I've been mostly keeping my head down finalizing models and forecasts for a handful of new companies.

• Tomorrow we'll initiate coverage of Codexis. 10x Genomics and Exact Sciences will follow later this week.
• I recently wrapped up interviews with Recursion Pharmaceuticals and Centessa Pharmaceuticals, which we'll initiate coverage for shortly. I'd like to include Verve Therapeutics and / or Exscientia (why not keep the technology-enabled drug development theme going?) in that batch, too.
• I may even throw in coverage of a new Flyer position taking a novel approach to Alzheimer's disease.

But I do take breaks occasionally. There's simply too good of an opportunity to pass up in AVITA Medical (NASDAQ: RCEL). I've decided to increase my stake in the company by reducing my allocations in two others.

The Rationale for A Bigger Stake

AVITA Medical recently swiped a lot of risk off the table by announcing positive data from clinical trials in soft tissue repair and stable vitiligo. The stock has actually declined. There are explanations for the tepid response from the market. There aren't many shares outstanding, the business will need to raise additional capital eventually, a global recession is near, and management absolutely sucks at communicating.

Nonetheless, the soft tissue repair indication will seamlessly drop into existing infrastructure built and being built. It won't officially launch until the second half of 2023, but the company's annual revenue could at least double from 2022 to 2024. Another way to look at it: AVITA Medical is currently valued at less than 3x full-year 2024 revenue.

Meanwhile, the stable vitiligo indication will require significant new capital and investments to position for commercial success. But AVITA Medical has done a good job executing and, importantly, sticking to an intentional growth strategy. ReCell won't launch in stable vitiligo until the company has new commercial infrastructure, widespread reimbursement, and (most likely) regulatory approval for a third-generation device. That means I'm not worried about stomaching excessively large operating losses as the company launches and ramps the new indication. It almost certainly won't launch without a sound strategy – or partner – in place.

The Transactions

I'm reducing my positions in Certara and 10x Genomics to fund the new purchases of AVITA Medical. I had to downsize allocations to free up cash because I've halted regular contributions to my portfolio as Solt DB gets off the ground.

At a high level, I expect returns from AVITA Medical to exceed those of Certara or 10x Genomics, based on current prices for each.

• Certara is an Anchor position in my portfolio. All five of my Anchor positions had a 10% allocation. The company has encountered temporary headwinds from its small-but-growing regulatory compliance business, but continues to perform well. The rationale for reducing the allocation hinges on the reality that the slow-growing business is unlikely to surge much higher anytime soon. It may go on a buying spree during the upcoming economic downturn, adding more margin-boosting software tools to the mix, but shares are unlikely to rise substantially through the end of 2023.
• 10x Genomics is a Growth (Quality) position in my portfolio. I only started the position this year and targeted a 5% target allocation, but was soon blindsided by stalling growth in the first half of 2022. The business remains on solid footing with healthy long-term growth potential, but it appears the worst is not over for the lab hardware company. I'll be reducing price targets for 10x Genomics later this week.

Further Reading

• (upcoming) AVITA Medical management will host an investor webinar discussing latest clinical trial results on Wednesday, September 21 at 8:30 am ET.
• September 2022 company update discussing stable vitiligo study results
• August 2022 company update discussing soft tissue repair study results

‍