So long, farewell
Auf Wiedersehen, goodnight
I hate to go and leave this pretty sight"

The Sound of Music

AVITA Medical announced a reshuffling of the management team and streamlining of operations after market close on Thursday, January 19, 2023. CFO Michael Holder and COO Kathy McGee will be departing the company.

Good riddance.

The company has initiated a search for a new CFO, but will not be replacing the COO role. The former chairman of the board, James Corbett, became the CEO in 2022 and replaced former chief executive Michael Perry. He's now leaving his mark on the company's hierarchy once again.

One of my contacts has shed light on the situation. Former CEO Dr. Perry had extensive experience at Novartis Gene Therapy, but at larger companies "managers and directors are at meetings all day and not really leading anything. They're next to useless." He was not the right person to lead AVITA Medical during the upcoming inflection point in commercial operations.

Now, current CEO James Corbett is shedding additional "dead weight" in the CFO and COO roles. The most important executives at the company were always Mr. Corbett and Chief Commercial Officer Erin Liberto. I attempted to publicly nudge the company in this direction in a tweet thread following clinical trial results last summer. It worked for Twist Bioscience (and Amyris, Ginkgo Bioworks, Intrexon, and so on), and it appears to have worked once again, as confirmed through my contact. Both Michaels have since departed -- a best-case scenario by my standards.

This executive shakeup is a great development for shareholders. If the stock price falls ~10% tomorrow morning (near $8.00 per share) on a kneejerk reaction to the news, then I will personally invest $10,000 of new capital before my flight back home. It is currently ~12.5% of my portfolio.

The important thing to remember is that Wall Street is woefully underestimating full-year 2023 revenue. According to Yahoo! Finance, analysts expect an average of $39.6 million in revenue during the current fiscal year. That's growth of only 18% from the prior-year period. CEO James Corbett has already stated that annual revenue growth of 30% is inadequate. Solt DB Invest forecasts full-year 2023 revenue of $50.9 million, or year-over-year growth of 52%.

AVITA Medical will announce full-year 2022 revenue, first-quarter 2023 revenue guidance, and full-year 2023 revenue guidance after market close on February 23. It's possible our modeling is an underestimate, although management is expected to underpromise and overdeliver. Either way, Wall Street will likely need to recalibrate in late February.

As always, focus your research on individuals with the domain competence in this space (Solt DB Invest). Analysts from other services are subscribers of Solt DB Invest (explaining some overlap...) but are not able to adequately weigh in on developments in real time.

Forecast & Modeling

(No change.)

AVITA Medical 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

• Allocation range of up to 15% (previously up to 10%).

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 January 19):  $8.72 per share
• Likely Undervalued:          <$8.72 per share
• Midpoint:                            $11.33 per share
• Likely Overvalued:           >$13.93 per share
• Allocation Range:             Up to 15%

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

• January 2023 press release announcing management changes and full-year 2022 conference call
• December 2022 company update discussing revenue modeling in more depth
• 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

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