With all available information I have as an investor, AVITA Medical might be the only stock I purchase between now and February 2023.

The new CEO held an investor webinar the evening before Thanksgiving. Although the timing wasn't ideal, the business shared a few key insights. AVITA Medical expects to grow faster and to a higher revenue total in Japan than previously communicated, has a path to profitability without launching in stable vitiligo, and expects R&D expenses as a percentage of revenue to peak in the third quarter of 2023.

Most important, CEO James Corbett told investors that although he couldn't share exact numbers until the February 2023 call, "We believe 30% annual revenue growth is inadequate for the business. We think it needs to be considerably more than that." This instills high confidence in Solt DB Invest forecast and modeling.

Wall Street is Way Off

AVITA Medical is not a widely covered stock, which both helps and hurts investors. The average of five Wall Street estimates for full-year 2023 revenue is $39.6 million (growth of 18%), compared to our forecast of $50.9 million (growth of 52%). The business thinks 30% annual revenue growth is inadequate – and that excludes contributions from stable vitiligo – which means Wall Street is off by a mile.

What everyone has been missing about the business is the scale and speed at which the soft tissue repair indication will launch. The new indication benefits from having reimbursement established before launch, already being used by trauma surgeons, already in inventory at major burn and trauma centers, and sharing the same sales team. The product will generate revenue quickly – enough to be meaningful despite only being formally available for six months of the calendar year.

Our revenue forecast will likely end up being too conservative.

Let's assume AVITA Medical achieves the midpoint of full-year 2022 revenue guidance of $33.5 million. If the existing burn business grows 30% next year, then that provides $43.55 million in revenue. That means soft tissue would only need to provide $7.35 million in revenue once it launches in July 2023 to meet our forecast. The opportunity is 3x larger than burns and can leverage existing infrastructure. The indication could relatively easily achieve over $10 million in revenue during 2023.

The range of full-year 2023 revenue outcomes will largely hinge on the penetration of and execution within outpatient treatment settings. If successful, then it will provide a key avenue of growth for both burns and soft tissue repair.

Nonetheless, I was confident in our revenue model months ago even when it looked crazy compared to Wall Street. That confidence has only solidified following third-quarter 2022 operating results. AVITA Medical is one of the most attractive opportunities on the stock market right now.

Forecast & Modeling

(No change.)

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

(No change.)

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. 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.

Further Reading

• November 2022 company update 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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