinicaltrials.gov suggest the study was completed on May 11, compared to April 8 for the soft tissue reconstruction study. More or less time could be required to compile data, but investors might expect an announcement by the end of September.

Additionally, the study appears to have enrolled 49 patients, which is almost double the target of 25 patients. That's still a relatively small patient population, but could reduce the potential for statistical noise to delay development.

I'll write a dedicated article exploring the vitiligo study soon. Until then, here are the historical results for the ReCell System in stable vitiligo. The upcoming study results used the most diluted 1:20 expansion and responders are considered those with at least 80% repigmentation at 24 weeks ("six months") -- creating a relatively high bar for success:

Further Reading

• Clinicaltrials.gov study details for soft tissue reconstruction
• Clinicaltrials.gov study details for stable vitiligo
• August 2022 press release for Q2 2022 operating results
• August 2022 press release for soft tissue reconstruction results
• August 2022 regulatory filing (10-Q) for Q2 2022 operating results

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